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IRS Tax Exempt Treatment Ruling
[By Robert Whirley, CPA]
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.
Excerpts
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
This may sound like Greek to some doctors. The affect is that 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 doctor with a life policy paid by your medical practice, or other S-corporation, to discuss the tax policy and estate planning particulars with your accountant.
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Filed under: Estate Planning, Insurance Matters, Taxation | Tagged: life insurance |
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