2. Estate Dilution Due to: Repeat Estate Taxation & A Growing Family

3. Repeat Estate Taxation1.
Parents
$100
Dilution Due to
Repeat Estate Taxation
Estate Tax Rate
Generation
40%
50% 1
Parents
$100 2
Children
$60
$50 3
Grandchildren
$36
$25 4
Great GC
$21
$12 5
Great Great GC
$13 $6 6
GGG GC $8 $3
IRS
$$$ 2.
Children
$60
IRS
$$$ 3.
Grand-Children
$36
$$$
IRS 4.
Great GC
$21
IRS
$$$

4. How many people have a client say:
Estate Dilution
How many people have a client say:
“I don’t care if the children get $60M rather than $100M?”
(Plug in the numbers)

5. Estate Dilution
Very few Clients are aware of the dilution due to the combined effect of
Taxes
A growing family

6. But what about the $5.45M/$10.9M Gift & GST Exemption … ?
Dilution Due to Repeat Estate Taxation & A Growing Family (40% Estate Tax)
Parents
$100
$100
<$40> Estate Tax
$60 to Children
$20 /Child
<$8> Estate Tax
$12 to GC
Child
$20
Child
$20
Child
$20 GC $4 GC $4 GC $4
$4/GC
But what about the $5.45M/$10.9M Gift & GST Exemption … ?

7. Dilution Due to Repeat Estate Taxation & A Growing Family ($10M Exemption, 40% Estate Tax)
Parents
$100
$100 - $10 = $90 x .4
<$36> Estate Tax
$64 to Children
$21.3 /Child
$21.3 – $10 = $11.3 x .4
<$4.5> Estate Tax
$16.8 to GC
Child
$21.3
Child
$21.3
Child
$21.3 GC
$5.6 GC
$5.6 GC
$5.6
$5.6/GC
If Parents funded a dynasty trust with $10M upon death, each GC’s share would increase to $6M.
What could they accomplish with lifetime planning?

8. Generational Split Dollar
Robert W. Finnegan, J.D., CLU
(518)

9. Traditionally - Which Pocket?
Insured(s) & Funder(s)
Insured’s Children, GC, etc.
Trust
(Dynasty Optimal)
Traditional Planning
The Client
Is the insured and
Source of funds
Wealth:
Private Financing

10. Generational Split Dollar (GSD) Plans
A strategy where …
Parents (G1) fund insurance on the life of children (G2)
In a Dynasty Trust for the benefit of GC and subsequent generations (G3+)
Split Dollar is the basis for Generational Split $
Economic Benefit Regime (Morrissette)
Loan Regime (Superior)
Freeze G1’s estate and move the appreciation (LI death benefit) to a Dynasty Trust

11. Generational Split Dollar (GSD) Plans
Parents (G1) fund insurance on the life of children (G2)
Dynasty Trust for the benefit of GC and subsequent generations (G3+)
Split Dollar is the basis for Generational Split $
Economic Benefit Regime (Morrissette)
Loan Regime (Superior)
Freeze G1’s estate and move the appreciation (LI death benefit)
to a Dynasty Trust

12. (G2 - Same Insured as Part I)
Which Pocket?
PARENTS
(G1)
CHILD
(G2 - Same Insured as Part I)
GC, GREAT GC, etc.
(G3, G4, etc.)
$$$
Dynasty Trust
Required
Generational Split $
Client (G2) is the Insured
Parent (G1) funds
G2 - Insureds Only

13. Generational Split Dollar (GSD) Plans
Client Profile:
UHNW Client (Senior Generation - G1)
Older – age(s) 70+
Frequently in poor health (uninsurable)
G1 has done substantial planning and moved significant wealth, but needs to do more
G2 (Child) has or will have substantial wealth
G2 has established need for insurance
Keep a closely held business in the family (Control ownership)
Fund estate taxes
Reduce dilution of grandchildren’s & GGC interest

14. GSD – What’s the Attraction? For the CLIENTS
Discounts!
Range from 30% to 95%!
G1 & Dynasty Trust enter into split dollar plan
Policy insures G2 or G3 (Children or GC)
G1 advances $30M in premium under Split $ plan
G1 has right to recover $30M upon insureds death (the “Split $ Receivable” or “Receivable”)
That recovery is a long time in the future
Qualified appraisal values Receivable at
$1.5M (95% discount) to
$7.5M (75% discount)

15. GSD – What’s the Attraction? For the IRS
Discounts!
Range from 30% to 95%!
Needless to say the Service does not like GSD plans (valuations)!!!
The IRS has been
Auditing every Economic Benefit Regime GSD plan
Assessing gift tax deficiencies asserting a 100% gift
Settling some plans
Litigating others
Note: The aggressive discounts have not yet been litigated

16. GSD – With all that attention …
Why would we want to propose a transaction that is sure to invite IRS scrutiny?
Planning with G1’s funds to purchase LI on G2 fbo G3 is a perfectly valid planning strategy.
Split $ funding is an attractive planning strategy even without the discounts
All the better if we can obtain discounts.
GSD plans can be responsibly promoted, implemented and managed.

17. Discounts Under-Promise/Over-Deliver
We don’t know what discounts will be (if any!) in the future when G1 transfers Receivable (at death or during G1’s lifetime). Therefore:
Initially, evaluate and propose the GSD strategy on it’s merits assuming no (0%) discount.
Even with no discount when used to fund a fully guaranteed UL policy,
EB regime GSD acts as an estate freeze.
G1 is only entitled to receive the loans plus accrued interest back upon G2’s death.
We’ve been promoting split dollar for years without discounts!
Why are they so important now?

18. II. Estate of Morrissette vs. Commissioner 146 T. C
II. Estate of Morrissette vs. Commissioner T.C. 11 (April 13th, 2016) A recent favorable GSD case. See Also Estate of Levine vs. Comm. (July 13, 2016)

19. Estate of Morrissette Background
Mrs. Client (G1) established three dynasty trusts, one for each son (G2) primarily for the benefit of grandchildren (G3).
The trusts purchased life insurance on the sons (G2) to fund a cross purchase buy-sell agreement.
Mrs. Client (G1) revocable trust contributed $30M in premiums pursuant to an EB Regime split dollar plan.
The estate valued Mrs. Client’s $30M receivable at $7.5M
A 75% discount!

20. Estate of Morrissette The IRS
Treated the full value of $29.9M premium advances as gifts, and
Assessed a gift tax deficiency of $13.8M and penalties of $2.7M.
The Full Tax Court ruling in favor of the Client, granted summary judgement, holding that
The agreements are subject to the split dollar economic benefit regime.
The dynasty trusts’ only economic benefit under the agreements was the right to receive the current life insurance protection.
Note: In granting summary judgement, the Tax Court held that the law was so well established the estate was entitled to prevail without proceeding to a full trial.

21. Estate of Morrissette Notes: The Tax Court emphasized
Agreement exactly modeled example in the preamble to final split dollar regulations.
The insurance was for a valid business purpose (buy-sell keep the business in family).
Morrissette was a gift tax case.
Some advisors overemphasize the importance of Morrissette.
The IRS will certainly litigate or settle the estate appraisal of $7.5M for $29.9M of premium advances - a 75% discount!

22. Estate of Morrissette Notes:
It is essential that clients entering into GSD transactions understand the unsettled valuation issues regarding this strategy.
Although Morrissette
Involved Economic Benefit Regime Split Dollar.
We feel that Loan Regime Split Dollar is fine.

23. Understanding Generational Split Dollar Plans

24. Understanding GSD Plans Three Key Concepts
Imputed Gift - One-Year Term Cost
(Economic Benefit Regime)
G1’s Split Dollar Receivable
Valuation Methodology

25. Understanding GSD Plans 1. Imputed Gift
With private split $, individual pays the premium.
The economic benefit to the trust =
Joint Life (Table 2001)
M60/F ₵/$1,000 x $75,000,000/$1,000 = $3,000
M61/F ₵/$1,000 x $75,000,000/$1,000 = $3,750
Single Life (Carrier Rates)
50 (M or F) 72₵/$1,000 x $50,000,000/$1,000 = $36,000
51 (M or F) 76₵/$1,000 x $50,000,000/$1,000 = $38,000

26. Understanding GSD Plans 1. Imputed Gift
Economic Benefit Regime Split $
Two alternatives for treating the economic benefit:
Trust pays portion of the premium = the economic benefit.
Imputed gift to the Trust = the economic benefit.
GSD utilizes the imputed gift mode:
G1 is obligated to pay the full premium.
G1 makes an imputed gift to the Dynasty Trust.
The Trust may optionally and unilaterally pay a portion of the premium equal to the one year term cost.

27. Understanding GSD Plans 1. Imputed Gift
Single life term rates:
Government Rates Table 2001 (replaced PS58 Rates)
Carriers rates - Must satisfy the IRS' guidelines
Reflect term rates made known to the general public (published) and
Policies actually sold by the carrier (sold)
Second-to-Die term rates:
Government Rates Table 2001 (Morrissette)
Carrier or Table 2001 Term Rates?
Whether we use the Government Rates or the Carriers rates does not effect the valuation of the receivable.
It does however dramatically effect the value of the imputed gift.

28. 1. Imputed Gift Split $ - One Year Term Rates $75M Coverage, 1-Pay
1. Imputed Gift Split $ - One Year Term Rates $75M Coverage, 1-Pay* $15M
Trust
Carrier Rates
Table 2001 Rates
Share of
Rate
Single
Cumulative
Year
Age DB
Per $1,000
Life
Gifts 1 50
60,000,000
0.72
43,200
2.30
138,000 6 55
0.98
58,800
301,200
4.15
249,000
1,117,800 11 60
1.36
81,600
664,200
6.51
390,600
2,804,400 16 65
2.03
121,800
1,178,400
11.90
714,000
5,592,000 21 70
3.37
202,200
2,012,400
20.62
1,237,200
10,693,200 26 75
5.69
341,400
3,415,200
33.05
1,983,000
19,008,600 31 80
9.79
593,208
5,797,008
54.56
3,273,600
32,485,800 t
*Single premium to illustrate concept. In practice, ensure non-MEC. $4M/4 buys $76M.

29. Understanding GSD Plans 2. G1’s Receivable
Pursuant to the Economic Benefit Regime Split $ Plan
G1 advances shortest-pay non-MEC (“Receivable”)
Upon insured’s (G2’s) death, G1 has the right to recover greater of
Premiums Advances.
Cash Value.
A fully guaranteed UL G policy has very low cash value
(always less than the premiums)

30. Understanding GSD Plans 3. Valuation Methodology
G1 advances $16M in premiums (4-Pay $4/year)
G1 has right to recover the $16M Receivable only upon
Insured’s (G2) death.
Dynasty Trust surrendering policy.
Recovery is a long time in the future
G2 age 50, Life Expectancy.
35 Years (general population), 39-years (preferred non-tobacco).
Source: VBT 2008
Qualified appraisal values Receivable at time of transfer.

31. 3. Valuation Methodology
G1 is obligated to pay the full premium, the only interest for valuation purposes is the Split $ Receivable.
Notes:
If the Trust were obligated to pay a portion of the premium equal to the one year term cost, then that payment would have to be factored into the valuation of the split $ receivable.
On the other hand, it may be desirable for the Trust to (optionally) pay the one year term cost in order to eliminate the deemed gift & GST transfer. Especially where the client has limited gift and GST exemptions. t

32. 3. Valuation Methodology Discount Rate
In calculating the present value of the expected recovery of the Receivable, the discount rate selected makes a big difference.
What is the appropriate discount rate?
Valuation firms are using rates from 14% to 18%*.
Based on studies, for example, what is the expected return of funds invested by a life settlement company purchasing inforce life insurance policies?
Is it reasonable to project that rate 50+ years in the future?
*See Leimberg Estate Planning Newsletter #2444, by Espen Robak, Pluris Valuation

33. 3. Valuation Methodology Example
Mortality - VBT 2008
(A)
(B)
(C)
(D)
(Preferred NT) 
Prob.
Expected
Split $
Male 
Death
Payment of
Year
Receivable
Age
VBT 2008 1
4,000,000 50
0.032%
1,274 2
8,000,000 51
0.055%
4,419 3
12,000,000 52
0.075%
8,962 4
16,000,000 53
0.091%
14,536 5 54
0.106%
16,909 6 55
0.121%
19,378 7 56
0.138%
22,046 8 57
0.158%
25,219 9 58
0.182%
29,101 10 59
0.210%
33,580 …
100
For each year of the split $ plan, calculate
Receivable x Prob(Death) (Col. A x Col. C)
Calculate the Present Value of all of the expected payments (Col. D) over the life of the split $ plan.
Notes:
The mortality factors reflect the Age, Sex & Initial Underwriting Status of the insured.
VBT 2008 is the current table used by insurance carriers. t

34. 3. Valuation Methodology UL G, Economic Benefit Regime Value of Receivable* if transferred in given year
Year
Split $
Age 
Present Value of Expected Payment of Receivable Of
Receivable
 of
5.00%
9.00%
Transfer
max(Prem,CSV)
Insured PV
Discount 5
16,000,000 54
4,157,883
74.0%
1,763,234
89.0% 10 59
5,163,920
67.7%
2,519,088
84.3% 15 64
6,332,088
60.4%
3,511,774
78.1% 20 69
7,665,226
52.1%
4,792,957
70.0% 25 74
9,102,695
43.1%
6,337,043
*Assumes 100% of VBT 2008 Mortality Rates for Male Non-Smoker Age 50.

35. Aggressive Generational Split Dollar Plans

36. Aggressive GSD Plans
Gift or sell the receivable at a fraction of the premium advances, shortly after inception
Cash in the policy when CSV = split $ receivable
Example:
G1 advances $16M premiums to fund $76M DB on G2 owned by a Dynasty Trust.
Year 4, G1 sells the receivable for $800,000 (95% Discount) to a separate Dynasty Trust in exchange for a note.
Year 6, Dynasty Trust #2 cashes in the policy when the CSV = $16M.
Dynasty Trust #2 is a defective grantor trust, i.e. no gain on sale!
Move $15.2M to Dynasty Trust with no gift or GST tax.
An added twist:
G1 borrows initial $16M from bank (G1 uses OPM!).
After cashing in the policy, Dynasty Trust #2 lends $16M to G1 to repay bank.
That $16M is a debt against the estate. t

37. Aggressive GSD Plans
Carriers will not issue if they suspect Aggressive GSD.
Many carriers are restricting GSD entirely or policies available for GSD
Will not allow use of accumulation products where there is a risk of surrender.
Advanced Sales will work with you to educate carriers when necessary. t

38. Economic Benefit or Loan Regime?

39. Example 1 Economic Benefit Regime Split $ - G1 Advances $15M Premiums
M50 Preferred Non-Tobacco
G1 creates a Dynasty Trust
For benefit of GC, GGC, etc.
Defective grantor trust (grantor pays Trust income taxes).
Economic Benefit Regime Split $
Trust owner & beneficiary.
Trust assigns G1 100% of CV, DB = premium advances.
Imputed annual gift to Trust equal to the 1-year term cost.
G1 advances $16M Premium (Receivable).
$76M Universal Life NLG (Fully guaranteed coverage). t

40. Example 1 10-Pay – 9-Year Note
Economic Benefit Regime Split $
Total DB = $76M * Imputed Gift
Insured's Parents (G1)
Dynasty Trust
Split $
Death
Imputed Gifts - Carrier Rates
Year
Age
Premium
Receivable
Benefit
Per $1,000
Life
∑Gifts 1 50
4,000,000
72,000,000
0.72
51,840 2 51
8,000,000
68,000,000
0.76
51,680 3 52
12,000,000
64,000,000
0.80
51,200 4 53
16,000,000
60,000,000
0.85
51,000 5 54
0.91
54,600
260,320 6 55
0.98
58,800 7 56
1.06
63,600 8 57
1.13
67,800 9 58
1.21
72,600 10 59
1.29
77,400
600,520 11 60
1.36
81,600 12 61
1.45
87,000 13 62
1.54
92,400 14 63
1.69
101,400 15 64
1.86
111,600
1,074,520 16 65
2.03
121,800
1,196,320 21 70
3.37
202,200
2,030,320 26 75
5.69
341,400
3,433,120 31 80
9.79
593,208
5,814,928
Example 1 10-Pay – 9-Year Note

41. The Risks of Private Split $ (EB Regime)
Following the first death or on a Single Life Policy
Switch from joint to single life term rates.
The term rates increase substantially (Carrier rates 2X – 34X joint rates).
Do the carrier term rates meet the IRS “published and sold” requirements?
If not, must use Table 2001 rates (5x carrier rates).
The imputed gift must be sheltered from the gift and GST tax, so it is significant which rates/$1,000 apply.

42. Example 1 10-Pay – 9-Year Note
Economic Benefit Regime Split $
Imputed Gift: Carrier or Table 2001 Rates/$1,000
Carrier Rates
Table 2001 Rates
Year
Age
Benefit
Per $1,000
Life
∑Gifts
Premiums 1 50
72,000,000
0.72
51,840
2.30
165,600 2 51
68,000,000
0.76
51,680
2.52
171,360 3 52
64,000,000
0.80
51,200
2.81
179,840 4 53
60,000,000
0.85
51,000
3.20
192,000 5 54
0.91
54,600
260,320
3.65
219,000
927,800 6 55
0.98
58,800
4.15
249,000 7 56
1.06
63,600
4.68
280,800 8 57
1.13
67,800
5.20
312,000 9 58
1.21
72,600
5.66
339,600 10 59
1.29
77,400
600,520
6.06
363,600
2,472,800 15 64
1.86
111,600
1,074,520
10.41
624,600
4,937,000 16 65
2.03
121,800
1,196,320
11.90
714,000
5,651,000 21 70
3.37
202,200
2,030,320
20.62
1,237,200
10,752,200 26 75
5.69
341,400
3,433,120
33.05
1,983,000
19,067,600 31 80
9.79
593,208
5,814,928
54.56
3,273,600
32,544,800
Example 1 10-Pay – 9-Year Note

43. The Risks of Private Split $ (EB Regime)
Value of the policy at rollout
No lapse guarantee UL is the product of choice.
Premium advances always exceed the cash value (low or no).
Is the value upon rollout
The greater of premiums or cash values or
Does the policy have a higher or lower value?

44. The Risks of Private Split $ (EB Regime)
Upon G1’s death or if transferred during G1’s lifetime, the receivable
Must go to a separate dynasty trust
If it goes to the original dynasty trust, it may eliminate discounts (see Neff).
Is the insured a trustee of that other trust or have a power of appointment over trust assets?
The Receivable continues to generate a benefit to the original dynasty trust
The economic benefit would likely be characterized as a trust distribution.
If the trust that holds the Receivable is not fully exempt, then it could taint the original dynasty trust.
What is the value of the $16M Receivable?
Does the grantor or the estate have sufficient GST exemption to shelter?
What if a 75% discount was planned on, on audit 35% was agreed to?
To the extent that there is insufficient GST exemption,
The dynasty trust must purchase the receivable from G1’s estate.
Does that dynasty trust have sufficient assets to purchase?

45. Economic Benefit Regime Split $ - Issues#
Issue
Comments 1
EB Regime Imputed gift must be sheltered from gift and GST tax.
Trust can pay some of the term costs, but would require pre-funding = increases cost and complexity. 2
Transfer of Receivable during G1’s life or upon death, requires sufficient GST exemption.
Dynasty Trust can buy the Receivable, but would require pre-funding = increases cost and complexity. 3
If IRS assesses a higher value to the Receivable, the GST exemption issue is exacerbated.
Must plan for possibility of a higher valuation of the Receivable. 4
Receivable must be left to a separate Dynasty Trust.
Added complexity and cost. 5
Do carrier term rates meet “published and sold” requirement?
If disallowed, dramatic increase to imputed gift, use/need more GST exemption.

46. Example 2 Private Financing (Loan Regime) - G1 Lends $15M to Dynasty Trust
Takes advantage of favorable
Loan Regime Split Dollar Regulations.
Accrual of Interest.
Locks in low Applicable Federal Rates (AFRs).
Client lends funds to a Dynasty Trust ILIT sufficient to
Pay annual premiums $60M UL G policy.
Repay loan plus accrued interest.
The policy death benefit plus loan proceeds invested by Trust in excess of the loan balance is transferred to the Dynasty Trust.

47. Example 2 $60M UL G - M50 Life-Pay Policy – Lifetime Term Loan
Dynasty Trust Cash Flow & Value of Trust Assets (Side Fund)
Net to Family
2.75% LT AFR
Beginning of Year
End of Year
Life
Trust
Age
 Thru LE (A84)
Lifetime
6.00%
Insurance
Assets - Of
Then
Value of
Annual
Pre-Tax
Note
Total
Death
Loan
Yr.
Insured
1.97% MT AFR
Assets
Premium
Earnings
Repayment
Trust Assets
Benefit
Balance
$15,000,000 1 50
15,412,500
15,000,000
(600,000)
864,000
15,264,000
60,000,000
(148,500) 2 51
15,836,344
879,840
15,543,840
(292,504) 3 52
16,271,843
896,630
15,840,470
(431,373) 4 53
16,719,319
914,428
16,154,899
(564,420) 5 54
17,179,100
933,294
16,488,193
(690,908) 35 84
38,180,051
42,504,511
2,514,271
44,418,782
6,238,731 36 85
38,932,198
2,629,127
46,447,909
7,515,711 37 86
39,699,162
2,750,875
48,598,783
8,899,621 38 87
40,481,236
2,879,927
50,878,710
10,397,474 39 88
41,278,716
3,016,723
53,295,433
12,016,717 ⁞
100
52,166,922
91,648,679
5,462,921
96,511,600
44,344,677

48. Economic Benefit Regime Issue Private Financing (Loan Regime)
Private Financing (Loan Regime) Overcomes Economic Benefit Regime Split $ Issues #
Economic Benefit Regime Issue
Private Financing (Loan Regime) 1
EBR Imputed gift must be sheltered from gift and GST tax. (Trust can pay the term cost, but would require pre-funding and increases complexity.)
There is no gift with Private Financing.
All benefits are accounted for with loan and accrued interest. 2
Transfer of Receivable during G1’s life or upon death, requires sufficient GST exemption? (Funded Dynasty Trust can buy the Receivable, but would require pre-funding.)
Depending upon investment performance, loan includes funds sufficient to repay the loan (or a significant portion of it). 3
If IRS successfully assesses a higher value to the Receivable, the GST exemption issue is exacerbated.
The Receivable is repaid from invested loan proceeds and/or policy death benefit. Funding is designed to repay full Receivable (undiscounted). 4
Receivable must be left to a Dynasty Trust.
Receivable can be transferred to GST or non-GST exempt trust. 5
EB Regime split dollar is complex.
Clients understand loans. 6
SUL NLG or hybrid products produces best result.
Works with any product (UL, UL G, IUL, VUL, 2TD) 7
Discounts for NLG UL & SUL may be stronger.
Discounts may be weaker than EB Regime.

49. Generational Split Dollar Plans
Designing
Generational Split Dollar Plans

50. T A K E A W A Y S
D E S I G N
G1 funding life insurance on G2 fbo G3+ is a perfectly valid strategy.
Promote GSD concept based on no (best) or low discount.
Establish valid need for the insurance, plan to keep in force & follow all split $ formalities.
Policy design
Identify the policy that best suits the client’s needs.
UL, UL G, IUL, VUL, Single Life, Survivorship.
Select optimal GSD design.
Economic Benefit vs. Loan Regime
EB Regime poses many gift and GST issues.
Loan regime superior since there is no gift.
Strictly observe formalities - follow split $ rules & regulations.
G1 cannot unilaterally terminate the agreement.

51. D E S I G N T A K E A W A Y S Discounts Trust – Always use
Under-promise & Over-deliver.
Design to maximize discount - leave negotiating room.
Inform Client to expect further IRS attacks.
Trust – Always use
Dynasty Trust (Consider GST implications).
Defective Grantor Trust.
Second dynasty trust to receive Receivable.
All trusts allow trust-to-trust transfers.
Independent trustee with absolute discretion best.
Avoid aggressive plans.
Aggressive early discounts.
Early surrender programs.
Ensure that highly qualified counsel is involved.
Select a highly qualified and experienced valuation firm.

52. 3. Valid Need, Keep In Force & Observe Formalities
Establish a valid business or estate planning need for the insurance
Keep a closely held business in the family
Control ownership of a family business
Fund Children’s estate taxes
Reduce dilution of future generations interest in estate
(G1 parents, G2 Children, G3 GC, G4 …)
Plan to keep insurance inforce
Notes:
Avoid aggressive early surrenders

53. 3. Valid Need, Keep In Force & Observe Formalities
Observe all formalities of the split $ plan
For Economic Benefit Regime account for economic benefits
Imputed gift to the Trust or
Trust (optionally) pays one –year term cost
Account for all of G1’s rights under the plan (greater of premiums advanced or cash value)
For Loan Regime
Account for principal and loan interest
Trust pays interest or accrues (better result)

54. 3. Valid Need, Keep In Force & Observe Formalities
Observe all formalities of the split $ plan
The Morrissette Court emphasized:
The agreement exactly modeled an example in the preamble to the final split dollar regulations.
The insurance was for a valid business purpose (buy-sell to keep the business in the family).
The parties accounted for (reported or paid) all economic benefit costs (i.e. term costs).

55. 2. Split $ Plan Design
G1 cannot unilaterally terminate the split dollar agreement:
G1 and Trustee (independent trustee preferred) must unanimously agree to terminate or
Independent Trustee can have the unilateral right to terminate (best practice).
Note:
G1’s unilateral right terminate the agreement at any time would affect the valuation.
G1 would be in constructive receipt and there would be no or low discount.

56. 6. Discounts Under-Promise/Over-Deliver
We don’t know what the discount and the discounting rules will be in the future when G1 transfers Receivable (at death or during G1’s lifetime)! Therefore:
Initially, evaluate and propose the GSD strategy on it’s merits assuming no and/or reasonable discount (0%-35%)
Even with no discount
EB Regime - GSD is an estate freeze with UL G or SUL G policy.
G1 is only entitled to receive the premiums advanced back (due to low CV of policies).
Even some cash value policies will result in a “soft” freeze.
Loan Regime – No gift or GST transfer.

57. With Economic Benefit Regime
6. Discounts Design plan to optimize discounts, maximize wealth transferred
With Economic Benefit Regime
G1 is obligated to pay the full premium, the only interest for valuation purposes is the split $ receivable.
Optionally and occasionally, the Trust may pay the one year term cost in order to eliminate the deemed gift & GST transfer.
With Loan Regime
Lump sum loan.
Full pay premiums.
Accrue interest.
No gift!

58. 6. Discounts C. Managing the Discounts
Year G1 transfers the policy (the farther from issue date, the lower the discount)
Discount rate makes a huge difference
Assumed rollout or termination date of plan
Use a policy that generates cash value rather than a UL G policy (Economic Benefit)
Use a loan rate greater than the appropriate AFR (Loan Regime)
Select a highly qualified and experienced valuation firm!
Work with highly competent counsel and tax advisors
Note on “Discounts”:
We all speak of “discounts”, but that is just a convention.
We are really talking about the FMV of property.
Would you pay $10M today for the right to receive $10M 40-years in the future?

59. 6. Discounts Managing the Discounts How low do you go?
Can a 95% discount be defended upon audit by IRS?
A 55-75%% discount? Maybe
35-50% discount? Reasonable
Don’t go too low - Leave some negotiating room!
Note: The Service just settled a case at a 35% discount where the appraisal produced a 95% discount. See Unfinished Business Leimberg EP Newsletter #2418 by Jensen & Berselli.

60. 6. Discounts Expect further IRS attacks based upon Sham Transaction
Step Transaction
Code §2703
Modification of Agreement Reg. § (c)(1)(ii)(B)(2)
Code §§2036 and 2038
Code §2043 for excess policy value over value of discounted receivable.
Notes:
In a recent case filed with the Tax Court, Estate of Cahill vs. Comm., the Service is asserting #s 3, 5 and 6 above.
Is the Service merely using legal attacks to induce the parties to settle?

61. 3. Discounts Summary
We don’t know what the discounting rules will be in the future when G1 transfers Receivable.
Evaluate plan on merits assuming no or low discount
Manage the discount
Be reasonable with discount to minimize audit risk
But not too low - leave some negotiating room
Avoid aggressive discounts
File a protective gift tax return to start the statute of limitations running
IRS can be expected to audit the plan
Use a highly qualified appraiser.

62. 4. Defective Grantor Trust
Make the Dynasty Trust a defective grantor trust (for income tax purposes) with respect to G1
If Trust pays a portion of the premium or loan interest
Under the split $ regulations, that creates income to the grantor (G1).
If the Trust is defective grantor trust with respect to G1 (and his spouse), then the deemed income is negated (a transaction between the grantor and him or herself cannot create taxable income).

63. 5. For EBR GSD Consider GST Tax Implications
The imputed gift will be a transfer for gift and GST tax purposes.
The Receivable should pass to
The original Dynasty Trust (with a merger of interests). Not advisable. See Neff case.
To a separate Dynasty Trust (with authority to make distributions to original Trust)
We don’t know
When G1 will pass
What the ultimate valuation of the Receivable will be
Again, the most conservative approach is to assume no or low/reasonable discount for G1’s receivable to ensure sufficient GST exemptions or pre-fund.

64. 5. Consider GST Tax Implications
If insufficient GST exemptions to shelter transfer of Receivable (during G1’s lifetime or upon death)
Consider implementing a discounted sale to a defective grantor trust at the time the GSD plan is implemented. See Example next slide.
Consider the Trust purchasing the Receivable with a promissory note during G1’s lifetime or upon death.
G2 could gift funds to the Trust (must shelter from gift & GST tax) provided G2 is not a beneficiary of Trust.
Consider transferring a portion of the Receivable to a non-GST exempt trust using a defined value clause. Problematic.
Notes:
IRS does not like defined value clauses.
If Receivable left to non-GST trust, may cause deemed GST transfer issues (with imputed transfer to original Dynasty Trust).

65. 6. Life Insurance Policy Design
Decide the appropriate type of policy to meet the client’s need
UL G, CV UL, IUL, or VUL.
Note: Only use loan regime split $ with high CV (UL, IUL & VUL).
Single Life or Survivorship.
Decide Optimal Funding Pattern
Single Premium (MEC).
Shortest # of Payments to create non-MEC.
Note: Short-pays create favorable discounts.

66. highly competent counsel is involved.
9. Legal Counsel
Be certain that
highly competent counsel is involved.

67. highly competent valuation firm is involved.
10. Qualified Valuation
Be certain that a
highly competent valuation firm is involved.