Splitting the insurance bill – Family split-dollar arrangements can reduce gift taxes

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Abstract: Dave and Susan have established an irrevocable life insurance trust (ILIT) to purchase and hold a second-to-die life insurance policy. When the second spouse dies, the death benefit will be paid to the trust estate-tax free and then distributed tax free to their daughter, Anna, the trust’s beneficiary. There’s just one problem: To cover the policy’s premium, Dave and Susan make annual contributions to the ILIT, which are considered taxable gifts to Anna. Because of the way the trust is structured, the couple can use their combined annual gift tax exclusions to shield a portion of each contribution from gift tax. But the remaining portion is still a taxable gift. A family split-dollar insurance arrangement may be the answer.