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Using Split-Dollar to Reward Key Executives and Preserve Family Wealth in Closely Held Firms

Split-dollar life insurance remains a powerful tool for closely held businesses and high-net-worth (HNW) families to retain key executives, fund buy-sell agreements, and preserve family wealth while managing income, gift, and estate tax exposure. This article explains practical split-dollar structures, tax and compliance considerations under current IRS guidance, carrier and pricing realities for large cases, and tactical design choices for firms in major U.S. markets such as New York City, the San Francisco Bay Area, and Chicago.

What split-dollar accomplishes for closely held firms and HNW families

Split-dollar arrangements allow an employer (or the company owner) and an executive (or the executive’s family/trust) to share the costs, benefits, and cash value growth of a life insurance policy. Typical business objectives include:

  • Retaining and rewarding a key executive with supplemental death benefit protection and deferred compensation.
  • Funding buy-sell obligations with cash on death to facilitate transfers among family owners without forced asset sales.
  • Preserving family liquidity to pay estate taxes or equalize inheritances among heirs.
  • Customizing estate and income tax outcomes by choosing between Loan Regime and Economic Benefit Regime structures (and hybrid approaches).

Core split-dollar regimes and current IRS posture

The IRS guidance that controls modern split-dollar practice is foundational to structuring a compliant plan. See IRS Notice 2002-8 for the contemporary framework and valuation rules: https://www.irs.gov/pub/irs-drop/n-02-08.pdf

Two primary regimes used today:

  • Loan Regime — the employer loans premiums to the insured or pays premiums and records a loan (often with interest). The employee’s economic benefit is generally limited to the after-loan interest accrual; repayment terms are contractually specified. Loan regimes are commonly preferred for HNW arrangements because they avoid current imputed income when properly documented.
  • Economic Benefit Regime — the employer provides the insured with the economic benefit of an insurance policy (imputed interest/gift issues apply). Under Notice 2002-8, economic-benefit arrangements are treated per valuation tables and can create taxable compensation if structured poorly.

For a deeper legal/tax walkthrough, see: Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today.

Quick comparative table

Feature Loan Regime Economic Benefit Regime Typical Use
Immediate taxable income to employee No (if properly documented) Yes — imputed economic benefit Loan regime used for deferred comp; econ benefit used when employer intends taxable current comp
Employer recovery of premiums Contractual loan repayment / offset against death proceeds Employer retains interest in death proceeds until cost recovered Loan regime preserves employer security
Gift tax issues Possible if forgiveness Often gift/compensation implications Trusts used to mitigate gift exposure
IRS valuation focus Loan balance and interest Imputed economic benefit (table-based) See IRS Notice 2002-8

(For additional structural guidance and drafting best practices, consult Split-Dollar Insurance Demystified: Structures, Regimes, and Tax Consequences for Owners.)

Typical design approaches in practice

Design choices will vary based on whether the employer wants to:

  • Retain a lien/economic interest in the policy to recover premium outlays,
  • Grant the executive continuing coverage and access to policy cash value (loan access/withdrawals),
  • Place the policy in an irrevocable life insurance trust (ILIT) to remove death proceeds from the insured’s estate.

Common practical combinations:

  • Employer pays premiums, records a policy loan to the executive; on death, the company is repaid from proceeds and excess passes to the beneficiary or trust.
  • Employer and executive split premium payments with rights to different “slices” of proceeds (split by percentage).
  • Policy owned by an ILIT with loan or collateral assignment to the trustee to finance premiums (useful when owners want estate exclusion).

For business-owner scenarios that integrate split-dollar with corporate succession, review: Designing Split-Dollar with Trusts and Buy-Sell Agreements for Business Owners.

Pricing, carriers, and product considerations (what HNW clients should know)

Large-case split-dollar arrangements typically use permanent life products (indexed/universal life or whole life) or private placement life insurance (PPLI) when investment customization and tax-efficient investment wrappering are priorities.

Carriers commonly used for HNW work:

  • MassMutual
  • Northwestern Mutual
  • New York Life
  • Prudential
  • Transamerica
  • Lincoln Financial

Price and product realities:

  • Minimum face amounts for large-case or private placement often begin at $5 million–$10 million; many carriers prefer $10M+ for PPLI-style cases.
  • For permanent life policies used in split-dollar, annual premium funding for HNW use cases commonly ranges from $100,000 to several million depending on age and desired death benefit. For example, an insured age 50 seeking a $5M universal life death benefit could see target annual funding in the $100,000–$400,000 range depending on underwriting class and product design.
  • PPLI and wrap-fee structures typically charge investment/wrap fees of roughly 0.5%–2.0% annually plus underlying manager fees.

For retail term comparatives and consumer pricing benchmarks, see Policygenius’ rate research and illustrations: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/ (useful for baseline comparisons on replacement-cost and term-rate context).

Note: premiums vary widely by age, underwriting class, and product; always obtain large-case carrier illustrations and consult large-case underwriting teams in New York, California, or Illinois for local considerations.

Key compliance, ERISA and anti-abuse concerns

When employers sponsor split-dollar for employees, especially key executives, ensure:

Sample corporate use cases (New York City, San Francisco Bay Area, Chicago)

  • New York City boutique private equity firm: funds a split-dollar policy on a founding partner to secure a buy-sell payment to the family on the partner’s death. Use of a loan regime minimizes immediate tax to the partner while ensuring firm recovery of premium outlays.
  • San Francisco Bay Area tech founder retention plan: uses a split-dollar funding arrangement to provide supplemental death benefit and deferred compensation to a CTO. Policy owned by a trust with premium loans reduces estate exposure and aligns with venture exits.
  • Chicago-based family manufacturing business: funds a $10M permanent policy to equalize inheritances among non-working family members, structured as an ILIT with a collateral assignment to the company to secure repayment of premium advances.

Practical checklist before implementation

  • Confirm the intended tax regime (Loan vs Economic Benefit) and model tax outcomes.
  • Obtain carrier large-case underwriting quotes and confirmed minimum face amounts.
  • Draft a split-dollar agreement with repayment, default, and termination provisions—see drafting guidance: Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms.
  • Coordinate ILIT, buy-sell, and corporate governance documents to avoid unintended transfer-for-value or estate inclusion risks.
  • Review State-specific issues (e.g., premium tax/insurer availability) in states like New York, California, and Illinois.

Sources and further reading

For advanced design, valuation, and unwinding considerations see: Unwinding Split-Dollar: Tax Traps, Transfer-for-Value, and Post-Termination Risks.

Bold planning, careful documentation, and coordination among corporate counsel, estate attorneys, and experienced large-case carriers are essential when using split-dollar in closely held firms.

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