290 / Is there a loss of the tax exemption for death proceeds after a life insurance policy is transferred to a corporation in a tax-free organization or reorganization?

Other examples of tax-free transfers include tax-free reorganizations, which include statutory mergers, consolidations and the transfers of substantially all the property of one corporation solely in exchange for the voting stock of another corporation.¹ Where an asset changes hands in a tax-free transfer, the tax basis of the asset does not change.² Consequently, such a transfer comes within the exception to the transfer for value rule set forth in IRC Section 101(a)(2)(A) ( Q 279).

If proceeds would not have been exempt had a policy been retained by a transferor, the tax-free transfer will not cause them to become tax-exempt unless the insured is an officer or shareholder of the transferee corporation.³

If a corporation purchases the assets of another corporation in a transaction that is not a tax-free reorganization and those assets include a life insurance policy, the sale will cause a loss of exemption for the proceeds unless the insured is an officer or shareholder of the purchasing corporation ( Q 285).⁴