Tier One - Discounting the Future: How Intergenerational Split-Dollar Unlocks Wealth Transfer Value

Given the recent certainty (for now) of the federal estate and gift tax exemption being set at $15 million per individual beginning January 1, 2026, we are seeing years of planning paralysis disappear.  High-net-worth individuals are increasingly seeking advanced planning strategies to reduce their taxable estates and ensure that wealth is passed to the next generation efficiently. One strategy gaining traction is the intergenerational split-dollar (IGSD) arrangement, a sophisticated life insurance funding mechanism that leverages valuation discounts and estate inclusion rules to transfer wealth with minimal tax friction. In light of recent Tax Court decisions, most notably Estate of Marion Levine v. Commissioner, this technique has become even more compelling.

In fact, in over half of the private placement life insurance (PPLI) transactions our firm is engaged to support, intergeneration split-dollar is applied.

What Is Intergenerational Split-Dollar?

At its core, split-dollar is not a type of life insurance policy; it’s an arrangement governing who pays for and who benefits from the policy. When used between family members or related trusts, it’s referred to as “private” or “intergenerational” split-dollar. The typical IGSD structure involves an older generation, usually a parent or grandparent, funding life insurance premiums for policies insuring the lives of their children or grandchildren. The policies are owned by an irrevocable life insurance trust (ILIT), and the funding individual or their estate retains a right to be repaid either the premiums advanced or the policy’s cash surrender value, whichever is greater.

Crucially, that repayment isn’t due until the insured (the child or grandchild) passes away, which may be decades after the original funds were advanced. This long delay provides the foundation for a discounted valuation of the receivable on the funder’s estate tax return, potentially reducing the taxable estate by millions.

The Blueprint: Estate of Marion Levine

The 2022 Levine decision marked a watershed moment for IGSD planning. Marion Levine advanced $6.5 million to fund two life insurance policies on the lives of her adult children, with the policies owned from inception by an ILIT. Upon her death shortly after the arrangement was put in place, the IRS argued the full $6.5 million should be included in her estate. The Tax Court disagreed, ruling that only the present value of the receivable, just $2.28 million, should be included. This resulted in a 65% valuation discount.

Several aspects of the Levine structure proved critical:

• No Incidents of Ownership: Because the ILIT owned the policies from day one, and Levine never had a right to terminate the arrangement or surrender the policies, the IRS could not claim she retained control under IRC §§ 2036 or 2038.

  
  

• Independent Trusteeship: The ILIT had an institutional trustee and an independent investment committee, not family members. This independence prevented the IRS from characterizing the arrangement as illusory.

  
  

• Proper Structure from Inception: By structuring the arrangement under the economic benefit regime and making clear distinctions in ownership and fiduciary responsibility, Levine’s advisors built a defensible plan.

  
  

The Two Regimes: Economic Benefit vs. Loan

IGSD arrangements can be structured under either the economic benefit regime or the loan regime, each with its own advantages.

Under the economic benefit regime, the older generation funds premiums, and the ILIT pays the “economic benefit," essentially the cost of current life insurance protection. For younger insureds, this term cost is minimal in the early years, allowing the ILIT to acquire substantial death benefit coverage with relatively little taxable gift exposure. The donor retains a receivable equal to the greater of the policy’s cash value or the premiums paid, collectible at the insured’s death.

Alternatively, under the loan regime, the older generation lends money to the ILIT, typically at the applicable federal rate (AFR), with the expectation of repayment from future policy death benefits. Although this structure is more administratively complex, it aligns more clearly with traditional lending principles and is explicitly recognized under Treasury regulations as a bona fide loan.

In either case, the long timeline until repayment, coupled with the inherent illiquidity and mortality-based uncertainty, allows for substantial valuation discounts at the donor’s death.

Discounting the Receivable

The valuation of the split-dollar receivable is the linchpin of this strategy. Appraisers use discounted cash flow (DCF) analysis to determine its present fair market value, taking into account:

• The insured’s life expectancy

• Projected cash surrender values or premiums paid

• Applicable discount rates, often drawn from analogous markets such as life settlements or structured settlements

  
  

As Espen Robak, CFA, of Pluris Valuation Advisors notes, life settlement market data suggests appropriate discount rates often fall between 14% and 18%, with some reaching into the twenties for highly illiquid or long-dated receivables. These steep discount rates translate into significantly reduced estate inclusion.

In the Levine example, a $6.5 million receivable was valued at $2.28 million, a 65% discount. The longer the insured is expected to live, the greater the potential discount, due to the time value of money.

Why Now?

The One Big Beautiful Bill has provided some welcomed certainty to wealth transfer planning.  Setting the federal estate and gift tax exemption amount at $15 million per person as of January 1, 2026 has unleashed a wave of structuring work.

IGSD planning offers a way to pre-fund future liquidity needs (e.g., estate tax payment) with life insurance while simultaneously removing value from the taxable estate. It is particularly suited for families with:

• An older generation (e.g., age 75+) with significant wealth

• Adult children or grandchildren insurable and aged 30–60

• A need for trust-owned life insurance

• An estate potentially subject to taxation post-2025

  
  

Final Thoughts

Intergenerational split-dollar is not a one-size-fits-all solution. It is a technically demanding strategy requiring precise documentation, professional administration, and coordination with legal, tax, and valuation experts. Done improperly, it may result in IRS scrutiny or collapse of the intended tax benefits.  Just applying the structure may increase the applicant’s IRS audit risk.

But when done correctly, as illustrated in the Levine case, IGSD planning can provide a meaningful and tax-efficient way to reduce an estate’s taxable value while ensuring future generations have the life insurance funding necessary to preserve wealth.

In an era of tightening exemptions and increasing estate tax exposure, discounting the future might be the smartest way to preserve your legacy.

If you’re interested in exploring whether an intergenerational split-dollar arrangement fits into your estate plan, let’s schedule a consultation. Sophisticated strategies require experienced guidance.

At Life Insurance Strategies Group, LLC, we do not sell products.   We help our affluent individual and institutional clients make complex decisions involving life insurance.   If we can help you, reach out to us through www.lifeinsurancestrategiesgroup.com.