Where a key employee policy – or an interest in a key employee policy – has been transferred for any type of valuable consideration, proceeds may lose their income tax free status. Fortunately, even if there has been a transfer for value, there are exceptions which, if met, will enable the policy proceeds to maintain their income-tax-free status. These exemptions allow transfers to the following transferees:
- the insured;
- the insured’s partner;
- a partnership in which the insured is a partner; or
- a corporation in which the insured is a shareholder or officer.
- It should be noted that transfers to co-shareholders of the insured are not among the protected transfers. Also, transfers to a corporation in which the insured is merely a director but is not an officer or shareholder are not among the protected transfers.
The transfer for value tax trap is so deadly (both in complexity and potential expense to all parties) that no transfers of life insurance policies should be made without careful review of the transfer for value rules by competent legal counsel.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM