Understanding the Changing Landscape of Split-Dollar Insurance Trusts in New York
If you or your financial advisor have ever used a split-dollar insurance trust in NYC as part of your estate or tax plan, the latest IRS rulings might change how you view those arrangements. The recent McGowan case and related guidance have highlighted new risks—especially around how the IRS defines “current access” to life insurance benefits and cash values.
This blog is for New York families, professionals, and high-net-worth individuals who use life insurance as part of their wealth protection or estate strategy. You’ll learn what these new tax rulings mean, how to identify red flags in existing policies, and when it’s time to revisit your insurance trust structure.
What Is a Split-Dollar Insurance Trust and Why Do Families Use It?
A split-dollar life insurance arrangement allows two parties—often an individual and a trust, or an employer and an employee—to share the costs and benefits of a life insurance policy. The goal is to use life insurance as a tax-efficient way to fund estate liquidity or wealth transfer while minimizing immediate tax consequences.
In family estate planning, these arrangements are often tied to irrevocable life insurance trusts (ILITs). The trust owns the policy, while a parent, family member, or business entity pays the premiums. When carefully structured, it can help reduce estate taxes and preserve assets for heirs.
But after the McGowan ruling, the IRS has made it clear: not all split-dollar structures are created equal. If the party paying the premiums retains certain rights or future access to cash value, the IRS may treat those benefits as taxable income or include them in the taxable estate—undoing the tax advantages that families intended to secure.
How Have Estate Planners Adjusted After the McGowan Ruling?
Experienced estate planners in New York are now taking a more conservative, documentation-driven approach. Key strategies include:
- Reassessing all existing split-dollar and premium-sharing arrangements. Before continuing or creating new structures, attorneys are reviewing whether the non-owner has any “current access” to cash value or benefits that could trigger income inclusion.
- Favoring arrangements with clearly defined, limited benefits. The safest structures are those where the non-owner’s rights are tightly restricted or vest only under narrow conditions.
- Choosing the correct tax regime. Whether using the “loan regime” or “economic benefit regime,” the documentation must clearly support how the premiums are treated and ensure compliance with IRS interest and valuation rules.
- Avoiding questionable premium deductions. Planners are far more cautious about claiming deductions for third-party premium payments, especially in family or closely held business settings.
- Strengthening documentation. Agreements, trust documents, and side letters should clearly describe each party’s rights and responsibilities to minimize ambiguity.
In many cases, families are shifting toward traditional ILITs as a simpler, safer solution. When properly drafted, an ILIT removes the insured from ownership and control, protecting against income or estate inclusion under IRS scrutiny.
What Red Flags Should Families Look for in Existing Life Insurance or Trust Structures?
If you already have a split-dollar insurance arrangement, it’s important to review it carefully. Warning signs that your current setup could raise tax concerns include:
- Broad or ambiguous rights to cash value. If a non-owner (such as a business or family member) has any access—now or in the future—to the policy’s cash value, it may be considered taxable.
- The power to change beneficiaries or trustees. If someone other than the trustee or owner can alter key terms, the IRS may see that as retained control.
- Premiums paid by third parties without clear contracts. When funding comes from outside the trust without formal documentation, it can appear as a hidden benefit.
- Old or incomplete records. Outdated agreements that don’t reflect current tax standards are especially vulnerable.
- Split-dollar structures used for non-business purposes. Family-based arrangements without a legitimate business rationale tend to face heavier IRS scrutiny.
If your policy hasn’t been reviewed since it was created, now is the time. As we noted in Five Pitfalls of Beneficiary Designations: An Often Overlooked Yet Critical Part of Your Estate Plan, even small oversights in documentation can create major tax consequences for your heirs.
Should You Revisit or Restructure Your Insurance Trust?
Yes—and sooner rather than later. Given the IRS’s position after McGowan, reviewing your life insurance and trust documents is essential to avoid future surprises. Steps to take include:
- Inventory all existing policies and funding sources. List every policy that involves trust ownership, third-party premium payments, or shared benefits.
- Conduct a structural audit. Identify who owns the policy, who pays the premiums, and what control or access rights each party has.
- Run “what-if” scenarios. Have your advisor model potential tax exposure if the IRS were to treat the arrangement as fully taxable.
- Amend or unwind risky structures. Tighten benefit rights, convert informal funding into documented loans, or move policies into more traditional ILITs.
- Update your documentation. Clarify purpose, ownership, and restrictions through updated trust language and side letters.
If you haven’t already, consider reading The Importance of Incorporating Life Insurance into Your Estate Plan for a deeper understanding of how life insurance can strengthen your estate strategy when properly structured.
How The Village Law Firm Helps New York Families Protect Their Legacy
At The Village Law Firm, we help NYC families navigate complex financial and legal structures like split-dollar insurance trusts with clarity and confidence. Our goal is to ensure your plan not only meets IRS requirements but also aligns with your family’s long-term goals and peace of mind.
We review, stress test, and—when necessary—restructure insurance trusts and funding arrangements so your wealth transfers as efficiently as possible.
FAQs
What is the main takeaway from the McGowan ruling?
The IRS is expanding its definition of “current access” to life insurance benefits. This means even future or contingent rights could trigger taxation—making documentation and structure more critical than ever.
Can existing split-dollar insurance trusts be fixed?
Often, yes. By revising agreements, tightening benefit rights, and ensuring clear ownership, families can reduce tax exposure without dismantling their entire plan.
When should I review my insurance trust?
Ideally every 2–3 years—or sooner if tax laws or family circumstances change. Regular reviews help prevent outdated or risky structures from causing costly mistakes.
Ready to review your split-dollar insurance trust in NYC?
Contact The Village Law Firm today to schedule a confidential consultation. We’ll help you clarify your structure, identify potential risks, and protect your family’s financial future.
