For ultra-high-net-worth families, traditional estate planning often reaches a ceiling once lifetime exemptions are exhausted. At PH Robb Private Client Advisors, when the goal is to move significant capital into a multi-generational vehicle without triggering immediate, heavy gift taxes, we often turn to more sophisticated structures. One of the most effective tools in our arsenal is the private split dollar arrangement. This strategy allows us to leverage life insurance and dynasty trusts to freeze estate values and transfer wealth with remarkable efficiency. By understanding how private split dollar transactions function, families can better protect their legacies against future tax volatility.
What is a Private Split Dollar Transaction?
The Mechanics of Wealth Transfer
A private split dollar arrangement is built on a specialized agreement between a client and an irrevocable dynasty trust. In this setup, we facilitate a loan from the client’s taxable estate to the trust, which then uses those funds exclusively to purchase a high-capacity life insurance policy. Because the transaction is structured as a loan rather than a direct gift, we avoid immediate depletion of the client's lifetime gift tax exemption. This allows for a much larger "seed" of capital to begin working within the trust immediately, providing a head start on generational wealth accumulation.
Leveraging Valuation Discounts
One of the most compelling aspects of private split dollar transactions is the potential for significant valuation discounts. When the client passes away, their estate holds a "loan receivable" rather than the full policy value. Following the Morrissette II Tax Court decision, this receivable may be valued at a discount, especially when the AFR is lower than the established 8-9% discount rate. This means we are effectively reducing the taxable value of the estate's assets while the actual wealth continues to grow and compound inside the dynasty trust.
Tax-Free Growth and Liquidity
Within the dynasty trust, the life insurance policy serves as a powerful engine for tax-exempt growth. Private split dollar transactions ensure that the death benefits delivered to the trust remain entirely free of income tax. This creates a financial result equivalent to a full basis step-up, but with the added advantage of having the assets already removed from the taxable estate. For the beneficiaries, this provides immediate liquidity to cover potential estate taxes or fund lifestyle needs across multiple generations, all while maintaining the core principal of the family’s wealth.
Strategic Implementation and Compliance
Success in private split dollar planning requires a high degree of care and multi-disciplinary coordination. At PH Robb Private Client Advisors, we work closely with estate planning attorneys, tax advisors, and qualified appraisers to ensure every detail meets the rigorous requirements of IRC Section 7872. Proper documentation and annual interest accrual are essential to withstand IRS scrutiny. By aligning these professional pillars, we ensure that the private split dollar transactions we implement are both robust and compliant, providing our clients with the peace of mind that their sophisticated planning will stand the test of time.
Securing Your Family Legacy
private split dollar planning offers a sophisticated pathway for UHNW families to mitigate estate tax exposure while securing multi-generational benefits. By combining the tax advantages of life insurance with the longevity of a dynasty trust, PH Robb Private Client Advisors helps families maximize their transfer efficiency. If your taxable estate exceeds current federal limits, this strategy may be the key to your next level of wealth preservation. We invite you to explore our specialized advisory services or contact us for a detailed analysis of your estate's liquidity options.