31 August 2012 0 Comments

From The Employer (beneficiary designations)

I’m still on the topic of beneficiary designations.  This segment was not on my original outline, but over the years I’ve seen so many screw ups on employer provided benefits, I felt I had to touch on it.  This will be of primary interest to those who own a business.

If you are an employee of your own Corporation and you decide to purchase life insurance for the benefit of your family, do not make your corporation the owner of the policy.  If you do that the death proceeds will be paid to your corporation and in order to get them to your family at your death they would either be subject to personal income tax to you, or treated as a dividend and not eligible as a business expense.  This is true even if you, the employee, are named as beneficiary because it will be deemed that since the corporation had a right to receive the proceeds as owner, the cash flow will be treated as though it was paid to the Corporation and then they paid it to you.

I have had people tell me they do it this way so the business can write off the premium as a business expense.  That is a fallacy.  If the corporation owns the policy, they cannot deduct the premium.  The Corporation should merely bonus (tax deductible) the premium to the employee to purchase the policy and the employee declares the premium as income.  The employee names his own beneficiary and proceeds are received tax free.

The exception to this would be if the Life Insurance is part of a non-qualified deferred compensation program.  With these golden handcuff arrangements the employer does own the policy, receives the proceeds tax free and uses them to recoup costs of the plan.  But, even here the premium is not tax deductible to the employer.

Moving on, I’ll be covering policy ownership, especially when the policy is intended to provide estate tax liquidity.

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