Potential Implications to COLI/BOLI Policies Inherited Through an Acquisition

Included in the tax reform legislation passed last December were changes to the previously existing transfer for value rules. These changes were designed to address perceived abuses in the stranger-owned life insurance (STOLI) market, whereby entities are formed for no other reason than to acquire, own and be the beneficiary of insurance policies. 

Our industry provided input to ensure that traditional corporate-owned and bank-owned life insurance (COLI and BOLI) would not be impacted in this legislation. However, the bill was modified during the last days in Congress without consideration of the potential impact to BOLI and COLI, and subsequently passed into law. 

The language as written is potentially problematic for BOLI and COLI in that it taxes death benefits for policies acquired through an acquisition (reportable policy sale) whereby the new owner does not have a continued economic interest in the life of the insured other than the life insurance policy itself. 

Policies on insureds who are actively employed at the time of the acquisition, and those insureds who are due an insurance benefit or some other ongoing financial relationship should meet the standard of continued economic interest in the life of the insured, and continue to enjoy the same tax status as prior to the acquisition. BOLI policies acquired through an acquisition, whereby the policies were originally purchased to fund ongoing aggregate employee benefit cost (as allowed under banking regulations) could also meet the ongoing economic interest standard if the acquirer can demonstrate the aggregate employee benefit funding need is still applicable. 

Based on feedback our contacts in Washington, D.C. have received from congressional tax staff, the potential negative implications to COLI and BOLI was inadvertent, and our industry has been working for a positive resolution. The Treasury Department is writing regulations related to the new law, and recently asked for public comment. The American Council of Life Insurance provided a comment letterto which Newport Group provided input−seeking a positive resolution.  There is no definite timetable set for the release of these new regulations, but we believe it will be within a number of months. 

We are also working through our partners in Washington to seek positive resolution through a technical corrections bill. Although we believe any bill is likely to positively address this issue, the prospects for a bill are uncertain given the current political climate. 

Newport Group will keep you updated with any new developments. 

To download a copy of this article, click here.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions.

The information herein reflects our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein.

Securities are offered through Newport Group Securities, Inc., member FINRA and affiliate of Newport Group, Inc.  Securities in California are offered under the d/b/a Newport Securities Insurance Services. Other insurance products may be offered by Newport Group, Inc.


Unauthorized access is prohibited. This site is designed for U.S. residents only.
Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and InterServ, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and InterServ, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment adviser. when offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer.
Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.