Split-dollar agreements and estate inclusions: Estate of Cahill.

AuthorRansome, Justin

Estate planning advisers have grown accustomed to taking special care in helping clients formulate arrangements involving property interests, knowing that an unintended estate inclusion can come from any of several quarters. Not only do such arrangements often fall prey to valuatior controversies, but several provisions of the Code can ensnare estate plans where the decedent has failed, in the IRS's estimation, to relinquish all control. In particular, Sec. 2036(a) can cause an estate inclusion of property interests in which the decedent held at death any right to possess or enjoy property or income it generates.

This alone might be easy enough to avoid. But the provision also includes any right to designate another person to possess or enjoy the property or income from it. This right need not be unilatera on the part of the decedent because Sec 2036(a)(2) also applies when the right is held "in conjunction with any person." Sec. 2038(a)(1), which governs powers to alter or terminate a transferred interest, similarly does not require that the right be solely in the decedent's control.

Both provisions have scuttled estate plans, including those involving family limited partnerships (1) and, more recentl) a case involving a less common vehicle, a split-dollar insurance agreement.

Split-dollar agreements are perhaps more common in a corporate setting, often between a company and one or more key officers or employees, or with major shareholders. The "split" in split-dollar insurance refers to sharing the costs and benefits of the insurance policy. Often, in a traditional split-dollar arrangement, an employer and an employee join in purchasing a cash-value insurance policy (or a similar type of policy, such as variable or universal life, containing an investment element) on the employee's life. The employer typically agrees to pay the portion of the insurance premiums equal to the annual increase in the cash surrender value (the investment portion) of the policy, and the employee agrees to pay the balance (the insurance portion), if any, of the premiums. Upon the employee's death or the cancellation of the agreement, the employer is entitled to receive an amount equal to the cash surrender value of the policy (representing a return of its investment), and the named beneficiary receives the balance of the death benefit payable under the policy.

Sometimes, split-dollar arrangements are used as an estate planning vehicle between family members and their trusts (often referred to as "private" split-dollar arrangements). One such plan was at the center of a recent controversy between a decedent's estate and the IRS. In Estate of Cahill, (2) the Tax Court found that the cash surrender value of a split-dollar life insurance arrangement was includible in the decedent's estate.

Richard Cahill (the decedent) created two trusts--the revocable Richard F. Cahill Survivor Trust (Survivor Trust) and the irrevocable Morris Brown Trust (MB Trust). The MB Trust was formed just before the decedent's death. This trust purchased and took legal ownership of three whole-life policies--one insuring the life of Patrick Cahill (the decedent's son), and two insuring the life of Patrick's wife. Patrick was trustee of the Survivor Trust and was the decedent's attorney-in-fact. Patrick's cousin, William Cahill, was trustee of the MB Trust, and Patrick and his issue were the primary beneficiaries of that trust. The lump-sum premiums totaled $10 million for the three policies, and each policy guaranteed a minimum 3% return on the invested portion of the premium. The policy amounts totaled $79.8 million. Both the estate and the IRS agreed that all assets in the Survivor Trust on the decedent's date of death were includible in the gross estate.

Patrick, as trustee of the Survivor Trust, and William, as trustee of the MB Trust, executed three split-dollar agreements--which provided that the Survivor Trust would pay the premiums--to fund the acquisition of the three life insurance policies. The Survivor Trust raised the money to pay the premiums by borrowing $10 million from an unrelated third party. The decedent's involvement in the three split-dollar life insurance arrangements occurred solely through the Survivor Trust, directed by Patrick Cahill. The decedent (with Patrick signing for him as his attorneyin-fact) and Patrick (as trustee of the Survivor Trust) were the obligors on this loan.

Each of the split-dollar agreements provided that, when the insured died, the Survivor Trust would receive a portion of the death benefit equal to the greatest of (1) the remaining balance of the loan; (2) the total premiums the Survivor Trust paid on the policy; or (3) the cash surrender value of the policy immediately before the insured's death (decedent's death benefit rights). The MB Trust would retain any excess of the death benefit (MB Trust's death benefit rights). The trustees of the Survivor Trust and the MB Trust could agree in writing to terminate each split-dollar agreement during the insured's life. If one of the agreements were terminated during the insured's life, the MB Trust could opt to retain the policy or, instead, transfer its interest in the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT