Transfer of Value for Life Insurance

Life Insurance in Pension Plans QandA
Steve
by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

A life insurance policy’s death benefit is usually paid to beneficiaries free of federal income tax. One exception to this rule is when a policy is sold or transferred for valuable consideration. In this scenario, the income tax exemption only applies to the purchase price plus premiums paid by the transferee. The death benefits less the purchase price and premiums paid by the transferee are included in the beneficiary’s gross income.

The transfer of a life insurance policy as a gift without consideration results in a death benefit paid to beneficiaries free of federal income tax. A gift of a policy with a loan against the policy that exceeds the donor’s basis is considered a transfer for value. There are some exempt transferees who can buy a policy without triggering this transfer for value, including:

  • The insured and his or her spouse (if he or she buys the policy directly from the spouse)
  • A corporation in which the insured is a shareholder or officer
  • A partnership the insured is part of or one of the insured’s partners
  • Anyone who receives the policy by a form of transfer in which the transferee’s tax basis is determined by reference to the transferor’s basis
  • Grants or trusts where the insured is considered the grantor

An existing life insurance policy purchased by a non-exempt transferee generates a death benefit that is partially taxable. Non-exempt transferees might include:

  • The insured’s co-shareholder
  • The insured’s child or sibling
  • A revocable trust owned by the insured
  • A key employee of the insured

Note that a transfer for value will occur if, for valuable consideration, a policy owner names a third party as beneficiary, even if no actual assignment of the policy takes place.

 

Steve

CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.

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Steve

Get in touch with Steve Goodman today

CPA, MBA – President & Chief Executive Officer

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