William Byrnes' Tax, Wealth, and Risk Intelligence

William Byrnes (Texas A&M) tax & compliance articles

Key Employee Life Insurance and the Transfer for Value Rule

Posted by William Byrnes on November 16, 2010

Why is this Topic Important to Wealth Managers?  Discusses a basic deferred compensation plan available to many small businesses seeking to retain key personnel.  Provides discussion on common transactions as well as expected tax consequences.

Key employee insurance generally means “a life insurance policy owned by and payable to a business that insures the lives…of employees whose deaths would cause a significant economic loss to the business, upon whose skills talents, experience or business or personal contacts the business is dependent, and who would be difficult to replace.” [1]

Generally, life insurance premiums payable by a business are not deductible. [2]  Which means the income received (whether in a single sum or otherwise) by the business, under the life insurance contract by reason of the death of the insured, is not included in gross income.  [3] 

If a key employee policy is transferred for valuable consideration, just as with other life insurance policies, the income tax benefit normally afforded to life contract proceeds payable at death may be extinguished. [4]

As was discussed a few weeks back in our blogticle: AdvisorFYI- Treatment Life Insurance Contracts—Part II: Secondary Market Participants, “[i[n the case of a transfer for valuable consideration…the amount excluded from gross income shall not exceed an amount equal to the sum of the actual value of the consideration paid and the premiums and other amounts subsequently paid by the transferee.” [5]   In other words, the transferee must include the death benefits as gross income over the amount of consideration and any additional premiums paid. 

Read the entire blogticle at AdvisorFYI.

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