FATHER KNOWS BEST

Rediscovering the Lost Glory of Split Dollar Using Loan Regime Split Dollar

My father (of blessed memory), Willy Wolfgang Nowotny, died last November at the age of 85. He was born and raised in the Saxon region of East Germany on the Czech and Polish borders. I always figured his town was the German equivalent of Hooterville. It is so small that it is not even on many maps. He came to the United States in 1953 as a refugee through Canada with nineteen dollars in his pocket. He had enough of the Russians as they probably had their fill with him. He made his exit from East Germany in 1952 by swimming across a river on the border studying the guards for a week before escaping. He was sponsored by the Chaplain of the U.S. Army as a refugee. He was a very gifted soccer player with an opportunity to play professionally in the early version of the Bundesliga, but instead left for a new life in America.


The day that he arrived at Penn Station from Canada, there was a transportation strike that prevented his great Aunt from meeting him. No one spoke German and he spent his first night in America sleeping on a bench at Penn Station. He later worked for a family that owned and operated a bakery in Falls Church, Virginia. His cardboard suitcase remains a prized possession in the family.


This family became his second family and my father remained in contact with them until their death but continued to have a relationship with their only son who suffered with mental challenges. He visited my Dad for a week every year.

My Dad was drafted into the U.S. Army in 1954 before he could speak English. I never appreciated how difficult it must have been being a private in Uncle Sam's Army with a heavy German accent right after World War II. It was hard enough for me even without a German accent. He was stationed in Panama which ultimately led to his return to the Panama Canal Zone where he lived and worked for twenty-five years. He had a good career with the federal government and had a long and comfortable retirement traveling to every continent and making it to the South Pole a year before his passing.


While I was growing up, he rarely discussed his childhood. He lost his father during WWII and saw a lot of horrible events during and after the war. I was fortunate to hear the stories of the "lost" years of the war and after the war in the years before he died. As a German’s German, he was heavy on discipline and short on patience, but left with me with an eternal view that Father did know best, at least most of the time.

In the Canal Zone, we had little American TV limited to a few hours per day on the military TV channel. Most of the classic shows of the 1950's and 1960's like The Adams Family, and Father Knows Best were only available dubbed in Spanish. I did not see these shows until I came to the United States for my last two years of high school. In the show Father Knows Best, the character of the father, Jim Anderson, Sr, is a life insurance agent for the General Insurance Company. The character of Ward Cleaver, Beaver's father, in Leave It to Beaver, was also a life insurance agent.


So, this article follows the idea that two of the idealized fathers in American popular TV from the 1950’s and 1960’s, both life insurance salesman, knew what is best. This article focuses on the resurgence of Split Dollar in the current low interest environment and specifically Loan Regime Method Split Dollar Life Insurance™. The declaration of its demise in 2003 has been greatly exaggerated.


Overview of Loan Regime Split Dollar


a. Loan Regime Basics

The primary planning objective of the Loan Regime Method of Split Dollar™ is to provide a business owner or key executive with low-cost death protection and equity buildup in the cash value. In the loan regime, the business owner is the applicant, and owner of the policy and collaterally assigns an interest in the policy cash value and death benefit to the employer equal to its cumulative loans plus any accumulated interest payments. The Employer provides a series of loans to the business owner to all or most of the premiums. The Employer’s loans are not treated as taxable to the business owner provided the loan terms are arms-length in nature. The taxable gifts where the loans are extended to the trustee of a family trust.

b. The Impact of Below Market Rate Loans

Below-market rate or interest-free loans are sometimes used in Loan Regime Split Dollar™ where the Employer