Advisors catering to the advanced markets space can enjoy a welcome reprieve from growing compliance burdens should any of the clients face situations like those addressed by the IRS and a U.S. tax court in separate rulings during the year past. So noted Thomas Commito, vice president of sales at Radnor, Pa.-based Lincoln Financial Distributors, who co-presented the kick-off general session, “What’s Hot, What’s Not—2012 Edition, at LIMRA’s Advanced Sales Forum in Chicago on August 6th.
Commito first applauded a private letter ruling (PLR 201217017) of the IRS, which held that a buy-sell agreement among corporate shareholders, in combination with life insurance policies on the shareholders lives, but owned their closely held corporation, satisfied the IRS’ four notification and consent requirements respecting the policies’ issuance.
Internal Revenue Code Section 101(j) mandates an employer buying policies on the lives of its employees to (1) notify the employees in writing and (2) secure their written consent. The employees additionally have to be (3) informed of the policies’ maximum face amounts and (4) be issued statements indicating that coverage will continue after they terminate employment.
The case that gave rise to the PLR, said Commito, concerned a buy-sell agreement that had been signed by a corporation and each of its shareholders. A conventional buy-sell contract, that agreement stipulated that, in the event of the shareholder’s death or termination, the corporation would buy his or her interest in the business, the purchase funded with a life insurance policy on the employee’s life.
Each of the policy applications signed by the shareholders stipulated the corporation would be both policyholder and beneficiary; and the apps indicated the amount of coverage. The corporation did not meet the 101(j)’s notice and consent requirements before buying the policies. But in its PRL ruling, the IRS stated the policy applications and the buy-sell agreement, taken together, were adequate substitutes.
“The PLR ruling was a very positive development, said Commito. “Particularly for those employers and agents who have no knowledge of 101(j), the PLR will be a lot of comfort. And it certainly makes our lives as insurance professionals easier.”
Also a great result for the industry, added Commito, was a tax court decision that sided with the grantor of an irrevocable life insurance “Crummey” trust. In its decision (Estate of Turner vs. Commissioner, T.C. Memo. 2011-209) the court ruled legitimate a grantor’s payment of premiums directly to the life insurer rather than, as is standard practice, making cash gifts to the trust, and the trust paying the insurer. The court permitted an annual gift tax exclusion, though the trust’s beneficiaries may have been unaware of their rights to withdraw or borrow from the policy’s cash value.
By ruling in the trust grantor’s (settlor’s) favor, said Commito, the tax court rejected two arguments of the IRS: (1) that the premium payments were gifts of future interest that don’t qualify for the annual gift exclusion because the trust beneficiaries had no “meaningful rights to withdraw” the premium payments (as they were not paid to the trust); and (2) that the beneficiaries did not possess withdrawal rights because the beneficiaries had no knowledge of them.
In justifying its decision, said Commito, the tax court noted that, with or without prior notice, the beneficiaries had the “legal right to demand” withdrawals. The fact that the grantor paid the insurer directly did not alter this right.
Despite the favorable ruling, Commito counseled session attendees to stick with the conventional payment method.
“That’s the safer way,” he said. “But at least [trust grantors] can take solace in the fact that if they forget to send out a Crummey letter”—alerting the trust beneficiaries of the premium payments to the trust and, thereby, qualifying the payments as present interest gifts—“or make a direct payment to the insurer, then that’s okay.”