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SPLIT-DOLLAR PROCEEDS NOT INCLUDED IN INSUREDS' ESTATES.

NOV. 7, 1997

LTR 9745019

DATED NOV. 7, 1997
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, insurance, life
    death benefits
    insurance, life
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1997-30519 (7 original pages)
  • Tax Analysts Electronic Citation
    1997 TNT 217-43
Citations: LTR 9745019

UIL Number(s) 2042.05-00, 2511.00-00

                                             Date: August 8, 1997

 

 

            Refer Reply to: CC:DOM:P&SI: 4/PLR-107253-97

 

                              Re: * * *

 

 

LEGEND:

 

taxpayers = * * *

 

irrevocable trust = * * *

 

child A = * * *

 

child B = * * *

 

child C = * * *

 

 

Dear * * *

[1] This is in response to your letter dated April 10, 1997, and other submissions in which you request rulings concerning the income, gift and estate tax consequences of a private split-dollar life insurance arrangement.

[2] You represent that the taxpayers, husband and wife, reside in a community property state. The taxpayers have three children: child A, child B, and child C. The taxpayers created an irrevocable trust in October 1996. Child A was named trustee. The terms of the trust specifically preclude the taxpayers from acting as trustees. The trust is irrevocable and the taxpayers have retained no powers or authority over either the trust or the trust property or the administration thereof.

[3] The trust instrument provides that, during the lifetime of the taxpayers, the net income of the trust is to be paid in equal shares quarter-annually to child A, child B, and child C. Upon the death of the last to die of the taxpayers, the trust is to be divided into as many shares as there are children of the taxpayers then living and children of the taxpayers then deceased leaving issue then living (except no share is to be established for the issue of child B). Each share is to comprise a separate subtrust. The net income of each subtrust is to be paid quarter-annually for the benefit of the child for whom the subtrust was created. The principal of each subtrust may be distributed, at the discretion of the trustee, for the respective child's health, education, maintenance, or support. At the death of either child A or child C with both taxpayers deceased, the trustee of the subtrust for such deceased child is to distribute the remaining corpus of the subtrust to the issue of the deceased child by right of representation. Upon the death of child B with both taxpayers deceased, the remaining corpus of the subtrust for child B is to be distributed to the taxpayers' issue by right of representation except that no distributions are to be made to the issue of child B.

[4] The taxpayers initially funded the primary trust with a cash gift. With this initial contribution the trustee purchased, and paid the first premium on, a second-to-die life insurance policy covering the lives of the taxpayers. The irrevocable trust was named the owner and beneficiary of the policy. The taxpayers and the trustee propose to enter into a collateral assignment split-dollar agreement with respect to any policies held by the trust.

[5] Under the collateral assignment split-dollar agreement, the trustee is designated the owner of the policy. During the joint lives of the taxpayers, the trustee will pay that portion of the annual policy premiums equal to the insurer's current published premium rate for annually renewable term insurance generally available for standard risks. After the death of the first taxpayer to die, the trustee will pay that portion of the annual policy premiums equal to the lesser of 1) the applicable amount provided in the P.S. 58 tables set forth in Rev. Rul. 55-747, 1955-2 C.B. 228, or 2) the insurer's current published premium rate for annually renewable term insurance generally available for standard risks. The taxpayers will pay the remaining portion of the annual premium. The entire premium may be remitted by the taxpayers, and, if the taxpayers remit the total premium, the trustee is obligated to reimburse the taxpayers within 30 days for the trustee's portion of the premium.

[6] The split-dollar agreement may be terminated at will by either the trustee or the taxpayers if the value of the assets held by the trust, excluding the value of the insurance policy, but including the loan value of the policy, equal or exceed the amount that is to be paid to the taxpayers upon termination as set forth below. In all other cases, the split-dollar agreement may be terminated only through the mutual consent of the trustee and the taxpayers. The agreement will also terminate upon the bankruptcy of the taxpayers, the failure of the trustee to timely reimburse the taxpayers, the failure of the taxpayers to pay the premiums, or the death of the survivor of the taxpayers.

[7] If the agreement is terminated prior to the death of the survivor of the taxpayers, the survivor of the taxpayers will be entitled to receive an amount equal to the cash surrender value of the policy (net of the cash surrender value at the end of the initial policy year). For a 60-day period after the date of termination the owner has the option of obtaining a release from the collateral assignment by returning to the insureds (taxpayers) or the survivor an amount equal to the then cash surrender value of the policy less the cash surrender value at the end of the initial policy year. If the owner fails to exercise this option, the insureds or the survivor have the right to surrender the policy and obtain the cash surrender value less the cash surrender value at the end of the initial policy year.

[8] If the agreement is terminated as a result of the death of the survivor of the taxpayers, the estate of the survivor of the taxpayers (or its designated beneficiaries) will be entitled to receive an amount equal to the cash surrender value of the policy immediately prior to the death of the survivor of the taxpayers less the cash surrender value at the end of the initial policy year.

[9] In order to secure the taxpayers' interest (or the interest of the estate of the survivor) in the policy, the trustee will assign to the taxpayers, under a collateral assignment agreement, certain rights in the policy. Under the agreement, the following rights are assigned to the taxpayers: 1) the right to receive a portion of the proceeds payable on the survivor's death equal to the taxpayers' interest under the split-dollar agreement; and 2) the right to receive the cash value of the policy if the policy is surrendered by the trustee, less the cash surrender value amount at the end of the initial policy year. All other rights with respect to the policy are reserved to the trustee and all such rights may be exercised solely by the trustee subject to the taxpayer's security interest.

[10] You request that we rule as follows:

     1. The payment by the taxpayers of the portion of the premiums

 

        for which they are responsible under the split-dollar

 

        agreement, will not result in a gift to the trust by the

 

        taxpayers or a deemed gift to the trust by the taxpayers

 

        under section 2511 of the internal Revenue Code.

 

 

     2. The insurance proceeds payable to the trust pursuant to the

 

        split-dollar agreement from the second-to-die life insurance

 

        policy held by the irrevocable trust will not be includible

 

        in the gross estate of the second taxpayer to die under

 

        section 2042.

 

 

ISSUE 1 (Gift tax Consequences of premium payments)

[11] Section 2501 imposes a tax on the transfer of property by gift by an individual. Section 2511 provides that the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 2512(b) provides that, where property is transferred for less than adequate and full consideration in money or money's worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift.

[12] Section 25.2511-2(b) of the Gift Tax Regulations provides that, as to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another, the gift is complete. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined.

[13] Rev. Rul. 64-328, 1964-2 C.B. 11, holds that when there is a "split-dollar" arrangement, in which the employer pays the portion of the premiums equal to the increases in the cash surrender value and the employee pays the balance, if any, of the premiums, and in which, from the proceeds payable upon the employee's death, the employer receives at least an amount equal to the funds it has provided, with the beneficiary receiving the balance, the value of the insurance protection in excess of the premiums paid by the employee must be included in the employee's income. The ruling further states that the same income tax result follows if the transaction is cast in some other form that results in a similar benefit to the employee.

[14] Rev. Rul. 76-490, 1976-2 C.B. 300, holds that, where an employer makes premium payments on a group term life insurance policy for an employee and the employee has irrevocably assigned the insurance policy to an irrevocable trust, each premium payment made by the employer is deemed an indirect transfer by the employee to the assignee of the policy for purposes of section 2511, and is subject to the gift tax imposed by section 2501. Under the facts in the ruling, the policy was a group term life insurance policy on the life of the employee and the employer made all premium payments.

[15] Rev. Rul. 78-420, 1978-2 C.B. 68, holds that where a corporation enters into an arrangement with a spouse of an employee for the purchase of a life insurance policy insuring the life of the employee, the value of the life insurance protection provided by the corporation which is included in the income of the employee is deemed to be transferred by the employee to his spouse for purposes of section 2511 and is subject to the gift tax imposed by section 2501. In Situation 2 of the ruling, the spouse is the owner of the policy and has the right to select the beneficiary. The corporation provides the funds to pay part of the annual premiums to the extent of the increase in the cash surrender value of the policy each year. The spouse provides the balance of the premiums. The corporation is entitled to receive, out of the proceeds of the policy upon the death of the employee, an amount equal to the cash surrender value of the policy or at least an amount equal to the funds it has provided for premium payments.

[16] The arrangement in Rev. Rul. 78-420 arises out of the employer-employee relationship between the employee and the corporation. The arrangement is of the type contemplated by Rev. Rul. 64-328, and, consequently, the premium payments by the corporation are deemed to be compensatory in nature and income to the employee. The employee is then deemed to make a gift of this income to his spouse.

[17] Unlike the relationships contemplated in the above mentioned revenue rulings, the premium payments by the trustee of the trust, in the present case, are not compensatory in nature. The taxpayers have no employer-employee relationship with the trustee of the trust. The taxpayers made a taxable transfer to the trust at its inception and they receive nothing else of value, compensatory or otherwise, when the premium payments are made.

[18] Under the terms of the split-dollar agreement, the taxpayers will pay the portion of the premiums in excess of that paid by the trustee. If the agreement is terminated prior to the death of both taxpayers, the surviving taxpayer or taxpayers will receive, as reimbursement for their premium payments, an amount equal to the cash surrender value of the policy, less the cash surrender value at the end of the initial policy year. At the death of the last taxpayer to die, the estate of that taxpayer will receive, as reimbursement for the premium payments, an amount equal to the cash value of the policy immediately prior to the taxpayer's death, less the cash surrender value at the end of the initial policy year. Since the taxpayer (if living) or the estate of the last taxpayer to die will be reimbursed by the trust for the portion of the premium payments made by the taxpayers, the portion of the premium payinents made by the taxpayers will not constitute gifts to the trust for gift tax purposes. We note that, if the taxpayers make additional contributions to the trust in order to provide funds for the trustee's portion of the premium payments, these latter contributions will be taxable for gift tax purposes.

[19] We conclude that the payment by the taxpayers of the portion of the premiums for which they are responsible under the split-dollar agreement, will not result in a gift to the trust by the taxpayers or a deemed gift to the trust by the taxpayers under section 2511.

ISSUE 2 (Inclusion of policy in taxpayer's gross estate)

[20] Section 2042(2) provides that the value of a decedent's gross estate shall include the proceeds of all life insurance policies on the decedent's life receivable by beneficiaries, other than the executor of the decedent's estate, to the extent that the decedent possessed at his death any incidents of ownership exercisable either alone or in conjunction with any other person. An incident of ownership includes a reversionary interest arising by the express terms of the instrument or by operation of law only if the value of such reversionary interest exceeds 5 percent of the value of the policy immediately before the death of the decedent.

[21] Section 20.2042-1(c)(2) of the Estate Tax Regulations provides that "incidents of ownership" is not limited in its meaning to ownership of a policy in the technical legal sense. Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy.

[22] In the present case, the taxpayers have retained no incidents of ownership in the second-to-die life insurance policy on their lives. In the event that the trust includes assets (other than the insurance policy) such that these assets when added to the loan value of the policy would allow the trustee to pay the specified amount upon termination and the taxpayer(s) elects to cancel the agreement, the trustee could pay the taxpayer(s) an amount equal to the cash surrender value of the policy (net of the cash surrender value at the end of the initial policy year). The taxpayer(s) cannot, thus, force the cancellation of the policy.

[23] We conclude that the insurance proceeds payable to ;Lhe trust pursuant to the split-dollar agreement from the second-to-die life insurance policy held by the irrevocable trust will not be includible in the gross estate of the last taxpayer to die under section 2042.

[24] Except as we have specifically ruled herein, we express no opinion under the cited provisions or under any other provision of the Code. Specifically, we express no opinion regarding the application of sections 2503 and 7872 to this transaction.

[25] This ruling is based on the facts and applicable law in effect on the date of this letter. If there is a change in material fact or law (local or Federal) before the transactions considered in the ruling take effect, the ruling will have no force or effect. If the taxpayer is in doubt whether there has been a change in material fact or law, a request for reconsideration of this ruling should be submitted to this office.

[26] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) provides that it may not be used or cited as precedent.

                                   Sincerely yours,

 

 

                                   Assistant Chief Counsel

 

                                   (Passthroughs and Special

 

                                     Industries)

 

 

                               By: George Masnik

 

                                   Branch Chief

 

                                   Branch 4

 

 

Enclosure

 

  Copy for 6110 purposes
DOCUMENT ATTRIBUTES
  • Institutional Authors
    Internal Revenue Service
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    estate tax, insurance, life
    death benefits
    insurance, life
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 1997-30519 (7 original pages)
  • Tax Analysts Electronic Citation
    1997 TNT 217-43
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