This yr on the Heckerling Institute on Property Planning, Donald O. Jansen, Mary Ann Mancini, and G. Michelle Ferreira offered “Cut up Greenback is Nonetheless Alive and Kicking – Fundamentals and Intergenerational Replace” – an attention-grabbing and academic look into the foundations and up to date developments of split-dollar preparations.
Treasury Rules Part 1.61-22(b) defines “cut up greenback” as an association between an proprietor and a non-owner of a life insurance coverage premium contract that satisfies the next standards:
- Both occasion to the association pays, instantly or not directly, all or any portion of the premiums on the life insurance contract, together with a payment by way of a mortgage to the opposite occasion that’s secured by the life insurance contract;
- No less than one of many events to the association paying premiums is entitled to recuperate (both conditionally or unconditionally) all or any portion of these premiums and such restoration is to be constituted of, or is secured by, the proceeds of the life insurance contract; and
- The association isn’t a part of a group-term life insurance coverage plan described in Inside Income Code Part 79 until the group-term life insurance coverage plan supplies permanent benefits to employees.
Foundations
Jansen kicked off the presentation with the historical past and makes use of of split-dollar preparations between staff and employers—notably specializing in worker fringe advantages, cross buy agreements, nonqualified deferred compensation and property tax planning. Jansen and Mancini additionally delved into the construction and nuances of the 2 split-dollar regimes: the financial profit regime and the mortgage regime.
Beneath the financial profit regime, the employer or donor owns the life insurance coverage coverage and endorses the financial advantage of the coverage to the worker or donee, which can lead to revenue, employment and/or present tax penalties. The financial profit regime is helpful when the employer needs to personal and management the money worth of the coverage.
Beneath the mortgage regime, the employer or donor loans the coverage premiums (normally on the present relevant federal charge) to the worker or donee, who owns the coverage. The employer’s curiosity within the money worth of the coverage is restricted to the premium loans made (plus gathered curiosity), and the remaining money worth is owned and managed by the worker or donee and may develop tax-free.
Intergenerational Cut up Greenback
After offering a complete background of split-dollar preparations, Jansen and Mancini turned the presentation over to the star of the present: Michelle Ferreira. Final yr, Ferreira efficiently defeated the Inside Income Service in Property of Marion Levine v. Commissioner, 158 T.C. No. 2 (2022), which targeted on the property tax penalties of intergenerational split-dollar life insurance coverage planning preparations.
Intergenerational cut up greenback is an property planning technique during which a grandparent (Gen 1) funds an irrevocable life insurance coverage belief (the ILIT) that advantages their grandchildren (Gen 3). The ILIT subsequently purchases a life insurance coverage coverage on the lifetime of Gen 1’s youngster (Gen 2). Gen 1 advances the life insurance coverage premiums to the ILIT and takes again a receivable underneath which Gen 1 is entitled to the higher of: (1) the premiums paid; or (2) the money worth of the life insurance coverage coverage on the time of Gen 2’s loss of life. In line with Ferreira, intergenerational split-dollar preparations are greatest for shoppers who aren’t doing “deathbed planning” and who:
- Have ample liquidity to reside for the remainder of their life with out the necessity of the money used for the insurance coverage insurance policies and liquidity to buy the life insurance coverage insurance policies;
- Face an property tax invoice ample sufficient to justify the prices of planning; and
- Have insurable kids who themselves have ample web value for to qualify for big life insurance coverage insurance policies.
Property of Marion Levine v. Comm’r
In 2008, Marion Levine entered into an intergenerational split-dollar association by which her revocable belief paid $6.5 million {dollars} for 2 life insurance coverage insurance policies on her daughter and son-in-law’s lives. The insurance policies had been held in an ILIT, of which South Dakota Belief Firm, LLC was the trustee. Importantly, solely an Funding Committee might make selections relating to the investments inside the ILIT, together with the choice to terminate the insurance policies. As is important with intergenerational split-dollar preparations, the ILIT agreed to pay the revocable belief the higher of: (1) the whole quantity of the premiums paid for these insurance policies (that’s, $6.5 million); and (2) both (a) the present money give up values of the insurance policies on the loss of life of the final surviving insured or (b) the money give up values of the insurance policies on the date that they had been terminated, in the event that they had been terminated earlier than each insureds died.
At Levine’s loss of life, her property reported just one asset: the receivable, which was valued at $2.2 million (that’s, the current worth of the proper to obtain the funds sooner or later). The IRS took the place that the property ought to embrace the present worth of the money give up values of the life insurance coverage insurance policies ($6.2 million) or the worth of the premiums paid ($6.5 million) underneath IRC Sections 2036 and 2038.
The Tax Courtroom discovered that Sections 2036 and 2038 didn’t apply as a result of Levine and her property didn’t have the proper to find out who might use possess or benefit from the revenue from the life insurance coverage insurance policies. The ILIT that owned the insurance policies had an unbiased, company trustee, and solely the Funding Committee retained the proper to terminate the insurance policies.
The IRS additionally argued that the particular valuation guidelines underneath Part 2703 utilized to the split-dollar association and that by coming into into the split-dollar association, Levine restricted her proper to regulate the $6.5 million and the insurance coverage insurance policies. In line with the IRS, this restriction is what ought to be disregarded when figuring out the worth of the property. The property contended that the particular valuation guidelines of Part 2703 solely apply to property owned by Levine (that’s, the receivable, which didn’t have any restrictions), and never the insurance coverage insurance policies, which she by no means owned in any respect. The court docket agreed, and solely the $2.2 million receivable was thought-about included within the property.
Planning Suggestions
In closing, Ferreira supplied the next planning suggestions for split-dollar preparations:
- The shopper shouldn’t have the power (alone or together with some other particular person) to unwind the split-dollar association, and the one who can unwind the association shouldn’t be appearing on behalf of the shopper.
- Unbiased members ought to function fiduciaries. If a fiduciary isn’t being paid for his or her providers, it should be clear that the fiduciaries wouldn’t profit personally from the association.
- The ILIT ought to be the one proprietor of the insurance coverage insurance policies. Preparation of all kinds, drafting, purposes for insurance coverage and different authorized belief devices and assignments clearly point out who the proprietor of the life insurance coverage insurance policies is.
- The authorized paperwork ought to be rigorously drafted, signed, saved, monitored and ready to comport with the holdings within the controlling instances and split-dollar laws. Present and property tax returns ought to be well timed filed and valuation studies ready and included with the returns to report the worth of the receivable.
Katie Coeyman is a Tax and Property Planning Lawyer with Schechter
