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Treasury Issues Final Regulations on Reportable Policy Sale Provisions

On October 25, 2019, the Internal Revenue Service (IRS) issued Final Regulations, which established rules around the Reportable Policy Sale provisions included in the Tax Cuts and Jobs Act of 2017 (TCJA). The Reportable Policy Sale provisions included in the TCJA were written in a way that could cause policies acquired through an acquisition (or potentially other policy transfers) to be subject to future taxation.  

Of specific concern was the taxation of death benefits received on policies acquired through an acquisition where the transferee did not have an ongoing interest in the life of the insured other than the life insurance policy itself. These policies would likely have been subject to IRS Reportable Policy Sale informational reporting at the time of the acquisition. Furthermore, any death proceeds received in the future from these policies (Reportable Death Benefits) would be subject to taxation at the time of death.  

We understand the Reportable Policy Sale provisions were included in TCJA to address perceived abuses in the life settlement market (Stranger Owned Life Insurance) and inadvertently entangled BOLI/COLI policies acquired through tax-free reorganizations.  Prior to the enactment of TCJA, policies acquired through a tax-free reorganization that inherited the basis of the transferor enjoyed same tax standing as the transferor (i.e. cash value grows tax-deferred and death benefits are received tax-free).  

The Final Regulations are complex and we haven’t fully digested all of the implications, but note the following:

  • Section 1.101-1(e)(3)(ii) - Policies acquired through the acquisition of a C-corporation may be exempted from the Reportable Policy Sale provisions unless more than 50% of the gross value of the assets of the C-corporation consists of life insurance. This C-corporation exemption generally applies to tax-free ‘stock’ reorganizations and NOT to tax-free ‘asset’ reorganizations or taxable assets transactions. For acquisitions that qualify for the exemption, policies acquired will continue to enjoy the tax advantages of BOLI (tax-deferred build-up and tax-free death benefits).  
  • Section 1.101-1(c)(2)(ii) - A specific exception to the Reportable Policy Sale provision was given for transfers between corporations that are members of an affiliated group that files a consolidated U.S. tax return.
  • Section 1.101-6 - The effective date of the final regulations is October 31, 2019, however taxpayers may apply the rules set forth in Sections 1.101-1(b) through (g) of the final regulations to death benefits paid or interest in policies transferred after December 31, 2017 and on or before October 31, 2019.  
  • The IRS clarified the meaning of Substantial Financial Relationship, which coupled with application of the rules to 1035 Exchange transactions (Section 1.101-1(c)(v)) would likely subject the exchange of policies on inactive insureds to the Reportable Policy Sale provisions and ultimately the taxation of any death benefits received on those policies.  

Newport is continuing to analyze the Final Regulations and their impact on our markets, and will keep you informed of any new developments. For more information, contact Scott Bethune, Vice President, BOLI Consulting at 336-369-2270.

Newport and its affiliates do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions. Insurance products are offered to institutional clients through non‐affiliated insurance companies. 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.

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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.
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