We wanted to bring to your attention an important development from the U.S. Treasury Department and IRS: the release of proposed regulations (REG-108054-21) concerning changes in life insurance contracts and their associated reporting requirements. In this communication, we aim to provide you with a concise understanding of the key aspects of these proposed regulations.
Section 1035 Exchanges
The primary concern addressed by these regulations relates to section 1035 exchanges. The previous rules led to a scenario where a life insurance policy transferred in a reportable policy sale could subsequently be exchanged for a new policy under section 1035. The issue arose when the death benefits under the new policy weren't reported under section 6050Y(c). The proposed regulations intend to rectify this by revising the final regulations in several ways.
1. Definition of Transfer: The proposed regulations revise the definition of a transfer of interest in a life insurance contract to exclude the issuance of a life insurance contract to a policyholder. This ensures that such issuances, including those in section 1035 exchanges, aren't considered transfers subject to reporting.
2. New Rule for Section 1035 Exchanges: The proposed regulations introduce a new rule for section 1035 exchanges. They provide guidelines on determining the excludable proceeds from the new interest, avoiding potential limitations, and ensuring proper reporting of reportable death benefits.
3. Modification to "Reportable Policy Sale" Definition: The proposed regulations modify the definition of "reportable policy sale" to address section 1035 exchanges. This ensures that the attributes of the old interest, including designation of death benefits, carry over to the new interest acquired in such exchanges.
4. Conforming Modifications to Reporting Rules: The proposed regulations modify reporting rules to account for reportable death benefits paid under contracts issued in section 1035 exchanges. They also specify that certain exceptions do not apply in the context of section 1035 exchanges.
Ordinary Course Trade or Business Acquisitions
In addition to section 1035 exchanges, the proposed regulations include provisions for ordinary course trade or business acquisitions involving C corporations. These provisions offer relief from the reportable policy sale rules for certain direct acquisitions of life insurance contract interests from C corporations, provided specific conditions are met.
The proposed regulations detail the applicability dates for various provisions. Notably, they provide flexibility for taxpayers to apply certain rules to section 1035 exchanges and acquisitions that occurred after December 31, 2017, and before the publication of the final regulations.
These proposed regulations aim to bring clarity and consistency to the treatment of life insurance contracts and reporting requirements. As your trusted advisors, we're committed to helping you understand and navigate these changes. We encourage you to stay engaged and informed as these regulations develop further. If you have any questions or require assistance in understanding the potential impact on your financial strategies, please don't hesitate to reach out to our team.