What Is a Loan Regime Split Dollar Arrangement?

A Loan Regime Split Dollar Arrangement is an estate planning strategy to address several retirement and asset protection objectives. Anyone who currently has an estate tax issue or is likely to have an estate tax issue when the federal exemption drops to $5 or $6 million in 2026 will want to consider it, according to a recent article from Forbes, “Can A Loan Regime Split Dollar Arrangement Work For You?”

Many estate plans include an Irrevocable Life Insurance Trust (ILIT) to remove life insurance from a taxable estate. However, the funds gifted to an ILIT to pay the premium on the life insurance policy most likely use the annual exemption amounts each year, and any excess payment would be covered by the unified tax credit.

To some people, this is very appealing. This is because it’s an asset-shifting technique that, done over time, can be substantial. However, it may not be enough for everyone. Even after using both spouse’s unified tax credit, an estate may still face potential estate taxes. This is where the potential for a Loan Regime Split Dollar Arrangement could be considered.

Here’s a step-by-step look at how it happens.

• First, create an ILIT to buy and own a cash-value life insurance policy.
• Instead of gifting cash to the ILIT, lend some money to the grantor trust in exchange for an interest-bearing note.
• The trustee of the ILIT uses cash to pay premiums on the life insurance policy.
• During retirement, the trustee supplements retirement cash flow needs by making payments on the promissory note to the grantor.
• Upon death, you leave an income and estate tax-free as well as an asset-protected legacy, as per the terms of the trust for beneficiaries of the ILIT in an amount equal to their life insurance policy death benefit.

While the structure of the note and the type of life insurance product is essential, the key to making this work is the design of the ILIT.

It must contain the appropriate provisions to make the grantor the owner of the trust assets for income tax purposes, must exclude the death benefit legacy from your taxable gross estate for estate tax purposes, and must incorporate appropriate asset protection provisions to shield the legacy from the heirs’ or beneficiaries’ creditors.

This strategy is not for everyone, but it may be worth a closer look.

An experienced estate planning attorney will be able to determine whether this or other strategies will be most effective for your unique situation.

Reference: Forbes (Jan. 3, 2023) “Can A Loan Regime Split Dollar Arrangement Work For You?”