287 / Does a transfer for value problem arise when an insurance-funded stock redemption plan is changed to a cross-purchase plan, or vice versa?

Yes. If a corporation sells a policy on stockholder A’s life to stockholder B, proceeds will lose their tax-exempt status ( Q 286). Even if the corporation does not sell a policy, but merely distributes it to stockholders, there will be a transfer for value. Valuable consideration may be found, for example, in relieving the corporation of its obligation to continue premium payments and its obligation to redeem the stock or in satisfying the corporation’s dividend obligation to its stockholders.¹ The danger cannot be averted by a transfer to the insured and a subsequent transfer by the insured to another stockholder ( Q 288).

A transfer by a corporation to a shareholder was ruled to fall within an exception where stockholders also were partners in a bona fide, although unrelated, partnership.²

Similarly, a transfer of a reverse split dollar policy from a corporation to two shareholders who also were partners of the insured for the purpose of funding a cross-purchase agreement fell within the partner exception to the transfer for value rule.³