Brody, Lawrence e Althauser, Lucinda e Cave, Bryan. Private split-dollar in light of PLRs
9636033 and 9745019 - a new form of split-dollar or just an extension of the existing rules?.
Washington: Tax Management Financial Planning Journal, 19 de outubro de 1999.
Private split-dollar in light of PLRs 9636033 and 9745019 - a new form of split-dollar or
just an extension of the existing rules?
Tax Management Financial Planning Journal; Washington; Oct 19, 1999; Lawrence Brody;
Lucinda Althauser; Bryan Cave;
Abstract:
In Ltr. Rul. 9636033, the IRS held that, since the insured received nothing of value for tax
purposes as a result of the agreement, the insured would not be deemed to have received or
transferred anything to the spouse as a result of the agreement, as he or she is deemed to do in
employment-related or entity-ownership arrangements. The IRS concluded that, because the
spouse would receive the greater of the cash value of the policy or an amount equal to her
premium contributions upon termination of the agreement in consideration for her premium
payments, the spouse would not be deemed to have made a gift. In Ltr. Rul. 9745019, concerning
a split-dollar arrangement between a husband and wife as the premium providers and their
irrevocable insurance trust, the IRS held that the arrangement did not constitute a gift by the
insureds to the trust for gift tax purposes. In the letter rulings, the IRS has, in effect, approved
private split-dollar arrangements under a fairly generous analysis.
Full Text:
Copyright Tax Management Inc. Oct 19, 1999
Major References: PLRs 9636033, 9745019 PLR 9636033
In PLR 9636033 - for the first time - the IRS ruled on the income and transfer tax consequences
relating to so-called "private" split-dollar - an arrangement not involving an employment or
entity ownership arrangement.1 This ruling addressed a split-dollar agreement between the
insured's spouse and a typical Irrevocable Insurance Trust created by the insured for the benefit
of the spouse. Under the terms of the split-dollar agreement, the trust, which owned the policy,
contributed the "economic benefit" cost of the agreement toward premium payments and the
spouse contributed the balance of the premium.2 On termination of the agreement during the
insured's lifetime, the spouse would receive the entire cash value of the policy.3 On termination
of the agreement at the insured's death, the spouse had the right to receive the greater of the
amount of her premium contributions or the then cash value of the policy.4
The ruling addressed three issues: (1) whether the insured would be deemed to have received
anything as a result of the transaction and whether the insured would be deemed to have
transferred anything to the spouse as a result of the transaction (which in either case would be a
taxable benefit); 5 (2) whether the spouse would be making a gift to the trust; 6 and (3) whether
the proceeds of the policy, when received by the trust, would be included in the insured's estate.
To address the first issue, the IRS reviewed Rev. Ruls. 64-328 7, 76-490, 8 and 78-420. 9 It
concluded that, unlike the situations at issue in those rulings, the situation in PLR 9636033 was
completely removed from the employment context. Since here the insured received nothing of
value for tax purposes as a result of the agreement (because of the absence of an employment
relationship or any other relationship to the premium provider which might generate a taxable
benefit to the insured), the insured would not be deemed to have received or transferred anything
to the spouse as a result of the agreement, as he or she is deemed to do in employment-related or
entity-ownership arrangements.
While this portion of the ruling certainly seems to make sense, it is interesting to note that under
Rev. Rul. 78-420, in which the IRS first addressed what are now called "third-party owner" splitdollar agreements, contributions toward premium payments made by the third-party owner were
ruled to offset the economic benefit otherwise taxed to the employee. Thus, while the IRS'
conclusion in PLR 9636033 that no deemed transfers by the insured were involved was based on
a lack of an employment-type relationship, it seems it could have reached the same result by
simply applying the principles of Rev. Rul. 78-420 - since the policy owner (the trust)
contributed the full economic benefit cost of the arrangement, there would be nothing left to treat
as a deemed transfer to or by the insured. By finding this transaction totally removed from the
earlier revenue rulings, however, the IRS has actually gone one step further in its decision. Under
its analysis, there arguably should be no deemed transfer to or by the taxpayer even if the trust
had contributed no portion of the policy premiums (which is an unexpected result).lo
The IRS' response to the second issue was somewhat surprising, although certainly favorable.
The Service concluded that because the spouse would receive the greater of the cash value of the
policy or an amount equal to her premium contributions upon termination of the agreement "in
consideration" for her premium payments, the spouse would not be deemed to have made a
gift.11 The IRS stated: "Since the spouse will be reimbursed for the premium payments, the
spouse's payment of the premiums will not be subject to gift tax;" interestingly, this statement
did not focus on the cash value return (rather than just her premium advances) as providing
consideration for the spouse's premium advances, although whether just a premium
reimbursement would have provided consideration isn't clear.12 In effect, the IRS seemed to find
that the spouse's premium payments were not transfers for less than full and adequate
consideration under 2511.
As with the first issue, the IRS' analysis of the second issue is particularly interesting because the
trust's contribution of the "economic benefit" amount toward premium payments seems to be
irrelevant - this item is mentioned in the facts, but is never cited by the IRS as a contributing
factor in its analysis. In fact, under the relatively simple analysis given by the IRS, one could
argue that so long as the spouse receives the greater of the cash value of the policy or an amount
equal to her premium contributions, she will be receiving consideration for her payments and
will not be making a gift to the trust (although note again the lack of any reference to the cash
value in the sentence from the ruling quoted above). 13 Of course, in spite of the fact that the
IRS' analysis in this ruling ignores the trust's contributions toward premium payments, whether
the IRS would reach the same result if the trust made no premium contributions is not clear.
The IRS reached its decision on the second issue without an analysis of (sec) 7872, but
specifically stated that it was expressing no opinion on the application of (sec) 7872 to the
transaction (as it has in all of its private letter rulings on employment-related and other
entityrelated split-dollar since 1992). If the transaction was treated as a loan, then an analysis of
the application of 7872 would seem to center on whether the cash value ultimately received by
the spouse would represent sufficient interest earned on her premium contributions.
The IRS' reservation of this issue could be quite significant in the private split-dollar area
(although the same could be said of both more traditional employmentrelated and of entityrelated split-dollar arrangements).
With respect to the third issue, the IRS' conclusion that the proceeds of the policy would not be
included in the insured's estate was not at all surprising and was in keeping with the current state
of the law. In conjunction with this portion of the ruling, however, it is important to note that the
result could have arguably been different if the insured were the premium provider under the
split-dollar arrangement. Under Rev. Rul. 79-129,14 if an insured holds a general security
interest in a policy (under a typical collateral assignment document, such as the standard
American Banker's form) on his or her life, the policy proceeds will be included in his or her
estate under (sec) 2042, because under such an assignment the insured-assignee can exercise
incidents of ownership in the policy under the assignment (such as the power to borrow against
or surrender the policy).15
Therefore, with a survivorship policy, it has generally been assumed that neither insured could be
the premium provider and have such a general security interest in the policy; as noted below,
however, based on PLR 9745019, discussed below, a "restricted" collateral assignment (of the
kind routinely used in controlling shareholder arrangements) could apparently be safely used to
secure their interest in their reimbursement in that situation (and presumably even in a single life
policy situation where the insured provided the premiums).
It is also important to note that in a private splitdollar agreement such as the one considered in
PLR 9636033, the longer the insured lives, more of the policy value will return to the spouse and
be subject to transfer tax at her death - this downside is particularly evident in a non-equity splitdollar arrangement like the one described in the ruling (where the primary premium provider will
receive the greater of cash value or premium payments upon termination of the agreement).
Economically, however, this arrangement gives the spouse unfettered access to full policy cash
value during the insured's lifetime, adding flexibility to the usually inflexible irrevocable
insurance trust. 16 If the insured were the premium provider, assuming the collateral assignment
were significantly restricted to prevent inclusion of the policy proceeds in his or her estate, based
on PLR 9745019, discussed below, access to policy values during the insured's lifetime would be
unavailable.
In addition, the arrangement would become complicated if the spouse here were to predecease
the insured, since the spouse's interest in the policy would presumably pass under her estate plan.
The spouse's estate plan would have to prevent the insured from becoming the owner of that
interest in the policy, because, as noted, Rev. Rul. 79-129 concluded that a typical collateral
assignment security interest in the policy would be sufficient to cause the policy proceeds to be
included in the insured's estate under (sec) 2042. 17
It is possible that the spouse's interest in the policy could pass to a "Unified Credit" or
"Exemption Equivalent" Trust, under the spouse's estate planning documents, if she were to
predecease the insured. If the insured served as trustee of that trust, however, the insured might
again risk inclusion of the policy proceeds in his estate, because of fiduciary incidents of
ownership. Typically, incidents of ownership held by the insured on a policy on his life as a
trustee will cause the policy proceeds to be included in his estate for estate tax purposes,
although there are exceptions to this rule for situations in which an insured "inadvertently"
becomes a fiduciary of a trust which owns a policy on his life.18 These exceptions do not usually
apply, however, if the insured is providing the funds for premium payments; thus, it is important
that the spouse's unified credit trust have sufficient assets to fund its ongoing premium payment
obligations.
Even if the insured was not a fiduciary of the trust which owned the policy security interest,
simply being the beneficiary of a trust which owned the policy could theoretically cause
problems if the spouse's unified credit trust includes provisions for mandatory principal
distributions, powers of withdrawal or even powers of appointment held by the insured which
could be satisfied with a distribution of an interest in the policy. A further consideration is
whether the trustee of the credit shelter trust, as the new "premium provider" under the splitdollar arrangement, can continue to provide funds for premiums under the terms of the splitdollar
arrangement without breaching its fiduciary obligations to the trust beneficiary(ies).19
If the trust to which the policy interest passed at the spouse's death and which is providing the
premiums in the arrangement was a trust for which the marital deduction had been elected at the
spouse's death, then the portion of the policy proceeds payable to the marital trust would be
included in the insured's estate. A QTIP or income/general power of appointment marital trust
might raise additional concerns if the surviving spouse's required power to make the marital trust
property productive (to meet the required "income for life" requirement for surviving spouses in
these types of trusts) were deemed to somehow give the insured spouse an incident of ownership
in the policy, by allowing him to require a sale of the policy, to invest the sale proceeds for
income; presumably an estate trust would not raise those concerns.
These concerns apply if a trust created under the spouse's estate planning documents becomes
the primary premium provider upon the initial premium provider's death, i.e., if a trust created by
the deceased spouse takes her place after her death in PLR 9636033. If, however, a trust created
by the premium provider spouse (or someone else for the benefit of the spouse, e.g., a lifetime
QTIP created for her benefit by the insured spouse) was the initial premium provider, then so
long as that trust was sufficiently funded, the death of the premium provider should not present
any significant issues.
Again, however, the parties would have to consider whether the trustees of that trust are making
an appropriate investment of trust assets by entering into the split-dollar agreement, and have the
power to do so under state law and the trust instrument; 20 again, if the trust were a QTIP trust
for the benefit of the spouse, there is the additional issue regarding meeting the "income"
requirement where trust cash is "invested" in policy advances and cash values.
As an alternative, at the deceased premium provider's death, directing the receivable from the
insurance trust back to the insurance trust (by a provision in the decedent's will or revocable
trust) might make sense; the collateral assignment and split-dollar arrangement could be
terminated and policy cash values could be used to support the policy without further gifts or
advances. 21
If the initial premium provider was not the spouse of the insured but was a trust not includible in
either spouse's estate, which had adequate funding to avoid the need for present gifts to provide
the trust with the funds to make the required premium contribution, it would be the perfect entity
to use to advance premiums to the insurance trust - such a trust might have been created for the
benefit of either spouse or their descendants by another family member. Again, subject to
fiduciary concerns, such a trust as the premium provider would eliminate all of the issues relating
to the death of the premium provider before the insured and transfer taxation of the premium (or
greater cash value) reimbursement. Alternatively, if the insured's adult children had adequate
independent resources, they might be a similarly perfect source of future premiums (with none of
the fiduciary concerns that use of a trust would involve).
PLR 9745019
In the second ruling on private split-dollar, PLR 9745019, the IRS reviewed a private split-dollar
arrangement between a husband and wife as the premium providers and their Irrevocable
Insurance Trust, with respect to a policy insuring the lives of the husband and wife, on a
survivorship basis. At the death of the survivor of the premium providers, the trust was to
continue in trust for their children for life, remainder to their respective descendants - a
generation-skipping trust. The premium providers initially funded the trust with a cash gift, with
which the Trustee purchased and paid for the first premium on a survivorship policy covering
their lives. The trust was named as initial owner and beneficiary of the policy.
Under the proposed collateral assignment splitdollar agreement, the Trustee was designated as
the owner of the policy, and would pay that portion of the annual policy premiums equal to the
insurer's current published premium rate for annual renewable term insurance generally available
for standard risks during the joint lifetimes of the taxpayers,22 and thereafter would pay that
portion or the annual premium equal to the lesser of the single life term rate or the rate shown in
the PS 58 tables. The insureds would pay the balance of the annual premium. The split-dollar
agreement was terminable at will by either the Trustee or the insureds, so long as the value of the
trust assets (based on the loan value of the policy) equaled or exceeded the amount to be repaid
to the insureds on termination of the arrangement. In all other cases, the agreement could be
terminated only by mutual consent of the Trustee and the insureds.23 The agreement would also
terminate upon the bankruptcy of the insureds, failure of the Trustee to reimburse the insureds,
failure of the insureds to pay their share of the premiums, or the death of the survivor of the
insureds.
If the agreement terminated prior to the death of the survivor of the insureds, the survivor would
be entitled to receive an amount equal to the cash value of the policy (apparently not the greater
of premiums or cash value), net of the cash surrender value at the end of the initial policy year.24
If the agreement terminated as a result of the death of the survivor of the insureds, the estate of
the survivor would be entitled to receive an amount equal to the cash value of the policy
immediately prior to the survivor's death, again, less the cash surrender value at the end of the
initial policy year.25
In order to secure the insureds' interest in the policy, the Trustee assigned to the taxpayers
limited rights under a "restricted" collateral assignment. The only rights assigned to the insureds
were the right to receive a portion of the death proceeds payable on the survivor's death and the
right to receive the cash value of the policy if the policy were surrendered by the Trustee. All
other rights under the policy were reserved to the Trustee under the collateral assignment,
The IRS was asked to rule on two aspects of this proposed arrangement:
1. Whether the payment by the insureds of a portion of the premiums for which they were
responsible under the split-dollar agreement would result in a gift to the trust; and
2. Whether the insurance proceeds payable to the trust under the split-dollar agreement would be
includible in the gross estate of the surviving insured.
With respect to the first issue, as in PLR 9636033, the IRS ruled that the arrangement did not
constitute a gift by the insureds to the trust for gift tax purposes, since the arrangement did not
arise out of an employer/ employee relationship, so that the insureds received nothing else of
value, compensatory or otherwise, when they advanced premiums to the trust. The ruling stated,
in part:
Since the [insureds] (if living) or the estate of the last [insured] to die will be reimbursed by the
trust for the portion of the premium payments made by the [insureds], the portion of the premium
payments made by the [insureds] will not constitute gifts to the trust for gift tax purposes.... If the
[insureds] 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.
Again, as in PLR 9636033, this statement does not refer to reimbursement of the cash values
(only the premiums advanced by the insureds, even though they were to be reimbursed for the
cash values).
With respect to the second issue, the IRS ruled that the insureds retained no incidents of
ownership in the survivorship policy on their lives, as a conclusion, and without any analysis.
Although the ruling discusses the broad nature of the phrase "incidents of ownership" under the
(sec) 2042 regulations, the ruling goes on to apparently conclude - without any discussion - that
the restricted nature of the collateral assignment to the insureds was enough to prevent their
interest in the policy from rising to the level of an incident of ownership in the policy. 26 Again,
even if the policy proceeds were not includible in the survivor's estate for estate tax purposes, the
premium reimbursement would be; a bequest of it to charity might make sense.
EFFECT OF THESE PLRS
In both PLRs 9636033 and 9745019, the IRS has, in effect, approved "private" split-dollar
arrangements under a fairly generous analysis. Perhaps the most interesting aspect of the IRS'
analysis is that, as discussed above, it does not seem to treat private split-dollar arrangements as
extensions of Rev. Ruls. 64-328 or 78420, but instead concludes that those rulings do not apply,
so there is no deemed transfer by the premium providers) to the insured(s) or the trust. The IRS'
determination that the spouse did not make a gift as a result of the transaction in the first ruling
and that neither of the insureds made a gift in the second ruling was apparently based solely on
2511 and a finding of full and adequate consideration in the transaction - the traditional
employment or entity-related split-dollar rulings were not mentioned at all in either analysis.
Again, whether the facts that the trusts were contributing the economic benefit amounts and that
the premium providers were entitled to the full cash value as their reimbursement were critical to
those holdings is not clear; obviously, economically it would be preferable for the trust not to
have to contribute (which would avoid gifts to the trust by the insured(s)) and for the
reimbursement to be limited to the premiums advanced (which would limit the amount
returnable to the premium provider and maximize the death benefits retained by the trust).27
Going forward, it is important to remember that in private split-dollar arrangements such as the
ones addressed in the rulings, a portion (perhaps a large portion) of the policy proceeds will
belong to the premium provider(s); the economic effect of this result and whether the
arrangement should be planned to be unwound during the insured's lifetime (using policy values
or other trust assets) should be carefully considered in structuring a similar private split-dollar
arrangement. As noted above, subject to fiduciary considerations, use of a trust which would not
be includible in either spouse's estate, and which had adequate prior funding to pay its share of
the ongoing premiums without additional gifts, or even the children of the insured(s) as the
premium providers) would solve this problem. As a final cautionary note, it is important to
remember that the IRS did not consider whether 7872 would apply to these transactions, and, if
so, what the result of its application would be.
Having said that, are these two private letter rulings on private split-dollar the beginning of a
new set of rules on these types of arrangements, or are they merely an extension of the existing
entity-related splitdollar arrangement rules to these types of arrangements? While it can be
argued that the rulings merely extend and apply existing rules to private arrangements, it could
also be argued that they, in fact, are the beginning of a new (and different) set of split-dollar
rules.
The absence of income tax consequences of the arrangements to the insured(s) is clearly correct without an employment relationship (or entity ownership relationship), income from a private
split-dollar transaction to the insured(s) is hard to find.28 The estate tax exclusion for the insured
husband in PLR 9636033 also seems clear - he had no interest in the policy on his life either
under the trust or under the split-dollar arrangement with his spouse. In PLR 9745019, estate tax
exclusion for the survivor of the insureds under the splitdollar arrangement was not as clear (and,
in fact, was surprising). Without mentioning the use of a "restricted" collateral assignment
arrangements to avoid attribution of corporate incidents of ownership to a controlling
shareholder under Regs. 20.2042-1(c)(6), the ruling appeared to follow the concepts approved in
PLR 9511046 to eliminate indirectly held incidents of ownership to eliminate directly held
incidents of ownership in private split-dollar (apparently, for the first time).
However, in some ways the most interesting aspect of these two rulings is their apparent decoupling of the private split-dollar gift tax rules from the traditional gift tax rules of third partyowned, entity related split-dollar arrangements. As noted, in traditional third partyowned splitdollar arrangements, the economic benefit amount (however determined) taxable to or
(contributed by) the insured is the measure of the gift of the net death benefit provided to the
third party owner. While, as noted, the rulings could have applied that rule to private split-dollar,
they did not do so. Instead, they concluded that there was no gift by the premium providers) to
the third-party owner, because there was no transfer for less than full and adequate consideration
to the trust, and therefore no gift for 2511 purposes.
Does this mean that this is a different form of splitdollar for transfer tax purposes than we have
known? If so, new planning opportunities may be presented by private split-dollar - for example,
if there is no gift in the transaction (even if the economic benefit is not contributed by the policy
owner), an unlimited amount of death proceeds could be provided to the trust without either gift
or GST implications. In traditional third party split-dollar, there will be some gift or GST
implications of providing the death benefit to the third party owner (unless and to the extent the
thirty party owner contributes to the arrangement, presumably using funds gifted to the trust by
the insured, with prior gift tax consequences).
If the rulings indicate that the "cost" of the "no gift" conclusion is inclusion of the full policy
cash value in the premium provider's estate for estate tax purposes,29 as well as contribution of
the economic benefit by the trust which owns the policy, the economic analysis may be to
compare this technique with a minimum applicable federal rate, interest-only loan to the trust by
the premium provider. The trade-off would be the nondeductible/taxable interest (unless the trust
were a grantor trust, in which case there would be neither income to the grantor nor a deduction
by the trust) against freezing the inclusion amount in the premium provider(s)' estates) at just the
premiums advanced and the difference in the amount treated as a gift - the economic benefit
amount versus the interest due each year. If the rulings do not impose these "costs" for the "no
gift" conclusion, private split-dollar would be preferable to an interest-bearing loan.
CONCLUSION
While it is too early to know with certainty, it appears that private or family split-dollar may
have unique income and transfer tax advantages over traditional employment-related or entityowner split-dollar arrangements. If these private letter rulings turn out to be the law in this area,
private split-dollar arrangements may become attractive alternatives to many potential insured(s)
for whom "traditional" split-dollar arrangements are not available. Whether these arrangements
become even better than such traditional arrangements will depend on whether non-contributory,
equity transactions are approved as not involving gifts by the premium provider(s).
[Footnote]
1 The only prior reference to private split-dollar, Rev. Rul. 79-129, 1979-1 C.B. 306, discussed
below, dealt with its estate tax consequences to an insured who was the premium provider.
[Footnote]
2 The spouse was "taking the place" of a corporate employer in a more typical employmentrelated split-dollar arrangement.
It was, therefore, a non-equity, contributory arrangement.
[Footnote]
4 In restating the facts, the IRS referred to this as a "reverse" split-dollar arrangement. However,
there is nothing "reverse" about it - as in a traditional employment-related collateral assignment
split-dollar arrangement, the policy owner (the trust) is the party which contributes the economic
benefit
[Footnote]
amount and which is entitled to the death benefit in excess of the premium provider's
reimbursement, and the premium provider (the spouse) contributes the balance of the premium,
which is returned to her on termination of the arrangement.
[Footnote]
5 The ruling, in a related holding, stated that since there was no employment relationship, the
insured had no income from the transaction; that holding appears to clearly reach the correct
conclusion.
[Footnote]
s This issue was critical in this ruling, since the spouse was an income beneficiary of the trust - if
she had been treated as having made a gift to the trust, at least some part of the value of the trust
would be included in her estate.
1964-2 C.B. 11. 8 1976-2 C.B. 300. 9 1978-2 C.B. 67.
[Footnote]
10 Whether the IRS would reach this same conclusion where the trust did not contribute toward
the premiums is not clear; given the ruling's broad statement and failure to mention Rev. Rul. 78420 in this section of the ruling, it arguably should make no difference. Eliminating that
requirement would eliminate the need for gifts to the trust to fund the trust's contribution and
increase the potential transfer tax lever@ge of the arrangement.
[Footnote]
The ruling did not reach the issue of whether the spouse would have reportable income if (as and
when) she received back more than her investment in the arrangement (the policy equity);
presumably the equity would be income if the arrangement terminated during the insured's
lifetime - reimbursement at the insured's death should be protected by 101 (a).
[Footnote]
12 Reimbursing only premiums would also increase the potential transfer tax leverage, by
reducing the amount returned to the spouse and includible in her estate for estate tax purposes,
thereby increasing the death benefit remaining in the trust. In fact, as noted below, that kind of
equity split-dollar reimbursement to the premium provider may be the only transaction which
makes economic sense.
[Footnote]
13 Again, it is not clear whether the fact that the spouse was entitled to the greater of policy cash
values or her premium advances as her reimbursement (rather than just her premium advances)
was important to the conclusion that no gift was involved in the transaction; it is possible that the
IRS insisted on that fact as a condition to issuing the ruling without raising the "equity" splitdollar issue raised in TAM 9604001 (although
[Footnote]
the applicability of that TAM is questionable in this context, given its reliance on 83 and the IRS'
conclusion here that there was no employment income to the insured under the private splitdollar arrangement - here, presumably the tax consequences of the policy equity belonging to the
trust would have been for gift tax purposes).
[Footnote]
14 1979-1 C.B. 306.
15 Inclusion of the insured's interest in the policy in his or her estate could be offset by
bequeathing it to charity.
16 In order to prevent that increasingly unattractive transfer tax result, unwinding the
arrangement during the insured's lifetime could be considered. If the trust had other assets which
could be used to repay the premium provider, future gifts by the insured could be avoided;
otherwise, the arrange
[Footnote]
ment would have been a gift deferral device, postponing the need for gifts of premiums to the
trust.
[Footnote]
three vear ugh, as noted below, based under &2035 for the conclusion of PLR Although, use of a
"restricted below, based on the collateral assignment would work to avoid this risk to the
insured; if the of a "restricted" collateral assignment would work to avoid this risk to the spouse
were not so restricted, adding the original aspropriate restrictions after the spouse's death would
stare not so restricted, adding the apthree-vear issue restrictions after 42035 for the spouse's
death would stared.
[Footnote]
18 See Rev. Rul. 84-179, 1984-2 C.B. 195.
19 Under state law (as opposed to federal tax law), the trust providing the premiums might be
deemed to be making an interest-free loan to the trust owning the policy, which might pose
problems for the fiduciary of the premium provider trust under state fiduciary law. At a
minimum, any such trust being created today should specifically authorize such a transaction.
[Footnote]
20 That is, despite the basic holding of Rev. Rul. 64-328 that split-dollar is not an interest-free
loan for income tax purposes, for state fiduciary law purposes, it might be held to be an interestfree loan.
[Footnote]
21 That bequest would use up some part or all the decedent's unified credit or require payment of
estate tax, and should be accompanied by a change to the tax clause in the decedent's will or
revocable trust, putting the burden of any tax generated by the bequest on the insurance trust.
[Footnote]
22 Why this measure of the amount to be paid by the Trustee was used is not clear (nor is it clear
how to derive that number for a survivorship policy, unless the insurer provides such a measure
of the benefit); interestingly, by not raising any issue about this measure of the contribution, the
IRS may have - for the first time - indirectly approved use of a Rev. Rul.
[Footnote]
66-110 type alternative measure of the economic benefit for a survivorship split-dollar
arrangement (based on survivorship term rates) here.
23 These provisions were likely used to prevent any argument that the insureds could force
termination of the arrangement and obtain ownership of the policy.
24 Why this limitation was imposed on the insureds' right
[Footnote]
of reimbursement also is not clear; it has been suggested that it was included to avoid any issue
about the initial gift to the trust being a completed gift in which the insureds retained no
reversionary interest.
[Footnote]
25 Again, this was a contributory, non-equity arrangement. 26 This conclusion is similar to the
rationale of PLR
9511046 and later PLRs, ruling that a similarly restricted col
[Footnote]
lateral assignment agreement did not create corporate incidents of ownership in a controlling
shareholder arrangement which would have seen attributed to the insured under the controlling
shareholder regulations issued under 2042.
27 In fact, it could be argued that non-contributory, equity
[Footnote]
private split-dollar is the only transaction that makes economic sense - whether the IRS would
rule that such a private splitdollar arrangement also involved no gift by the premium providers)
is the - so far - unanswered question. Although, note again the absence of any reference to
reimbursement of the cash value in the language of the PLRs holding there was no gift involved.
[Footnote]
28 But note that, as discussed above, the premium providers) would presumably have income to
report from any return over their investment (especially if it were received during the insured's
lifetime(s)).
29 As noted, the use of a previously funded trust which
[Footnote]
would not be includible in either spouse's estate for estate tax purposes or the children of the
insured(s) as the premium providers) would avoid the estate inclusion issue (but raises the
[Footnote]
state law fiduciary issues for the trustee of the trust making the advances).
[Author note]
by Lawrence Brody, Esq. and Lucinda Althauser, Esq. Bryan Cave LLP
St. Louis, Missouri