Bank-owned life insurance (BOLI) has been a widely used investment and employee benefit for community banks. But what happens to this insurance in a bank sale? This question often arises in bank mergers and acquisitions, and in some cases, can significantly impact on how the sale is negotiated.
Options in an Acquisition Transition
There are generally three options in an acquisition transaction related to the BOLI owned by the seller.
- The BOLI stays with the buyer. This causes the acquirer to “step into the shoes” of the seller as it relates to ownership. The policies stay in place, and the death benefit is paid out upon the passing of the insured individuals.
- The buyer takes the BOLI and then cashes it in after closing, typically immediately. This allows the buyer to take the cash from the BOLI and reinvest it into something else.
- The seller redeems the BOLI prior to closing.
While several factors contribute to the attractiveness of each option, it’s important to note there are different tax implications associated with each.
One example is if the transaction is structured as a stock sale and the BOLI is not redeemed, there will be no tax implications. However, with S Corporations in particular, it’s more common to treat a transaction as an asset sale. If that’s the case, even if the policies aren’t redeemed, the sale could trigger a taxable gain which could then have significant consequences on the sale. In addition, a 10% MEC (modified endowment contract) tax penalty could be implemented if the policies are redeemed, regardless of whether the transaction is structured as an asset sale or a stock sale.
If you are involved in a bank merger or acquisition as either a buyer or seller where BOLI is involved, be sure you understand all the implications prior to signing a contract. There is no standard treatment for this asset, and every transaction is different.
Reach out to a Pinion financial institutions advisor if you need assistance navigating tax implications related to BOLI or help interpreting contracts.
