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RGMacEsq
RGMacEsq, Attorney
Category: Business Law
Satisfied Customers: 16786
Experience:  Licensed Texas General Practice Attorney
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If the ownership of a life insurance policy is transferred

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If the ownership of a life insurance policy is transferred from a C corporation to an employee/majority stockholder of the corporation who is also the named insured on the policy, will that employee owe tax on the entire cash value of the policy immediately (if so, will it be taxed as ordinary income) and will the death proceeds of the policy also then become taxable?

RGMacEsq :

Thank you for using JustAnswer. I am researching your issue and will respond shortly.

RGMacEsq :

In this situation, the asset does have present value (a "cash surrender value", or CSV if it's whole, rather than term, life insurance). The extent that cash surrender value equals or is less than premiums paid, you will owe ordinary tax on that (it would be like a bonus to you). You would not owe tax on the amount in excess of the premiums paid, unless and until you surrender that. CSV in excess of the aggregate premiums paid is ordinary income to the owner after you surrender it for the full CSV.

RGMacEsq :

Hope that clears things up a bit. If you have any other questions, please let me know. If not, and you have not yet, please rate my answer AND press the "submit" button, if applicable. Please note that I don't get any credit for my answer unless and until you rate it a 3, 4, 5 (good or better). Thank you, XXXXX XXXXX luck to you!h

Customer:

Will the death proceeds be taxable? Since the corporation has paid the premiums, will they be considered in the employee's basis for the policy?

RGMacEsq :

No. The proceeds would still not be taxable, pursuant to the tax code, unless it was transferred into an annuity. The premiums paid to the extent that they equal CSV will be considered income now and would be taxable as income. It's not like stock which could be a long term capital gains / loss situation.

RGMacEsq :

Rather, it would be a present asset that would have a CSV, that you could opt for, but only to the extent that the current CSV is equal to or less than premiums paid.

RGMacEsq :

Hope that clears things up a bit. If you have any other questions, please let me know. If not, and you have not yet, please rate my answer AND press the "submit" button, if applicable. Please note that I don't get any credit for my answer unless and until you rate it a 3, 4, 5 (good or better). Thank you, XXXXX XXXXX luck to you!

Customer:

Are the proceeds not taxable based on exception to Transfer for Value Rule?

RGMacEsq :

Yes, they would be, but you didn't mention that this policy would be sold to the employee. Is that the case?

RGMacEsq :

It only applies if the life insurance policy is transferred for something of value in return. But it ALSO does not lose its tax exempt status when the policy is transferred to the insurred.

RGMacEsq :

If it was transferred to some other party, or from the insured to another party, the transfer for value rule would apply. But if to the insured, it would not.

Customer:

No, the company's intention is to give the policy to the employee. In fact, there are multiple policies that will be given to the employee. We have been told thought that the corporation will have to show a gain on the policies at transfer and offset this gain by showing compensation equal to cash value to the employee.

RGMacEsq :

Yes.

RGMacEsq :

But your question was about the tax implications to the employee, not the corporation, correct?

Customer:

Yes, should I start another question to inquire about corporation?

RGMacEsq :

Yes. We can only answer questions in the scope of the original. Individual tax versus corporate tax are two different matters.

RGMacEsq :

If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (~35 minutes) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!

RGMacEsq :

Did you have any other questions before you rate this answer?

Customer:

Ok. Thanks. I will rate question.

RGMacEsq :

My pleasure. If there's nothing else, please rate this answer. Please note that I don't get any credit for the time (~40 minutes) and effort that I spent on this answer unless and until you rate it a 3, 4, 5 (good or better). If you feel that I have gone above and beyond in this answer (my average answer is about 10 minutes) bonuses are greatly appreciated. Thank you, XXXXX XXXXX luck to you!

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