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DBO Deferred Comp Plan never written, now insured dies


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Here goes: 10 years ago a broker convinced a corproration and an executive to this. The corp bought a $600,000 life ins. policy on the executive and paid the premium by deducting it from the executives bonus pay. The corp. is the policy owner, and the executives wife is the beneficiary. No deferred comp agreement was ever written. No split-dollar agreement was ever written. The executive dies and his wife gets the $600,000 from the ins. co.

How is this to be taxed is the question.

Thanks,

Rene

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Let's see. The arrangement pre-dates 409A if it's deferred comp and pre-dates the final split-dollar regs if it's split-dollar, so general tax principles and/or Notice 2002-8 applies.

I suppose the answer depends primarily on whether the deductions from the bonus were on a pre-tax basis or an after-tax basis. If they were deducted on a pre-tax basis, the executive never recognized in income the current value of the life insurance protection, so the argument is that the death benefit is taxable to the beneficiary and generates a deduction to the company. If the premiums were deducted from the bonus on an after-tax basis and covered the value of the life insurance protection each year (or arguably at least in the year of death), then the death benefit would be income-tax free to the beneficiary with no corresponding deduction to the company. If there are no written documents, maybe the paystubs would shed some light.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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