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 have always been immensely impressed by the song-writing collaborations that created some of the great songs of our generation such as Bachrach and David and Paul Williams. The documentary on his life, “Still Alive” is a must-see. 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 listening to Casey Kasem's American Top 40 on the military radio station every Saturday night. Several bands were Canal Zone favorites such as Santana. Oddly, the band Rare Earth had a lot of popularity in the Canal Zone. The group was one of the few white groups signed at Motown Records. You can still hear them occasionally on Sirius Radio and 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 Split Dollar Life Insurance and specifically the Loan Regime Method of Split Dollar™. 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 in a Split Dollar Arrangement, 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 as a source of tax-free supplemental retirement income and a tax-free death benefit.

Overview of “Late Start” Split Dollar

"Late Start" Split Dollar is a planning concept designed to convert a corporate owned policy or an individually owned policy into a policy that is part of a Split Dollar plan. This change can be made after the policy has been issued without any taxation to the business or business owner. In the current low interest environment, the strategy is to convert an Endorsement Method Split Arrangement where the business is the owner of the policy into a Loan Arrangement Split Dollar Arrangement where the business owner or a family trust is the owner of the policy. Alternatively, a policy that is individually owned can be converted after the fact into a Split Dollar Arrangement using the Loan Method of Split Dollar™ which allows the business to make tax-free loans that can used as premium payments into the policy.

The planning goal of the “Late Start” Split Dollar Arrangement is to maximize the financial and tax leverage of the Loan Regime Method of Split Dollar™. The conversion allows the business to provide tax-free loans to the policyholder to make premium payments maximizing the benefit of the historically low interest rate environment. The arrangement creates financial and tax leverage through the vehicle of permanent life insurance and the split dollar arrangement. The life insurance policy enjoys the tax-free buildup of the cash value, tax-free loans and withdrawals and an income tax-free death benefit.

The current interest rate environment is uniquely positioned 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 an exceptionally low cost through the tax advantage and efficiency of permanent life insurance.

It's time to look at all of your client's existing corporate and individual policies to see if this strategy can add value.

Strategy Examples Using “Late Start” Split Dollar

Example 1

Hector Heathcoat (Heathcoat), age 45, is the majority shareholder in Acme Technology, Inc. Acme is a privately held, C corporation. Heathcoat currently owns a life insurance policy within an irrevocable life insurance trust. He purchased the policy six mo