A sharing approach to life insurance

Looking for a way to make permanent life insurance a more affordable and valuable financial security and estate conservation tool for your family? Try sharing -- both premium payments and certain rights to the policy -- through private split dollar life insurance arrangements. Many individuals have to their advantage.

At its essence a private split dollar arrangement is a contract -- separate and apart from the policy itself -- that sets forth how various parties are to share premium payments and rights to an insurance policy. The agreement typically separates the death benefit -- the amount payable at death -- and the cash value -- the current worth of the contract at any point in time.

Private split dollar scenarios typically involve at least three entities:

-- the insured;

-- an irrevocable life insurance trust (ILIT) established by the insured;

-- and a trusted relative or friend of the insured, usually a spouse, to whom certain rights of the policy are assigned in return for a commitment to pay a portion of the premium.

Properly structured, private split dollar arrangements achieve a win-win by keeping death benefits out of the insured's estate, while allowing the insured's loved ones to access the cash values of an in-force policy when needed. The establishment of the ILIT is necessary to keep the policy benefits out of the insured's taxable estate.

There are various structures that can be built around split dollar agreements. The following describes the use of a single-life contract on a grantor/insured:

Let's say Joe, husband of Helen, creates an ILIT with a gift of a cash contribution and names his close friend, Al, as trustee. Joe's children are named as beneficiaries of the trust. Al, as trustee, applies for a life insurance policy insuring Joe's life. Joe then makes a gift in an amount equal to the value of the economic benefit (one-year renewable term) of the remainder of the premium cost to the trust. Al makes the gift available to Joe's children according to the Crummey withdrawal provisions so that Joe's gift will be eligible for the annual gift tax exclusion.

Through a collateral assignment of the policy, Al agrees with Helen to allow her access to the cash values on the policy and to receive a portion of the death benefit while the trust retains ownership of the remaining death benefit. In consideration for her rights, Helen pays the portion of the premium over and above the value of the economic benefit (one-year renewable term cost) to the trust.

Al uses the money in the trust to pay the remaining premium for the life insurance policy. Note that Helen's payments to the trust are not gifts; rather they are considered payments for her rights to the cash values and a corresponding portion of the death benefit. Note too, that Joe need only use the gift tax exclusion to the extent of the economic benefit costs, rather than the entire premium.

One caveat under this scenario is that Joe must have no incidents of ownership of in the policy. For example, if Helen predeceased Joe and willed him her right to the cash values, the proceeds of the policy would be back in Joe's estate. On the other hand, because Helen is contributing to a trust where she is retaining a life interest, the IRS may claim that the value of the policy is includible in her gross estate.

The couple must also be also careful that Helen pays premiums from her separate property. If payment came from their community jointly owned property, incidents of ownership could be traced to Joe, negating the primary goal of the split dollar arrangement. Of course, Joe could exercise the unlimited gift tax exclusion between married couples to gift the payment amount to Helen.

Even long-standing life insurance policies can be brought into line with one's estate planning needs by adding a split dollar agreement. For example, if a man transfers an existing policy into an ILIT for the purpose of removing the proceeds from his estate, he could still allow his family access to the cash values in excess of the business' interests through the trustee's discretion.

Married couples may also want to consider the use of second-to-die policies within split dollar agreements. In all cases, it is advisable to seek assistance from a qualified financial professional before proceeding.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )