A judge said he remains unsure how to rule following a four-day trial in which the IRS accused a taxpayer of using life insurance policies to avoid estate taxes.
“I look forward to your briefs because for me this is going to be a hard case,” said U.S. Tax Court Senior Judge Joseph Goeke on Oct. 11, at the end of the trial.
The issues remaining 5.5 years into the case are whether six life insurance policies at their cash surrender value—what would be gotten from cashing them out—must be included in the deceased woman’s taxable estate and whether the estate is liable for tax underpayment penalties. The policies were purchased for $30 million.
If the court finds the estate underpaid taxes, it must further decide whether the estate is liable for a 20% tax addition penalty under Section 6662.
The final ruling could also dictate the overall attractiveness for estate planners of an arrangement at the center of the case called a split-dollar arrangement—made between parties to split the cost and benefit of a life insurance policy, where a party paying premiums gets an interest in the payout.
The estate in the case is connected to a set of family businesses, described in court documents as the “Interstate Group,” which were accumulated in the decades after Arthur Morrissette started a moving company, Ace Van & Storage, in 1943.
Arthur’s surviving wife, Clara Morrissette, used her revocable trust to transfer $29.9 million to three trusts for the benefit of each of her three sons in 2006. Those trusts then used the funds to make lump-sum payments for six permanent life insurance policies. This meant each son’s trust held a policy that insured the lives of the two other sons.
These transactions were governed by split-dollar arrangements between Clara’s revocable trust and her son’s trusts—whenever an insured son died or an arrangement was terminated, Clara’s trust would get either a policy’s cash-surrender value or all the premium payments made on it, whichever was greater. If the policy remained in place until an insured son died, Clara’s payout would be taken out of the death benefit, and the sons’ trusts would receive any remaining death benefit.