“Family” is a word with connotations of a lifetime of shared promises and dreams. Over the years, you and your loved ones have collaborated to achieve many goals. Now there is a way that you can work together to improve the family’s financial position, for the short term and for the future.

Family Split Dollar

Family Split Dollar is an arrangement that helps you and your adult children protect an estate, while maintaining or even improving your own lifestyle. All it requires is a universal life insurance plan that is designed according to your family’s individual financial capabilities and objectives. It is simple and allows you and your children to share in both the contributions and the rewards.

How does it work?

Shared contributions

You and your children decide how much each of you can invest annually over a specified period of time, for instance, ten years. With this amount, you purchase a joint-last-to-die universal life plan with your children named as the beneficiaries. You, the parents, are the insured. You each make an annual contribution for five years. Your children then make the full premium payments (including your annual contribution) until year ten. Consequently, you are free from making further contributions for five years.

Shared rewards

Long term: By purchasing a universal life insurance plan, you and your children have created an immediate estate that will grow over time. The universal life proceeds are paid to your beneficiaries at your death, and your children inherit an estate that they helped create and preserve.

Short term: At the end of five years, you can access a substantial tax-free amount since you will be withdrawing up to 50% of the cash value when your contributions were much less than 50%.These funds represent an exceptional return on your investment. They can be used on whatever you choose: to supplement your retirement income, go on a cruise, or re-model your home. The universal life insurance plan remains in force, and the policy proceeds continue to grow (provided the children continue to make the specified premium payments)

What are the benefits?

Family Split Dollar provides families with three key advantages:

    1. Contributions are minimal (compared to alternatives) and the “returns” are excellent

2. It allows for short-term funding of your goals, using partial withdrawals.

3. It provides an immediate estate for your named beneficiaries and the proceeds are not subject to probate fees* or final taxes.

Who should consider Family Split Dollar?

You should consider this strategy if you have adult children and are approaching retirement or are already retired. Your children may already be looking for ways to help you create or preserve your estate without compromising your lifestyle. Under a Family Split Dollar arrangement, you should antici­pate receiving an excellent return on your investment over a short period of time.

Example:

The Peters family wishes to contribute a total annual amount of $10,000 over ten years. Both parents are 65 years old.

How will this annual premium be shared between parents and children?

Of course, this is a family decision and the Peters choose to split the premium as follows:

The Result

In the fifth year, the parents will be able to withdraw $23,000 (50% of the cash value within the poli­cy). No tax is payable on this amount according to current tax laws. This represents the equivalent of an 6.7%* gain on the investment.

The policy remains in force. Only the children make payments now.

They will continue paying the full premium for the next five years.

Should the parents live to year 22 of the policy, their Death Benefit (the children’s inheritance) would be $326,605 (provided that the Peters children continue to make full payments to year ten, at the projected policy rate of return).