Taxation of COLI/BOLI Proceeds

[Guest Guy Incognito]

Company X has a COLI/BOLI policy on its key employees. Upon the death of a key employee, Ins. Co. pays the proceeds to Company X. Company X then remits a portion of the proceeds to the designated beneficiary of the key employee. Are the amounts paid to the beneficiary taxable to the beneficiary?

Thanks.

[Guest mjb]

I thought that Under IRC 101 the designated beneficiary of the LI policy receives the proceeds exempt from income tax does not pay taxes but a person paid by the employer from the proceeds will be considered to recieve taxable income. There are special rules for employer owned policies depending on whether the policy was purchased prior to or after Aug 17, 2006. You need to consult with a tax advisor.

[jpod]

If the beneficiary is not the beneficiary "under the policy," the payment to the beneficiary is taxable. Presumably this is intentional: the company is seeking a tax-free receipt of death proceeds, coupled with a deduction for the payment to the beneficiary, as part of its overall deferred compensation funding strategy.

By the way, great User name!

[Guest Guy Incognito]

If the beneficiary is not the beneficiary "under the policy," the payment to the beneficiary is taxable. Presumably this is intentional: the company is seeking a tax-free receipt of death proceeds, coupled with a deduction for the payment to the beneficiary, as part of its overall deferred compensation funding strategy.

By the way, great User name!

Thanks.

As far as I know, the Company is not taking a deduction for the payment to the beneficiary and is not using the proceeds it receives to fund any other benefit plans. From what I understand, Company took a deduction for its costs under the policy (premium payments) and when it receives the proceeds, will recoup its costs and pay the excess to the beneficiary of the insured.

Also, 101(j) only discusses the taxability of the proceeds to the employer, not the beneficiary of the insured.

[Guest mjb]

so what is the answer?

[Guest Guy Incognito]

so what is the answer?

I don't know and I can't find anything that gives me a definitive answer. That's why I am posting here.

[jpod]

I thought the issue was whether the money paid to the so-called beneficiary by the Company was taxable to him/her. If so, we answered by saying that it is taxable unless he/she is the beneficiary under the policy. If the Company is the beneficiary, but there is a separate agreement to pay money to this person equal to all or a portion of the amount of the policy death benefit, then it is taxable to this person.

Is there some other question we are not answering?

[Guest Guy Incognito]

I thought the issue was whether the money paid to the so-called beneficiary by the Company was taxable to him/her. If so, we answered by saying that it is taxable unless he/she is the beneficiary under the policy. If the Company is the beneficiary, but there is a separate agreement to pay money to this person equal to all or a portion of the amount of the policy death benefit, then it is taxable to this person.

Is there some other question we are not answering?

Yes, you did answer the question, but you seemed to condition your answer on the company using the payments as part of a funding strategy, which is not the case here. I was just seeking further clarification.

Anyway, if you have any authority you can cite to for your answer, that would be helpful. Otherwise, thanks for your help.

[jpod]

No, my speculation about funding strategy was merely an attempt to explain why the Company was the beneficiary under the policy (assuming it was the beneficiary under the policy). Authority? I would have to say Section 61 of the Internal Revenue Code, and the fact that Section 101 of the Code provides no relief in this case to the person to whom the Company paid the $$.

[XTitan]

BTW - Since you mentioned that the company may be deducting the premium, you may want to check Section 264 since this is would be unusual.

[Guest EXB 1]

BTW - Since you mentioned that the company may be deducting the premium, you may want to check Section 264 since this is would be unusual.

The company should not be deducting premiums. This is a nondeductible business expense. However, the benefits paid the employee's beneficiary should be taxable income. The company can then take a tax deduction for this payment.

[Guest Guy Incognito]

BTW - Since you mentioned that the company may be deducting the premium, you may want to check Section 264 since this is would be unusual.

The company should not be deducting premiums. This is a nondeductible business expense. However, the benefits paid the employee's beneficiary should be taxable income. The company can then take a tax deduction for this payment.

Thanks for all of the replies, everyone. Good stuff. I'll have to circle-back with the person I am working on with this as I have been receiving a lot of info third-hand.