Transfer-for-Value & Reportable Policy Sale Concerns in Buy-Sell Arrangements
Situation: Using life insurance as a funding vehicle for a buy-sell arrangement gives rise to several potential tax traps, especially in out-of-the-ordinary owner/beneficiary structures. It seems that more than almost any other area, buy-sell agreement funding, modification, and termination gives rise to potential transfer-for-value and reportable policy sale traps. This Counselor’s Corner discusses some of the most frequent buy-sell situations that result in adverse taxation under these rules.
Solution: Before discussing the potential tax traps caused by life insurance transactions in buy-sell arrangements, let’s first review how the transfer-for-value and the reportable policy sale rules work and why violation of these rules can be so detrimental to a buy-sell situation.
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