In Uncategorized on 04/13/2016 at 20:18

The late Clara wanted to keep the family moving company moving in the family. So she has her own trust buy split-dollar universal life insurance policies for the trusts of each of her three sons, so at the death of any of them, the remaining sons could buy out the decedent’s interest.

Big question: Does the economic benefit régime of Reg. 1-61.22 apply? It does if the only benefit to the heirs was the current life insurance cover; the greater of the cash surrender value (CSV) or the total amount of premiums paid had to remain with the late Clara (or her trust) and not go to the sons’ trusts.

Answer (per Judge Goeke): It did. The economic benefit régime applies. But he isn’t deciding whether the late Clara’s trust’s valuation of the CSV in the late Clara’s trust at DoD is correct.

The whole story is found in Estate of Clara M. Morrissette, Deceased, Kenneth Morrissette, Donald J. Morrissette, and Arthur E. Morrissette, Personal Representatives, 146 T. C. 11, filed 4/13/16.

To fund the intrafamily buyouts, the late Clara’s trust poured $29 million into the three sons’ trusts, which bought universal life insurance cover on each son in favor of the other two sons. Universal life means the purchaser of the policy can pay upfront, over time, or stop paying and then start again, a real roll-your-own.

“Under the split-dollar life insurance arrangements, upon the death of the insured the [late Clara’s] Trust would receive a portion of the death benefit from the respective policy insuring the life of the deceased equal to the greater of (i) the cash surrender value (CSV) of that policy, or (ii) the aggregate premium payments on that policy (each a receivable, and collectively, receivables). Each Dynasty [son’s] Trust would receive the balance of the death benefit under the policy it owns on the life of the deceased, which would be available to fund the purchase of the stock owned by or for the benefit of the deceased. If a split-dollar life insurance arrangement terminates for any reason during the lifetime of the insured, the [late Clara’s] Trust would have the unqualified right to receive the greater of (i) the total amount of the premiums paid or (ii) the CSV of the policy, and the Dynasty Trust would not receive anything from the policy.” 146 T. C. 11, at p. 7.

The deal was crafted expressly to comply with economic régime regs, and the sons assigned the policies back to the late Clara’s trust as collateral security for the repayment to the late Clara’s trust of the right to receive premiums paid or CSV. And the late Clara’s trust reported gifts per Table 2001, IRS’ numbers for economic benefit.

IRS claims the whole $29 million was a gift, and loses. The late Clara’s estate claims $7 million, but that’s for another day.

The deal is subject to the split-dollar regs; no dispute there. The outcome depends upon who owns the policy. As each of the sons’ trusts owns the policies on the other sons, it looks like the loan régime is the key.


“As an exception to the general rule, the final regulations include a special ownership rule that provides that if the only economic benefit provided under the split-dollar life insurance arrangement to the donee is current life insurance protection, then the donor will be the deemed owner of the life insurance contract, irrespective of actual policy ownership, and the economic benefit regime will apply. Id. subpara. (1)(ii)(A)(2).” 146 T. C. 112, at p. 14.

Now the preamble to the reg aforesaid distinguishes between the case where all the sons’ trust would get is the current death benefit (less the greater of CSV or premiums paid), and one where sons’ trusts get the death benefit (less the lesser of CSV or premiums paid). In the latter case, there’s excess benefit to the sons’ trusts.

So if the lesser, then loan. If the greater, economic benefit, and that’s only the insurance cover.

Now Tax Court doesn’t really like preambles to regs. They aren’t legislative history, and have little weight. But anyhow, Judge Goeke gives Skidmore deference (one degree above “meh”) to the preamble, even though he goes into the rationale further.

The trusts have no present right to CSV or premiums paid. Whether at death of insured or rollout (pre-death termination), the late Clara’s trust gets it all–greater of CSV or premiums paid.

IRS says that the late Clara’s trust provided the sons would get it all when the late Clara became the late Clara. But, says Judge Goeke, the late Clara’s trust was a revocable trust. The sons’ trusts had no legal right to any of it. And anyway, even when the late Clara became the late Clara, the CSV or premiums paid went into her trust, not to the sons’ trusts, and there was no direction that the trustee pay the sons’ trusts.

And the sons’ trusts had no obligation to pay any premiums. They had the right, but not the obligation. If the late Clara’s trust front-loaded the premiums, that gave the sons’ trusts no greater benefit than the policies provided.

A Taishoff “Good Job, First Class” goes to James Egbert McNair III, Esq., and Kelley C. Miller, Esq., and their colleagues at Reed Smith, counsel for the petitioners.





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