Charitable Split-Dollar Insurance Plan

A charitable split-dollar insurance plan is a type of life-insurance arrangement in which a donor gifts money to a charitable organization so the organization may in turn invest that gift in a life insurance policy for the donor. When the donor dies, the benefits of the insurance policy go to the charity and to the donor’s heirs. The initial agreement between the donor and the charity should specify the specific breakdown of the split.

This type of life insurance arrangement originally gained popularity for its tax benefits. The charitable donation saved the donor from paying taxes on the charitable gift. Meanwhile, the donor’s heirs would be exempt from paying taxes on the money they inherited through the life insurance policy.

Charitable split-dollar insurance plans developed in the early 1990s. However, within a decade they came under scrutiny from the U.S. Treasury. In January of 1999, the Wall Street Journal published a story about a software developer marketing these life insurance arrangements to “the angry affluent” as a way to reduce their tax burdens and protect their heirs from paying large taxes on their inheritances. 

Shortly after the publication of this story, the IRS began examining this type of insurance plan and later that year issued a document alerting potential donors and charitable organizations that the IRS knew about the use of this type of plan to avoid paying taxes. In 2003, the IRS formally closed the loophole allowing for this type of arrangement, making it significantly less appealing as a way to purchase life insurance or to pass on wealth.

Charitable split-dollar insurance plans are partly modeled on standard split-dollar insurance plans. In a standard plan, more than one party pays into the life insurance plan’s premium. Employers commonly offer these types of plans as a fringe benefit for employees. The employer pays into the employee’s life insurance policy, which saves the employee money and ultimately benefits their family in the event of their death.

In a split-dollar insurance plan, when the insured person dies, the benefits of the policy are then split among beneficiaries, including the other parties, such as the employer, who had paid into the premium. In this way, split-dollar insurance policies are sometimes said to resemble interest-free loans, since the money paid toward the policy premium by the employer eventually comes back to them when the employee dies.