A risk that almost every company faces is the death of a key person.
Consequently, many companies purchase life insurance on key executives. But this can raise a number of questions regarding taxation.
For example, are the proceeds of such a policy included in the insured executive’s estate? It depends. If the policy was owned by and payable to a company, and the insured had no “incidents of ownership, the answer is no. If the insured had incidents of ownership at the time of death, the proceeds would be included in the gross estate even with the corporation named owner and beneficiary.
The proceeds of a key executive policy are also considered, with other non-operating assets, a relevant aspect in valuing company stock for estate tax purposes. When the insured is a stockholder, the value of the insurance payout will be reflected in valuing the stock in the insured’s gross estate. Including the insurance payout in the stock valuation may or may not trigger an increase in value equal to the full value of the payout. It depends on the valuation method used.
A discount in the value of the stock could be applied to reflect the loss of the executive’s services, although proof must be provided to verify the loss. No discount will be allowed if the stock is personal holding company stock with assets consisting of stocks and bonds. The company must be an operating business.
If the insured is a controlling stockholder (50% or greater share in the company), the extent to which the payout is made other than to or for the benefit of the company will be applied to the insured. The payout would be included in the insured’s estate.
For more information on the tax treatment of insurance payouts on key employees, please see:
Succession Planning and Key Person Life Insurance: The Tax Implications | Think Advisor
Succession Planning and Key Person Life Insurance: The Tax Implications | Think Advisor