Life Insurance - Question

[caryn22359]

I have a client that owns life insurance . Client owns an S corp and he is 100% shareholder. He wants to make the corporation and his children beneficiaries of the policy.
The corporation will be paying for the premiums - Question: Can the corporation deduct the premiums? and What is the tax consequences if the shareholder dies?

Thank you

[david rigby]

You posted this in the message forum titled, "Retirement Plans in General".

Let's be clear, is this related to a retirement plan of any type?

(If you want this discussion moved to another forum, any of the Moderators can move it for you.)

[ETA Consulting LLC]

I've actually consulted many Financial Advisors while managing a Qualified Plan Consulting team inside of an Advanced Markets Department of a Life Insurance Company. [[Try to figure that one out :-) ]] So, while my expertise is qualified plans, I've gotten this question at least 100 times during my tenure.

Here's how I broke it down into layman's terms: A qualified plan (or IRA) gives you three distinct tax advantages: 1) Tax deduction on Contributions; 2) Tax Deferral on the gains; and 3) Retirement Income (where there is a reasonable certainty that you'll receive the benefit in the future. When it's not a qualified plan, then you're going to lose at least one of these three.

With life insurance, you get income tax deferral on the gain (and it may be used to fund a retirement), but there is no authority for taking a tax deduction on the contributions. For a while, 419(e) plans were marketed to make tax deductible contributions and invest all proceeds in life insurance for the tax deferral on the gains (under the auspices of providing welfare benefits), but that was quickly shot down by the IRS as [[[another method to receive an income tax deduction on the purchase of life insurance - among other things]]]

So, the short answer to you as given to many advisors in the past, you're never going to make life insurance come remotely close to functioning like a qualified plan. If there was a way to do it, I'd still be working for a Life Insurance Company selling the strategy :-)

Good Luck!

[XTitan]

I suggest discussing with counsel familiar with split-dollar.