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By Trisha J. English, Esq. Winstead PC Houston, Texas
The Tax Court's April holding in Estate of Morrissette v. Commissioner that split-life insurance premium payments are not gifts to the named policy owners effectively ended the similar split-dollar agreement dispute in Estate of Levine v. Commissioner.
Levine had two trusts, an irrevocable trust and a revocable trust. In January of 2008, the irrevocable trust purchased the first life insurance policy on her and her husband's lives. The irrevocable trust entered into a split-dollar agreement with the revocable trust, whereby the revocable trust was required to pay all policy premiums during the term in which the policy was in effect. In exchange, the irrevocable trust assigned to the revocable trust an interest in the policy equaling the greater of either the policy's cash value or the total premiums paid. The revocable trust was also prohibited from collecting any amounts exceeding the value of the policy. Later that same year, the irrevocable trust purchased a second life insurance policy and entered into a similar split-dollar agreement with the revocable trust.
Levine's revocable trust transferred a combined $6.5 million to the irrevocable trust to pay for the single-payment premiums on the two policies. Recall that under the economic benefit regime set forth in Reg. §1.61-22, a gift must be reported in an amount equal to the term cost of the life insurance less the amount of each premium paid. Consequently, Levine's 2008 Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return , reported gifts of $1,689 for the first policy and $955 for the second policy, which constituted the respective amounts of the economic benefit.
At issue was whether the $6.5 million paid in insurance premiums constituted a gift for federal gift tax purposes under §2501 and §2511. The IRS asserted that the insurance premiums were a gift and that Levine's state owed $2.9 million in federal gift tax plus a $1.1 million accuracy penalty related to Levine's 2008 Form 709. Conversely, Levine's estate argued that the three-year statute of limitations had closed and that the IRS erred in calculating the value of the gift.
Levine presented a similar fact pattern to those raised and decided in Morrissette. In Morrissette, the Tax Court ruled that nearly $30 million in life insurance premiums paid by a mother's trust for life insurance policies on her three sons in a split-dollar insurance arrangement with three irrevocable trusts for the sons' benefit were not taxable gifts. In Morrissette, like in Levine, the mother's revocable trust was to receive the greater of the aggregate premiums paid or the cash surrender value of the contract, foreclosing the possibility that one of the irrevocable trusts would receive an additional economic benefit. The Tax Court held that the split-dollar insurance premium payments were not gifts to the irrevocable trusts (the named policy owners) because the irrevocable trusts received no additional economic benefit beyond life insurance protection.
The taxpayer in Levine had filed a motion for summary judgment on the statute of limitations issue, which the Tax Court granted, citing Morrissette as controlling and directly on point for the underlying characterization of the split-dollar insurance arrangement. The IRS opposed the motion for summary judgment, presumably to preserve its right to appeal both the decisions in Morrissette and Levine.
For now, estate planners that have utilized irrevocable life insurance trusts and split-dollar agreements as a wealth-transferring strategy will take some comfort in the Morrissette and Levine decisions. Estate planners considering the use of this approach in future transactions may want to follow the approach in Levine so that there is a reportable gift triggering the three year statute of limitations for the federal gift tax.
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