Best practices governing the issuance of corporate-owned life insurance, which have garnered industrywide support and which President Bush signed into law on August 17 as part of the Pension Protection Act of 2006, may not be such a good thing after all, according to speakers at LIMRA International's Advanced Sales Forum, held here last week.
COLI notice and consent provisions, plus a host of recent court cases, IRS rulings and other legislation, drew much criticism from presenters during the first general session.
Thomas Commito, vice president and senior tax advisor for Lincoln Financial Distributors, Philadelphia, Pa., lauded the COLI provisions' intent but described the legislation's reporting requirements as "a disaster." He noted that IRS attribution rules require individuals owning more than 50% of a company's stock–be they an owner-employer, family member in a family-limited partnership or other majority shareholder–to file all prior notice and consent forms, in addition to an annual report, respecting ownership of life insurance policies on the lives of employees.
To ensure that death benefit proceeds from COLI policies remain exempt from income tax, Stephan Leimberg, president and CEO of Leimberg Information Services, Bryn Mawr, Pa., said companies will have to thoroughly document notice and consent forms for each insured employee, and specify the maximum amount of insurance to be purchased, before policies are issued. The reporting requirements will apply, too, to policies covering key person insurance, stock redemption plans and non-qualified deferred compensation plans, among other life insurance-funded vehicles used for business planning purposes.
"Somebody was asleep at the switch when they shepherded these provisions through Congress because they're an absolute nightmare," said Leimberg. "You've got to alert everyone to be careful about COLI–period."
Among the landmark cases focusing on insurable interest during the year past–Ecel Energy vs. United States, Mayo vs. Hartford Life, Betina Tillman vs. Camelot Music, and Chawla vs. Transamerica Occidental Life–the last especially concerned the presenters because of the inconclusive result of an appeals court ruling.
In Chawla, the U.S. District Court for the Eastern District of Virginia held that an irrevocable life insurance trust lacked an insurable interest in the grantor, who was also the sole lifetime beneficiary and a co-trustee. The 4th Circuit Court of Appeals held the trust was not entitled to death benefit proceeds because of misrepresentations by the insured. But the court vacated the insurable interest holding.
Commito said the fact the appeals court did not reverse the lower court's insurable interest holding "leaves the worst impression." If left in force, irrevocable life insurance trusts could never become the first owners of life insurance policies. Rather, an insured would have to buy a policy, hold it for a period of time, then assign it to a trust.
