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An estate planning strategy that was used in the past to reduce an elderly person’s estate was having the older generation buy an intergenerational split-dollar life policy on the life of a much younger family member. The concept was that the policy would not pay out for many years and when the elderly person passed away the value of the split dollar interest would be significantly discounted due to the longer life expectancy of the younger family member. This strategy has been significantly pierced in the case of “Estate of Cahill v. Commissioner” where the value used was disallowed, and the policy was forced to be valued taking into consideration the existing CV as well as the death benefit. Below is a Synopsis of the case:

The decedent’s revocable trust had advanced $10 million to an irrevocable trust under a split dollar agreement for the trust to purchase life insurance policies on the lives of the decedent’s son and his wife. The estate valued the estate’s right eventually to be reimbursed for its advances at only $183,700, because of the long period of time before the policies would mature at the insureds’ deaths. The IRS argued, among other things, that the reimbursement right should have a value equal to the full cash surrender value of the policies (about $9.6 million) in part because of §§ 2036, 2038, and 2703, and the notice of deficiency asserted penalties for negligence, and either gross or substantial valuation misstatements, with the asserted penalties exceeding $2.2 million.

(This case has been considered an extreme and abusive valuation example given the estate attempting to value the $10 million advance down to less than $200,000 for estate tax purposes after a very short time frame.)

Given the outcome of the case, it may now be more beneficial for the older generation to transfer (after at least three years) its interest in the policy as there are different valuation and taxation rules for gift taxes than there are for estate tax purposes. In addition, just using a long-term low rate AFR loan versus insurance can potentially capture some of the same estate tax benefits with lower risk and costs.

The material contained herein is for informational purposes only and does not constitute tax advice.  You should consult with your own tax advisor regarding your personal tax situation.  PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. The material contained herein is not intended as investment advice and does not address or account for individual investor circumstances.  Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance.  The statements contained herein are based solely upon the opinions of Telemus Capital, LLC.  All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third party sources, which we believe to be reliable, but not guaranteed.

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