Multi-Generational Discount Private Split Dollar

Posted by Bob Burton on Tue, May 5, 2009 @ 07:37 PM

Sound esoteric?  It is!  And it’s not for the faint-at-heart.  In fact, it was presented as an “aggressive, pushing-the-envelope technique” for very high net worth individuals that should be considered only after all other more main stream planning techniques have been implemented.

In its simplest terms, it is a program established  by a grandparent who creates an ILIT for the benefit of grandchildren that will be the owner and beneficiary of a life insurance policy on the life of the middle generation (the grandchildren’s parent) that is funded under an endorsement method economic benefit non-equity private split dollar arrangement between the grandfather and the ILIT.  Under the new split dollar regulations, even though the ILIT is the nominal owner of the policy, the grandfather is the “deemed owner”, thus ostensibly justifying that it is indeed endorsement method split dollar.

The thrust of the arrangement is to claim a huge discount for the grandfather’s interest in the policy (which is equal to the greater of premiums paid by the grandfather or the policy’s cash value) as a result of severe restrictions placed on the grandfather’s interest and rights in the policy.

Will it work?  The discount is likely to be challenged by the IRS on audit, so a client who adopts this arrangement needs to be prepared for a fight.  However, if you have a client worth at least $25,000,000 who is willing to be aggressive, perhaps it’s something to discuss..