Life Insurance Transfer Transition Guidance Planned; Reporting Requirements Delayed (IR-2018-104; Notice 2018-41)

The IRS will provide guidance on the new information reporting obligations for certain life insurance contract transactions under Code Sec. 6050Y. In addition, the proposed regulations will provide guidance on the modifications to the transfer for value rules for life insurance contracts. Further, the IRS delayed the new reporting requirements until it issues the final regulations.

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 such a contract may be includable in income. A “reportable policy sale” is the acquisition of an interest in a life insurance contract when the acquirer has no substantial family, business, or financial relationship with the insured. A “reportable death benefit” is the 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 Code Sec. 6050Y apply to reportable death benefits paid and reportable policy sales made after December 31, 2017. However, the reporting requirements are until the IRS issues final regulations.

Under Code Sec. 6050Y, information returns must be filed when:

  • A person acquires a life insurance contract, or any interest in a life insurance contract, in a reportable policy sale; or
  • An issuer has notice (i) of a reportable sale, or (ii) of a transfer of a life insurance contract, or (iii) any interest in a life insurance contract, to a foreign person; and
  • A payor pays any reportable death benefits.

Proposed Regulations

The proposed regulations will describe how and when to satisfy the reporting requirements. They will also clarify who is subject to the reporting requirements and other definitional issues. For example, Treasury and the IRS intend to include viatical settlements in the term “reportable policy sale” in the proposed regulations.

In addition, the proposed regulations will clarify the extent to which Code Sec. 6050Y applies to sales or acquisitions effected by transferors and transferees outside the U.S., 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.

IR-2018-104; Notice 2018-41

 

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CCHTaxGroup

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