Moving Corporate Owned Life Insurance to Shareholders

I represent clients who have entered into a buy-sell agreement between them on the corporation. One of the shareholders is not insurable. There are, however, two key-man policies inside of the corporation. We have been pondering how to move these policies out of the corporation so that they can be used in the buy-sell agreement. Particularly, we did not want to trip over the transfer for value rules.

I was well aware that the transfer for value rules had an exception when the policy is transferred to the insured. Such a transfer, however, would be detrimental to the buy-sell goals, as each shareholder needs to own the policy that insures the other shareholder.

I learned today that the transfer for value rules also has an exception for transfers to a partner of the insured. Voila! My concerns are answered. The corporation can simply distribute out the policies to the shareholders, because they are also partners in a partnership.

Unfortunately, I think we will still be subject to the special 3 year rule for corporate owned life insurance where a shareholder owns 50%+ of the shares of the company. Must research...