Survivorship and Split Dollar
No matter what the size of a married couple's estate, an appropriate estate
plan can eliminate federal estate tax entirely on the first death due to the unlimited
marital deduction. All the tax comes due at the second death, as the property passes to
children or other persons. This unlimited deduction has led to a leap in popularity for
survivorship policies. When such a policy is held under a split dollar program, the
results can be startling.
Because of the joint mortality assumptions, survivorship premium costs will generally be
significantly lower than single life policies. Lower premiums, however, do not always
translate into affordable premiums.
Split dollar funding of survivorship life insurance can help by combining the traditional
split dollar advantage of obtaining personal insurance via business dollars with
survivorship's low economic benefit costs. Only one of the insured needs to be an employee
of the employer in order for the arrangement to be treated as a split dollar agreement.
In a typical case, the trustee of an irrevocable life insurance trust will be designated
the owner and beneficiary of the coverage and enter into the split dollar agreement with
the business. The employer's interest is secured by a collateral assignment of the policy.
Properly structured, this arrangement prevents the death proceeds from being included in
the insured's estates.
The economic benefit flowing each year to the employee is not the price of single-life
annual term insurance, but the actuarial product of assuming that both deaths occur in the
same year (the U.S. Table 38 rate). This assumptions produces a far lower rate for any
given year than either the regular single life term rate or the P.S. 58 rate because the
death of both insured in the same year is highly improbable.
When the employer pays the premium for the policy owned by the irrevocable trust, the
employee will be subject to income tax on the economic benefit. In addition, this economic
benefit amount will be considered a gift to the trust. The low U.S. Table 38 rates result
in the ability to handle very large premium cases without exceeding the insureds' annual
exclusions. For example, the economic benefit and resulting gift for 65 and 69 year olds
on a $1,000,000 survivorship policy where the premium is $25,000 is about $900 in year 10.
Because the gifts to the trust for the survivorship policy are measured by the economic
benefit instead of the actual premium, the insureds can generally continue their other
gifts to their beneficiaries and not use their entire annual gift tax exclusion on this
one premium. In addition, these gifts will correspondingly reduce the insureds' estates.
Though there is no income tax advantage to doing split dollar for an S corporation owner,
it may still be an attractive option for estate and gift planning purposes.
After the first death, the higher single-life one-year term insurance rates will be used
to determine the economic benefit. It is critical to terminate the split dollar agreement
before the economic benefit becomes so large that it creates a gift tax disaster. At
rollout, the agreement is terminated and the employer is repaid premiums it has advanced.
The economic benefit and resulting gift then end.
The combination of a survivorship policy in an irrevocable trust and split dollar can be a
very effective estate planning tool. There will typically be little or no gift taxes
attributable to the annual contributions made by the grantor and the death proceeds are
removed from the insureds' estates.
