In the February 9, 2009 Virginia Business Online Magazine, I wrote about the advantages of private split dollar life insurance for taxpayers seeking to provide estate tax free insurance protection for their families. The private split dollar planning advantages and the details of structuring a plan are described in the February 11 Post and, therefore, will not be repeated here.
What is worthy of note, however, is that in March the IRS approved the desired tax results for taxpayers who entered into a private split dollar arrangement. The insureds were a married couple who purchased a survivorship policy and titled it in an Irrevocable Trust to remove it from their taxable estates. See Private Letter Ruling (200910002). Although a Private Letter Ruling is not legal precedent, it does indicate the IRS’ position on similar transactions. Of particular note, the IRS agreed with the taxpayers regarding the following:
- The transaction qualified as "non-equity split dollar" under Treas. Reg. Section 1.61-22, and the taxpayers, the grantors of the Trust, were the "owners" for split dollar purposes.
As the policy owners for split dollar purposes, the gift tax charged to the grantors is the economic benefit that the Trust receives, i.e., generally the cost of the term insurance under Notice 2002-8, 2002-1 CB 398. This amount is significantly less than the premium payment.
For estate planning purposes, however, the Irrevocable Trust is the owner of the policy. Thus, the insurance death benefit is removed from the taxpayers’ estates. Obviously this is the desired result whenever a second to die policy is used to pay estate tax at the second death.
In non-equity split dollar, there is a receivable due to the insureds’ estate at the termination of the agreement, which is included for estate purposes.
Private split dollar is a planning alternative to be considered by taxpayers to provide insurance protection for their families in a gift tax efficient manner.