Dismaying New Rules for Employer-Owned Life Insurance

During the nearly 25 years I have practiced law in the area of Estate Planning and Business Succession Planning, No “technical” tax change has personally caused me more dismay or made less sense than Congress’ most recent blunt instrument approach to “fixing” a perceived abuse of life insurance policies.  New IRC §101(j), added by the Pension Protection Act in 2006, is ostensibly directed toward major public corporations’ practice of insuring virtually any employee (so-called “janitor insurance”).  It has, I believe, unfortunately unfair and far-reaching consequences for the 1000's of closely held business companies in the United States.

Ownership of life insurance on key participants has long been an important tool for funding Buy-Sell obligations.  In many cases, it is the only way a business can insure that upon the untimely death of a participant, his or her family will receive fair payment for the decedent’s interest in the business.

Like life insurance proceeds in the hands of individuals, the proceeds of such business-owned policies have always been income tax free under §101(a) of the IRC.  Now, Congress has set a major trap for the unwary!

New Section 101(j) reverses the time-honored rule that such proceeds are income tax free and replaces it, instead, with the presumption that the proceeds will be income taxable, unless the employer meets certain exceptions and new requirements created by the section.

Under §101(j), in order for such proceeds to be received by the business free of income tax, the insured employee must be (1) employed by the business during the 12 month period prior to death, or (2) a director or (3) a “highly compensated employee,” (4) or used to purchase an equity interest from the decedent’s family or estate.

It may seem that this will not be a problem in most cases.  However, the section additionally imposes Notice and Consent requirements, which require that the employer give written notice to the employee of the intent to obtain insurance, of the maximum face amount of the policy, and that the employer will be the owner and beneficiary of the policy--and which require that the employee sign a written consent to such insurance, before the issuance of the insurance contract.  It does not appear that the IRS would accept a confirmation of such intent at any time after the contract has been issued.  This seems to go far beyond addressing the problem it was intended to address.

When advising your clients regarding the purchase of “Buy-Sell” insurance policies, it will be important that all the advisors are aware of this issue and that the written consent and notice requirements are followed and well-documented.

  

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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Do You Really Want To Read About More Year End Strategies?

Rather than add to your stack of already informative “tips, tricks, traps” and other year end tax and financial strategies, I will make this an opportunity to reflect on some personal and informal issues.

Our firm held its annual meeting on November 17 and 18.  One topic involved marketing.  We have a diverse mix of areas of practice, and styles.  During our discussion, I was impressed by a recurring theme:  relationships.  Clearly, our most effective “marketing” approach has been the development and maintenance of quality professional relationships with our clients and, importantly, our professional colleagues.

 I want to thank all of you who have been sources of information and support (and in many instances, for your friendship) over the years.  I also want to thank you for providing our clients with top quality service when we have been able to refer them--and for the trust and confidence you place in us when you refer your important clients to us.

I would like to take this opportunity to do something I do not do often enough:  tell you a little about some of the services my firm can provide to you and your clients which I may not personally provide.

We are a 9-lawyer firm with offices in Saginaw and Frankenmuth.  In addition to the Business, Tax, Elder Law and Estate Planning, Probate and Trust Administration  you are accustomed to hearing me tout, we offer a number of other important services to our clients.

Our attorneys represent individuals, businesses and institutional clients in real estate, municipal, bankruptcy, and litigation.  We have trial lawyers in the firm who are highly skilled and have years of courtroom experience in commercial and personal matters (including accident and personal injury, construction, business disputes).  We do adoptions.  We represent clients in municipal matters, including zoning, condemnation and Michigan Tax Tribunal work.  We represent clients doing real estate development, and establish condominiums, but are equally able to assist individuals in personal real estate purchases, sales and leases.  And of course, we handle Probate and Trust Administration.

 I hope you will continue to consider us a resource for any legal problem or issue you may have.  I will be happy to discuss any of these issues which may arise for you or your clients from time to time and if I cannot address them directly, will refer you to one of my partners.

Finally, I want to wish you a blessed holiday season, and a happy, successful and profitable New Year.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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