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It's (Not) Too Late, Baby!

Using Late Start Split Dollar to Create Financial and Tax Leverage


I have mentioned in prior articles that I am not particularly a fan of folk music and ballads. Nevertheless, I am immensely impressed by the song-writing collaboration of Bachrach and David. Carole King and her ex-husband, Gerry Goffin, were another tremendous song-writing collaboration. As I have written in the past, as a Zonian, I am a man without a country. Oddly enough, in the Panama Canal Zone, our musical connection to the music of the day was maintained by Casey Kasem's American Top 40 on the military radio station. For some particular reason, the band Rare Earth had a lot of popularity in the Canal Zone. They were one of the few white groups signed at Motown Records. You have to admit that their rendition of "I Just Want to Celebrate" and " Get Ready." are an excellent part of the musical fabric from the time period.

I have been writing for several weeks on the need for rediscovery of the planning power and magic of Split Dollar Life Insurance. In particular, the Loan Regime Method of Split Dollar™ is a planning strategy that should be on the top of the planning list for financial advisors and life insurance agents. Even if you don't like Private Placement Life Insurance (PPLI), a retail variable universal life insurance or Equity Indexed Universal Life Insurance policy can transfer a tremendous amount of wealth with little or no tax cost to the policyholder while providing the policyholder with the ability to use loans and withdrawals on a tax-free income as a source of supplemental retirement income and a tax-free death benefit.

"Late Start" Split Dollar is a planning concept to convert a corporate owned policy or an individually owned policy to convert without any taxation into a policy that is part of a Split Dollar plan. Specifically, the " Late Start" Split Dollar methodology contemplates a corporate resolution to provide for a tax-free loan to the policyholder to use the loan proceeds to fund the policy. The business as the lender in the arrangement acquires a restricted collateral assignment interest in the policy cash value and death benefit equal to the amount of the past and future premiums. The policyholder, a business owner or a family trust acquires an interest in the policy cash value and death benefit equal to the excess of the collateral assignment interest. The restriction limits the lender's access to the policy cash value until the earlier of the insured's death or the termination of the Split Dollar arrangement or policy surrender.

The current interest rate environment is a special time for the Loan Regime Method of Split Dollar™. The long term applicable federal rate for a loan exceeding nine years is currently 1.12 percent for August 2020. This provides tremendous leverage to transfer wealth at a very low cost through the tax advantage and efficiency of permanent life insurance. It's time to look at all of your client's existing policies to see if this strategy can add value.

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