289 / Is there a loss of the income tax exemption for death proceeds following a transfer of life insurance policies between partners or to a partnership in which the insured is a partner?

No.

The transfer for value rule does not apply where a policy is transferred to a partner of the insured or to a partnership in which the insured is a partner.¹ The partnership actually must operate as a partnership, however, and not exist in form only.² A partner can sell a policy on the partner’s life to the partnership or to another partner. A retiring partner can sell to an incoming partner the policy the partner owns on another partner’s life. A partnership can sell a policy to an insured partner or to a copartner of the insured. Where a partnership owns a key person policy on the life of a non-partner, there is no transfer for value when a new partner enters or an existing partner leaves the partnership, provided the partnership is not terminated by that action.³

Sale of a policy to a member of an insured’s family who is not a partner would disqualify the proceeds for exemption. Where there is an insurance-funded buy-sell agreement between more than two partners and a partner dies, a surviving partner may buy policies on the lives of other surviving partners from the deceased’s estate without loss of tax exemption for the death proceeds.⁴