Intergenerational Split Dollar, Recent Adverse Decisions in Morrissette and Cahill – Where Do We Go from Here?

Two recent Tax Court decisions affecting intergenerational split dollar (IGSD) arrangements have forced practitioners to rethink this strategy. In Morrissette in 2016, the Tax Court ruled favorably on the income and gift tax treatment of the initial premium transfer.[ii] The unanswered question after Morrissette, however, was the determination of the value of the donor/decedent’s interest in the IGSD plan. Taxpayers have taken, based on independent appraisals, significant discounts in valuing the decedent’s interest in IGSD plans.

The IRS has argued for the application of Sections 2036, 2038 and 2703 to negate the discount. In mid-June, the Tax Court refused to rule favorably on the taxpayer’s request for summary judgement that Sections 2036, 2038 and 2703 were not applicable in this context.[iii] Practitioners might consider communicating with clients who have existing economic benefit ISGD plans.

Those plans should be evaluated to determine if steps might be taken, based on the Cahill and Morrissette decisions, to differentiate those plans and perhaps to enhance their viability. Nonetheless, practitioners will have to wait to see how these cases and the Levine case are finally decided. There is also the possibility that one or both cases are settled without a court decision, but it would seem that the IRS may push to a final court holding to bolster its position with other IGSD plans.

It might not be advisable to create a new economic benefit IGSD plan until the final Cahill and Morrissette decisions are issued because of the doubt about being able to discount the donor’s repayment rights, if the potential estate tax discount is a key part of the transaction. It is possible that these recent decisions may not affect loan split-dollar transactions, although practitioners should endeavor to better corroborate business purposes for such transactions in the wake of Cahill and Morrissette.

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