The estate of Arthur Cinader, founder of J.Crew, has filed a motion in Tax Court challenging an Internal Revenue Service deficiency notice, claiming that taxable donations made by the deceased should be increased by more than $60 million and that the debts claimed by the deceased should be reduced by more than $30 million. Both of these problems stem from a dollar-sharing agreement.
A dual amount life insurance agreement is an agreement between an irrevocable trust and the settlor/insured regarding the payment of premiums and the death benefit. In this case, the independent trustee of an irrevocable trust established by Arthur took out life insurance policies on the lives of Arthur and his wife. Under the agreement, the trustee was obligated to pay insurance premiums and was guaranteed to pay, upon Arthur’s death or termination, the greater of: (1) the net cash value of the policies; or (2) the total premiums paid. In exchange, Arthur was obliged to pay certain amounts calculated according to the IRS tables (PS 58 rate or 2001 table rate) for the value of the life insurance protection, for which he had the right to designate the beneficiary of the death benefit that exceeded what was owed the trust. If Arthur failed to make payment, the amount owed to the trust was treated as a loan, and promissory notes were prepared each year to update any outstanding amount. The petition explains that at the time of his death, Arthur owed the trust approximately $41 million under the agreement, which was listed on Schedule K of the tax return as an enforceable claim against the estate.
It appears that the IRS asserted that these loans were in fact gifts to the trust, eliminating the deduction for them as estate debts and increasing the estate tax owed. The IRS asserted that this amount was not deductible because it had not been established that the bond was a personal obligation enforceable against the estate under New Mexico law. Rather, she characterized the debt as a substitute for a taxable bequest from Arthur to the trust. The IRS’ response to the estate’s petition is not yet available, so there is no explanation of its rationale or position.
According to the petition, Arthur’s trust prohibited the settlor from exercising any power in the administration of the trust, including “any incident relating to the ownership of any insurance policy…”. He had no right of reversion or income, nor any right to control beneficial interests. However, the petition also states that “the trust or Mr. Cinader could have terminated the agreement at the end of any policy year”.
Other dollar-sharing agreement cases have recently focused on whether the settlor/insured had the power to terminate the dollar-sharing agreement. For example, in Estate of Levine c. Commissioner158 TC No. 2, the court emphasized that only the insurance trust, not the grantor, had the right to revoke the agreement, distinguishing it from two previous cases Estate of Cahill c. Comm’r, Memo TC. 2018-84 and Estate of Morrissette II c. Com’rr, Memo TC. 2021-60, in which the donor retained the power to terminate the fractional dollar by mutual agreement with either the donee (cahill) or the trust (Morrisette).