Tax Court in Brief | Estate of Levine v. Commissioner | Split-Dollar Life Insurance and Estate Planning

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The Tax Court in Brief – February 28th, 2022  – March 4th, 2022

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

Estate of Levine v. Comm’r, 158 T.C. No. 2 | February 28, 2022 | Holmes, J. | Dkt. No. 13370-13

“[A]ll other things being equal, tax tomorrow is better than tax today. And tax decades from now is better still.”

Short Summary: This case involves a split-dollar life insurance estate-planning arrangement. Marion Levine (Levine) entered into a transaction in which her revocable trust paid premiums on life insurance policies taken out on her daughter and son-in-law that were purchased and held by a separate and irrevocable life-insurance trust that was settled under South Dakota law. Levine’s revocable trust had the right to be repaid for the premiums. Decisions for investments within the irrevocable life-insurance trust, including for its termination, could be made only by its investment committee, which consisted of one person—Levine’s long-time friend and business partner. Levine died, and the policies had not terminated or paid out at that time as her daughter and son-in-law were still living. The question was what has to be included in her taxable estate because of this transaction: (1) the value of her revocable trust’s right to be repaid in the future (i.e., $2,282,195), or (2) the cash-surrender values of those life-insurance policies at the time of Levine’s death (i.e., $6,153,478)?

Primary Holdings:

Key Points of Law:

Insights:  This case illustrates the importance of careful estate planning when utilizing split-dollar insurance and trust arrangements. The state law under which the arrangement and applicable irrevocable trust is settled, together with the rights, control, and powers of the settlor and the trustee, are critical components to determining whether the assets transferred to or purchased by the trust should be included in the settlor’s gross estate upon death. If created pursuant to the Treasury Regulations, the determination of whether and to what extent a split-dollar insurance arrangement is includable in a decedent’s gross estate is determined by the default rules of the Code’s estate-tax provisions, taking into consideration the “economic benefit regime” and the “loan regime” applicable to these arrangements.

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