Considerations for intergenerational split-dollar arrangements

Though the lifetime estate tax exemption remains historically high at $15 million,¹ advisers still encounter many households whose estates will face a large estate tax liability despite their best efforts at planning. In these situations, intergenerational split–dollar (IGSD) arrangements can provide a powerful planning tool when implemented responsibly for the right taxpayers and the right reasons. This article examines the details to be considered when designing a plan for clients.

What is an IGSD arrangement?

An IGSD arrangement is a variation on a split–dollar arrangement, which in simple terms is a way for one party to fund a life insurance premium on the life of someone else. The IGSD strategy has gained popularity for clients who have exhausted all other estate minimization strategies.

In an IGSD arrangement, the senior generation (G1) loans amounts to pay life insurance premiums to a trust that purchases life insurance policies on children (G2) for the benefit of G1’s grandchildren (G3). G1 receives a note receivable from the trust for the loan. G1 will not receive payment of their note receivable until G2 (insured) dies and the death benefit is collected. Since G2 is younger than G1, the expectation is that G1 will die prior to G2 and the note receivable will be an asset that will need to be valued in G1’s final estate. Since promissory notes can be discounted for estate tax purposes based on interest rates and the maturity date of the note, an IGSD arrangement provides the potential for the note receivable to be discounted in the final value of G1’s estate, creating estate tax savings for G1.

Practitioners have promoted this strategy as a way for G1 to achieve a discount on the value of the note receivable he or she holds at death, although this should never be the sole reason for pursuing this solution. It is a complicated strategy that requires a significant amount of attention to detail.

As noted above, an IGSD arrangement is a variation on a split–dollar arrangement. The IRS issued final split–dollar regulations in 2003,² and under those regulations, there are two ways a split–dollar arrangement can be structured:

• Economic-benefit regime:³ The lender pays the premiums and collateralizes the insurance policy for the greater of cumulative premiums paid or the policy’s cash value. The insured must pay the reportable economic benefit (REB) to the lender annually. The REB is calculated annually on the carrier’s alternate term rates or Table 2001 rates. The younger the insured, the less expensive the REB is, and as one ages, the REB increases significantly. The REB can be imputed.
• Loan regime:⁴ The lender pays the premiums and collateralizes the policy for the cumulative premiums paid. Interest must be charged at a rate at least equal to the applicable federal rate (AFR) for the length of the note and can be accrued and capitalized to the loan.

 Who is the right client for an IGSD transaction?

Ideally, G1 would have a taxable estate and would have exhausted their lifetime gifting and other estate minimization techniques. G1 would be at the point in planning where there really is nothing additional that they can do to minimize their estate tax liability because they have implemented all the other strategies that were suitable for them.

G2 should understand that this strategy is for the benefit of G3. G1 and G2 should both desire to provide a benefit for G3, and they both should have a demonstrated use for the life insurance within their estates that is separate from the IGSD transaction.

IRS scrutiny

Clients should expect that an IGSD transaction could be scrutinized by the IRS. Advisers should not recommend it on the sole basis that the client’s estate could receive a discount on the note receivable. Three Tax Court cases — Cahill,⁵ Morrissette,⁶ and Levine⁷ — provide insight into how the IRS views these transactions and what the taxpayers did successfully and unsuccessfully in their respective scenarios.

An IGSD transaction might be scrutinized for how the note receivable is valued in G1’s estate, the extent of G1’s control and authority over the insurance policies, and whether the split–dollar requirements outlined in the final regulations have been met. The three most likely Code sections to be considered are:

Sec. 2036 (estate inclusion): This sectionstates that a decedent’s estate will include the value of any property transferred during life over which the decedent retains the possession or enjoyment of, or the right to the income from, said property or retains a right, alone or in conjunction with another person, to designate the persons who would possess the enjoyment of the property or the income derived from it. There is an exception for transfers that are bona fide sales for adequate and full consideration in money or money’s worth.⁸

Sec. 2038 (estate inclusion): This section states that a decedent’s estate will include the value of any property transferred during life over which the decedent had the right to exercise a power, alone or in conjunction with another person, to alter, amend, revoke, or terminate the enjoyment of said property, or where such a power was relinquished during the three–year period preceding the decedent’s death, with an exception for a bona fide sale for adequate and full consideration in money or money’s worth.⁹

Sec. 2703 (disregarding restrictions of a split–dollar agreement): This section states that the value of any property will be determined without regard to (1) any option, agreement, or other right to acquire or use the property at a price less than the fair market value (FMV) of the property or (2) any restriction on the right to sell or use such property.¹⁰ It also provides an exception for any option, agreement, right, or restriction that (1) is a bona fide business arrangement; (2) is not a device to transfer such property to members of a decedent’s family for less than full and adequate consideration in money or money’s worth; and (3) has terms comparable to similar arrangements entered into in an arm’s–length transaction.¹¹

How to determine suitability

An IGSD transaction should not be the first tool an adviser pulls out of their toolbox. In determining the suitability of the strategy for a client, the following points should be considered, analyzed, and clearly documented:

• Cash flow planning and estate tax projections for G1 need to clearly show how much capital G1 needs for their lifestyle and the excess capital that could provide funds for this transaction. Advisers should not be careless in the amount of funds loaned in an overzealous attempt to secure a larger discount for G1’s estate. Caution should also be taken when collateralizing assets needed for the lifestyle in a premium financing arrangement.
• There should be a clearly demonstrated need for permanent life insurance on G2’s life. It should make sense in the overall planning of G2’s estate, and the need should be permanent for the entirety of G2’s life. The taxpayers in both Cahill and Morrissette were unsuccessful in proving that the insurance would be retained for G2’s life, and this was a negative factor in the outcome of each transaction.¹² The taxpayer in Levine was successful in showing that G2 had a permanent need to provide a death benefit to G3 and that the family understood the importance of the insurance.
• The family members should be educated about the transaction, and the pros and cons of the transaction should be clearly articulated and documented.

What is the role and importance of the trustee?

The trust that holds the life insurance should be managed by an independent trustee. Sec. 672(c) provides that a trustee is not independent if the trustee is related or subordinate to the grantor.¹³

The trustee needs to have independent and unilateral power over the trust and insurance policies and a clear fiduciary duty to G3. It is imperative that G1 and G2 not have any control — i.e., authority or influence — over the decisions the trustee makes. In Levine, G1 did not have any authority to terminate or approve the termination of the split–dollar agreement, which made the IRS unsuccessful in claiming that Sec. 2036 or 2038 would apply. In Cahill and Morrissette, G1’s consent was required for the trustee to terminate the split–dollar agreement.

It also would be advisable for G1 to consider having different fiduciaries for his or her estate and for the trust. By having separate fiduciaries, their decisions can be segregated, with neither one being responsible for both sides of the coin. In Cahill, the same person (G2) was the fiduciary for both the G1 estate and the trust. The court did not view this favorably.

Advisers should clearly define the role, power, and independence of the trustee in maintaining their strict fiduciary duty to G3.

Loan or economic benefit?

In Cahill, Morrissette, and Levine, the economic–benefit split–dollar regime was used. There is a difference in how a loan is defined for estate tax purposes between the two split–dollar regimes within the final split–dollar regulations — the economic–benefit regime and the loan regime — which requires taxpayers and advisers to consider whether the loan regime might offer a safer alternative.

• For federal estate tax purposes, a loan regime split-dollar agreement creates a bona fide loan that is respected for federal tax purposes.¹⁴
• The economic-benefit regime creates a receivable that is respected for purposes of income tax, gift tax, and taxes under the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), Railroad Retirement Tax Act (RRTA), and Self-Employment Contributions Act (SECA).¹⁵ A mention of federal estate purposes is noticeably lacking.

Even though the taxpayers in Cahill, Morrissette, and Levine all employed the economic–benefit split–dollar approach, an argument could be made that a safer alternative would be using the loan regime, since the promissory note is respected in that regime as a loan for federal estate tax purposes in the final split–dollar regulations.

How does the Tax Court view an older G1 loaning money for G2’s life expectancy?

Deathbed planning is typically frowned upon by the IRS. In Levine, G1 died six months after implementing the IGSD plan. In Cahill, G1 was not capable of handling his own affairs when the plan was implemented. While the timing may not have been looked upon favorably by the IRS, it alone was not enough to cause a negative outcome, likely because under Regs. Sec. 1.7872–15(e)(4)(iii)(D), for a split–dollar term loan described in Regs. Sec. 1.7872–15(e)(5)(ii)(A), the projected term of a split–dollar loan payable on the death of an individual (G2) is ”the individual’s life expectancy as determined under the appropriate table in §1.72–9 on the day the loan is made.”¹⁶ This means that the loan is not payable in full upon the demand of the lender and that the duration of the loan is the life expectancy of G2.

It is plausible to consider that a loan made by a G1 with a short life expectancy might be challenged as a gift if not used in a split–dollar transaction, but that remains outside the scope of this article.

Ability to surrender policies

G1’s ability to surrender the policies indicates that G1 has control over the policies and will be viewed as a negative factor. In Levine, the irrevocable life insurance trust had an independent trustee, and the trustee was directed by an investment committee. The investment committee and trustee had a fiduciary duty to G3, and this fiduciary duty prevented the trustee from surrendering the policies. Since G1 had no ability to influence or force the trustee to act, G1 was viewed as not being able to surrender the policies for their cash value, and the Tax Court held that both Secs. 2036 and 2038 did not apply. An IGSD arrangement should avoid giving G1 the power to surrender or change the life insurance policies in any manner.

The power to terminate the agreement

The issue of power to terminate the agreement was raised by the IRS in Cahill, Morrissette, and Levine. The IRS’s argument has been that an ability to terminate the agreement, either alone or in conjunction with the other party to the split–dollar agreement, represents the opportunity to “designate enjoyment of the property,” thus triggering Sec. 2036(a)(2). The taxpayer in Levine successfully argued that because only the investment committee had the right to terminate the agreement, the taxpayer did not retain Sec. 2036 powers. The investment committee was viewed as a special trustee of the trust with a fiduciary duty to G3, not G1.

In both Morrissette and Cahill, the agreement could be terminated if both G1 and G2 mutually agreed to do so. In Cahill, the Tax Court held that the taxpayer was deemed to have retained Sec. 2036 powers. In Morrissette, however, the taxpayer was not held to have retained Sec. 2036 rights because the bona–fide–sales exception applied.

Sec. 2703

Sec. 2703 addresses how certain restrictions, such as a split–dollar agreement, are treated when valuing property for estate and gift tax purposes. The section aims to prevent taxpayers from using these arrangements to artificially reduce an asset’s value. In Levine, the IRS argued that no discounting of the receivable was appropriate because G1 used the split–dollar agreement to place a restriction on the life insurance policies. Its argument failed because the court held that the reference to “any property” in Sec. 2703 referred to the property of G1’s estate, not the trust’s property. The policies were always the property of the trust — they were purchased in the trust, and G1’s estate never owned them. G1 and G1’s estate never had any ownership, influence, or control over the policies at any point. The only property in G1’s estate was the split–dollar note receivable.

Income tax and basis issues

As with any strategy, it is important not to view it in a vacuum. Advisers consider an IGSD strategy because of the potential for discounting that reduces the future estate tax liability. It is sometimes lost that at G1’s death, if the note receivable receives a discount upon valuation, there will be a step–down in basis that will affect income tax going forward. Assume that the face value of the note receivable is $1 million and the estate successfully values the note at $600,000. Whoever receives the note by way of estate bequest or purchase will have a basis of $600,000, meaning that $400,000 of the original principal plus future interest will be income taxable upon receipt as payments on the note are made. While the estate successfully saves 40% on the discounted amount, someone will be paying income tax on that discount.

How is a discount potentially applied to the note receivable?

In general, assets includible in a decedent’s gross estate will be valued at their FMV as of the date of the decedent’s death.¹⁷ For promissory notes, Regs. Sec. 20.2031–4 provides that ”the fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower or that the notes are worthless.” The regulation acknowledges that circumstances could cause the valuation of a note receivable to be less than the principal balance of the note plus accrued interest. The regulation goes on to list what some of those circumstances might be: interest rates, date of maturity, collectibility, insolvency of the payer, or if property that has been pledged as collateral would not be sufficient to repay the entire note.

In an IGSD structure, G2’s extended life expectancy is what causes the note maturity to be lengthy, creating the factor that most significantly affects the amount of discounting that might be applied to the note receivable when valued at G1’s death.

Under the split–dollar regulations, the insured’s life expectancy determines the note’s duration. Under Regs. Sec. 1.7872–15(b)(3), the loan is not payable in full upon the lender’s demand. And under Regs. Sec. 1.7872–15(e)(4)(iii)(D), for a split–dollar term loan described in Regs. Sec. 1.7872–15(e)(5)(ii)(A), the projected term of a split–dollar loan payable on the death of an individual (G2) is ”the individual’s life expectancy as determined under the appropriate table in §1.72–9 on the day the loan is made.”¹⁸ The longer the life expectancy (the younger the insured is), the longer the duration of the note will be and the greater the discount it might receive.

The split–dollar regulations provide clear guidance that the term of the note receivable is set by the insured’s life expectancy. It is imperative that the file demonstrate that the note receivable is intended to exist for its duration. If the file, adviser, or client indicates that the note will be terminated somehow prior to the insured’s life expectancy, it is reasonable to expect that no discount will be afforded, based on the note’s duration. This was seen in Morrissette: An amendment to G1’s trust stated that the note receivable would be distributed to the trust holding the life insurance policy. The court held that this meant the parties would likely terminate the note after the three–year statute of limitation. The IRS used three years for the note duration rather than the insured’s life expectancy and therefore took the position that the note receivable should not be discounted.

What happens to the note receivable at G1’s death?

The note receivable is treated as an asset of G1’s estate and is valued for the final estate return. Then G1’s estate needs to be settled, and the note is treated just like any other asset. It will be left somewhere according to G1’s estate instructions.

Some options might include:

• G1’s estate could stay open and hold the note. (This is likely not a popular course of action.)
• G1’s estate could leave the note to the same trust that holds the life insurance policy, though, as seen in Morrissette, this may work against a discounted valuation, since the IRS won its argument in that case that the note’s being left to the trust likely meant it would be terminated once the statute of limitation had passed.
• G1’s estate could leave the note to G2 directly. Now G2’s taxable estate will receive the money owed from the trust. G2 could hold the note, and their estate would receive repayment upon their death. G2 could gift the note to another trust for the benefit of G3 or even G4, using some of G2’s own lifetime estate tax exemption or generation-skipping transfer tax exemption.
• G1’s estate could leave the note receivable to another of G1’s beneficiaries.
• G1’s estate could sell the note receivable to someone at the estate value.

There are other options, and in each case, it should be clearly determined how G1 will dispose of the note receivable and to whom. Generation–skipping allocation also needs to be considered at every step in this transaction.

Details matter

An IGSD transaction is a sophisticated strategy that can provide benefits to G1, G2, and G3 if structured intentionally and properly. Attention to details in the structuring of a plan cannot be overemphasized, and a wide lens needs to be cast to consider the tax consequences and impacts to G1’s estate and the future note holder.

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Footnotes

¹For gifts made or decedents dying in 2026.

²T.D. 9092.

³Regs. Sec. 1.61-22.

⁴Regs. Sec. 1.7872-15.

⁵Estate of Cahill, T.C. Memo. 2018-84.

⁶Estate of Morrissette, T.C. Memo. 2021-60.

⁷Estate of Levine, 158 T.C. 58 (2022).

⁸Sec. 2036(a).

⁹Sec. 2038(a)(1).

¹⁰Sec. 2703(a).

¹¹Sec. 2703(b).

¹²See Ransome and Angkatavanich, “Split-Dollar Agreements and Estate Inclusions: Estate of Cahill,” 50 The Tax Adviser 842 (December 2019).

¹³See also Sec. 674(c), providing that no more than half of a trust’s trustees may be related or subordinate parties who are subservient to the grantor’s wishes.

¹⁴Regs. Sec. 1.7872-15(a)(2).

¹⁵Regs. Sec. 1.61-22(a).

¹⁶Regs. Sec. 1.7872-15(e)(5)(ii)(C).

¹⁷Sec. 2031(a); Regs. Sec. 20.2031-1(b).

¹⁸Regs. Sec. 1.7872-15(e)(5)(ii)(C).

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Contributor

Laura Brown, CPA/PFS, is vice president, advanced sales, with PartnersFinancial in Austin, Texas. For more information about this article, contact thetaxadviser@aicpa.org.

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MEMBER RESOURCES

Article

Warley et al., “Recent Developments in Estate Planning,” 56-10 The Tax Adviser 46 (October 2025)

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