Okay, you focus on wealth management, not insurance, so why do you want an insurance trick in your kit bag? Because, in the right circumstances, a split-dollar arrangement can be a great tool to help a client achieve important overall financial planning goals.

Don't stop until the end because split-dollar planning can mesh wonderfully with the core services you offer your clients. We'll show you how.

Split-dollar is not a type of insurance, it is a method of structuring the ownership of permanent life insurance. A split-dollar arrangement divides responsibility for paying life insurance premiums between the policy owner and another party, such as a trust or business.

This frees up your client to gift more money while buying the insurance coverage necessary to protect the estate, an important consideration these days when children may need extra help.

"Split-dollar insurance arrangements can help your client fund life insurance premiums by safely minimizing or eliminating the taxable gift going to an irrevocable trust," says Richard Harris of BPN Montaigne in Clifton, N.J.

The client can thus free up funds to make current cash gifts to heirs in need without jeopardizing their insurance plan. "The Internal Revenue Service recently ruled favorably on private split-dollar arrangements between insured clients and their irrevocable trust, (in PLR 200910002) which has many planners and attorneys taking another look," says Mary Hickok, trust counsel at Wilmington Trust Co.

Here is a simple example of how the split-dollar method can be used to help a client accomplish a host of objectives. Mom and Dad have an estate worth about $8 million, consisting of a securities portfolio, a home and a closely-held business.

Say Mom and Dad are 68 and 70 years of age, respectively, and are concerned about estate tax. They reside in a state with an estate-tax exclusion of only $1 million, so in addition to federal tax, the state estate tax will be significant.

One child works in the family business and will inherit ownership of the company. But the other does not. Mom and Dad need insurance to provide cash, which will equalize the inheritance of the two children, pay estate tax and provide liquidity. They estimate that they require $3 million worth of survivorship coverage. If they used the "standard" approach, their insurance trust would purchase the $3 million. Premiums would be about $56,000 per year, based on health and family history.

But where would the trust get that money? Sadly, not via tax-exempt gifts. Since Mom and Dad have used annual gifts to help their two kids and move business interests out of their estate, there is not a lot of maneuvering room to get money into the trust that will own their insurance.

This year, the most Mom and Dad can gift without tax liability is $26,000 per year to each of the two children for a total of $52,000 annually.

Enter split-dollar planning. Mom and Dad enter into a split-dollar arrangement with the insurance trust that will own the policy. The trust is essential to keeping the proceeds out of their estates-which would be counterproductive from a tax perspective, to say the least.

The insurance trust buys a $3 million permanent policy. But, under the split- dollar arrangement, it only has to pay the cost of term insurance based on both Mom and Dad dying in the same year.

The trust's share of the premiums will come to about $1,000 (its part of the split), a theoretical amount calculated using an approach sanctioned by the IRS called the "Greenberg to Greenberg" method. Mom and Dad pay the balance of the premiums, about $55,000, themselves, using money that is not gifted.

With the split-dollar method, Mom and Dad will only have to use up $1,000 of their annual gift exclusion, instead of the $56,000 they would have had to use. That's certainly a winner from a planning perspective. "Split-dollar provides tremendous leverage for your client's gift exclusions and exemption," notes Lawrence Brody, an attorney at Bryan Cave in St. Louis.

The Giveback

Of course, there's a catch, but it doesn't show up for a long time. Eventually, when both Mom and Dad pass away, the estate of the second parent to die will have to be repaid. The estate gets the greater of the premiums paid or the cash surrender value on the policy, and the insurance trust will receive the balance of the death benefit.

If Mom and Dad die in the earlier years of the plan, the bulk of the proceeds will be paid to the trust.