Wednesday, September 26, 2018
An intergenerational split dollar agreement is intended to allow a grantor to make large premium payments on life insurance policies benefiting the grantor’s children without incurring excessive transfer taxes. It usually involves forming an irrevocable life insurance trust by the grantor, which then will purchases life insurance policies on the grantor's children. An agreement that involves the grantor paying premiums in return for the grantor's estate being repaid after the insured's death is struck, but the reality is that the insured (the child/children) will not likely pass away anytime soon.
The value of the receivable payment is then at a substantial discount, and the Internal Revenue Service becomes highly suspicious. In a prior case, the Tax Court upheld the taxpayer’s argument that the intergenerational split dollar agreement should be taxed under the economic benefit regime as opposed to the loan regime—resulting in the taxpayer being permitted to claim the larger discount afforded to the former regime.
In the current case of Estate of Richard Cahill, the Tax Court denied the taxpayer partial summary judgement while upholding the overall economic benefit regime. The Tax Court agreed with the Internal Revenue Service that rights were retained by the decedent in the context of Code Sections 2036 and 2038 and that the irrevocable life insurance trust's right to veto should be disregarded for valuation purposes under Code Section 2703. It also found that the agreements did not fit the definition of a "bona fide business arrangement."
See Michelle L. "Shelly" Harris, Cahill Case Sheds Light on Tax Court’s View of Intergenerational Split Dollar Agreements, Williams and Mullen, September 24, 2018.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.) for bringing this article to my attention.