Tax Court docket in Transient | Property of Levine v. Commissioners | Break up Greenback Life Insurance coverage and Property Planning | Freeman Regulation

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Tax Litigation: The Week of February 28, 2022, by March 4, 2022

Property of Levine v. Comm’r, 158 TC No. 2 | February 28, 2022 | Holmes, J. | dct. No. 13370-13

opinion

“[A]ll different issues being equal, tax tomorrow is healthier than tax in the present day. And tax many years from now’s higher nonetheless.”

Abstract: This case includes a cut up greenback life insurance coverage property planning association. Marion Levine (Levine) entered right into a transaction wherein her revocable belief paid premiums on life insurance coverage insurance policies taken out on her daughter and son-in-law that had been bought and held by a separate and irrevocable life-insurance belief that was settled below South Dakota legislation. Levine’s revocable belief had the proper to be repaid for the premiums. Selections for investments inside the irrevocable life-insurance belief, together with for its termination, could possibly be made solely by its funding committee, which consisted of 1 individual—Levine’s long-time buddy and enterprise accomplice. Levine died, and the insurance policies had not been terminated or paid out at the moment as her daughter and son-in-law had been nonetheless dwelling. The query was what must be included in her taxable property due to this transaction: (1) the worth of her revocable belief’s proper to be repaid sooner or later (ie, $2,282,195), or (2) the cash-surrender values ​​of these life-insurance insurance policies on the time of Levine’s demise (ie, $6,153,478)?

Main Holdings:

  • The split-dollar association on this case met the precise necessities of the Treasury Laws. The insurance policies in query had been bought and owned by the irrevocable belief, not Levine, and the association expressly gave the facility to terminate solely to the belief’s funding committee. Thus, neither IRC Part 2036(a)(2)—the final “catch-all” statute for property property—nor Part 2038—the “claw-back” provision for sure property property transferred earlier than demise—don’t require inclusion of the insurance policies’ cash-surrender values ​​as a result of Levine didn’t have any proper, whether or not by herself or along with anybody else, to terminate the insurance policies.
  • As such, and as of her demise, Levine possessed a receivable created by the split-dollar life insurance coverage, which was the proper to obtain the larger of premiums paid or the money give up values ​​of the insurance policies once they had been terminated.
  • Opposite to the Commissioner’s place, the transaction was not merely a scheme to cut back Levine’s potential estate-tax legal responsibility and there was a reputable enterprise function. There was nothing behind the “transaction’s façade” that will counsel that look of the specific written phrases of settlement and association don’t “match actuality.”
  • Pursuant to relevant state legislation, the belief’s funding committee—albeit one individual—owed fiduciary duties to the belief and beneficiaries apart from Levine, Levine’s daughter, and son-in-law, and the proof illustrated that the written agreements afforded Levine no energy to change, amend, revoke or terminate the irrevocable belief such that its property ought to be included in Levine’s property pursuant to Sections 2036(a)(2) or 2038.
  • The one asset from the split-dollar association that Levine’s revocable belief owned on the time of her demise was the split-dollar receivable.
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Key factors of legislation:

  • Irrevocable life-insurance trusts are sometimes used as a automobile to personal life-insurance insurance policies to cut back reward and property taxes. If executed correctly, a life-insurance belief can take a coverage out of its settlor’s property and permit the proceeds to circulation to beneficiaries tax free. Break up-dollar life-insurance trusts are a device to take away demise advantages from a settlor’s taxable property—or not less than defer fee of any tax owed.
  • Break up-dollar preparations entered into or materially modified after September 17, 2003 are ruled by Reg. § 1.61-22. A split-dollar life-insurance association between an proprietor and a non-owner of a life-insurance contract wherein: (i) both social gathering to the association pays, immediately or not directly, all or a portion of the premiums; (ii) a celebration making the premium funds is entitled to recuperate all or a portion of these premium funds, and reimbursement is to be produced from or secured by the insurance coverage proceeds; and (iii) the association just isn’t a part of a group-term life insurance coverage plan (apart from one offering everlasting advantages). Id. § 1.61-22(b)(1)-(1)(iii).
  • Items of beneficial property for which the donor receives much less beneficial property in return are referred to as “cut price gross sales.” The worth of items made in cut price gross sales is often measured because the distinction between the truthful market worth of what’s given and what’s obtained. Nonetheless, the Treasury Laws present a distinct measure of worth when split-dollar life insurance coverage is concerned. See Reg. § 1.61-22(d)(2).
  • There are two completely different and mutually unique regulatory regimes relevant to split-dollar insurance coverage trusts—referred to as the “financial profit regime” and the “mortgage regime”—and that govern the income- and gift-tax penalties of split-dollar preparations. These two regimes decide who “owns” the life insurance coverage coverage that’s a part of the association. The overall rule is that the individual named because the proprietor is the proprietor. Non-owners are any individual apart from the proprietor who has a direct or oblique curiosity within the contract. Nonetheless, if the one proper or financial profit offered to the donee below a split-dollar life-insurance association is an curiosity in present life-insurance safety, then the donor is handled because the proprietor of the contract. That is the economic-benefit regime.
  • The place a split-dollar life insurance coverage belief meets the necessities of Treas. Reg. § 1.61-22 the IRS and the courts should look to the default guidelines of the Code’s estate-tax provisions to determine the best way to account for the impact of the split-dollar association on the gross worth of the actual property.
  • The Code defines a taxable property as the worth of a decedent’s gross property minus relevant deductions. See 26 USC § 2051. Part 2033 supplies {that a} decedent’s gross property contains the worth of any property {that a} decedent had an curiosity in on the time of her demise. Sections 2034 by 2045 determine what different property to incorporate in an property.
  • For instance, Part 2036(a) is a catchall designed to forestall a taxpayer from avoiding property tax just by transferring property earlier than the taxpayer’s demise. Pursuant to the associated Treasury Laws, “[a]n curiosity or proper is handled as having been retained or reserved if on the time of the switch there was an understanding, specific or implied, that the curiosity or proper would later be conferred.” treas. Reg. § 20.2036-1(c)(1)(i). Equally, Part 2038 permits for a “claw-back” right into a decedent’s property the worth of property that was transferred wherein the decedent retained an curiosity or proper—both alone or along with one other—to change, amend, revoke, or terminate the transferee’s enjoyment of the transferred property.
  • Each sections 2036 and 2038 embrace an exception for transfers which might be “a bona fide sale for an satisfactory and full consideration in cash or cash’s value.” 26 USC §2036(a), §2038(a)(1).
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Insights: This case illustrates the significance of cautious property planning when using split-dollar insurance coverage and belief preparations. The state legislation below which the association and relevant irrevocable belief is settled, along with the rights, management, and powers of the settlor and the trustee, are vital parts to find out whether or not the property transferred to or bought by the belief ought to be included within the Settlor’s gross property upon demise. If created pursuant to the Treasury Laws, the willpower of whether or not and to what extent a split-dollar insurance coverage association is includable in a decedent’s gross property is set by the default guidelines of the Code’s estate-tax provisions, taking into account the “financial profit regime” and the “mortgage regime” relevant to those preparations.

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