Ind Business Life Insurance

<div class="Section1"><br /> <br /> As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.<br /> <br /> For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee's death would have on the business. Business life insurance is also commonly used in the context of a buy-sell agreement, where the business is obligated to purchase the ownership interest of an owner who dies. The insurance also could be used to fund a non-qualified retirement package for a single employee or a number of employees.<br /> <br /> </div>

<p>As the name suggests, business life insurance is life insurance that is owned by a business, regardless of whether the business is organized as a sole proprietorship, partnership, or corporation. The insurance can serve a number of different purposes.</p><p>For example, business life insurance is often used to insure the life of a key employee, in order to mitigate the negative impact that the employee's death would have on the business. Business life insurance is also commonly used in the context of a buy-sell agreement, where the business is obligated to purchase the ownership interest of an owner who dies. The insurance also could be used to fund a non-qualified retirement package for a single employee or a number of employees.</p>

<p> For purposes of the nondiscrimination requirements that apply to IRC Section 79 plans (<em><em>see</em></em> Q <a href="javascript:void(0)">8785</a>), a key employee is an employee who, at any time during the employer's tax year was: <br/>(1) an officer of an employer having annual compensation greater than $235,000 in 2026. No more than the greater of (a) three individuals or (b) 10 percent of employees need to be treated as officers, but in any event no more than 50 individuals may be considered officers;</p><p>(2) a more-than-5 percent owner of an employer; or</p><p>(3) a more-than-1 percent owner, determined without considering those employees who are not counted in testing for discriminatory eligibility, having an annual compensation from an employer of more than $160,000 in 2026 .<a href="#_ftn1">¹</a></p><p> A key employee also is any former employee who was a key employee when he or she retired or separated from service.<a href="#_ftn2">²</a></p><p> For purposes of determining corporate ownership, the attribution rules of IRC <br/> Section 318 apply. Rules similar to the attribution rules apply to determine non-corporate ownership. In calculating attribution from a corporation, a 5 percent ownership test will apply rather than a 50 percent test. </p><p> In determining the percentages of ownership, only the particular employer is considered; other members of a controlled group of corporations or businesses under common control and other members of an affiliated service group are not aggregated. They are aggregated for purposes of determining the employee's compensation and in testing for discrimination.<a href="#_ftn3">³</a></p><p><hr align="left" size="1" width="33%"></hr></p><p> <a href="#_ftnref1">1</a>. IRC §§ 79(d)(6), 416(i). </p><p> <a href="#_ftnref2">2</a>. IRC § 79(d)(6). </p><p> <a href="#_ftnref3">3</a>. IRC § 414(t); <em><em>see also</em></em> Temp. Treas. Reg. § 1.79-4T, A-5. </p>

<div class="Section1"><br /> <br /> Yes. There are certain exceptions to the $50,000 ceiling on tax-exempt coverage. The cost of group-term life insurance, even for amounts over $50,000, is tax-exempt in the following situations:<br /> <p style="padding-left: 40px;">(1)  The insurance is provided to a former employee who:</p><br /> <p style="padding-left: 80px;">(a)  has terminated his or her employment as an employee with the employer and has become permanently disabled,</p><br /> <p style="padding-left: 80px;">(b)  has terminated his or her employment on or before January 1, 1984, and was covered by the plan or by a predecessor plan when he or she retired if the plan was in existence on January 1, 1984, or the plan is a comparable successor to such a plan, or</p><br /> <p style="padding-left: 80px;">(c)  has terminated employment as an employee after January 1, 1984, having attained age 55 on or before January 1, 1984, and having been employed by the employer at any time during 1983 if the plan was in existence on January 1, 1984, or the plan is a comparable successor to such a plan, <em>unless</em> the individual retired under the plan after 1986 and the plan is discriminatory after that date, not taking into account insurance provided to employees who retired before January 1, 1987;</p><br /> <p style="padding-left: 40px;">(2)  If a charitable organization is designated as policy beneficiary, where this designation may be made with respect to all or any portion of the proceeds, but no charitable contributions deduction is allowable for such a designation; or</p><br /> <p style="padding-left: 40px;">(3)  If an employer is beneficiary (directly or indirectly), unless the employer is required to pay proceeds over to an employee's estate or beneficiary.<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> Any contribution toward group-term life insurance, but not toward permanent benefits, made by an employee during a taxable year generally reduces, dollar for dollar, the amount that otherwise would be included in the employee's gross income for term insurance. This reduction is not permitted, however, if the employee makes a prepayment for coverage after retirement or for payments allocable to insurance where the cost is not taxed because of one of the exceptions outlined above.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The exemption of the cost of up to $50,000 of group-term life is not available with respect to group-term insurance purchased under a qualified employees' trust or annuity plan. The provisions of IRC Section 72(m)(3) and Treasury Regulation Section 1.72-16 apply to the cost of the protection purchased under qualified plans and no part of the cost is excludable from an employee's gross income.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Premiums for supplemental insurance in excess of $50,000 provided by an employer under a group-term insurance plan are not taxable to an insured employee when paid by a family member to whom the employee has assigned the insurance.<a href="#_ftn4" name="_ftnref4">⁴</a> If the cost of the coverage in excess of $50,000 is shared by an employer and assignee, the employer's portion of the cost is includable in the insured employee's gross income.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 79(b); Treas. Reg. § 1.79-2; TRA '84 § 223(d), as amended by TRA '86, § 1827(b)(1); Temp. Treas. Reg. § 1.79-4T, A-1. <em><em>See also</em></em> Let. Rul. 9149010.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. §§ 1.79-2(a)(2), 1.79-3(g).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 79(b)(3); Treas. Reg. § 1.79-2(d).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  Rev. Rul. 71-587, 1971-2 CB 89.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  Rev. Rul. 73-174, 1973-1 CB 43.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The cost of up to $50,000 of group-term life insurance coverage generally is tax-exempt under IRC Section 79 (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8782">8782</a>). The cost of coverage in excess of $50,000 is taxable to the employee in most situations (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8784">8784</a> for a discussion of the exceptions).<br /> <br /> In calculating the cost of coverage, an employee who has more than one employer must combine all group-term coverage and is entitled to exclude only $50,000 of the combined coverage. If an employee contributes toward the cost of the insurance, all of the employee&rsquo;s contribution for coverage will be subtracted from the amount that would otherwise be taxable.<a href="#_ftn1" name="_ftnref1">¹</a> The employee cannot carry over any unused portion of his or her contributions from year to year.<br /> <br /> The taxable cost of coverage in excess of $50,000 must be calculated on a monthly basis. The steps are as follows:<br /> <p style="padding-left: 40px;">(1)&nbsp; Determine the total amount of group-term life insurance coverage for the employee in each calendar month of the employee&rsquo;s taxable year, and if a change occurs during any month, take the average at the beginning and end of the month;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; Subtract $50,000 from each month&rsquo;s coverage;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; Apply the appropriate rate from the applicable tables of monthly premium rates (reproduced below) to the balance, if any, for each month;</p><br /> <p style="padding-left: 40px;">(4)&nbsp; Subtract total employee contributions for the year, if any, from the sum of the monthly costs.<a href="#_ftn2" name="_ftnref2">²</a></p><br /> The cost is determined on the basis of the life insurance protection provided to an employee during the employee&rsquo;s tax year, without regard to when the premiums are paid by an employer. The rates in the table provided immediately below should be used to compute the cost of excess group-term life insurance coverage.<a href="#_ftn3" name="_ftnref3">³</a><br /> <table border="1" align="center"><br /> <tbody><br /> <tr><br /> <td colspan="2" align="center" width="494"><em>Uniform Premiums for $1,000 of Group-Term Life Insurance Protection*</em><br /> <br /> Rates Applicable to Cost of Group-Term Life Insurance<br /> <br /> Provided After June 30, 1999</td><br /> </tr><br /> <tr><br /> <td align="center" width="247"><strong>5-Year Age</strong><br /> <br /> <strong>Bracket</strong></td><br /> <td align="center" width="247"><strong>Cost per $1,000 of Protection</strong><br /> <br /> <strong>for One-Month Period</strong></td><br /> </tr><br /> <tr><br /> <td align="center" width="247">Under 25</td><br /> <td align="center" width="247">$0.05</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">25 to 29</td><br /> <td align="center" width="247">.06</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">30 to 34</td><br /> <td align="center" width="247">.08</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">35 to 39</td><br /> <td align="center" width="247">.09</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">40 to 44</td><br /> <td align="center" width="247">.10</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">45 to 49</td><br /> <td align="center" width="247">.15</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">50 to 54</td><br /> <td align="center" width="247">.23</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">55 to 59</td><br /> <td align="center" width="247">.43</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">60 to 64</td><br /> <td align="center" width="247">.66</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">65 to 69</td><br /> <td align="center" width="247">1.27</td><br /> </tr><br /> <tr><br /> <td align="center" width="247">70 and above</td><br /> <td align="center" width="247">2.06</td><br /> </tr><br /> <tr><br /> <td colspan="2" align="center" width="494">*In using the above table, the age of the employee is the employee&rsquo;s attained age on the last day of the employee&rsquo;s taxable year.</td><br /> </tr><br /> </tbody><br /> </table><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 79.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Treas. Reg. &sect; 1.79-3.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect; 1.79-3(d)(2).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. If a Section 79 plan covers any key employees and the plan discriminates in favor of them either as to eligibility to participate or with respect to the kind or amount of benefits, the key employees may not exclude the cost of the first $50,000 of coverage (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8782">8782</a>). If a plan is found to be discriminatory, the key employee must include the higher of the actual cost for such insurance or the cost as specified in the uniform premium Table I (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8783">8783</a>). Employees who are not key employees may exclude the cost of $50,000 of coverage even if a plan is discriminatory.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> A plan is considered discriminatory in favor of key employees with respect to eligibility to participate <em>unless</em>:<br /> <p style="padding-left: 40px;">(1)&nbsp; it benefits at least 70 percent of all employees;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; at least 85 percent of participants are not key employees;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; the plan benefits a class of employees found by the IRS not to be discriminatory; or</p><br /> <p style="padding-left: 40px;">(4)&nbsp; if the plan is part of a cafeteria plan, the requirements for cafeteria plans are met (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8897">8897</a>).<a href="#_ftn2" name="_ftnref2">²</a></p><br /> Individuals who do not need to be counted for the purposes of determining whether a plan is discriminatory include:<br /> <p style="padding-left: 40px;">(1)&nbsp; employees with fewer than three years of service;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; part-time and seasonal employees;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; employees excluded from a plan who are covered by a collective bargaining agreement if group-term life insurance was the subject of good faith bargaining, and</p><br /> <p style="padding-left: 40px;">(4)&nbsp; certain nonresident aliens.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> Benefits are discriminatory unless all benefits that are made available to key employee participants are available to all other participants.<a href="#_ftn4" name="_ftnref4">⁴</a> Benefits are not discriminatory if the plan provides a fixed amount of insurance that is the same for all covered employees or merely because the amount of insurance bears a uniform relationship to the total compensation of employees, or to their basic or regular rate of compensation.<a href="#_ftn5" name="_ftnref5">⁵</a> In other circumstances, the determination of whether a plan is nondiscriminatory will be based on all the facts and circumstances.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> For purposes of determining whether an employer&rsquo;s group-term insurance plan is discriminatory, all policies providing group-term life insurance to a key employee or key employees carried directly or indirectly by an employer will be treated as a single plan. An employer may treat two or more policies that do not provide group-term life insurance to a common key employee as a single plan.<a href="#_ftn7" name="_ftnref7">⁷</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8786">8786</a> for a discussion of who are considered key employees for purposes of these nondiscrimination rules.<br /> <p style="text-align: center;"><strong>Exemption for Church Plans</strong></p><br /> The nondiscrimination requirements discussed above do not apply to church plans for church employees. A church plan generally is one established by a church or convention or association of churches that is tax-exempt under IRC Section 501(c)(3). A church employee includes a minister, or an employee of an organization that is tax-exempt under IRC Section 501(c)(3), but does not include an employee of an educational organization above the secondary level, other than a school for religious training, or an employee of certain hospitals or medical research organizations.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 79(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 79(d)(3)(A).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 79(d)(3)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 79(d)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 79(d)(5); Treas. Reg. &sect; 1.79-4T, A-9.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; Treas. Reg. &sect; 1.79-4T, A-9.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect; 1.79-4T, A-5.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect; 79(d)(7).<br /> <br /> </div></div><br />

<div class="Section1">The general rules applicable to life insurance contracts also apply in the case of business life insurance. As such, the entire lump sum payable at an insured&rsquo;s death is exempt from regularly calculated income tax regardless of whether the beneficiary is an individual, a corporation, a partnership, a trust, or the insured&rsquo;s estate.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8777">8777</a> for rules pertaining to employer-owned life insurance contracts issued after August 17, 2006.<br /> <br /> A portion of the death proceeds may be taxable if the proceeds are paid out under a life income or other installment option. In this case, the amount payable at death may be prorated and recovered from the payments in equal tax-free amounts over the payment period, but the interest earned on the proceeds over the distribution period is taxable.<br /> <br /> Proceeds received by a partnership or by an S corporation retain their tax-exempt character when passed on to individual partners or shareholders. Proceeds received tax-free by a regular<br /> (C) corporation are, when paid out, usually taxable to the recipients as compensation or dividends.<br /> <br /> Despite the general rule, there are some circumstances where death proceeds paid out in a lump sum are not wholly tax-exempt. For example, the IRC expressly provides that proceeds are taxable, under some circumstances, where a policy has previously been sold or otherwise transferred for a valuable consideration (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8778">8778</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8781">8781</a>).<br /> <br /> Under Section 101(a), in the case of proceeds payable under qualified pension or profit sharing plans, only the amount in excess of the cash surrender value is tax-exempt. The same rule applies to proceeds received under a tax sheltered annuity and proceeds received under individual retirement endowment contracts.<br /> <br /> In some cases, the exemption may not be available because proceeds are not considered to be received as life insurance proceeds. These include proceeds that are taxable as dividends or compensation, proceeds that are taxable because of lack of insurable interest, proceeds taxable as a return of embezzled funds, and proceeds of creditor insurance.<br /> <br /> Where liquidation of a business after a partner&rsquo;s death resulted in a loss, but life insurance on that partner had been purchased by the other partner for the purpose of protecting his capital investment in the business, the court ruled that because the loss was compensated for by insurance, it was not deductible. IRC Section 165(a) provides that &ldquo;[t]here shall be allowed as a deduction any loss sustained during the taxable year <em>and not compensated for by insurance or otherwise</em>&rdquo; (emphasis added).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 101(a); Treas. Reg. &sect; 1.101-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; <em>Johnson v. Commissioner</em>, 66 TC 897 (1976), <em>aff&rsquo;d</em>, 78-1 USTC &para; 9367 (4th Cir. 1978).<br /> <br /> </div></div><br />

<div class="Section1">No. This is true regardless of who is beneficiary under the policy. In the case of a sole proprietorship, premium payments are treated as nondeductible personal expenses because a sole proprietor and the business are considered one and the same for tax purposes.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The general rules governing the deductibility of life insurance premiums (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8765">8765</a>) apply in the case of insurance purchased by a sole proprietor on the life of an employee.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 262(a); Treas. Reg. &sect; 1.262-1(b)(1).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor&rsquo;s Note:</em> Note that under the 2017 tax reform legislation, the generally applicable exceptions to the transfer for value rule do not apply if the transfer occurred in a reportable policy sale (<em><em>see</em></em> below).<div class="Section1"><br /> <br /> Under IRC Section 101(a)(2), if a life insurance policy or any interest in a policy is transferred for a valuable consideration, the death proceeds generally will be exempt only to the extent of the consideration paid by the transferee and net premiums, if any, paid by the transferee after the transfer. Any interest paid or accrued by the transferee on indebtedness with respect to the policy is added to the exempt amount if the interest is not deductible under IRC Section 264(a)(4).<a href="#_ftn1" name="_ftnref1">¹</a> This provision regarding interest paid or accrued applies to contracts issued after June 8, 1997. Further, for purposes of this provision, any material increase in a death benefit or other material change in a contract shall be treated as a new contract with certain limited exceptions.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> After subtracting the permissible exclusions outlined above, the balance of the death proceeds is taxable as ordinary income. This is known as the &ldquo;transfer for value rule.&rdquo; If a sale or other transfer for value comes within any of the following exceptions to the transfer for value rule, the exemption is available despite the sale or other transfer for value:<br /> <p style="padding-left: 40px;">(1)&nbsp; The sale or other transfer for value is to the insured individual;<a href="#_ftn3" name="_ftnref3">³</a></p><br /> <p style="padding-left: 40px;">(2)&nbsp; The sale or other transfer for value is to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is an officer or shareholder.<a href="#_ftn4" name="_ftnref4">⁴</a> Members of a limited liability company (&ldquo;LLC&rdquo;) taxed as a partnership are considered to be partners for this purpose; or<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> <p style="padding-left: 40px;">(3)&nbsp; If the basis for determining gain or loss in the hands of the transferee is determined in whole or in part by reference to the basis of the transferor. This occurs, for example, where a policy is transferred from one corporation to another in a tax&ndash;free reorganization, where a policy is transferred between spouses, or where a policy is acquired in part by gift.<a href="#_ftn6" name="_ftnref6">⁶</a></p><br /> Under the 2017 tax reforms, these exceptions do not apply if the transfer occurred in a reportable policy sale. A reportable policy sale means the acquisition of a life insurance contract (directly or indirectly) if the acquirer has no substantial family, business or financial relationship with the insured individual apart from the interest in the life insurance contract. This includes acquiring an interest in a partnership, trust or other entity that holds an interest in the life insurance contract.<a href="#_ftn7" name="_ftnref7">⁷</a> This new rule is effective for transfers occurring after December 31, 2017.<br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8779">8779</a> for a more thorough discussion of when a life insurance policy is considered to have been transferred for value. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8780">8780</a> for a more thorough discussion of the exceptions to the transfer for value rule.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 101(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; TRA &rsquo;97, &sect; 1084(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 101(a)(2)(B).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Let. Rul. 9625013.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect; 101(a)(2)(A); Rev. Rul. 69-187, 1969-1 CB 45; Let. Rul. 8951056.<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect; 101(a)(3).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor's Note:</em> Note that under the 2017 tax reform legislation, the generally applicable exceptions to the transfer for value rule do not apply if the transfer occurred in a reportable policy sale (<em><em>see</em></em> below).</div><br /> <div class="Section1"><br /> <br /> Several exceptions exist to allow proceeds of a life insurance contract to maintain their tax-exempt status even if there has been a transfer for value. If a sale or other transfer for value comes within any of the following exceptions to the transfer for value rule, the exemption from gross income is available despite the sale or other transfer for value:<br /> <p style="padding-left: 40px;">(1)  The sale or other transfer for value is to the insured individual;<a href="#_ftn1" name="_ftnref1">¹</a></p><br /> <p style="padding-left: 40px;">(2)  The sale or other transfer for value is to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is an officer or shareholder.<a href="#_ftn2" name="_ftnref2">²</a> Members of a limited liability company ("LLC") taxed as a partnership are considered to be partners for this purpose; or<a href="#_ftn3" name="_ftnref3">³</a></p><br /> <p style="padding-left: 40px;">(3)  If the basis for determining gain or loss in the hands of the transferee is determined in whole or in part by reference to the basis of the transferor. This occurs, for example, where a policy is transferred from one corporation to another in a tax–free reorganization, where a policy is transferred between spouses, or where a policy is acquired in part by gift.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> For example, if a corporation purchases a policy insuring a key person and later sells it to the insured, the proceeds will be received wholly tax-exempt by the beneficiary despite the sale to the insured.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> Under the 2017 tax reforms, the exceptions discussed above do not apply if the transfer occurred in a reportable policy sale. A reportable policy sale means the acquisition of a life insurance contract (directly or indirectly) if the acquirer has no substantial family, business or financial relationship with the insured individual apart from the interest in the life insurance contract. This includes acquiring an interest in a partnership, trust or other entity that holds an interest in the life insurance contract.<a href="#_ftn6" name="_ftnref6">⁶</a> This new rule is effective for transfers occurring after December 31, 2017.<br /> <br /> Moreover, a transfer to a trust that is treated as owned wholly or in part by the insured comes within the exception as a transfer to the insured to the extent the insured is treated as owner.<a href="#_ftn7" name="_ftnref7">⁷</a> An individual is treated as owner of a trust where the individual retains control over property the individual has transferred to the trust so that the income on that property is taxable to the individual under IRC Sections 671-679.<br /> <br /> Where a policy is transferred more than once but the last transfer, or the last transfer for value, is to the insured, a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer, the proceeds will be wholly tax-exempt regardless of any previous sale or other transfer for value.<a href="#_ftn8" name="_ftnref8">⁸</a> If the insured transfers the policy for a valuable consideration, and the transfer does not come within any of the exceptions to the transfer for value rule, the proceeds again will lose their tax-exempt status.<br /> <p style="padding-left: 40px;"><em>Example:</em> X Corporation purchases an insurance policy for a single premium of $500 with a face amount of $1,000 upon the life of A, one of its employees, naming the X Corporation as beneficiary. The X Corporation transfers the policy to the Y Corporation in a tax-free reorganization (the policy having a basis for determining gain or loss in the hands of the Y Corporation determined by reference to its basis in the hands of the X Corporation). The Y Corporation later transfers the policy to the Z Corporation for $600. The<br /> Z Corporation receives the proceeds of $1,000 upon the death of A. The amount which the Z Corporation can exclude from its gross income is limited to $600 plus any premiums paid by the Z Corporation subsequent to the transfer of the policy to it.</p><br /> <p style="padding-left: 40px;">If Z Corporation, however, before A's death, transfers the policy to the N Corporation, in which A is a shareholder, the N Corporation would receive the $1,000 proceeds upon A's death free from income taxes.<a href="#_ftn9" name="_ftnref9">⁹</a></p><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 101(a)(2)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 101(a)(2)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Let. Rul. 9625013.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 101(a)(2)(A), 1041; Rev. Rul. 69-187, 1969-1 CB 45; Let. Rul. 8951056.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  <em><em>See</em></em> Let. Rul. 8906034.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 101(a)(3).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.  Rev. Rul. 2007-13; <em>Swanson v. Commissioner</em>, 75-2 USTC ¶ 9528 (8th Cir. 1975).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.  <em><em>See</em></em> Treas. Reg. § 1.101-1(g)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.  <em><em>See</em></em> Treas. Reg. § 1.101-1(g)(3).<br /> <br /> </div>