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ESTATES, TRUSTS & GIFTS

to borrow the $6.5 million needed to estate. The IRS reasoned that the insur- on the date they were terminated,
make the premium payments, and (2) ance trust had the power to terminate if they were terminated before both
documents to put the split-dollar ar- the split-dollar arrangement at the time insureds died.
rangement into effect. Levine died six of Levine’s death. Therefore, the insur- The Tax Court explained that split-
months later, on Jan. 22, 2009. ance trust and the beneficiaries of the dollar life insurance arrangements began
Larson and Nancy, as attorneys-in- revocable trust already effectively had as a means for employers to pay life
fact, signed gift tax returns for 2008 and access to $6.2 million. The IRS issued insurance premiums for their employees,
2009, reporting the gift’s value as the Levine’s estate a deficiency notice for retain an interest in the policy’s cash
economic benefit transferred from the more than $3 million, most of which value and death proceeds, and pass on
revocable trust to the insurance trust. was attributable to adjusting the value to the employee or beneficiaries any
Applying valuation rules in the regula- of Levine’s rights under the split- remaining death benefit. Rev. Rul.
tions applicable to split-dollar life insur- dollar arrangement. 64-328 clarified that the death benefit
ance arrangements,2 Larson and Nancy The Tax Court summarized the key portion of the policy would be included
placed the value at $2,644. steps in the split-dollar arrangement in the recipient’s income as an economic
The estate reported the value of the as follows: benefit. Estate planners wanted to help
split-dollar receivable owned by the ■ The insurance trust agreed to buy clients utilize the economic and tax ben-
revocable trust to be approximately $2 insurance policies on the lives of efits of life insurance, essentially using
million. This represented the present Nancy and Larry; the policies as tax-advantaged savings.
value of the $6.5 million receivable ■ The revocable trust agreed to pay the Final regulations from 20033 govern all
based on the date of death of the last to policy premiums; split-dollar arrangements entered into or
die of Nancy and Larry — the date on ■ The insurance trust agreed to assign materially modified after Sept. 17, 2003,
which the receivable would be due. the insurance policies to the revocable and broadly define them as arrange-
The IRS objected to the small trust as collateral; and ments between an owner and nonowner
amount reflected on the gift tax re- ■ The insurance trust agreed to pay of a life insurance contract in which:
turn but ultimately resolved that issue the revocable trust the greater of (1) 1. Either party pays (directly or indi-
before the matter went to trial. It also the total premiums paid for these rectly) all or part of the premiums;
objected to the approximately $2 mil- policies ($6.5 million); and (2) either 2. The premium-paying party may
lion receivable value, instead arguing (a) the current cash-surrender values recover all or part of the premium
that the cash-surrender values of the of the policies upon the death of payments, and repayment is to be
life insurance policies (approximately the last surviving insured or (b) the made from or secured by the insur-
$6.2 million) should be included in the cash-surrender values of the policies ance proceeds; and

EXECUTIVE SUMMARY an indirect gift to a trust for the held that the gifted interests
benefit of the taxpayer’s heirs, the must be valued separately at
• The Tax Court held that an estate Tax Court held. the time of transfer and that the
was not required to include the fractional interest discounts were
cash-surrender value of policies • The Fifth Circuit, affirming the Tax appropriate.
in a split-dollar life insurance ar- Court, held that the value of fam-
rangement but only the present ily limited partnership interests a • In a Chief Counsel Advice, the
value of a receivable based on the taxpayer transferred were based IRS ruled that a grantor retained
policies’ coverage of the lives of on the transfer documents, not annuity trust’s funding with un-
the decedent’s children. subsequent events. dervalued stock led to the failure
of a taxpayer’s retained annuity
• A taxpayer’s gift of limited liability • The IRS challenged a taxpayer’s interest to function as a quali-
company interests to his spouse, discount of the value of fractional fied interest under Regs. Sec.
who in turn gifted them to the interests in land he gifted to his 25.2702-3.
taxpayer’s trust, was in substance sons; however, a district court

2. See Regs. Sec. 1.61-22(d)(2). 3. T.D. 9092.

34 December 2022 The Tax Adviser