It seems like my team and I are regularly answering questions regarding policy ownership and beneficiary designations.
Here are a few situations from the past month or so:
Agent: My client wants to buy a $1,000,000 policy in the company on a key man and have the company pay for it and make his family the beneficiary of half of it as a perk.
Bill: Key man isn’t claiming any of the premium as income?
Bill: Who told you that was a good idea?
Agent: My client has a policy owned in the company with the company as the named beneficiary but she is paying for it personally. When I mentioned there might be an issue she told me that her advisor said it was fine; that if she paid for it with personal funds she can get the death benefit to her family tax free.
Bill: Really? The company is the owner and the beneficiary and the IRS is good with you distributing the $2,000,000 death benefit with no taxation?
Corporate Bookkeeper: The business owners are selling the company to their kids in an asset sale so we want to change the ownership from being cross owned on each other to the company as owner.
Corporate Bookkeeper: Well, the company owns the cash value so we thought we should change the policy ownership.
Bill: The business owners own the policies personally and the company books the cash value as an asset? This isn’t a split dollar or anything?
Corporate Bookkeeper: Nope.
Bill: Ok. We have to talk.
Client: Hey Bill, can you help us review the policy in our irrevocable trust?
Bill: Sure, but I need you to get this authorization signed by the trustee.
Client: Oh, we don’t have a trustee.
Bill: Who signed the insurance app?
Client: We did.
Bill: Who else?
Client: No one.
Bill: So you spent a couple thousand dollars on an irrevocable trust document to own the life insurance policy but you’re telling me that only you signed the policy application and you write the checks straight to the insurance carrier?
Client: Yeah, we always thought that was strange. Now that you mention it, the agent did seem to be in a rush to get the policy placed and we’ve never heard from him since.
In our experience it is commonplace for policy ownership and beneficiary designation to be all over the board. This is usually a part of the transaction which rarely gets in front of the client’s non-insurance professional advisors and few ask about details. Few people understand there are issues at all. In fact, I was recently involved in a case where a family court judge awarded all of the insurance cash value in an irrevocable trust to the wife as a part of her settlement. The trust wasn’t revoked or anything. The husband and wife simply listed all of their assets, not realizing this was not their asset. The judge didn’t know better even though the divorce decree clearly listed that the assets were in the irrev, which are owned by their children as trustees, but they were put on the wife’s side of the ledger to even up the pot. I can’t wait till she tries to spend them.