?? Life Insurance Assignments: What You Need to Know About Arm's Length Transfers ??
When assigning your life insurance policy to someone else, the tax implications can be significant, and understanding the rules is key to avoiding surprises. Here's a quick guide on "Arm's Length" transfers:
?? General Rule: If you assign your life insurance policy to an arm’s length party (someone unrelated and independent from you), your proceeds will equal the transfer price. The policy gain is calculated as:
Policy Gain = Transfer Price - Adjusted Cost Basis (ACB)
The person acquiring the policy will then have an ACB equal to the transfer price.
But what happens when the transfer isn't at arm's length?
?? Non-Arm’s Length Transfers: In most real-world scenarios, transfers are made to non-arm’s length parties—often to family members or related entities. Here are common situations where special rules apply:
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In these cases, the transfer isn’t based on market value but on what the policyholder would have received if they fully surrendered the policy—often, this means the cash surrender value (CSV) minus any outstanding loans.
EXAMPLE: Rob, terminally ill, owned a universal life policy on his wife’s life and assigned it to his brother, Jim. The policy had an ACB of $34,000 and a CSV of $61,000. Rob’s policy gain was $27,000, and Jim acquired the policy with an ACB of $61,000.
This ensures that policyholders can't avoid a policy gain by simply giving the policy away at a lower value.
?? Thinking of assigning your life insurance policy? Let’s discuss your options and make sure you're fully aware of the tax implications! Don’t leave this to chance—reach out to me today to find the strategy that works best for your situation.
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