Impact of Policy Sales in BOLI/COLI Marketplace
Tax Cuts and Jobs Act of 2017 (TCJA) modified the prior-law exemptions of the Transfer for Value Rules (TFV Rules) to include new reportable policy sale requirements that apply to all transfers for valuable consideration. This rule making has important implications for the Bank and Company Owned Life Insurance (BOLI/COLI) marketplaces and will affect the taxation of death benefit on some contracts. The Treasury Department recently released regulations offering several ways to preserve the pre-TCJA treatment of BOLI and COLI contracts.
The final regulations are responsive to the concerns raised by the life insurance industry with respect to the potential impact of the reportable policy sale rules on ordinary course transactions, such as mergers and acquisitions. Foremost, the final regulations may be applied retroactively to the TCJA’s enactment date (December 2017), protecting clients from the unintended consequences contained in the TCJA. The final rule includes nine exceptions that preserve prior law tax treatment of the death benefit with respect to policies transferred in ordinary course transactions. Satisfaction of any one of them will preserve the prior law tax treatment. Three of the exemptions stand out as likely to be applicable to the majority of the marketplace:
- Ordinary Course Transactions Involving C Corporations. This exception provides that there is no “indirect transfer” of life insurance, where (a) the acquiror becomes a beneficial owner of a C corporation that owns life insurance contracts, and (b) life insurance contracts do not comprise more than 50% of the gross value of assets of such C corporation immediately before the acquisition.
- A Substantial Financial Relationship Exists. An exception for life insurance contracts on inactive employees, where the acquiree maintains a substantial financial relationship with the insured. This is a key provision that will need further discussion with the corporation and advisor.
- Indirect Acquisitions of an Interest and Life Insurance Policies. For S corporations, partnerships, and trusts unable to take advantage of any of the other exemptions, the final rule includes a grandfather provision. In instances where an acquiror purchases an entity through a stock transaction, any BOLI/COLI policies transferred to the acquiror through that purchase are exempt from the reportable policy sale rules, so long as the entity held an interest in the life insurance policies prior to January 1, 2019.