While it’s best to avoid the need to transfer life insurance to an individual or corporation – along with the resulting tax consequences – it’s not always possible to foresee every future circumstance. There can be times when a transfer just needs to be done.
One way to avoid the need for a transfer later is with proper planning when the policy is put in place. For example, if a life insurance policy is owned in a holding corporation (Holdco), rather than an operating corporation (Opco), perhaps with the Opco as the beneficiary, the client may not need to transfer the life insurance policy later if the Opco shares are sold. This approach also removes the insurance from the reach of Opco’s creditors.
However, much like life, there may be times when your client finds him or herself in a situation in which they need to transfer a policy. PPI’s Tax Talk Bulletin (login required) is a helpful summary of the tax consequences related to transferring life insurance when advance planning did not prevent this situation from arising.
For more information on this topic, please refer to this article: Policy Transfers: The Importance of Planning in Advance.