Tax Court: Economic benefit regime applies, split-dollar insurance arrangements

Tax Court: Economic benefit regime

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.

Related content

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. 

Final regulations

  • The IRS issued final regulations in September 2003 to govern all split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.  
  • The final regulations define a split-dollar life insurance arrangement as an arrangement between an owner and a nonowner of a life insurance contract in which (1) either party to the arrangement pays, directly or indirectly, all or a portion of the premiums on the life insurance contract; and (2) the party paying for the premiums is entitled to recover all or any portion of those premiums, and such recovery is to be made from, or is secured by, the proceeds of the life insurance contract.  
  • The final regulations include a special ownership rule that provides that if the only economic benefit provided to the donee under the split-dollar life insurance arrangement is current life insurance protection, then the donor will be the deemed owner of the life insurance contract, irrespective of the actual ownership, and the economic benefit regime will apply.   

Tax Court opinion

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 IRS argued that the economic benefit provided was a material issue of fact.  The Tax Court, however, agreed with the taxpayer that it was a purely legal question.  
  • Further, the Tax Court agreed with the taxpayer that under the split-dollar life insurance arrangements, there was no current or future right to any portion of the policy cash value, and thus, no current access under the regulations.

KPMG observation

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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