Federal Tax Considerations and Retirement Plans Flashcards
1
Q
Life Insurance Transfer-for-Value Rule
A
The transfer-for-value rule was passed by Congress to discourage business transfers of ownership between parties looking to take advantage of the tax-free status of life insurance death benefits.
If a life insurance policy is transferred to a new owner in return for any kind of material consideration, the transfer-for-value rule partially removes the tax-exempt status of a life insurance policy.
The rule states that the amount of the death benefit that exceeds the value of consideration and any additional premium paid will be taxed as ordinary income.
If the transfer qualifies as an allowable exception to the rule, the death benefit will be paid tax free
