Understanding Nonequity Split-Dollar

The following information was released by the National Association of Insurance and Financial Advisors (NAIFA):

By NAIFA on 9/3/26, 3:14 PM

Often, individuals who are likely to face a federal estate tax or think they will desire to have life insurance paid to an irrevocable trust that is outside their estate. These proceeds can replace wealth confiscated by death taxes, or can provide liquidity to an executor who needs to cash to pay those taxes.

But the trick is how to pay for the policy. The premiumamounts could be gifted, but some clients might hope to use their exemption for gifts elsewhere, and others might have exhausted their exemption, so they hope to keep any new gifts small. Such individuals might consider lending premiums to the trust, but loans can be costly and future interest can be hard to predict.

For this reason, "nonequity split dollar" can be a more beneficial way for wealthy Individuals to pay premiums on a policy owned in an irrevocable life insurance trust. Nonequity split dollar arrangements can result in truly miniscule gift tax consequences for many years, often falling within the annual exclusion even when providing millions of dollars of death benefit. Furthermore, such plans can also be a savvy way for an employer to retain high net worth employees.

On September 10, 2026, advanced planning attorneys April Caudill, J.D., CLU, ChFC, AEP (Distinguished) and Daniel J. Finn, J.D., CFP, CLU will explain this concept and a case study during a webinar on Sept. 10 for NAIFA members. Register here. In addition, the September issue of the Journal of Financial Service Professionals will feature an article and the case study.

CLU, J.D., CFP, ChFC, AEP are education designations only, obtained by the holder by completing the requisite coursework. These designations do not mean the holder is acting in a fiduciary capacity.

Insurance products issued by Principal National Life Insurance Co. (except in NY), Principal Life Insurance Company, and the companies available through the Preferred Product Network, Inc., Plan administrative services provided by Principal Life. Referenced companies are members of the Principal Financial Group, Des Moines, IA 50392.

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