Managing Gift and Estate Tax Over the Life of Insureds

Individuals subject to the federal estate tax often buy life insurance in an Irrevocable Life Insurance Trust (ILIT). Traditionally, they simply give premium dollars to the trust and apply either their annual exclusion or gift tax exemption to the gift. But for those hoping to preserve their gift tax exemption, a split dollar arrangement can be a flexible tool for paying premiums for a policy in the ILIT while keeping the gift tax effects small. What’s more, the ability to “switch” the design of the split dollar arrangement from an economic benefit regime (non-equity)⁽¹⁾ to a loan regime as insureds age can further manage gift tax impacts. This approach is often referred to as Private Switch Dollar.