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”) policies and will affect the taxation of death benefits on some contracts.
- the acquirer becomes a beneficial owner of a C Corporation that owns life insurance contracts; and
- life insurance contracts do not comprise more than 50 percent of the gross value of assets of such C Corporation immediately before the acquisition.
- Step 1 – Grandfather Provision. In instances where an acquiror purchases an entity through a stock transaction, each COLI/BOLI policy indirectly transferred to the acquiror through that purchase is not an RPS, so long as the entity held an interest in the life insurance policy prior to January 1, 2019.
- Step 2 – Relationship Exceptions. If the acquired S Corporation (regardless of transaction form) has COLI/BOLI policies acquired after January 1, 2019, the insurance policies may still qualify for an exception if the insured has a substantial financial or business relationship with the acquiror (or acquiree).
Check the Remaining Exceptions. If the exceptions described above do not fit your circumstance, feel free to call us or consult the Final Regulations (link below) to determine whether one of the remaining exemptions applies.
Additional Detail: Final Regulations
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