Home | Site Map | About Us | Email | Quotes | Contact Form | Privacy Policy | Links | Search

Taxation

Taxation of such plans can change almost daily. It is almost certain that, in respect to premiums paid on any life insurance policy on an officer or employee, no deduction of premiums will be allowed for the premiums paid by the corporation. The proceeds may also be subject to provisions of the alternative minimum tax. Loans, and the interest on such loans, should be evaluated by a tax professional. Obviously, if the insured is a controlling shareholder in the corporation, then proceeds will be included in the estate to the extent that they are paid other than to the corporation.

At the death of the key employee, the proceeds are paid to the beneficiary, the employer. Generally, if proper steps have been taken, these proceeds are received tax-free. To the extent that the proceeds have the effect of increasing the corporation's earning and profits, it is very important to do two things in planning for key person insurance; namely, the corporation should document the cost to it of the loss of the key person. Proceeds, in the form of a life insurance policy, should be carefully planned and acquired, sufficient to replace the key person. The proceeds should be used for that plan. Secondly, to avoid additional taxation under the accumulated earnings maximum, the corporation needs to be careful about further accumulations of earnings within the corporation. Note that there is an exception to this rule: If the accumulation is intended to meet the reasonable needs of the business, this will prevent taxation. Obviously, in light of a $5,000,000 key person life insurance policy, there will be substantial discussion as to what the reasonable needs of the business are! [back] [next]