Treasury and the IRS issued two sets of final rules with significant implications for tax planning, estate planning, and M&A transactions involving life insurance:

1. Final regulations identifying certain charitable remainder annuity trust (CRAT) structures as listed transactions
2. Final regulations on transfer-for-value rules and information-reporting requirements for reportable policy sales, section 1035 exchanges, and life-insurance acquisitions in corporate reorganizations

A charitable remainder annuity trust (CRAT) is a split-interest trust that pays a fixed annuity to non-charitable beneficiaries for a term of years or for life, with the remainder passing to a charitable organization. CRATs are a legitimate estate and charitable planning tool when properly structured.

The IRS has identified certain CRAT structures as listed transactions — a designation that triggers mandatory disclosure obligations for both participants and material advisors. The targeted structures are those the IRS views as abusive — typically arrangements designed to generate inflated charitable deductions or to extract value from the trust in ways that circumvent the rules governing CRATs.

Disclosure Obligations

• Participants: Must disclose on Form 8886 (Reportable Transaction Disclosure Statement). Failure to disclose carries penalties up to $10,000 for individuals and $50,000 for entities per year of non-disclosure.
• Material advisors: Must file Form 8918 (Material Advisor Disclosure Statement) and maintain a list of advisees. Penalties for failure to disclose can reach $200,000 per transaction.

Practical Steps Tax counsel and estate planners should review existing CRAT arrangements against the final regulations’ listed transaction description, assess whether disclosure obligations have been triggered, and update engagement letters and due diligence procedures.

Life insurance death benefits are generally excluded from gross income under section 101(a). However, the transfer-for-value rule (section 101(a)(2)) provides that if a life insurance contract is transferred for valuable consideration, the death benefit exclusion is limited — the recipient can only exclude the consideration paid plus premiums subsequently paid.

The Tax Cuts and Jobs Act of 2017 added section 6050Y, creating information-reporting requirements for "reportable policy sales" — acquisitions of life insurance contracts for valuable consideration where the acquirer has no substantial family, business, or financial relationship with the insured.

The final regulations implement these reporting requirements, specifying who must report, what must be reported, when reports must be filed, and the forms to be used (Forms 1099-LS and 1099-SB).

Section 1035 Exchanges The final regulations address when a section 1035 exchange constitutes a reportable policy sale triggering information-reporting obligations.

M&A Due Diligence Implications When acquiring a company that holds life insurance policies — key-man insurance, split-dollar arrangements, or COLI programs — acquirers must:

• Identify all life insurance policies held by the target
• Determine whether any prior transfers triggered the transfer-for-value rule
• Assess the tax treatment of death benefits under the policies
• Review information-reporting obligations associated with the acquisition
• Consider whether the acquisition itself constitutes a reportable policy sale

Failure to conduct this analysis can result in unexpected tax liability — loss of the death benefit exclusion — and information-reporting penalties.

The IRS’s finalization of the CRAT listed transaction rules and the reportable policy sale regulations represents a significant tightening of the tax compliance framework for charitable planning and life insurance transactions. Tax counsel, estate planners, and M&A advisors should treat these final rules as a prompt to review existing arrangements and update due diligence and disclosure procedures.