Designing a Generational Split-Dollar PlanDesigning a Generational Split-Dollar Plan
Careful planning, implementation and administration are needed.
Much has been written1 about generational split-dollar (GSD).2 Let’s take a fresh look at the 2016 Morrissette v. Commissioner,3 2021 Morrisette v. Comm’r4 and Levine v. Comm’r cases5 in light of recent developments, including the Internal Revenue Service’s reported aggressive examination of GSD plans. I’ll review important aspects of these cases and offer a number of important GSD plan and policy design considerations.
GSD is a funding strategy in which a senior generation (G1), rather than the insured second generation (G2), funds trust-owned life insurance. Here’s how the typical GSD plan operates:
Parent (G1) creates an irrevocable dynasty trust that’s also a grantor trust for income tax purposes with respect to G1 for the benefit of grandchildren and subsequent generations (G3 ).
The trust purchases a substantial life insurance policy on the child’s life and/or the child’s spouse (G2).
Unlike the typical plan in which G2 is the premium payer, G1 makes substantial upfront advances or loans to the trust to fully fund the policy pursuant to a split-dollar agreement and holds a split-dollar receivable based on the premiums advanced or lent to the trust.
The split-dollar agreement provides that G1 will be repaid at G2’s death.
During G1’s lifetime or on their death, G1 transfers the receivable to a second trust. Because the receivable won’t be repaid until the G2’s death (actuarially, a long time in the future), it’s valued at a substantially lower amount than its face value.
Morrissette, Levine and, to a lesser extent, Estate of Cahill,6 provide a roadmap for implementing a GSD plan. It’s important to note ...
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