Split Dollar

Split Dollar Arrangements

Split Dollar arrangements are plans in which a life insurance policy’s premium, cash values, and death benefit are split between the owner and non-owner of the life insurance contract. Split Dollar arrangements are often used by employers as an executive benefit to recruit, retain and reward key executives. Split Dollar arrangements under the economic benefit regime fall into two general categories: endorsement and non-equity collateral assignment arrangements.

Concept Details

Split dollar is an arrangement where two parties share the cost and benefits of a permanent life insurance policy. It is not a plan of insurance or a type of policy. Generally, the parties involved in split dollar will enter into a written agreement spelling out the terms and conditions related to the split of costs and benefits. In most cases, split dollar is used in employment settings with the employer and a key employee as parties to the agreement. An employer may provide some or all of the premium costs of a life insurance policy as a benefit to the insured employee. Typically the employer will maintain an ownership interest in the policy by means of a collateral assignment or direct ownership in order to secure repayment of the premiums paid. Repayment may be made at policy surrender, upon the employee’s retirement or at death.

Over the years, many different forms of split dollar have evolved. Various premium splits and creative policy value splits have been used to meet the goals of the parties involved. In addition, the split dollar concept has been used in family and other non-employment settings where one party has the means to pay for the insurance while the other has the need for the death protection. The IRS has applied income, gift and estate taxation rules to these transactions in order to tax the transfer and receipt of economic benefits resulting from these arrangements.

Any permanent policy may be subject to a split dollar agreement. Reasons for considering the concept include, 1) insurance coverage as an executive benefit, 2) funding for a business buy-out, 3) the business owner’s personal estate planning needs, and 4) as a gift between family members. In an employment setting, the use of corporate dollars to pay for personal insurance often satisfies needs of both the business and the insured. Between family members, split dollar can be an ideal method of providing premium for younger generations or to facilitate business or property buy-outs.

Split Dollar Plans

A Split Dollar Plan is an arrangement between you as an employer and a select key employee to join in the purchase of permanent life insurance. Policy premiums, death benefits and sometimes cash values are divided-or “split”-between the two in accordance with the needs and objectives of each.

Split Dollar Plans may have a variety of designs but they generally fall under one of two categories based on policy ownership:        

Economic Benefit Regime — In these plans the employer is the primary policy owner and the key employee’s interest in the policy is typically limited to death benefit coverage. The death protection is an “economic benefit” with a value based on a government term insurance table. The value of the economic benefit is charged annually as income to the employee (unless the employee has paid for the benefit). At retirement the arrangement may be terminated and the policy surrendered by the employer or transferred as a bonus to the employee.

Loan Regime — In a Loan Regime plan the employee or a selected third party is the primary owner of the policy. The employer’s premium advances are considered to be loans to the employee. The policy cash values become collateral for the repayment of the premium loans. Loan interest is either paid by the employee or reported by the employee as imputed income.

Tax Implications

Split Dollar premiums are not tax deductible by the employer under either regime. Policies owned by the employer under an Economic Benefit Plan may have taxable gain if surrendered by the company. Policies transferred by the employer to an employee generally result in ordinary income to the employee and a compensation deduction for the employer. Death proceeds received by a named beneficiary are generally income tax-free.

In regard to the Loan Regime, interest paid by an employee on a premium loan is considered taxable income to the employer. In the case of a below-market rate loan, interest income is imputed to the employee and is considered to be re-transferred back to the employer. Imputed interest income is a deductible expense for the employer except that no deduction is allowed in a corporation-shareholder arrangement. Once again, the insured’s named beneficiary receives death proceeds income tax-free.

Advantages of a Split Dollar Plan

For The Company


  • No mandatory eligibility or participation rules
  • You select which key employees can participate

Cost Effective

  • You can recover the cost of the plan
  • Minimal annual administration costs


  • No IRS restrictions
  • No required plan provisions
  • Custom-tailored to each participant

“Golden Handcuff” Incentives

  • Recruit, reward and retain key employees

For Key Employees


  • The cost can be minimal depending upon plan design
  • When health conditions require an increased premium, splitting the cost with the employer helps make the coverage more affordable.

Survivor’s Benefits

  • Permanent insurance protection with reduced out-of-pocket costs
  • Income-tax free benefits paid to beneficiaries at employee’s death

Supplemental Income

  • Additional income source at retirement, disability or termination of employment from cash value loans or withdrawals above and beyond the amounts owed to the employer


  • Economic Benefit Regime Plans may anticipate a transfer of the policy to the employee at termination of employment or retirement
  • Loan Regime Plans have policies owned by the employees who will have full access to policy values once loans are repaid.

Split-Dollar Insurance is not an insurance policy; it is a method of paying for insurance coverage. A split-dollar plan is an arrangement between two parties that involves “splitting” the premium payments, cash values, ownership of the policy, and death benefits. Split dollar arrangements are subject to IRS Notice 2002-8 and Proposed Regulations that apply for purposes of federal income, employment and gift taxes.

The Sarbanes-Oxley Act of 2002 makes it unlawful for a company regulated by the Securities Exchange Act of 1934 (“34 Act”) to directly or indirectly make loans to its directors or executive officers. This includes not only companies required to register their securities under the 34 Act, but also companies required to file reports (i.e. 10k and 10Qs) under the 34 Act. Please consult with your attorney before purchasing a life insurance policy that will be corporate/business owned or used in a split dollar arrangement to determine what restrictions may apply. This information is not intended to be tax advice. Please consult your tax advisor for more information regarding the tax implications of this policy.


A split-dollar arrangement in its various forms is typically used to help clients minimize income taxes and transfer taxes associated with the funding of large life insurance premiums and/or reduce the cash flow required to fund a needed life insurance death benefit. While the 2003 final split-dollar regulations (Final Regs.) changed the way split-dollar arrangements are treated from a tax perspective, a properly structured split-dollar arrangement remains a viable technique to consider.

Split-Dollar Overview

A split-dollar arrangement is an agreement between an “owner” and a “non-owner” (i.e., an employer and employee or a family member and a trust), where the parties agree to split the premium payments, cash value and death benefit of a life insurance policy that satisfies the following criteria:

  1. Either party pays, directly or indirectly, all or any portion of the premiums on the life insurance contract, including a payment by means of a loan to the other party that is secured by the life insurance contract;
  2. At least one of the parties paying the premiums is entitled to recover (either conditionally or unconditionally) all or any portion of those premiums and such recovery is to be made from, or is secured by, the proceeds of the life insurance contract; and
  3. The arrangement is not part of a group term life insurance plan described in Internal Revenue Code (IRC) § 79 unless the group term life insurance plan provides permanent benefits to employees (as defined in

Treas. Reg. § 1.79-0).1

Split-dollar arrangements attempt to place the majority of life insurance premium costs in the hands of the person(s) or entity with the ability to pay the premiums.

Use of Split-Dollar Loans

The acquisition of a needed death benefit outside the client’s estate often requires planning to reduce or eliminate potential transfer tax issues. Many clients find the premium costs for the death benefit needed exceed their gifting capacity (i.e., annual gift tax exclusion and/or remaining lifetime gift tax exemption amounts).2 As a result, many clients use premium leveraging arrangements to facilitate funding their life insurance premiums with little or no cash flow and/or transfer tax impact.

This article examines the use of split-dollar loans between the client, the client’s closely held business or the client’s employer (referred to collectively as “lender”) and an irrevocable life insurance trust (ILIT) where the lender loans the premiums for a life insurance policy on the client’s life to the ILIT. The loans are secured by a collateral assignment on the life insurance policy owned by the ILIT and are taxed under the loan regime of the Final Regs.

The gift to the ILIT, if any, is equal to the amount of loan interest — not the entire policy premiums. Loan interest can be paid current or accrued. Loan principal, including any accrued interest, may be repaid from the life insurance proceeds or from other sources during the client’s lifetime.3 Since the amount secured by the collateral assignment is generally only the premiums paid, a split-dollar loan is similar to equity split-dollar in that the third party owns any equity in the policy.

Split-Dollar Post Final Regulations

The Treasury and IRS issued Final Regs. on Sept. 11, 2003, creating two separate tax regimes for split-dollar agreements: the economic benefit regime and the loan regime.4 Under the Final Regs. the actual or deemed owner of the life insurance policy determines the appropriate regime.

  1. In a compensatory arrangement, where the employer is the owner of the policy, or a private arrangement, where the
    donor is the owner, the economic benefit regime applies. Any arrangement not covered by the economic benefit regime is governed by the loan regime.
  2. Where a premium payer (e.g., an employer or donor) pays all or a portion of the life insurance premiums on behalf of the policyowner (e.g., an employee or trust) and is entitled to repayment from the policy’s cash value or death benefit, the loan regime generally applies. In these cases, the premium payer is considered to have lent the premium payments to the policyowner.5

Equity collateral assignment split-dollar arrangements entered into after Sept. 17, 2003, and arrangements entered into before Sept. 18, 2003, and materially modified after Sept. 17, 2003, are subject to the loan regime under the final regulations.

Loan Regime (Collateral Assignment)

The Final Regs. include regulations under IRC § 7872 that provide a road map for structuring split-dollar loans used to pay for life insurance premiums.6 Loans subject to these regulations are loans where:

  1. The payment (of premiums) is made either directly or indirectly by the non-owner to the owner (including a premium payment made by the non-owner directly or indirectly to the insurance company with respect to the policy held by the owner);
  2. The payment is a loan under general principles of federal tax law or it is not a loan under general principles of federal tax law (for example, because of the non-recourse nature of the obligation or otherwise); and
  3. A reasonable person nevertheless would expect the payment to be repaid in full to the non-owner (whether with or without interest).7,8

Directors and executive officers of publicly traded companies subject to the Sarbanes-Oxley Act of 2002 should avoid split-dollar loans; companies regulated by the Securities Exchange Act of 1934 (“34 Act”)9 and their subsidiaries are prohibited from directly or indirectly making any loans to a director or executive officer. Violation of this rule carries criminal penalties. An “executive officer” is defined as any person who leads a business unit, division or a major functional group, or who performs a policy-making function for the corporation. This includes not only companies required to register their securities under the 34 Act, but also companies required to file reports (i.e. 10k and 10Qs) under the 34 Act.

Where the lender is a nonprofit organization and the borrower is an officer or director, consideration should be given to a number of factors, including: whether the organization’s bylaws permit loans to officers and directors, whether state law expressly prohibits loans to directors and officers, and whether state law holds the nonprofit board members who approved the loan personally liable for repayment of the split-dollar loans.

Taxation Under the Loan Regime (Collateral Assignment)

The policyowner may either pay interest at the applicable federal rate (AFR) or be deemed to have paid the interest under IRC § 7872. Loan interest paid by the policyowner is subject to income tax in the lender’s hands. In a donor/trust situation, if the trust is a grantor trust for income tax purposes, loan interest should not be subject to income tax when paid or as accrued. Where no interest or less than the appropriate AFR rate is charged under IRC § 7872, the policyowner is deemed to have received the proper amount of interest (i.e., the foregone interest) from the premium payer, and the premium payer will be deemed to have received the same amount back from the policyowner. The policyowner will thus be subject to federal income tax or gift tax (depending on the arrangement) on the deemed interest element.

For instance, in a compensatory arrangement involving a trust as the policyowner, the arrangement will be subject to both federal income tax and gift tax. The employer is deemed to have paid the foregone interest to the employee and the employee is deemed to have made a gift of the foregone interest to the trust. Where the loan interest is subject to gift tax, it will also be subject to generation-skipping transfer tax.

Term Loans or Demand Loans

Split-dollar loans can be structured as either a term loan or a demand loan. The primary difference between the two is whether the loan has a set maturity date. The nature of the loan (term or demand) determines which AFR rate must be charged as well as the income tax consequences to the parties to the agreement. AFR rates are published monthly by the IRS and vary based on the duration of the note.

Term Loans

Where a repayment date is specified in the note, including a loan due at the occurrence of an event (i.e., date of death), the loan is a term loan. Term loans allow the parties to set the interest rate for the duration of the note at the appropriate AFR in effect at the time of execution of the note. Where premium payments are made annually, each premium payment is a new loan with its own terms (e.g., due date, interest rate, etc.). Loans payable at the insured’s death are treated as term loans with a duration based on the insured’s life expectancy at the time of execution of the note. See “Hybrid Loans” discussion below.

For purposes of determining the appropriate interest rate, term loans fall into three categories:

  • Short-term – Duration of not more than three years
  • Mid-term – Duration of more than three years, but not more than nine years
  • Long-term – Duration lasting more than nine years

Demand Loans

Generally, demand loans are payable in full at any time on the demand of the lender. The interest rate for demand loans resets annually and is the blended AFR rate announced in July of each year (effectively the average of the prior 12 months’ short-term AFR rates). Annual premium payments are added to the loan balance and the current year’s blended AFR rate is applied to the entire loan balance.

Hybrid Loans

As described above, the loan regime generally categorizes split-dollar loans as either term loans or demand loans.10 However, special rules apply to loans payable on the death of an individual (i.e., loans for life).11 Split-dollar loans payable on the death of an individual are split-dollar term loans for purposes of determining whether the loan provides for “sufficient interest.”

To that end, the term of a split-dollar loan payable on the death of an individual is the individual’s life expectancy as determined under the appropriate table in Treas. Reg. § 1.72-9 on the day the loan is made.12 The AFR in effect on the date the loan is made will constitute sufficient interest.13 As with any split-dollar loan, the AFR used must be appropriate for the loan’s term (e.g., short-term, mid-term or long-term).

Documenting Split-Dollar Loans

A split-dollar loan should be in writing. Depending on the relationship of the lender and the owner, the following documents may be required:

  1. Split-Dollar Agreement — Document memorializing the agreement between the lender and the owner (borrower) outlining each party’s rights and obligations under the terms of the split-dollar arrangement.
  2. Promissory Note — Document detailing the agreement between the lender and the owner (borrower), containing the sum loaned, the interest rate and stated term of the note.
  3. Corporate Resolution — Where a corporation is the lender, a corporate resolution authorizing the split-dollar loan is likely required.
  4. Collateral Assignment — Where the life insurance policy is the security for the loan, a collateral assignment from the owner (borrower) to the lender should be filed with the insurance carrier to secure the lender’s rights under the split-dollar agreement.
  5. Representation on Tax Returns — Where the split-dollar loan is non-recourse to the borrower, both parties to the agreement must attach statements to their federal income tax returns for the taxable year in which the lender makes the first split-dollar loan representing that a reasonable person would expect that all payments under the loan will be paid. The filing of this representation is necessary to prevent the contingent interest rules of IRC § 7872 and a “deferral charge” from applying. The representation must include the names, addresses and taxpayer identification numbers of the borrower, lender and any indirect participants. Representation must be attached to the federal income tax return for any taxable year in which the lender makes a loan to which the representation applies.14

Certain risks exist with split-dollar loans, including interest rate uncertainty and the decreasing net death benefits due to the collateral assignee’s increasing interest in the policy. In general, the longer the arrangement is in effect, the greater the risk to the client. As a result, a well-planned exit strategy should be in place from the beginning. A well-planned exit strategy provides clients an effective way to terminate a split-dollar loan by providing the funds necessary to repay the debt and maintain the client’s desired level of insurance protection.

Exit Strategies

Popular exit strategies to consider are grantor retained annuity trusts (GRATs), installment sale to an intentionally defective irrevocable trust (IDIT) and charitable lead trusts (CLTs). Generally, these techniques all provide for a future transfer of wealth at a reduced gift tax cost in an effort to provide the necessary funds to retire the debt associated with the premium leveraging arrangement at the appropriate time. By doing so, the client is able to utilize the split-dollar loan to acquire his or her desired level of insurance protection, while at the same time managing and mitigating the risks associated with the arrangement.


With a properly structured and implemented split-dollar loan, a client is able to acquire the death benefit needed with little or no transfer tax impact. Perhaps equally as important, split-dollar loans provide planning flexibility and certainty not found with other wealth transfer techniques. Split-dollar loans offer a number of advantages, including:

  • Favorable loan terms not found with other arrangements (e.g., loan payable on death of insured, interest accrual for entire loan term (i.e., life)), and no collateral beyond the policy required — even where the policy has no cash value).
  • Unlike most intra-family loans, there is little concern that the IRS will argue a split-dollar loan is not a bona fide debt.
  • Unlike an installment sale, no “seed” money is required.


1 Treas. Reg. § 1.61-22(b)(1)

2 Under IRC § 2503(b), the gift tax annual exclusion amount is $13,000 per recipient per year (2010) and $26,000 per year if a married couple splits their gifts under IRC §2513(a). The gift tax unified credit is $330,800 (2010), which translates into an applicable exclusion amount of $1,000,000 per individual.

3 Potentially, a return of premium rider can be used to repay the premium loan without diminishing the death benefit needed.

4 Treas. Reg. § 1.61-22(j); 68 Fed. Reg. 54336 (9/17/03)

5 Treas. Reg. § 1.61-22(b)(3)(i)

6 Treas. Reg. § 1.7872-15

7 Commercial loans, such as premium financing loans from a commercial lender, are specifically exempted from the provisions of IRC § 7872 under Treas. Reg. § 1.7872-5(b).

8 Treas. Reg. Section 1.7872-15(a)(2)(i)

9 Please consult with your attorney before purchasing a life insurance policy that will be corporate/business-owned or used in a split-dollar arrangement to determine what restrictions may apply.

10 Treas. Reg. § 1.7872-15(b)(2) and (3)

11 Treas. Reg. § 1.7872-15(e)(5)(i), and §1.7872-15(e)(5)(v)

12 Treas. Reg. § 1.7872-15(e)(5)(ii)(B) & (C)

13 Treas. Reg. § 1.7872-15(e)(4)(ii)

14Treas. Reg. § 1.7872-15(d)(2)

Endorsement Arrangements

With this approach, the employer owns the life insurance policy. The employer pays all or part of the premiums. The beneficiary is split with the employer being entitled to recover the greater of the policy cash value or the premiums it has paid with the balance of the death benefit, if any, endorsed to the executive or the executive’s irrevocable life insurance trust (ILIT). Where the arrangement provides a pre-retirement death benefit only, the employer may also use the policy cash values to provide supplemental executive retirement income under a non-qualified deferred compensation arrangement.

Non-Equity Collateral Assignment Arrangements

With this approach, the executive or the executive’s irrevocable life insurance trust (ILIT) owns the policy and assigns a portion of the death benefit to the employer as collateral to protect the employer’s interest under the arrangement in an amount equal to the greater of cash value or premiums paid under the arrangement. At the executive’s death, the policy death benefit is first used to repay premiums paid by the employer with the remaining death benefit paid to the executive’s beneficiary. In the case of a more than 50% owner and in an effort to avoid potential estate tax inclusion of the death benefits, a restricted collateral assignment should be used, restricting the employer’s rights over the policy to reimbursement upon termination of the arrangement.


The Preferred Return LLC (Split Dollar Alternative)

Your business clients may be seeking an alternative. The Preferred Return LLC can be an appropriate way to own life insurance, particularly in the employer-employee context, and may afford a better approach than split dollar plans.

The Preferred Return LLC is suitable for:

  • Employers and employees desiring to establish a fringe benefit plan, particularly a split dollar type of program.
  • Family situations where there will be a Family Limited Partnership.
  • Family Limited Liability Company, which will be funded with assets other than life insurance. The life insurance will be added to the existing FLP or FLLC
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