While the AMT is incredibly complicated, its impact on the life insurance proceeds received by the corporation can be calculated in advance and planned for to some extent.
The following is a grossly simplified example of the potential effect of the AMT on insurance proceeds received from a policy owned by a C corporation at the death of a shareholder. In the real world, it isn’t quite this simple, but this should give you some idea.
For Example:
Let’s assume your C corporation receives $1,200,000 of life insurance proceeds from the policy covering a shareholder under an entity purchase buy-sell agreement. The cash surrender value of the policy the day before the shareholder’s death was $200,000. The net amount at risk is the difference between the proceeds and the cash value, or $1,000,000. Of this amount, 75% or $750,000 (.75 x $1,000,000) is taxable at the rate of 20%. The net alternative minimum tax on the insurance proceeds is $150,000 (.20 x $750,000), as shown below.
| Total Death Benefit | $1,200,000 | $ __________ |
| Less Policy Cash Value | -200,000 | – __________ |
| Amount at Risk | $1,000,000 | $ __________ |
| Multiplied by Taxable Percentage | x .75 | x .75 |
| Amount Taxable | $750,000 | $ __________ |
| Multiplied by Corporate AMT | x .20 * | x .20 |
| Alternative Minimum Tax | $150,000 | $ __________ |
* The AMT rate is different for noncorporate taxpayers–you will need your accountant for this.
