DIVERSIFICATION ASSESSMENT

The goal of the diversification assessment is to ensure that small insurers with isolated policyholders are qualified to choose 831(b) effortlessly, while forcing small insurers with related policyholders to meet an alternative test aimed at restricting estate planning exploitations.

Whether the new diversification test also was directed at reinsurance pools is not clear. If the IRS applies the doctrines of Rev. Rul. 2009-26, the insurance company would look beyond the reinsurance to the core insureds to conclude who a “policyholder” is.

The statute and the Joint Committee on Taxation Technical Explanation do not cover this issue. If the doctrines of Rev. Rul. 2009-26 apply, an insurance company directly insuring only one policyholder, but deriving no more than 20 percent of its premiums from that policyholder, could meet this prerequisite with one pool that comprises many core insureds, none of which pay more than 20 percent of the premiums.

If those doctrines do not apply, that same insurance company may have to partake in at least four reinsurance pools, with no pool’s aggregate premium accounting for more than 20 percent of the insurance company’s premiums.

OWNERSHIP ASSESSMENT

The substitute assessment, an ownership assessment, is met under one of two conditions.

First condition: If no one who holds, directly or indirectly, an interest in the insurance company, directly or indirectly, is a significant other or lineal successor to someone who holds, directly or indirectly, an interest in any insured business or asset.

Second condition: If anybody who holds, directly or indirectly, an interest in the insurance company is a significant other or successor to anybody who holds direct or indirect interest in an insured business or assets, then each person’s proprietorship of the insurance company echoes that person’s possession in the insured businesses and assets (within a 2 percent margin).