Page 645 - TaxAdviser_2022

ESTATES, TRUSTS & GIFTS

the agreement. The court indicated that not a trustee of this trust. In Cahill and family members). In Levine, the court
the IRS’s position failed to consider Lar- Morrissette, the decedent held the power suggested that if the fiduciary’s duties
son’s fiduciary obligations owed to the in conjunction with others, triggering were “nonconflicting” (i.e., where the du-
beneficiaries of the insurance trust. the application of Secs. 2036(a)(2) and ties held in one fiduciary capacity would
Distinguishing the Levine facts from 2038. In Morrissette, the estate ultimately not require the fiduciary to act against
those in other cases in which the Tax prevailed because the Tax Court deter- his or her duties as a fiduciary in another
Court took issue with fiduciary duties in mined that the bona fide sale exception capacity), they are not “illusory” and
the context of a family limited partner- to Secs. 2036 and 2038 applied. Cahill should be respected. Although Levine
ship (FLP) as being “illusory,” the court involved a motion for summary judg- did not involve an FLP, the opinion’s
noted that Larson owed nonconflicting ment on the estate’s arguments that discussion of fiduciary duties from a Sec.
fiduciary duties both to the beneficiaries Secs. 2036, 2038, and 2703 did not apply 2036(a)(2) perspective may be a positive
of the insurance trust and to Levine as to the split-dollar arrangement, which development for the evaluation of FLPs.
an attorney-in-fact. In both Strangi7 and the Tax Court denied (therefore, further
Powell,8 the fiduciary’s role as attorney- proceedings will determine whether Gift tax
in-fact could have required him to act the estate ultimately prevails). Levine Transfer via spouse held an
against his duties as trustee, the court provides an example of how to structure indirect gift to trust
explained. Finding it more likely than split-dollar arrangements to avoid Secs. In Smaldino,10 the Tax Court held
not that Larson’s fiduciary duties limited 2036 and 2038 altogether — and not that a gift to the taxpayer’s spouse was,
his ability to cancel the life insurance have to rely on the bona fide sale excep- in substance, an indirect gift to a trust
policies, the court concluded that the tion to avoid estate tax inclusion of the for the benefit of the taxpayer’s heirs.
cash-surrender values of the life insur- cash-surrender values. At the time of the trial, Louis P.
ance policies should not be included in The IRS had also raised the Sec. Smaldino owned an $80 million real
Levine’s estate under Sec. 2036(a)(2). 2703 issue in Morrissette and Cahill. In estate portfolio. He married Agustina
Sec. 2703: Finally, the Tax Court Morrissette II, the Tax Court determined Smaldino in 2006. Mrs. Smaldino had
rejected the IRS’s assertion that the that the exception to the application of worked for her husband’s business since
special valuation rules under Sec. 2703 Sec. 2703 was met under the facts of the 1995. In 2012, Mr. Smaldino turned 69
applied to the split-dollar arrangement case and, therefore, Sec. 2703 did not and, after a health scare, decided to get
at issue. When Levine entered into apply. In Cahill, the Tax Court denied his estate affairs in order. At the time,
the split-dollar arrangement, the IRS the estate’s motion for summary judg- Mr. Smaldino had six children from a
contended, she effectively restricted her ment on the issue. In Levine, the Tax prior marriage and 10 grandchildren.
right to control the $6.5 million and Court determined that it was not an Mr. Smaldino owned and operated
the insurance policies, but this restric- issue because she did not own the life his real estate portfolio through limited
tion on her right to access the $6.5 insurance policies at her death (because liability companies (LLCs) held in a
million should be disregarded under she had not retained an interest in the revocable trust. One of these entities,
Sec. 2703(a)(2). Levine’s estate argued policies via Sec. 2036 or 2038). Smaldino Investments LLC, held 10
that Sec. 2703 applied only to property The Tax Court has questioned the rental properties. In 2013, he transferred
Levine owned when she died, and the strength of fiduciary duties in the con- roughly 8% of the LLC’s class B mem-
court agreed. text of family arrangements — distin- ber interests to a trust he had created a
The key to the estate’s successful guishing these arrangements from those few months earlier for the benefit of his
defense of not including the cash- at issue in the Supreme Court’s holding children and grandchildren. The value
surrender values of the life insurance in Byrum,9 (respecting fiduciary duties of these interests equaled his remaining
policies at Levine’s death was that that a majority owner of stock owes to gift tax exemption (approximately $1
she did not have the power under the its minority owners). This is especially million). Mr. Smaldino also transferred
split-dollar arrangement, solely or in true in the context of FLPs and the roughly 41% of the LLC’s class B mem-
conjunction with others, to terminate fiduciary duties that a general partner ber interests to Mrs. Smaldino, the value
the arrangement. Only the insurance (usually held by senior family members) of which roughly equaled her remain-
trust had that power, and Levine was has to its limited partners (usually junior ing gift tax exemption (approximately

7. Estate of Strangi, T.C. Memo. 2003-145. 9. Byrum, 408 U.S. 125 (1972).
8. Estate of Powell, 148 T.C. 392 (2017). 10. Smaldino, T.C. Memo. 2021-127.

36 December 2022 The Tax Adviser