If you own a policy on your life, you may want to transfer ownership to another individual (e.g., to the beneficiary) to avoid inclusion of the proceeds in your estate. Transferring ownership of a policy is easy: Simply complete a change-of-ownership form provided by your insurance company.
What is the life insurance transfer-for-value rule?
The transfer-for-value rule stipulates that if a life insurance policy (or any interest in that policy) is transferred for something of value (e.g., money, property, etc.), a portion of the death benefit is subject to taxation as ordinary income.
Can a life insurance policy be transferred to a shareholder?
If the life insurance policy is transferred to a shareholder, then the transfer may either be treated as compensation to a shareholder-employee or as a dividend to a shareholder, depending on the circumstances. If treated as compensation, the same rules apply to a shareholder-employee as the rules stated above for employees.
Can a C Corporation transfer a life insurance policy?
Similar to a C corporation, if an S corporation transfers a corporate-owned life insurance policy, the corporation will recognize taxable income to the extent of the policy’s gain and if the policy’s fair market value is below the policy’s basis, the corporation will realize a non-deductible loss upon the transfer.
How does transfer for value work in life insurance?
This article will discuss transfers to the insured, which is an exception to the “transfer for value” rule. IRC § 311 (b) provides that a corporation that changes ownership of a corporate owned life insurance policy to the individual insured (i.e., distributes the policy) recognizes taxable income equal to the policy’s gain.
What are the tax consequences of transferring a life insurance policy?
Scenario C: A private corporation transfers Policy XYZ to its shareholder, Ellen, for no consideration. The corporation reports a policy gain of $50,000 and Ellen is deemed to have received a taxable benefit equal to $200,000.
