A recent Tax Court decision in De Los Santos v. Commissioner illustrates the complexity of split-dollar life insurance arrangements. Taxpayers who participate in these or other types of life insurance arrangements should consult knowledgeable tax counsel to ensure that arrangement is reported properly on all applicable tax returns.
In 2003, the Treasury Department issued final regulations addressing the taxation of split-dollar life insurance arrangements. Split-dollar life insurance arrangements of the sort involved in this case fall into one of two categories—“compensatory arrangements” or “shareholder arrangements.” Reg. § 1.61-22(b)(2)(ii), (iii). In both types, the “owner” of the life insurance contract pays the premiums, and the “non-owner” has a current interest in the policy.