Jul 25
Key Man Insurance – IRS Tax Exempt Treatment Ruling
A recent revenue ruling has been issued by the Internal Revenue Service addressing the tax exempt treatment of life insurance policy proceeds on “key-man” policies of Subchapter S-Corporations; medical and/or otherwise.
Revenue Ruling 2008-42 concludes that premiums paid by the S-Corporation on an employer-owned life insurance contract, of which it is directly or indirectly a beneficiary, do not reduce the S-Corporation’s AAA. Further, the benefits received because of the death of the insured from an employer-owned life insurance contract that meets an exception under Code Sec. 101(j)(2) do not increase its AAA.
Assessment
What does this mean? Basically, life insurance proceeds on key-man policies in an S-Corporation are essentially trapped in the corporation. Any distribution of that cash to surviving S-Corporation shareholders – or to the estate of the deceased shareholder – triggers a taxable event.
It is therefore vital for any business with a life policy paid by the business, or other S-corporation, to discuss the tax policy and estate planning particulars with your accountant.
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