Rev. Rul. 81-198

ISSUE

What is the value of a gift of an interest in an insurance policy held under a "split-dollar" arrangement, for purposes of section 2512 of the Code?

FACTS

The donor, D, is an employee of X, a corporation. In 1974, D and X entered into a "split-dollar" arrangement to purchase a whole life insurance policy on the life of D.

Under the arrangement, X pays that portion of the annual premium that is equal to the amount of the increase in the cash surrender value of the policy during the year. D pays the balance.

Upon D's death, X will be entitled to receive out of the proceeds of the policy an amount equal to the funds it provided for premium payments. D has the right to name the beneficiary of the balance of the insurance proceeds.

X was designated as owner of the policy. However, X could not cancel, surrender or assign the policy without D's approval. Neither X nor D had an obligation to continue making premium payments.

On April 1, 1981, D executed a trust agreement for the benefit of D's child, assigning all of D's rights in the policy to the trustee. However, D was to continue to pay the portion of the premium allocated to D. At that time, the total of premiums previously paid by X was $8,590. The interpolated terminal reserve and proportionate part of the last premium paid before the date of the assignment which covers the period extending beyond the date totaled $12,583.

LAW AND ANALYSIS

Section 2512(a) of the Code provides that if the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.

Section 25.2512-6 of the Gift Tax Regulations provides a method for valuing an insurance policy, for gift tax purposes, when the policy has been in force for some time and further premium payments are to be made. Under section 25.2512-6, the value may be approximated by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the premium extending beyond that date. See Rev. Rul. 79-429, 1979-2 C.B. 321.

HOLDING

Since the policy had been in force for some time and further premium payments were to be made after the date of the gift, the value of the transferred interest, for purposes of section 2512 of the Code, is $3,993, the interpolated terminal reserve plus the proportionate part of the gross premium paid before the date of the gift, $12,583, reduced by the amount of funds provided by X for premiums, which is the corporation's interest in the policy, $8,590. Regarding the gift tax consequences with respect to the payment of annual premiums on the policy after the transfer. D's annual premium payment is a transfer by D for purposes of section 2511 of the Code. See section 25.2511-1(h)(3) of the regulations. Further, the value of the life insurance protection provided by the corporation, which is included in the income of D, is deemed to be transferred by D for purposes of section 2511 of the Code. See Rev. Rul. 78-420, 1978-2 C.B. 67.