The final regulations are responsive to the concerns raised by the life insurance industry with respect to the potential impact of the RPS rules on ordinary course transactions, such as mergers and acquisitions. Foremost, the guidance in the final regulations may be applied retroactively to the TCJA’s enactment date (Dec. 2017), protecting clients from the unintended consequences of the unclear statutory rules enacted by the TCJA. In addition, the final rule includes nine (9) exceptions that preserve the prior-law tax treatment of the death benefits with respect to policies transferred in ordinary course transactions. Satisfaction of any one of the nine will preserve the prior law tax treatment.
The following highlights the exceptions most likely applicable to the broadest number of taxpayers:
Analysis for C Corporations
Ordinary course stock transactions involving C corporations are generally exempt from the reportable policy rule. The exception provides that there is no "indirect transfer" of life insurance where:
the acquirer becomes a beneficial owner of a C corporation that owns life insurance contracts; and
life insurance contracts do not comprise more than 50 percent of the gross value of assets of such C corporation immediately before the acquisition.
Analysis for S Corporations
Step 1 – Grandfather Provision. In instances where an acquirer purchases an entity through a stock transaction, each COLI/BOLI policy indirectly transferred to the acquirer through that purchase is not an RPS, so long as the entity held an interest in the life insurance policy prior to January 1, 2019.
Step 2 – Relationship Exceptions. If the acquired S Corporation (regardless of transaction form) has COLI/BOLI policies acquired after January 1, 2019, the insurance policies may still qualify for an exception if the insured has a substantial financial or business relationship with the acquirer (or acquiree).
Check the Remaining Exceptions. If the exceptions described above do not fit your circumstance, please determine with your advisor whether one of the remaining exceptions applies.
This material is intended for informational purposes only and should not be construed as legal or tax advice. It is not intended to replace the advice of a qualified attorney, tax advisor, or plan provider.