I have a client that had their partnership take out a whole life insurance policy on a key employee in 2013. The partnership owned the policy and was the beneficiary of the policy. This employee moved on several years ago, but remained on good terms with the partnership owner. The owner would like to gift the policy to this individual so that they have control going forward, including the ability to designate their family as the beneficiaries instead of the partnership.
I am thinking this would be a two part transaction, with the partner withdrawing the policy from the partnership, and then personally gifting it to the other individual. My uncertainty is in regards to accounting for the basis. Let's say the partnership's cost-basis is $200,000 and the present cash value and cash-surrender values are both $150,000. From what I have been able to research, the withdrawal of the policy from the partnership would use the cost-basis of the premiums paid, in this case being $200,000. The premiums were paid in prior years, were non-deductible expenses, and increased partner basis $200,000. Would the policy withdrawal debit partner withdrawals $200,000 and credit the capital account $200,000 resulting in a wash for the partnership?
It looks like ordinarily the partner's basis would be the cost-basis of the policy ($200,000), and the individual that receives the policy as a gift would have the same basis of $200,000. Is this true even if the present value/fmv is only $150,000? I can see that the TCJA caused a change in policy basis for policies enacted after 2009, and I think cost-basis is correct, but I am not 100%.
I appreciate any clarifications!
I am thinking this would be a two part transaction, with the partner withdrawing the policy from the partnership, and then personally gifting it to the other individual. My uncertainty is in regards to accounting for the basis. Let's say the partnership's cost-basis is $200,000 and the present cash value and cash-surrender values are both $150,000. From what I have been able to research, the withdrawal of the policy from the partnership would use the cost-basis of the premiums paid, in this case being $200,000. The premiums were paid in prior years, were non-deductible expenses, and increased partner basis $200,000. Would the policy withdrawal debit partner withdrawals $200,000 and credit the capital account $200,000 resulting in a wash for the partnership?
It looks like ordinarily the partner's basis would be the cost-basis of the policy ($200,000), and the individual that receives the policy as a gift would have the same basis of $200,000. Is this true even if the present value/fmv is only $150,000? I can see that the TCJA caused a change in policy basis for policies enacted after 2009, and I think cost-basis is correct, but I am not 100%.
I appreciate any clarifications!