This memorandum is not intended to constitute tax or legal advice.
Publication Date: October 31, 2019
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) modified the prior-law exemptions of the Transfer for Value Rules (“TFV Rules”) to include new Reportable Policy Sale (“RPS”) requirements that apply to all transfers for valuable consideration. This rulemaking has important implications for the company-owned life insurance (“COLI”) and bank-owned life insurance (“BOLI”) marketplaces and will affect the taxation of death benefits on some contracts. The Treasury Department recently released regulations offering several ways to preserve the pre-TCJA treatment of COLI and BOLI contracts.
The final regulations are responsive to the concerns raised by the life insurance industry with respect to the potential impact of the RPS rules on ordinary course transactions, such as mergers and acquisitions. Foremost, the guidance in the final regulations may be applied retroactively to the TCJA’s enactment date (Dec. 2017), protecting clients from the unintended consequences of the unclear statutory rules enacted by the TCJA. In addition, the final rule includes nine (9) exceptions that preserve the prior-law tax treatment of the death benefits with respect to policies transferred in ordinary course transactions. Satisfaction of any one of the nine will preserve the prior law tax treatment.
The following table highlights the exceptions most likely applicable to the broadest number of taxpayers:
For more information please contact <<Insert Advisor Contact Info Here>>. They will help you determine whether existing COLI/BOLI contracts qualify for the exceptions available under the rule and can help structure COLI/BOLI contracts to ensure that they retain their tax advantages. Life insurance policies transferred for valuable consideration that do not meet the exceptions included in the RPS final rule will have their excludable portion of the death benefit limited to the consideration paid for the policy plus any subsequent premiums paid on the policy.
© 2019 AALU. All Rights Reserved