The notice can be incorporated into a sales contract or a separate document. The authors propose to include the notice in the sales contract and to use a separate notice and consent for each policy to provide mere proof of compliance with the duty of notification and consent. (Exhibits 1 and 2 provide standard forms and consent forms.) If a separate document, it may be provided by a third party, such as a lawyer, or by an insurance agent, but a qualified tax advisor should check every notification prepared by an agent or other third party. The notification must include the maximum amount of the policy area. The authors recommend opting for a very high amount in consent, providing a cushion that includes an increase in death benefits due to the investment of the current value, if any. For example, you`ll find examples at the end of this article. The inclusion of the notice in the sales contract may solve the problem of the fact that separate notice and consent do not take place in a timely manner A company or other employer that owns one or more of the employer`s life insurance must also submit Form 8925 each year with its government income tax return. If the guidelines were issued prior to notification and consent was obtained, the best option is to obtain new guidance if possible. If this is not possible, the company may eventually distribute the policies to insured owners who could later redistribute the policies to the company.
As this could be considered a milestone transaction, another possibility would be for owners to transfer the policies to an insurance LLC. If the company is a capital company, a distribution of a policy to one or more of its shareholders is a sale of the policy at fair value at the corporate level and a potentially taxable distribution to the beneficiary (s). When the entity is taxed as a partnership, the relevant capital accounts must reflect the fair value of the distributed policy. While the assessment of insurance policies is outside the scope of this article, Note that the valuation of an insurance policy is not necessarily just the undeserved insurance premium Impact of insurance on the purchase price If the sales contract is structured as a buyout contract, the parties must be clear in the agreement as to the impact of the life insurance product on the purchase price. This is important for financial and fiscal reasons. Many practitioners find that in the event of death the purchase price is the highest of the insurance product received and the value of the deceased owner`s interest. From a property tax perspective, such a provision can increase the value of interest on the estate and related property taxes. On the other hand, excess revenue (which would be reduced by inheritance tax if added to the purchase price) could remain in the business and help replace the loss of activity caused by the death of the insured. If the agreement uses a formula to set the purchase price, the agreement should make it clear whether the formula contains or excludes the death surcharge when determining the price. Also consider when the formula is evaluated and whether it should precede the owner`s death. Cost of life insurance If insurance is used to finance a sales contract, planning could implode because of high mortality costs as an owner ages. If the costs are not prohibitive, the parties should consider purchasing permanent life insurance and not where the costs will be higher in later years, but much less.
Decisions must also be made as to how long policy is sustainable.