University of Michigan Advances Split-Dollar Life Insurance for Coach Retention

The University of Michigan initiated the use of split-dollar life insurance arrangements as an alternative to deferred compensation in collegiate coaching contracts, beginning with football coach Jim Harbaugh in 2016. This strategy has subsequently been adopted by other universities including Clemson and South Carolina for their head coaches. Split-dollar life insurance arrangements involve the employer loaning funds to the employee to pay high premiums on a cash accumulation life insurance policy, which differs from typical policies focused on high death benefits. This setup enables rapid growth of cash value with minimal charges, which can be accessed income tax-free by the employee during retirement or through the policy death benefit, effectively functioning as a Roth IRA substitute with a potential supplemental benefit. Michigan’s recent basketball coaching turnaround under Dusty May positions the university to implement such an arrangement with May, drawing lessons from the prior agreement with Harbaugh to enhance retention incentives and financial efficiency. The former agreement with Harbaugh lacked an acceleration clause and interest on the loan, which allowed for early departure without accelerated loan repayment and generated ongoing imputed income tax obligations for the coach. Adjusting the agreement for May could include possibly charging IRS minimum interest rates and incorporating an acceleration clause that demands immediate repayment if May leaves early, thus functioning as a buyout clause and fostering long-term retention. Pairing this with a retention bonus to cover interest and tax liabilities could make the arrangement cost-neutral for the coach. Furthermore, structuring the loan to be interest-bearing offers opportunities to refinance at lower IRS prescribed rates, reducing the employee's taxable imputed income and enhancing tax efficiency. This arrangement's objective aligns the interests of both employer and employee to maximize benefits for retention while maintaining cost-effectiveness, underscoring the strategic use of advanced life insurance products for key talent retention in academia. Jordan Smith of Schechter Wealth provides insights into the legal and financial design of such arrangements, highlighting their role within comprehensive wealth preservation and advanced planning strategies.