The U.S. Tax Court granted an estate partial summary judgment and held that the economic benefit regime in Reg. section 1.61-22 applied to two split-dollar life insurance arrangements between a decedent’s revocable trust and trusts established for the benefit of the decedent’s three sons.
The case is: Estate of Morrissette v. Commissioner, 146 T.C. No. 11 (April 13, 2016). Read the Tax Court opinion [PDF 94 KB]
The taxpayer—a revocable trust established by the decedent—entered into two split-dollar life insurance arrangements with three distinct “perpetual” trusts established for her three sons, and contributed cash to the three additional trusts. Each of the three trusts purchased two universal life insurance policies (on the lives of the beneficiaries of the other two trusts). The split-dollar arrangements provided that the taxpayer would receive the greater of the cash surrender value of the respective policy or the aggregate premium payments on that policy upon termination of the split-dollar life insurance arrangement or the death of the insured. Each of the three trusts was to receive the balance of any death benefit.
The decedent reported the gifts to the trusts for the 2006-2009 tax years using the economic benefit regime of Reg. section 1.61-22. After her death the IRS determined a gift tax deficiency. The estate sought partial summary judgment regarding whether the split-dollar life insurance arrangements were governed by the economic benefit regime.
At issue was whether for valuation purposes, the economic benefit or loan regime applied to these particular split-dollar arrangements.
The Tax Court held that because the only economic benefit conferred upon the trusts was the current life insurance protection, the economic benefit regime applied—rather than the loan regime.
The split-dollar life insurance arrangements at issue were structured identically to an example in the preamble to the regulations. Tax professionals believe that the interpretation of the special ownership rule for donor transactions is likely also to apply to the similar special ownership rule for employer-employee arrangements
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