What is it?

1. What is it? Insurance on a key employee’s life owned by the employer with death benefit payable to employer

2. When is it indicated? • Corporation will incur obligation to pay a specified beneficiary or class of beneficiaries at employee’s death under death benefit only (DBO plan) • Employer needs way to finance nonqualified deferred compensation arrangement with employee upon death of employee

3. When is it indicated? • Closely held corporation needs liquid assets at death of key employee to maintain business operations • Corporation will need liquid assets to purchase stock from shareholder-employee’s estate

4. Tax Implications To the employee • No income tax to a key employee or their estate when corporation • owns the policy • pays the premiums • receives the death proceeds from key employee life insurance • Corporate-owned key employee life insurance may affect federal estate tax paid by deceased key employee’s estate

5. Tax Implications To the corporation • Corporation may NOT deduct corporate-paid premiums on life of key employee when corporation is owner and beneficiary of life contract • Death proceeds of key employee life insurance are tax-free when paid to corporation (except for AMT potential)

6. Tax Implications To the corporation • Possible corporate exposure to accumulated earnings tax if accumulating earnings to pay life insurance premiums brings corporate accumulated earnings above a threshold limit • Possible corporate exposure to corporate alternative minimum tax

7. Alternatives • Personally owned insurance • Use corporate funds to pay additional compensation

8. True or False? • Key employee life insurance can help a closely held corporation continue operations. • Although the corporation owns the policy and pays the premiums, death proceeds from key employee life insurance are included in the employee’s estate. • Corporate-paid premiums on life insurance for a key employee are tax deductible for the corporation.

9. True or False? • Use of key employee life insurance allows the corporation to avoid exposure to the corporate alternative minimum tax (AMT). • Because of its greater cost, personal life insurance is not a viable alternative to key employee life insurance.

10. Discussion Question Under what circumstances is key employee life insurance • Vital for a company to have • Nice to have, but not essential • Relatively unimportant