Wealth & Risk Management Blog

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

Posts Tagged ‘Insurance policy’

When are policy loans taxable?

Posted by William Byrnes on November 23, 2011


Generally, life insurance policies be withdrawn without income tax consequences. However, there are circumstances where a “loan” is immediately taxable. We have covered situations where a policy is surrendered with a loan outstanding, resulting in taxable income. This article discusses another case where a policy “loan” will be treated as taxable income.

In Frederick D. Todd II et ux. v. Commissioner (T.C. Memo. 2011-123), the Tax Court considered whether a distribution from a welfare benefit fund to a fund participant was a policy loan or a taxable distribution.

For previous coverage of life insurance policies held by welfare benefit funds in Advisor’s Journal, see Deductions for Life Insurance Premium Payments to Welfare Benefit Plan Denied (CC 10-29).

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of welfare benefit funds, see Advisor’s Main Library: B—Welfare Benefit Funds.

 

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What Next? ILITs & Estates under 5MM

Posted by William Byrnes on October 26, 2011


Life insurance is a common tool for ensuring estates have adequate liquidity to pay estate expenses and taxes. But recent changes to the estate tax have some people questioning whether the high premiums they’re paying are worth it when their estates are no longer likely to be hit by the estate tax.

With a $5 million exclusion amount and brand-new exclusion portability provisions, far fewer households have to deal with the federal estate tax. But is allowing unneeded life insurance to lapse the best solution?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance valuation in Advisor’s Journal, see Relative Policy Value of Life Insurance (CC 11-57).

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STOLI Scheme Lands Insurance Agent in Jail

Posted by William Byrnes on August 29, 2011


A California insurance agent will spend years behind bars for his part in a stranger originated life insurance (“STOLI”) scheme that swindled six victims out of almost $800,000. In addition to being sentenced to 3 years 8 months in jail, Victor L. Weber, 55, was also ordered to pay restitution to his victims.

In the typical STOLI arrangement, investors or promoters approach seniors to allow investors to purchase life insurance on the seniors’ lives. Insureds are typically enticed to sign on the dotted line by promises of “free life insurance,” cash payments, vacations or other perks. Insureds are usually unable to purchase needed life insurance because their life insurance capacity is occupied  by the investor owned policy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of stranger-originated life insurance in Advisor’s Journal, see New York Court of Appeals Upholds STOLI Arrangement (CC 10-106) & Recent STOLI Case Is a Big Win for Insurers (CC 10-59).

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Turning Plan Sponsors’ Risk into Reward

Posted by William Byrnes on August 12, 2011


Barry Flagg continues his popular series, this month discussing the cash value of life insurance as a factor of suitability. The desirability of a permanent life insurance product is influenced by the degree of cash value liquidity throughout the life of the policy. All other factors being equal, the higher the liquid cash value after deduction of cost of insurance charges and policy expenses (including contingent surrender charges), the more suitable the policy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of income taxation of life insurance, see Advisor’s Main Library: D–Gain Or Loss On Surrender Or Sale

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Is the Life Insurance Gender Gap Really Closing?

Posted by William Byrnes on August 3, 2011


Historically, the amount of life insurance purchased by men dwarfed that of women. Although the gender gap is closing, there’s still a discrepancy between the amount of life insurance coverage owned by men and women. A recently released study by the Life Insurance and Market Research Association (LIMRA) revealed that, although men and women own life insurance in nearly equal numbers, and women are working now more than ever, the amount of coverage owned by women is still fewer than men.

Historically, men have been the main source of household incomes; but recent research has revealed that about 30 percent of women earn more money than their husbands. Despite this change, LIMRA’s studies found that women’s life insurance ownership has not increased proportionately. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of life insurance in qualified plans, see Advisor’s Main Library: A – Life Insurance in Qualified Plans & 412(i) Plans.

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New York Holds Carrier Can’t Deny Term Conversion for Settlement

Posted by William Byrnes on July 26, 2011


The New York Department of Insurance, Office of General Counsel, stated on February 25, 2011 that insurance carriers cannot refuse to convert a term policy to a permanent policy on the ground that the policy will be sold on the secondary market. The debated issue was whether the converted policy is a “new” policy that must satisfy the insurable interest requirement. Nevertheless, this ruling will not affect all term policies, since many term life insurance policies are not convertible. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Subsequent Divorce Decree’s Impact on Beneficiary Designation

Posted by William Byrnes on July 18, 2011


Which prevails when it is time to make a claim, a last in time divorce decree or a beneficiary designation made at the time of the application years ago?  A wife had her estranged husband, sign a separation and property-settlement agreement to release him from any claims to her estate or property.  When the wife passed away, her former husband sought the life insurance proceeds, as did her mother and son.  The answer is provided in a cautionary tale of beneficiary designations told in a recent 4th circuit case.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of beneficiary designations in Advisor’s Journal, see The Effect of Divorce on Life Insurance Beneficiary Designations (CC 10-39) & Don’t Overlook Beneficiary Designations and Settlement Options (CC 09-28).

For in-depth analysis of beneficiaries and settlement options, see Advisor’s Main Library: D – Problems In Beneficiary Designations.

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Tax-Free Exchange Can Erase Policy’s Tax Benefits

Posted by William Byrnes on July 18, 2011


A recent IRS Revenue Ruling provides an important reminder for us of the rules for deducting interest that’s paid or accrued on a business life insurance policy loans. Knowing how and when policy loan interest is properly deductible can mean the difference between closing the sale in the first instance and an IRS audit down line if these rules are ignored.

In general, interest paid on a life insurance policy loan is not deductible for income tax purposes; but there are some exceptions for life insurance purchased for business purposes. The deductibility of policy loan interest has changed significantly over the past 20 years, so an intimate knowledge of the specifics is imperative when selling or transacting on a policy that’s issued to a business.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous Advisor’s Journal coverage of the exception to the pro rata limitation on interest deduction, see Obama Budget Would Undercut Utility of Life Insurance in Small Business Planning (CC-11-41).

For in-depth analysis of corporate-owned life insurance, see Advisor’s Main Library: D—Deductibility Of Business Insurance Premiums, E—Premiums As Taxable Income To The Insured & F—Taxability Of Corporate Owned Life Insurance Proceeds At Death.

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Historical Performance of Underlying Cash Value of Life Insurance

Posted by William Byrnes on July 17, 2011


Last month, Advanced Market expert Barry Flagg talked about the relevance of policy cash values to the overall suitability of a permanent life insurance policy. This month, he expanded on the cash value topic by addressing how cash value is generally a product of the number of cash value investment options, the historical performance of such cash value investment options, and the cost-effectiveness of the various cash value allocation options.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of valuation in Advisor’s Journal, see Life Insurance Valuation (CC 10-09).

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Pricing Stability of Life Insurance

Posted by William Byrnes on April 4, 2011


Last month, we discussed the obvious relevance of pricing competitiveness to overall life insurance product suitability. This month, we discuss the stability of pricing representations which is also a factor of suitability.  After all, pricing that appears competitive at the time of sale/purchase but which cannot be maintained can be worse than a less-competitive product with more stable pricing representations.

For instance, while premiums are often considered the price/cost of a life insurance policy, the premium is not the price/cost of a life insurance policy (unless contractually guaranteed like in term life insurance or guaranteed universal life insurance) any more than the $2,000 contributed to an Individual Retirement Account (IRA) is the cost of the IRA. In both cases, the cost is the sum of what is deducted from the premium/contribution.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90)Financial Strength and Claims-Paying Ability (CC 10-115)Cost Competitiveness of Life Insurance (CC 11-11).

 

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Life Settlement Provider Accused of Falsifying Life Span Reports

Posted by William Byrnes on March 10, 2011


One of the U.S.’s oldest life settlement companies, publically traded Life Partners Holdings, Inc., is being investigated by the SEC for falsifying life span reports used to sell the company’s life settlement products.  Falsified life spans can leave investors on the hook for additional premiums over the insureds’ remaining years when insureds outlive the firm’s life-span estimates.

The question for Life Partners Holdings shareholders and customers is whether the Life Partners investigation will go the way of Mutual Benefits Corp, a life settlement company that sold fractional interests in life insurance policies. Mutual Benefits was the subject of a similar SEC investigation concerning falsified life expectancies that ultimately led to the company’s collapse.  Could Life Partners be next?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

 

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NCOIL Warns a Federal Insurance Charter Would Hurt the States

Posted by William Byrnes on February 28, 2011


Federal interference in the regulation of the insurance industry could be around the corner, but the states are not going to cede their authority without a fight.

State legislators fear that “important funds and jobs could be lost if Congress authorizes a federal insurance charter and creates a new bureaucracy to regulate insurance.” According to a letter sent by NCOIL (The National Conference of Insurance Legislators) to every member of the 112th Congress, a federal insurance charter could cost states as much as $16 billion in revenue annually—representing lost fees and taxes generated for the states by insurance business. ….

Although the FIO itself is not given regulatory authority by the Wall Street Reform Act, the studies mandated by the Act may signal that the Feds are interested in expanding their reach into the insurance industry. And, it would be naïve to think that the FIO studies will find that federal regulation of insurance companies is absolutely unnecessary—given the role of insurance companies like AIG in the financial crisis.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Federal Insurance Office in Advisor’s Journal, see The Federal Insurance Office (CC 10-55).

 

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Cost Competitiveness of Life Insurance

Posted by William Byrnes on February 14, 2011


Cost competitiveness of life insurance policies is an obvious determinant of suitability.  Keeping costs low is critical because every dollar spent on expenses is one less dollar available to purchase more death benefit.  In fact, a recent study by Morningstar revealed that “Low fees are likely to be the best predictor of a mutual fund’s future success,” and the same certainly holds true for life insurance products. 

While different insurers refer to different policy expenses in different ways, all policy expenses in all life insurance policies fall into the following four categories: 1) cost of insurance charges (COIs), 2) fixed administration expenses (FAEs), 3) cash-value-based “wrap fees” (e.g., M&Es), and 4) premium loads.   Each type of policy expense and its role and relevance in pricing and suitability is discussed in the complete analysis at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance product suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90) and Financial Strength and Claims-Paying Ability (CC 10-115).

We invite your questions and comments by posting them or by calling the Panel of Experts.

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A Drunk, Two Insurance Policies, and One Court’s Interpretation

Posted by William Byrnes on February 1, 2011


Robert Fier was employed as a gaming machine operator in Las Vegas, Nevada.  He worked his way up through the company to be promoted to a managerial position.  During this time, Fier enrolled in an insurance program offered by the company to managers.  The enrollment entitled Fier to two insurance policies, a Long Term Disability Policy and a Group Life and Accidental Death and Dismemberment Insurance Policy.

The long term disability plan stated, in essence, Fier was entitled to payments upon the occurrence of disability if he earned less than 80% of what he had before the accident.  Also, the policy payments terminated if he starting making over 80% of what he had before the accident.  The group life and accidental death and dismemberment policy will be discussed in more detail below.

After five years with the company, Mr. Fier was shot in the throat during a hunting accident.  The individual who shot Fier on that hunting trip (in the great state of Utah) was evidently intoxicated.  The accident left Fier a quadriplegic for life.

Mr. Fier was then offered a position at the same company that was designed specifically to fit his new disability.  The company continued to pay Fier the same amount as it had before the accident.  However, after four more years, the company assigned Fier to a new position and lowered his salary by $20,000 annually.  Mr. Fier then filed a claim under his long term disability policy.  To read this article excerpted above, please access AdvisorFYI

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New York Life Insurance Commission Disclosures

Posted by William Byrnes on January 20, 2011


Beginning last week life insurance brokers in the Big Apple started disclosing commissions to consumers.  New York is one of the first states that are mandating life insurance commission details to be disclosed to clients.

Under New York Insurance law, [1] an insurance producer selling or renewing an insurance contract must disclose the following information to the purchaser orally or in writing not later than application for the insurance contract or the renewal:

(1)     whether the insurance producer represents the purchaser or the insurer for purposes of the sale;

(2)     that the insurance producer will receive compensation from the selling insurer based on the  insurance contract the producer sells;

(3)     that the compensation insurers pay to insurance producers may vary depending on a number of factors, including the insurance contract and the insurer that the purchaser selects, the volume of business the producer provides to the insurer or the profitability of the insurance contracts  that the producer provides to the insurer; and

(4)     that the purchaser may obtain information about the compensation expected to be received by the producer for the sale and for any alternative quotes obtained by the producer by requesting such information from the producer.

To read this article excerpted above, please access http://www.advisorfyi.com/2010/12/new-york-life-insurance-commission-disclosures/

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Cancellation of a Policy Generates Taxable Income: The Sanders Case

Posted by William Byrnes on January 19, 2011


Life insurance policies are granted preferred tax treatment, with death benefits distributable tax-free to beneficiaries, but some distributions from a life insurance policy are subject to income tax. For instance, although inside buildup of policy value occurs tax-free, when that value is tapped through policy withdrawals, the policy owner may be taxed on the distribution. Current income taxation can also result when a policy is cancelled or otherwise terminated when a policy loan is outstanding, as illustrated by a recent Tax Court case.

For previous coverage of life insurance developments in Advisor’s Journal, see Life Insurance: Iron-Clad Asset Protection or Chink in the Armor? (CC 10-114) and IRS Blesses Life Insurance Policy Held by Profit-Sharing Plan (CC 10-96).  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of policy loans and withdrawals, see Advisor’s Main Library: Section 19.1 G—Tax Treatment Of Policy Loan Interest and Section 19.1 C—Taxation of Amounts Payable During Life.

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New York Court of Appeals Issues Decision on STOLI Arrangement

Posted by William Byrnes on January 8, 2011


The Court of Appeals of New York—the state’s highest court— issued a decision as to whether New York’s insurable interest law was violated when an insured purchased a life insurance policy and immediately assigned the policy to a third party who did not have an insurable interest in the insured’s life.

The case involves an attorney who purchased $56.2 million in insurance coverage on his own life at the prompting of a STOLI promoter.  The policies were held by life insurance trusts that initially named the attorney’s adult children as beneficiaries of the trust, but the children immediately assigned their interests in the trusts to third party investors.  Investors paid all premiums.

When the attorney died, his wife refused to provide his death certificate to the investors.  She then sued the insurance companies and investors in federal district court, alleging that, because the policies were issued in violation of New York’s insurable interest law, policy proceeds should be paid to her instead of the investors.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them or by calling the Panel of Experts.

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Life Insurance: Iron-Clad Asset Protection or Chink in the Armor?

Posted by William Byrnes on January 6, 2011


Life insurance is often touted as an iron-clad asset protection vehicle since many states exempt life insurance policies from attachment by an insured’s creditors.  Life insurance can even provide limited asset protection in bankruptcy.

But life insurance is not a foolproof method of protecting family assets from all creditors, as illustrated by a recent U.S. District Court case.  In that case, an insured sued his insurance company and the IRS after the insurance company paid over the cash value of a life insurance policy to the IRS to satisfy a tax levy.  The insured’s wife and daughter were the beneficiaries of the life insurance policy, which would have shielded the policy from creditors in many states, including his.   Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of asset protection in Advisor’s Journal, see Domestic Asset Protection Trusts: New Chart Ranks the States (CC 10-30).

For in-depth analysis of asset protection, see Advisor’s Main Library: G—Domestic Asset Protection Trusts.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

 

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NCOIL Adopts Model Act Requiring Insurers to Inform Consumers of Settlement Options

Posted by William Byrnes on December 15, 2010


In a contentious move, the National Conference of Insurance Legislators (NCOIL) executive committee voted unanimously to adopt the Life Insurance Consumer Disclosure Model Act, (Model Act), which requires life insurance carriers to notify policy owners of settlement options when the policy owner is considering surrendering the policy or when the policy is set to lapse.

The life settlement industry is giddy over the Model Act—which should boost their business. But the insurance industry outlook on the Act is not so rosy—settlement essentially ensures that policies will not lapse before death benefits are paid and that many policy owners will choose settlement over carrier options like accelerated death benefits and policy surrender. Not all policy owners have a right to disclosure about settlements under the Model Act.  The disclosure requirement applies only where the insured is sixty years old or older or “is known by the insurer to be terminally ill or chronically ill” and … read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance settlement options in Advisor’s Journal, see Don’t Overlook Beneficiary Designations and Settlement Options (CC 09-28)

We invite your questions and comments by posting them or by calling the Panel of Experts.

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Insurers Accused of Wrongfully Refusing to Pay Death Benefits

Posted by William Byrnes on December 14, 2010


Insurance companies have been getting a lot of press the last few years. But this time, it’s not a story about a health insurance carrier denying a father-of-five cancer patient’s potentially life-saving treatment. It’s a Los Angeles Times story pillorying life insurance company American General and several other carriers for rescinding life insurance policies after the insured’s death.

According to the Los Angeles Times article, $372 million in life insurance benefits were denied beneficiaries in 2009, doubling over the past decade even as life insurance policy sales have decreased.

The article breaks down the denied death benefits by insurance company, finding that some carriers deny death benefits more than others. The prime target …… read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of a life insurance company’s right to rescind a policy after issuance, see Advisor’s Main Library: Section 20 C—Payment Of Proceeds.

We invite your questions and comments by posting them below or by calling the Panel of Experts.

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Lawsuit Seeks to Hold Insurer Responsible for Suspicious Death

Posted by William Byrnes on December 10, 2010


For as long as life insurance has existed, con artists and murderers have sought payouts from policies on the lives of their victims. Tomisue Hilbert, wife of insurance giant Conseco, Inc.’s founder Stephen Hilbert, suspects that her mother, Suzy Tomlinson, was a victim of one such schemer.

She looks to hold AIG responsible for her mother’s untimely death, believing that a high-value policy issued by American General (an AIG subsidiary) on her mother’s life was the impetus behind a scheme that ended with her mother’s death.  The life insurance policy at issue in the case is a $15 million policy on Tomlinson’s life naming Indiana businessman J.B. Carlson as its beneficiary. Policy premiums were paid with premium financing.

On September 29, 2008, Suzy Tomlinson drowned in her bathtub, fully clothed, after a night of drinking. Tomlinson’s death occurred right before a $1.27 million payment was due on the premium finance loan. Tomisue Hilbert’s lawsuit notes the fortuitous timing—for Carlson—of her mother’s death, Carlson’s debts of $5.9 million and the fact that Carlson may have been the last person to see her mother alive.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Employer Owned Life Insurance and Notice 2009-48

Posted by William Byrnes on November 29, 2010


President James A. Garfield's $10,000 life ins...

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Why is this Topic Important to Wealth Managers? Provides an update for wealth managers into the status of employer owned life insurance.  Discusses two notable exceptions to the general rule including income from the death benefits of an insurance policy when paid to a trade or business.

In 2006, Congress added Section 101(j) to the Internal Revenue Code which addresses the taxation of employer owned life insurance (EOLI) under Section 863 of the Pension Protection Act.  The law departed from the traditional status of life insurance proceeds payable by death of the insured as excluded from gross income. [1]

Section 101(j) essentially taxes life insurance proceeds payable at death, in the amount over contributions or basis, when the policy is owned by a trade or business, where the employer is the beneficiary, and the employee is the insured. [2] There are a certain number of exceptions where the benefit payable to the beneficiary will remain excludable.  [3] In all of the exceptional situations notice and consent requirements must be met. [4] For a discussion on the notice requirements specifically, or Section 101(j) generally, please see AdvisorFX: Death Benefits Under Employer Owned Life Insurance Contracts[5]

Since the enactment of law, the Service has issued guidance in regards to what transactions may be allowed under section 101(j).  That guidance came in part, last year when the Service published Notice 2009-48.

How do some of the exceptions work in consideration of the guidance published in Notice 2009-48?  Read our entire analysis and citations at AdvisorFYI.

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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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Proposals for Simplification of Life Insurance Policy Donation

Posted by William Byrnes on October 25, 2010


Valuing a donated life insurance policy can be tricky when taking a charitable contribution deduction. Detailed IRS guidance on insurance policy valuation has been confined to other scenarios, such as where a policy is sold or included in an estate.  Also complicating policy donation is the requirement that a qualified appraisal of the donated policy be included with the taxpayer’s return.

For in-depth analysis of the topic of charitable giving, see Advisor’s Main Library Section 1 F—Estate Planning Through Charitable Contributions

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We invite your questions and comments by posting them at AdvisorFYI, or by calling the Panel of Experts.

 

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Life Settlements Market Ideal for Re-Expansion

Posted by William Byrnes on October 21, 2010


Why is this Topic Important to Wealth Managers?  Discusses the general market conditions of life settlements.  Also provides reasons why some policy holders may consider selling their interests.   

As discussed earlier this week, a traditional life-settlement transaction consists of an third party purchasing an unknown individual’s life insurance policy for consideration.  The purchaser continues to pay the premiums until a death benefit is collected, the contract is sold to another individual or business, or is surrendered. 

The Wall Street Journal attributes the creation of the industry “back to the 1980s, when [terminally ill] patients sold their policies to raise cash for medical treatments.”   The Journal also notes, the “market boomed earlier this decade, as hedge funds eager for offbeat alternative investments piled in.”  

Since the decline in overall macroeconomic market conditions, “the total face value of policies purchased in the secondary market fell to $7 billion in 2009 from $13 billion in 2008”.  “Prices for policies, meanwhile, fell to an average of 13% of the death benefit in 2009 from 21% in 2006.”   Nevertheless, industry experts are expecting a rise again in total market figures by the end of 2010.  It is not surprising given the SEC’s new enforcement efforts discussed below. 

For the remainder of the article see AdvisorFYI.

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Treatment Life Insurance Contracts—Part II: Secondary Market Participants

Posted by William Byrnes on October 20, 2010


Why is this Topic Important to Wealth Managers?  Provides general taxation of life insurance contracts owned by a third party transferee, including the payment of death benefits as well as sale or exchange gain treatment.     

Today’s blogticle will discuss taxation of life insurance contracts from the purchaser’s prospective. 

As discussed yesterday, an insurance contract that carries a built-up cash value can be loaned against, collected by the beneficiary, surrendered or sold to a third party.   This blogticle deals in particular with payment of the face value to the third party caused by the death of the insured as well as another sale or exchange of the contract by the third party.  

What are the tax implications if the third party collects the death benefits?  What are the tax implications if the policy is sold to a third party? 

As a starting point, gross income includes all income from whatever source derived including (but not limited to) income from life insurance contracts (unless otherwise excluded by law).  Gross income specifically excludes amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.  For the complete article see AdvisorFYI….

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Treatment of the Sale or Exchange of a Life Insurance Contract—Part I

Posted by William Byrnes on October 19, 2010


Why is this Topic Important to Wealth Managers?  Provides general taxation of life insurance contracts that are surrendered, sold or exchanged.  Gives examples that are easy to follow and provides an educational foundation for real-world gain determinations.   

This is a two-part series in relation to the taxation of life insurance contracts once it is surrendered, sold or exchanged to a third party.  The first blogticle will examine the issue from the seller or insured’s perspective, and tomorrow’s blogticle will discuss the matter from the purchaser’s prospective. 

An insurance contract that carries a built-up cash value can be loaned against, collected by the beneficiary, surrendered, or sold to a third party.   This blogticle deals in particular with the sale or exchange of the contract, i.e., surrendered or sold. 

What are the tax implications if the life policy is surrendered?

As a starting point, gross income includes all income from whatever source derived including (but not limited to) income from life insurance contracts (unless the income is otherwise excluded by law). [1]

In general, a life insurance contract that is not collected as an annuity is included in gross income in the amount received over the total premiums or consideration paid. [2]  “The surrender of a life insurance contract does not, however, produce a capital gain.” [3] The amount collected over basis is therefore ordinary income

To read the remainder of this article please see AdvisorFYI.

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Recent STOLI Case Is a Big Win for Insurers

Posted by William Byrnes on October 3, 2010


An insurer recently won a major victory when the U.S. District Court for Delaware voided a life insurance policy that was purchased as part of a STOLI transaction. The case—Principal Life Insurance Co. v. Lawrence Rucker 2007 Insurance Trust—is significant because the court voided the policy for lack of an insurable interest based on the finding of insured’s intent to sell, even though the insured had not identified a particular purchaser for the policy at the time it was issued.

For the complete analysis of this development by our Experts Robert Bloink and William Byrnes, please read the article via your AdvisorFX subscription atRecent STOLI Case Is a Big Win for Insurers

For in-depth analysis of STOLIs, see Advisor’s Main Library Section 19.6 Life Settlements B—The Life Settlement Industry: Stranger-Originated Life Insurance (STOLI).

For in-depth analysis of the topic of insurable interest, see Advisor’s Main Library Section 20 Beneficiaries And Settlement Options B—Insurable Interest: New York Insurance Department Invalidates STOLI Scheme For Lack of Insurable Interest

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

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Incidents of Ownership and Burden on the Estate

Posted by William Byrnes on September 22, 2010


Why is this Topic Important to Wealth Managers?   Discusses estate tax considerations in regards to life insurance policies.  Also, includes a detailed dialogue of the incidents of ownership concept. 

What do most wealth managers try to avoid when planning with life insurance and trusts?

That the Gross Estate for Estate Tax calculations would include the death benefit from the policy in the estate.

What are some common ways to avoid this dilemma when using a trust and life insurance in regards to estate planning?

For the answer to this question, and planning analysis, see the blogticle at AdvisorFYI

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