NU Online News Service, Aug. 19, 11:05 a.m. — Washington

A new Treasury Department notice seeks to stop the spread of what the department calls “an abusive tax avoidance transaction using split-dollar life insurance.”

Treasury Notice 2002-59 deals with split-dollar life insurance arrangements, including reverse split-dollar, where the parties attempt to avoid taxes by using inappropriately high current term insurance rates, prepayment of premiums or other techniques to understate the value of taxable policy benefits, Treasury says.

“The notice makes clear that using any scheme to understate the value of benefits for income or gift tax purposes won’t be respected,” says Pamela Olson, acting assistant secretary for tax policy.

David Winston, vice president of government affairs for the National Association of Insurance and Financial Advisors, Falls Church, Va., says NAIFA is reviewing the notice.

According to Notice 2002-59, the use of techniques such as inappropriately high current term insurance rates and prepayment of premiums to understate the value of policy benefits does not conform to, and is not permitted by, any published guidance.

In addition, the notice addresses the use of two available methods of determining the value of current life insurance protection under a split-dollar arrangement.

Specifically, the notice says that in 2001, Treasury published a new table of one-year term premiums to determine the value of current life insurance protection on a single life provided under a split-dollar policy.

Alternatively, the notice says, taxpayers can determine the value of current life insurance protection by using the insurance company’s lower published premium rates that are available to all standard risks.

However, the notice says, these methods can be used only for the purpose of valuing current life insurance protection for federal tax purposes when, and to the extent that, the protection is conferred as an economic benefit by one party on the other party.

But, the notice says, if one party has any right to current life insurance protection, neither method can be relied upon to value that party’s current life insurance protection for the purpose of establishing the value of any policy benefits to which another party may be entitled.

The notice provides the following illustration:

Consider, the notice says, a situation in which a donor pays the premiums on a life insurance policy that is part of a split-dollar arrangement between the donor and a trust and the trust has the right to current life insurance protection.

Under this situation, the notice says, the current life insurance protection has been conferred as an economic benefit by the donor on the trust, and the donor is permitted to use either of the two methods to value the current life insurance protection for federal tax purposes.

By contrast, the notice says, consider a situation in which the donor pays the premiums on a life insurance policy that is part of a split-dollar arrangement between the donor and the trust, and the donor has the right to the current life insurance protection.

Under that situation, the notice says, neither method may be relied upon to value the donor’s current life insurance protection for the purpose of establishing the value of the policy benefits conferred upon the trust for federal tax purposes.

The results would be similar if the trust pays for all or a portion of its share of the policy benefits under the arrangement.

Treasury has posted the notice on the Web at http://www.ustreas.gov/press/releases/reports/po33602.pdf