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TAX TRENDS

extent that the use, possession, right to citing Helmholz, 296 U.S. 93 (1935),
The court concluded the income, or other enjoyment is to be and Estate of Tully, 528 F.2d 1401 (Ct.
applied toward the discharge of
Cl. 1976), determined that the language
that the property a legal obligation of the decedent, or in both Secs. 2036 and 2038 refers to
transferred was the otherwise for his or her pecuniary rights and powers created by specific
benefit.”
instruments, not general default rules of
$6.5 million that According to the Tax Court, while contract that might theoretically allow
Levine had paid for Levine transferred cash, in which she modification of a contract.
the life insurance, could retain no interest, she did in return The IRS also maintained that
receive the split-dollar receivable created Levine, through her attorneys-in-fact,
which the court found and defined by the split-dollar arrange- Robert, Nancy, and Larson, stood on
was a voluntary inter ments. The receivable gave her the right both sides of the split-dollar transactions
to the greater of $6.5 million or the
because Larson was a co-trustee of the
vivos transfer under cash-surrender values of the insurance revocable trust and he was also the only
Secs. 2036 and 2038. policies purchased under the split-dollar member of the investment committee
arrangements. Under the terms of these of the insurance trust, which allowed
arrangements, however, Levine did not him to control the actions of the trust.
have an immediate right to this The IRS reasoned that this meant that
transferred and what rights were re- cash-surrender value. She (or her estate) Levine, through her attorneys-in-fact,
tained by Levine and her estate under had to wait until the deaths of both could terminate the insurance policies at
these Code sections. Nancy and Larry or the termination of any time, causing their cash-surrender
Property transferred: Under Tax the policies according to their terms. value to be paid to the revocable trust.
Court precedent, a “transfer” is broadly While the policies held by the The Tax Court rejected this argument,
defined and includes a voluntary inter insurance trust could be terminated, finding that Larson would be prevented
vivos transfer of property. The Tax Court thereby transferring the cash-surrender from surrendering the insurance policies
found that the property transferred values of the policies to the revocable because of his fiduciary duties to the
could not be the life insurance policies trust, the power to terminate the policies beneficiaries of the insurance trust under
because they had always been owned by was held by the insurance trust, which state law.
the insurance trust and that it could not was solely controlled by Larson. Conse- The IRS, anticipating the problem in
be the split-dollar receivable because quently, the court concluded that under its argument caused by Larson’s fiduciary
the split-dollar receivable belonged to the terms of the split-dollar arrange- duties for the insurance trust, contended
the revocable trust and afterwards to ments, Levine did not have possession that he would not be violating those
the estate; therefore, it was retained, not of or rights to the cash-surrender values duties, which ran to the beneficiaries of
transferred. Thus, the court concluded of the policies. the insurance trust, because Nancy and
that the property transferred was the The IRS had argued that the Tax Robert were the beneficiaries. According
$6.5 million that Levine had paid for Court should take a broader perspective to the IRS, Nancy and Robert would
the life insurance, which the court found and look at the split-dollar arrange- benefit regardless of whether the life
was a voluntary inter vivos transfer under ments as a whole in determining its insurance policies stayed in place or were
Secs. 2036 and 2038. results. In particular, the IRS claimed surrendered. Thus, by surrendering the
Rights retained: The court then that while the arrangements said that policies, Larson would not be violating
looked at whether Levine had retained only the insurance trust had the power his fiduciary duties to the beneficiaries
rights in the property transferred. Under to terminate the deal and hand over the of the insurance trust.
Regs. Sec. 20.2036-1(c)(1)(i), “[a]n cash-surrender value to the estate, However, as the estate pointed out,
interest or right is treated as having been general principles of contract law al- the insurance trust had beneficiaries
retained or reserved if at the time of the lowed the estate to modify any term other than Nancy and Robert; Levine’s
transfer there was an understanding, of the arrangements in conjunction grandchildren were also beneficiaries,
express or implied, that the interest or with the insurance trust. As a result, and they would not benefit from
right would later be conferred.” The use, Levine retained rights under both Secs. Larson’s surrendering the life insurance
possession, right to income, or other 2036 and 2038 that required the cash- policies. The IRS argued that because
enjoyment of property is considered to surrender values to be included in her Nancy and Robert could extinguish
have been retained or reserved “to the gross estate. The Tax Court, however, their children’s interest in the insurance

58 May 2022 The Tax Adviser