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The Perfect Storm for Wealth Transfer

Currently historically high gift, estate and GST tax exemptions, depressed asset values and the ability to discount these values even further, defective grantor trusts, and historically low applicable federal rates (AFRs) have created the perfect storm for wealth transfer planning. What you may not know, however, is how powerful loan regime split dollar (Reg. sec. 1.7872-15) can be in this type of environment. In fact, loan regime split dollar rules are even more favorable than the intra-family loan rules (Code sec. 7872). For example:

  1. With a lump-sum loan, the current low long-term AFR (1.01%, June 2020) can be locked in for the life of the insured or, in the case of survivorship life, the life of the insureds.
  2. The loan regime split dollar rules clearly authorize accrued interest. (For example, why pay 1.01% loan interest with assets that are earning 5% or more?)
  3. Loan regime split dollar can fund any type of policy, including survivorship life or term insurance.
  4. Unlike a sale to a defective grantor trust, no seed money is required with a loan.
  5. The loan need not qualify as “a loan under general federal tax principles”.

Loan regime split dollar can have numerous beneficial applications. The following are just a few of the recent creative solutions where Highland’s Advanced Planning team employed life insurance funded with split-dollar loans to enhance non-insurance planning strategies:

  1. Where the grantor has used all of his exemptions, but wants to fund additional life insurance without paying a gift tax.
  2. Dual spousal lifetime access trusts (SLATs):
    1. Wealth Replacement: Insure each grantor spouse so that, upon death, the life insurance proceeds replace assets that are no longer available to the surviving spouse.
    2. Survivorship Life Planning: Make the survivorship irrevocable life insurance trust (ILIT) a permissible beneficiary of each SLAT so that SLAT cash flow can be distributed to the survivorship ILIT to provide a source of funds to repay the split dollar loan.
    3. An imbalance between SLATs: For example, where, following a gift of business interests to one SLAT, those interests were sold for a value well in excess of their gift value.
  3. Dynasty trust planning with a grantor retained annuity trust (GRAT) remainder trust: The GRAT remainder trust, that has successfully moved assets to children that will be included in their estates, lends funds to a dynasty trust to buy life insurance (acting as a freeze with respect to the GRAT remainder trust).

With the possible end in sight of this extraordinary planning environment, life insurance can complement and enhance the excellent wealth planning that is in process or has been completed. To help determine if a loan regime split dollar is a good fit for your wealth planning clients, or to discuss other strategies, please contact our Advanced Planning team at


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