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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 has been a common question we’ve seen with bank mergers and acquisitions, and in some cases, has had a significant impact on how the sale is negotiated. There are generally three options in an acquisition transaction.
3 Acquisition Options
- Stay with the Buyer.
The first option is for the BOLI to stay 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 pays out once the individuals covered by the insurance die.
- Cash In the BOLI.
The second alternative is for the buyer to take the BOLI and then cash it in sometime after closing, typically immediately. This allows the buyer to take the cash from the BOLI and reinvest it in something else.
- Redeem the BOLI.
The third option is for the seller to redeem the BOLI prior to closing.
The Effect of Tax Implications
There are numerous factors that may make one of the options more appealing than the other, including the fact that each has a different tax implications.
Stock Sale vs. Asset Sale
If the transaction is structured as a stock sale and the BOLI is not redeemed, then there will be no tax implications.
However, in particular with S Corporations, it is more common to treat a transaction as an asset sale. If that is the case, even if the policies aren’t redeemed, the sale could trigger a taxable gain that could have significant consequences on the sale. In addition, if the policies are redeemed, there could be a 10% MEC (modified endowment contract) tax penalty, regardless if 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 of the implications. There is no standard treatment for this asset, and every transaction is different.