Irrevocable Trust and Split Dollar (Definition)

Combining an Irrevocable Life Insurance Trust (ILIT) with a split dollar plan can be an effective way to have an employer pay all or most of the premium on an employee’s life insurance policy. The employee establishes an ILIT and the trustee enters into a split dollar agreement with the employer. The employer advances most or all of the premium. If the employer pays the entire premium, the employee must report that amount as taxable income. Otherwise, the employee gifts the amount of economic benefit to the trust.

At the employee’s death, proceeds from the policy reimburse the employer and the remaining death benefit is paid to the trust. The trustee either purchases estate assets or makes loans to the estate, and the executor uses these funds to pay estate taxes and expenses. Assets purchased by the trustee are distributed to the beneficiaries – the designated heirs.