ALI-ABA Course of Study Advanced Estate Planning Techniques February 19-21, 2009 Maui, Hawaii

Transcription

1 127 ALI-ABA Course of Study Advanced Estate Planning Techniques February 19-21, 2009 Maui, Hawaii Recent Cases, Rulings, Regs, and Legislation Impacting on Life Insurance in Estate, Financial, Business, Employee Benefits Charitable, and Divorce Planning By Stephan R. Leimberg Leimberg Information Services, Inc. Bryn Mawr, Pennsylvania

2 128 TABLE OF CONTENTS EOLI New Code Section 101(j) 1 Life Products Clearing v. Lobel 8 SEC and MASS Sue Hedge Fund 9 OGC: Non-Recourse Loans, Insurable Interest, Rebates 10 NAIC/ NCOIL Amendments to Model Viatical Act 15 Insurer Announces Loan Program 17 King v. Meltzer Lawsuit 19 Strauss: Cash Distributions Taxable 26 CH-IRA: Life Insurance, IRA, & Charity 30 IRS Targets Abusive 419(e) Plans 37 PLR Split-Dollar: Estate and Gift Tax 46 NCOIL Adopts Life Settlement Model 52 Section 419A(f)(6) Plan Disallowance of Deductions 54 Section 1035 Exchange Business Owned Life Insurance 66 SOLI - Sun Life V. Paulson 69 SOLI American General v. Schoenthal 75 Rev. Rul Grantor s Right to Substitute Assets 80 McCall v. Smith Divorce, Life Insurance, Insurable Interest 84 Gray v. Nash Divorce, Life Insurance, Insurable Interest 90 Rev. Rul S Corp and Key EE Life Insurance 96 PLR Split-Dollar, Gift, and Estate Tax 99 Jefferson-Pilot v. Campbell STOLI 104 Waldman v. Maini 114 PLR Split Dollar Between Two Trusts 123 Reinert Termination of Policy Triggers Taxation 131

3 129 TOPIC: EOLI - CODE SECTION 101(j): CITES: IRC Secs. 101(j) and 6039I; T.D. 9431, 73 F.R IRS Final Regs. on Information Reporting for Employer Owned Life Insurance H.R. 4, Section 683, Treatment of Death Benefits from Corporate-Owned Life Insurance; AALU Bulletin 06-65, June 14, J. Magner, "COLI Best Practices Act of 2005", Steve Leimberg's Employee Benefits and Retirement Planning Newsletter # 316;Estate Planning Newsletter # 1369; Zaritsky and Leimberg, Tax Planning With Life Insurance ( ). Steve Leimberg's Estate Planning Newsletter # 1005 (August 9, 2006) and # 1044 (Oct. 27th) at. See also Magner and Leimberg, "COLI Under the Pension Protection Act", Estate Planning, October 2006, Vol. 33, No. 10, Pg. 3. RESULTS: A new Code Section 101(j)) applies to Company Owned Life Insurance (COLI) and Bank-Owned Life Insurance (BOLI) with respect to policies issued after the date of enactment. Code Section 101(j) provides generally, in the case of an employer-owned life insurance contract, the amount excluded from the applicable policyholder s income as a death benefit cannot exceed (a) the premiums and (b) other amounts paid by such applicable policyholder for the contract. The excess death benefit is included in income. In other words, for the first time, when an employer receives death proceeds (directly or indirectly) from a COLI contract, the general rule essentially mandates that money will be ordinary income - except to the extent of the premiums paid by the employer. Exceptions to this income inclusion rule apply in the case of a life insurance contract with respect to which the notice and consent requirements of the provision are met in the case of an amount received by reason of the death of an insured individual who, with respect to the applicable policyholder, was an employee at any time during the 12-month period before the insured s death, or who, at the time the contract was issued, was a director or highly compensated employee or highly compensated individual. Contracts meeting both the notice and consent requirements and the exception rules (generally designed to ensure that the coverage does not include rank-and-file workers) will be able to exclude the full amount of death benefits for income tax purposes. COLI contracts are also subject to reporting and record maintenance 1

4 130 requirements under new Code Section 6039I. FACTS: EMPLOYEE NOTICE AND CONSENT REQUIREMENTS: There are three elements to the notice and consent requirements: Before the issuance of a COLI contract: 1. the employee (officer, director, highly compensated employee) must be notified in writing that the employer intends to insure the employee s life. This notice must state the maximum face amount for which the employee could be insured at the time the contract is issued, 2. The employee must provide the employer with written consent to a. being insured under the contract and b. that the employer may continue the coverage after the employee terminates employment, and 3. The employee must be informed in writing a. that the employer (technically "applicable policyholder) will be a beneficiary of any death benefits and b. the maximum amount of insurance for which the employee could be insured at the time the contract is issued must be stated at that time in that notification. Exceptions Allowing Full Exclusion of Death Benefits. If all three notice and consent requirements have been met, and if one or more of the following exceptions applies, the death proceeds received by the employer from a COLI contract will be income tax free: 1. RECENT EMPLOYEE. Under this first exception, the insured must have been an employee at any time during the 12-month period before his or her death. 2

5 INSURED WAS A DIRECTOR OR "HIGHLY COMPENSATED EMPLOYEE". This second exception is for insureds who were, at the time the contract is issued, directors or highly compensated employee or individual. For this purpose, such a person is one who is either: (1) a highly compensated employee as defined under the rules relating to qualified retirement plans, determined without regard to the election regarding the top-paid 20 percent of employees; or (2) a highly compensated individual as defined under the rules relating to self-insured medical reimbursement plans, determined by substituting the highest-paid 35 percent of employees for the highest-paid 25 percent of employees (certain employees are disregarded in making the determinations regarding the top-paid groups). In other words, under the first exception, at the time the insurance coverage become effective (i.e. the issue date), the insured must have been: 1. a director, or 2. a 5-percent or > owner at any time during the preceding year, or 3. received compensation in excess of $95,000 (adjusted for inflation) in the preceding year, or 4. one of the five highest-paid officers, or 5. among the highest-paid 35-percent of all employees. 3. DEATH PROCEEDS PAID TO INSURED'S HEIRS. An insured is defined as a U.S. citizen or resident who is covered by the contract. In the case of a joint and survivor contract, references to an insured cover both individuals. The third exception provides that death benefits are income tax free to the extent paid to: a member of the insured's family, an individual who is the designated beneficiary of the insured under the contract (other than the employer), a trust established for any such person, or 3

6 132 the insured's estate. This exception also includes life insurance death benefits used to purchase an interest (including partnership capital and profits) in the employer from any of the preceding persons or parties. These amounts must be paid or used by the due date of the tax return for the taxable year of the applicable policyholder in which they are received as a death benefit under the insurance contract, so that the payment of the amount to such a person or persons, or the use of the amount to make such a purchase, is known in the taxable year for which the exception from the income inclusion rule is claimed. Employers who own one or more COLI contracts issued after the date of enactment are required to file a return with the IRS for each year the contracts are owned. The filing must state: (1) the number of employees at the end of the year; (2) the number of those employees insured under the COLI contracts at the end of the year; (3) the total amount of insurance in force under the COLI contracts at the end of the year; (4) the employer's name, address, and taxpayer identification number (TIN) and the employer s type of business and, (5) that the employer has a valid consent (in accordance with the consent requirements) for each insured employee and the number of insured employees for whom such consent was not obtained. Employers owning COLI contracts subject to these rules must also maintain records necessary to determine whether Section 101(j) requirements are met. Effective Dates: Section 101(j) rules generally apply to COLI contracts issued after August 17th, the date of enactment. These rules do not, however, apply to a contract issued after that date pursuant to a section 1035 exchange for a contract issued on or before that 4