Split-Dollar Life Insurance in Estate Planning: Levine, Morrissette, Cahill and Connelly

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Who this page is for: California families in the $15 million to $100 million band and the $100 million and up band, where federal estate tax is in play and an irrevocable life insurance trust needs premiums larger than annual gifts can cover. Business owners whose companies pay for life insurance on owners or executives should read the section on company-paid premiums and Connelly at any estate size. The page is also for anyone holding an existing split-dollar agreement that needs review for who can terminate it, how it will be valued at death, and when to exit.

What split-dollar buys a family funding a large trust, and what it costs each year

A parent who wants to fund an irrevocable life insurance trust beyond what annual gifts allow can pay the premiums on a policy the trust owns and keep a right to be repaid. In the family version, a parent, or the parent’s revocable trust, pays large premiums on a policy owned by the trust, often on a child’s life. The parent keeps a right to repayment. The trust keeps the rest of the death benefit, outside everyone’s estate. Each year the parent makes a small taxable gift in place of a large one up front.

Split-dollar life insurance is any arrangement between a policy’s owner and a non-owner in which either one pays premiums and at least one premium payer is entitled to recover them from, or secured by, the policy’s proceeds (Treas. Reg. § 1.61-22(b)(1)). Arrangements entered into after September 17, 2003 fall under the final split-dollar regulations (Treas. Reg. § 1.61-22(j)). The regulations cover arrangements between employers and employees and arrangements between family members (Treas. Reg. § 1.61-22(c)(1)(ii)(A)). For the investment-oriented cousin of these policies, see private placement life insurance; for bank-financed premiums, see premium-financed life insurance.

What the arrangement costs each year depends on which regime applies and, under the economic benefit regime, on how old the insured is. On a hypothetical $20,000,000 policy where a parent’s trust advances $5,000,000 of premiums, the economic benefit regime treats the parent as giving about $97,650 a year while the insured child is 60 and about $818,400 a year at 80, while the loan regime charges about $261,000 a year at the October 2026 long-term rate at every age.

The economic benefit figure is the $15,000,000 of protection above the parent’s repayment right, times the Table 2001 rate for the insured’s age (Notice 2002-8). The loan figure is $5,000,000 at 5.22% (Rev. Rul. 2026-19). I assume, for illustration, that the long-term rate is the one that applies. The actual rate depends on the insured’s life expectancy when the loan is made (Treas. Reg. § 1.7872-15(e)(5)(ii)(C)).

Economic benefit arrangements are cheap early and expensive late, so an exit, or a switch to the loan regime, belongs in the plan from the start. Each year’s economic benefit is a gift to the trust and uses the parent’s exemption unless annual exclusions cover it. The 2026 annual exclusion is $19,000 per recipient (Rev. Proc. 2025-32).

How the tax code decides which regime applies

Ownership decides the regime, and the regulations sort every arrangement into one of two mutually exclusive regimes depending on who owns the policy, or is treated as owning it (Treas. Reg. § 1.61-22(b)(3)). The person named as the policy owner is generally the owner (Treas. Reg. § 1.61-22(c)(1)(i)). There’s a special rule for family deals: a donor is treated as the owner of a policy held by a donee, for example a life insurance trust, if at all times the only economic benefit the donee gets is current life insurance protection (Treas. Reg. § 1.61-22(c)(1)(ii)(A)(2)). That’s how an ILIT-owned policy can still fall under the economic benefit regime.

Under the economic benefit regime the coverage is the gift. When the payer owns the policy or is treated as owning it, the non-owner is treated as receiving economic benefits each year: the cost of current life insurance protection, any cash value the non-owner can currently reach, and any other benefits (Treas. Reg. § 1.61-22(d)(2)). The protection is the death benefit minus what’s payable to the owner, multiplied by a premium factor the IRS publishes (§ 1.61-22(d)(3)). The factor most planners use is Table 2001, which Notice 2002-8 issued as interim guidance for a single life. Between family members, the yearly economic benefit is a gift.

A non-owner who pays premiums on a policy someone else owns and expects repayment out of the death benefit or cash value has made a loan, with the owner as borrower (Treas. Reg. § 1.7872-15(a)(2)). The loan has to carry enough interest, and too little brings in IRC § 7872. A loan payable at the insured’s death is measured against the federal rate for the insured’s life expectancy, set the month the loan is made (§ 1.7872-15(e)(5)(ii)).

The estate tax turns on who can end the deal

The regulations govern income and gift tax, and the estate tax runs on its own rules. Treas. Reg. § 1.61-22 lists the taxes it covers, and the estate tax isn’t on the list. The Tax Court said so in Cahill and held in Levine that the regulation governs only the gift tax consequences of a family arrangement. What a parent’s estate includes at death is decided under §§ 2036, 2038, 2042 and 2703.

Section 2036(a)(2) pulls property into the estate when the decedent kept the right, alone or with any person, to decide who enjoys it, and § 2038 does the same for a power to alter, amend, revoke or terminate a transfer. Both have an exception for a bona fide sale for adequate and full consideration. Section 2703(a) values property without regard to an agreement to acquire or use it below fair market value, or a restriction on the right to sell or use it, unless the § 2703(b) test is met: a bona fide business arrangement, not a device to pass property to family for less than full value, with terms comparable to arm’s-length deals.

In the three intergenerational split-dollar estate tax cases below, the estates reported the parent’s repayment rights at a steep discount, and the IRS claimed the policies’ full cash surrender values. The results split on who could end the arrangement and on how the discount was computed.

Estate of Levine: the estate won

The estate won because the parent’s side couldn’t end the arrangement. Marion Levine’s revocable trust paid $6.5 million of premiums on policies on her daughter and son-in-law, owned by an irrevocable trust. Her trust had the right to the greater of the premiums or the cash surrender value when the arrangement ended. Only Robert Larson, a family friend who was the sole member of the irrevocable trust’s investment committee, could end it early. Larson was also one of Levine’s attorneys-in-fact and a co-trustee of her revocable trust, and the IRS argued that through her agents she stood on both sides. The Tax Court disagreed. As her agent Larson could do only what Levine could do, and she had no power over the irrevocable trust. As the committee member he owed fiduciary duties to that trust’s beneficiaries that would prevent him from surrendering the policies. So §§ 2036(a)(2) and 2038 didn’t apply, because she held no right, alone or with anyone, to terminate the policies, and § 2703 didn’t apply because there were no restrictions on the receivable she owned. The estate included the receivable at its stipulated $2,282,195, against the IRS’s $6,153,478, and no penalty applied. The court noted where the arrangement was weakest: the value of the gift when it was set up, a gift tax question the estate tax case didn’t decide.

Estate of Cahill: the IRS survived summary judgment

The IRS survived summary judgment because the parent could end the arrangements together with the trust’s trustee. Richard Cahill, a California resident, was 90 and unable to manage his own affairs when his son, acting as his attorney-in-fact and as trustee of his revocable trust, signed three split-dollar agreements in 2010. The revocable trust borrowed $10 million from a bank and paid it as premiums on policies on the son and his wife, owned by a new irrevocable trust. The arrangements could be ended by agreement of the two trustees. Cahill reported $7,578 of gifts under the economic benefit regime; his estate reported his rights at $183,700. The Tax Court denied the estate’s motion for partial summary judgment, holding that §§ 2036(a)(2) and 2038(a)(1) could apply because he could end the arrangements together with the irrevocable trust’s trustee, that the bona fide sale exception wasn’t met because what he received wasn’t close in value to what he paid, and that § 2703(a) could disregard the trust’s ability to block termination. The opinion didn’t set a final value.

Estate of Morrissette: the estate won the law and lost the value

The estate won on the law and lost on the value, and a 40% penalty followed. Clara Morrissette’s revocable trust paid about $29.9 million of premiums in 2006 on life insurance her sons’ trusts held, each son’s trust insuring his brothers, to fund buy-sell arrangements for the family’s moving and storage company. In an earlier 2016 opinion, as the 2021 opinion describes it, the Tax Court held the arrangements fell under the economic benefit regime, so the premiums weren’t a 2006 gift. At death the estate reported her rights at $7,479,000; the IRS said $32,060,070. In 2021 the court held that §§ 2036 and 2038 didn’t apply, because the premium payments were a bona fide sale for adequate and full consideration with a significant nontax purpose, and that the § 2703(b) exception kept the mutual termination restriction in the valuation. The IRS won on valuation: the court used a discounted cash flow method with the IRS expert’s discount rates and the IRS’s assumed maturity date. It also imposed the 40% gross valuation misstatement penalty, finding the estate didn’t rely in good faith on its appraisal.

Setting up the deal so it holds up

The safer practice is to give the parent’s side a right to be repaid and nothing more, and to put the termination right in the irrevocable trust alone, held by a fiduciary who owes duties to that trust’s beneficiaries. Levine accepted one person on both sides because his fiduciary duties to the insurance trust bound him. A plan that doesn’t need that argument is stronger. And the value reported at death has to be one an appraiser can defend without the family influencing the numbers.

When a company pays the premiums, Connelly raises the value of the shares

If your company pays for life insurance on its owners, the proceeds it receives count in what the company is worth. In Connelly v. United States (2024) 602 U.S. 257, the Supreme Court held that life insurance proceeds a corporation receives are an asset that increases its value, and that its obligation to redeem a deceased owner’s shares at fair market value doesn’t offset them. Crown C Supply used $3 million of insurance proceeds to redeem a 77.18% owner’s shares; the Court valued the company at $6.86 million with the proceeds and sustained an additional $889,914 of estate tax.

The same logic reaches a company that is a party to a split-dollar arrangement. Proceeds paid to the company count in its value under Connelly, and by the same valuation logic, a company that pays premiums and holds a right to repayment owns an asset, and an owner’s shares reflect it. The Court pointed to a cross-purchase structure, where the owners hold policies on each other, as an alternative. Morrissette was a version of that: trusts for each son held the policies that funded the buyouts, with the mother’s trust advancing the premiums. See buy-sell agreements in California.

Where California changes the plan

California adds no estate tax to this analysis, so the federal rules on this page decide the tax. California law matters for who has authority to sign and whose money it is. Its estate tax is tied to a federal credit that was repealed (R&TC § 13302 and former IRC § 2011).

Before an agent signs a split-dollar agreement for a California principal, read the power of attorney against Prob. Code § 4264. An attorney-in-fact can create or fund a trust, make gifts in trust, or make a loan to the attorney-in-fact only if the power of attorney expressly says so. In Cahill and Levine, agents signed for the parent, and Cahill came from California: the decedent lived here, and his son acted as his attorney-in-fact under California law. See durable powers of attorney in California.

A premium advanced from community funds needs both spouses on board, because the yearly economic benefit is a gift and one spouse can’t make a gift of community personal property without the other’s written consent (Fam. Code § 1100(b)). If the plan calls for only one spouse’s money, turning community property into separate property takes an express written transmutation (Fam. Code § 852(a), and Estate of MacDonald (1990) 51 Cal.3d 262). See transmutation agreements.

Working with Ridley Law

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Frequently asked questions

What is split-dollar life insurance?

An agreement where one party pays some or all of a policy’s premiums and is repaid from the policy’s death benefit or cash value. The IRS taxes it under either the economic benefit regime or the loan regime (Treas. Reg. § 1.61-22).

What’s the difference between economic benefit and loan regime split-dollar?

Under the economic benefit regime the payer is the owner, or treated as the owner, and the other side receives the value of the coverage each year. Under the loan regime the premiums are loans to the policy owner and must carry interest at the applicable federal rate or be treated as below-market loans under IRC § 7872.

Is intergenerational split-dollar still allowed?

Yes. Levine (2022) upheld one, and Morrissette (2021) held §§ 2036, 2038 and 2703 didn’t apply to another. Both turned on their facts, and Morrissette still lost on value and was held liable for a 40% penalty.

How is a split-dollar receivable valued at death?

At fair market value, usually by discounting the expected repayment to the date of death. The fights are over the discount rate, the expected date of repayment, and whether §§ 2036, 2038 or 2703 replace the receivable with the policies’ cash surrender values.

What is Table 2001?

The IRS’s interim table of one-year term premium rates per $1,000 of coverage, used to value current life insurance protection on a single life in split-dollar arrangements (Notice 2002-8).

Does Connelly affect split-dollar?

When a company is a party, it can. Life insurance proceeds a company receives increase its value, and an obligation to redeem shares at fair market value doesn’t offset them (Connelly, 602 U.S. 257 (2024)). A company’s right to be repaid under a split-dollar agreement is also a company asset, so it belongs in any valuation of the shares.

Can I end a split-dollar arrangement later?

The agreement controls. Under the economic benefit regime, a change that gives the trust more than current protection can move the arrangement to other rules (Treas. Reg. § 1.61-22(c)(1)(ii)(B)). Plan the exit when you sign.