Non classé

Tax Consequences of Transferring Ownership of a Life Insurance Policy to the Insured

Term life insurance: Term life insurance, even if these policies do not accumulate cash value, is subject to the transfer-for-value rule (decision letter 7734048). It is not necessary for the transfer to come from the police itself. A transfer of some or all of the underlying shares of the policy (for example, the proceeds of death) is sufficient to invoke the transfer rule for value. For example, the creation of an enforceable contractual right to receive the proceeds of a life insurance policy, in whole or in part, may constitute a transfer for valuable consideration. This may be the case if an insured shareholder and owner of a corporation that holds the policy for his life is contractually obligated, under a binding agreement of purchase and sale, to designate a co-shareholder as beneficiary of the policy to finance the transaction. Life insurance continues to be an excellent financial planning tool to inject cash – exactly when needed – to generate an immediate source of liquidity to quickly settle the last debts, taxes and administrative costs incurred upon a client`s death. However, if individuals or business owners own life insurance or are considering transferring a policy as part of the review or revision of their estate or succession plan, accountants must consider the potential impact on the transfer of value for their clients. In general, there are two types of life insurance policies that can be transferred. The first is a single prepaid payment policy. The advantage of transferring this type of policy is that there are no premiums that the new owner has to pay continuously. The second type is a policy that requires the payment of annual premiums, for which the new owner is responsible. Life insurance can ensure the safety of your loved ones upon your death and can even serve as a financial resource throughout your life. However, if it is not well structured, it can also affect the value of your estate and lead to significant tax consequences.

An estate planning lawyer can help ensure you understand the ins and outs of life insurance as you develop your estate and financial plan. Term life insurance provides coverage for a limited time (« term »). Most maturities are between 5 and 30 years. Life insurance death benefits are paid only if the insured dies during his or her term of office. If the new owner of the policy has to pay ongoing premiums to receive it, you can always give them up to $16,000 to cover the cost without penalty. If you have to pay gift tax on a transfer, that`s usually much less than what you`d pay in inheritance tax if you stuck to the policy. A life policyholder has the right to control the economic benefits of the policy. The owner may have full ownership of the policy or simply « property incidents ».

Policy ownership includes: Donations of a certain amount may be subject to federal gift tax. So, if you transfer a life insurance policy that is higher than the federal tax exemption, any amount above that amount will be taxed when the policy is paid. Allowances vary from year to year. If the policy is placed in an irrevocable trust (i.e. a trust that the person who created the trust (« settlor » or « settlor ») generally cannot amend), it may be possible to sell the life insurance policy to another trust with different terms that reflect changes in a person`s circumstances. However, the sale must be carefully constructed because when a life insurance policy is sold for a fee, the proceeds of the policy are subject to income tax. Income tax applies to any amount in excess of an amount equal to the amount paid for the transfer of ownership of the policy (plus the money the transferee subsequently pays for the policy itself). Once the transfer is complete, the new owner will be responsible for all premium payments.

If you continue to make payments for the policy, the IRS may take this as proof that you are still the true owner and that all life insurance proceeds in your estate count for tax purposes. You may not want to transfer the policy to your spouse if you are trying to minimize your tax liability. This is because your husband or wife could possibly be subject to high inheritance tax. The best choice might be to transfer it to an adult child or another parent. If you`ve managed to accumulate a decent amount of wealth, you don`t want much of it to be taken away by Uncle Sam. If done right, transferring your life insurance policy can keep more of your hard-earned money in the hands of loved ones. A trust, such as an irrevocable life insurance fund (ILIT), may also have a policy. When the insured dies, the proceeds are distributed to the trust, and distribution to the beneficiaries of the trust is then made in accordance with the trust agreement. An important feature of permanent life insurance policies is their « cash value ». The longer it takes after a policy is issued, the greater the risk that the policyholder will die (e.g., due to advanced age or deterioration in health) and trigger the death benefit. Mutual promise: A mutual promise can also be a valuable consideration.

For example, if several insured co-shareholders agree to « assign » each other`s policies to finance a cross-purchase agreement, the mutual gift represents valuable consideration. If, in addition, the co-shareholders agree to continue to pay the premiums of the given policies (to finance the cross-purchase agreement), this also represents valuable consideration (decision letter 199903020). Instead of gradually increasing premiums to account for increased risk, insurance companies charge the same premium throughout the life of the policy. Theoretically, this monthly premium will be more than necessary to cover the policyholder at the beginning of the policy (i.e. if the risk of death is comparatively lower). The surplus can therefore be invested over time and the return on investment can be used to fund the death benefit. Under the provisions of Article 101, the proceeds of life insurance due following the death of the insured person are, in principle, exempt from income tax. With proper structuring by third-party ownership of the policy, the product can also be obtained tax-free. However, if a life insurance policy or an interest in a policy is transferred in exchange for valuable consideration in any form, such as in a cash transaction or to fulfill mutual promises, the income tax exclusion is not available to the beneficiary and the proceeds of death are subject to federal income tax.

Specifically, the portion of the proceeds of death equal to the consideration paid for the acquisition of the policy or shares of the contract, plus future premiums paid by the purchaser (i.e., the recipient`s base in the contract), is continued tax-free, but the remaining proceeds of death are taxed as ordinary income under the regulations. Section 1.101-1(b)(3)(i). That said, it can still be helpful to transfer the policy instead of keeping it on your estate. If your estate is already subject to estate tax, the full amount of your life insurance policy will be included in your estate and will be subject to estate tax upon your death. However, if you transfer the policy before your death, only the amount of the policy at the time of the transfer will be taxed. To transfer your policy to an estate tax trust, you must transfer the policy to an irrevocable life insurance fund. After you transfer the policy, you no longer own the policy and insurance benefits are not included in your estate. Transfer versus value issues can arise in many unexpected circumstances. As already mentioned, adverse tax consequences can arise from a violation of the rule in personal and business transactions and go far beyond the entire sale of a life insurance policy to a third party.