C corp purchased keyman policy for owner. Intent - C corp to use proceeds to purchase owner stock at his passing. Issue: owner wants to gift his children the C corp stock now - but still wants non-owner spouse to still get keyman proceeds. Non-owner spouse now will no longer have any stock to redeem - so taxable to her? What is the character of the income? Can this even be done?
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Get the policy. It is life insurance on the owner, (probably term) and its purpose in buying it was to purchase the original owner's stock at his death. The corporation should be the owner, which means it controls the policy, since it is paying the premiums (I assume). The corporation may also be the beneficiary of the death proceeds, although you indicate the spouse may be which would defeat the purpose of the contract. So before you can determine what will happen here, you must read the policy provisions to determine (1) who owns it; (2) who the beneficiary(ies) are; etc. What incentive does the company have to continue paying the premiums? -
Whole Life policy - owner is corp and beneficiary is corp - purpose was to redeem stock at owners death. Owner is now in eighties and wants to give the stock to kids now for finality purposes. Owner still wants proceeds to go to wife - if he dies first. Overall joint wealth under $5 mil - so no issue to owner in gifting now. I can't see how corp can distribute proceeds to spouse if stock already gifted away.Originally posted by Burke View PostComment
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As far as the insurance policy is concerned, someone should discuss the matter with an insurance agent or the issuing company.
Regarding the shareholder's desire to gift his stock to his children, however, is that a wise move? If the corp's FMV is significantly greater than the shareholder's basis in his shares, a gift now will result in the loss of a stepped-up basis when he dies. Since he is already in his 80s, that event may not be too far in the future. If there is no compelling reason to gift the shares now, the tax-wise move would probably be to retain them in the current owner's name. His children can still run the business.Roland Slugg
"I do what I can."Comment
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Gift Life Insurance?
The policy and proceeds belongs to the corporation. The corp had to have an insurable interest when it was taken out and it did. The purpose was that if/when the stockholder dies the corp would get the face of the policy tax free and use what is necessary to purchase his stock from the widow. She has no right to the money if she is the executor/beneficiary and had the stock then the corp would negotiate with her for the purchase.
The reason for gifting has to be reviewed, you need to make sure the estate/gift tax reasons can justify it.Comment
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If the TP gifts his stock in the corporation to his wife/kids, then they become stockholders. Does that give them a majority interest in the corporation? You don't say how big this corp is, or whether it is a family affair, if she is an officer, board member, etc. The corp both owns the policy and is the bene. The TP cannot make her a beneficiary of the insurance without their permission. The corp gets the money at his death if they continue to pay the premiums which they may not wish to do. Frankly, it would seem to me that the transfer of such stock should be restricted to maintain the corporation's interests. They may not want to deal with the family if he is no longer around. This is a little beyond the scope of tax preparation and becomes a financial planning/legal matter.Last edited by Burke; 07-14-2016, 03:59 PM.Comment
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