In the Estate of Richard E. Cahill, et al. v. Commissioner, the Tax Court denied partial summary judgment to an estate that contested a deficiency notice in which the Internal Revenue Service adjusted the value of the decedent’s rights in three split-dollar life insurance arrangements from $183,700 to more than $9.61 million. The court declined to grant partial summary judgment on the estate’s arguments that Internal Revenue Code Sections 2036, 2038 and 2703 didn’t apply to the split-dollar arrangement and that Treasury Regulations Section 1.61-22 did apply in valuing the decedent’s interest in the split-dollar arrangements for estate tax purposes. The court’s decision will make the use of split-dollar policies less attractive as a way to shift wealth from one generation to the next and potentially may impact other estate planning vehicles.
Creation of Split-Dollar Insurance Agreements
In 2010, when Richard Cahill was 90 years old and no longer able to manage his own affairs, his son, Patrick, entered into three split-dollar insurance agreements on his behalf. Richard lived in California at the time of his death in December 2011. Patrick, a Washington state resident, served as executor of the estate.
The decedent had been the settlor of two trusts—the revocable Richard F. Cahill Survivor Trust and the irrevocable Morris Brown Trust. Patrick was trustee of the Survivor Trust and was his father’s attorney-in-fact under California law. Patrick’s cousin, William Cahill, was trustee of the MB Trust, and the primary beneficiaries of that trust were Patrick and his issue. The MB Trust was formed on Sept. 9, 2010 to take legal ownership of three whole life policies, two insuring the life of Patrick’s wife and one insuring Patrick’s life. Lump sum premiums for the three policies totaled $10 million; each policy guaranteed a minimum 3 percent return of the invested portion of the premium.
Patrick, as trustee of the Survivor Trust, and William, as trustee of the MB Trust, executed three split-dollar agreements to fund the acquisition of the three life insurance policies. These agreements provided that the Survivor Trust would pay the premiums; the Survivor Trust did so by taking a $10 million loan from an unrelated third party. The obligors on this loan were Richard (with Patrick as his attorney-in-fact) and Patrick as trustee of the Survivor Trust.
As a general matter, the estate’s involvement in the three split-dollar life insurance arrangements occurred solely through the Survivor Trust, directed by Patrick. Both the estate and the IRS agreed that all assets in the Survivor Trust on the decedent’s date of death were includible in the gross estate.
Provisions of Agreements
Each of the split-dollar agreements provided that when the insured died, the Survivor Trust would…
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Article published by WealthManagement.com June 27 2018
Written by Justin Ransome and N. Todd Angkatavanich