Life Insurance Transfer Transition Guidance Planned


The IRS intends to provide guidance on the new information reporting obligations for certain life insurance contract transactions under Internal Revenue Code (IRC) Section 6050Y. The proposed regulations will provide guidance on the modifications to the transfer for valuable consideration rules for life insurance contracts under IRC Section 101(a). In addition, the IRS has delayed the reporting requirements under
IRC Section 6050Y until the final regulations are issued.

Transfers for Value Rules

For transfers after December 31, 2017, the exceptions to the transfer for value rules do not apply to the transfer of a life insurance contract, or any interest in such a contract, that is a reportable policy sale. Thus, some portion of the death benefit ultimately payable under the contract may be includable in income. A “reportable policy sale” means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in the life insurance contract. A “reportable death benefit” is an amount paid at the death of the insured under a life insurance contract that was transferred in a reportable policy sale.

Reporting Requirements Delayed

The new reporting requirements of IRC Section 6050Y apply to reportable death benefits paid and reportable policy sales made after December 31, 2017. However, the transition guidance delays any reporting under IRC Section 6050Y until final regulations are issued.

Under IRC Section 6050Y, information returns must be filed in the following situations:

  • By anyone who acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale.
  • By an issuer of a life insurance contract upon notice of a transaction required to be reported above, or upon any notice of a transfer of a life insurance contract, or any interest in a life insurance contract, to a foreign person.
  • By any payor of reportable death benefits.
Proposed Regulations

The proposed regulations will describe the manner in which, and time at which, the reporting requirements of IRC Section 6050Y must be satisfied. They will also clarify which parties are subject to the reporting requirements and other definitional issues. For example, the Treasury and the IRS intend to define the term “reportable policy sale” in the proposed regulations to include a viatical settlement. In addition, the proposed regulations will clarify the extent to which IRC Section 6050Y applies to sales or acquisitions affected by transferors and transferees outside the United States, and to sellers and issuers that are foreign persons for purposes of these reporting rules.

The IRS is requesting public comment on the intended proposed regulations implementing these reporting requirements.

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