Winter 2003-05 Treasury enjoys no preference to collect tax from life insurance payment

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Number 50
Winter 2003

Treasury enjoys no preference to collect tax from life insurance payment

In Vélez Rivera v. Bristol-Myers Squibb, P.R., 2002 TSPR 123, the Puerto Rico Supreme Court determined that the Treasury Department has no preference to collect income tax from the proceeds of a life insurance policy.

Findings

The Supreme Court based its judgment in the following two findings:

1. The beneficiary of a life insurance policy enjoys superior rank with respect to creditors and heirs of the insured. The Supreme Court determined that pursuant to Article 11.330 of the Puerto Rico Insurance Code, P.R. Laws Ann. tit. 26, § 1133, said beneficiary "shall be entitled to the proceeds and avails of the policy against the creditors and representatives of the insured and of the person effecting the insurance, and such proceeds and avails shall also be exempt from all liability for any debt of such beneficiary existing at the time the proceeds and avails are made available for his use."

2. Pursuant to the Puerto Rico Internal Revenue Code of 1994, payments from a life insurance policy, where the insured is a resident of Puerto Rico, are not considered as part of the deceased's gross estate.

Ruling

The immediate effect of this decision is summarized in Letter Ruling No. N-L-10-17-2002, issued by the Office of the Insurance Commissioner on January 10, 2003, and which is applicable to all insurers authorized to transact life insurance business in Puerto Rico. The Commissioner, referring to the Supreme Court decision, stated:

"With this decision, it has been clearly established that designated beneficiaries of a life insurance policy are not required to provides insurers evidence of having obtained a certificate of exemption or of cancellation of lien from the Department of Treasury, in order to receive 100% of the policy benefits. In other words, insurers that subscribe life insurance in Puerto Rico shall not require evidence of such certificates, as a condition precedent to making the payment of the total amount to the beneficiaries, since such action would constitute a violation of Article 11.330 of the Insurance Code, supra."

Guidelines

The following guidelines are provided to comply with the ruling:

If the insurer retained the payment before the date of the decision of the Supreme Court and the 90-day period of Article 27.162 of the Insurance Code has expired, the insurer must make the payment within the next 30 days from the date of the ruling.

If the 90-day period has not lapsed, the payment must be made on or before the end of the 90 days.

If an extension for payment was granted to the insured, the extension lapsed on the date of the Supreme Court decision (September 17, 2002).

Claims presented to insurers after the date of the decision must be paid by the insurer as provided in Article 27.162 of the Insurance Code.

‡‡ Note:

The insurer might be required to pay interest (at the legal rate of 6% per year) on the full amount not distributed to the beneficiary, if not paid within the terms provided for in the ruling.

The ruling became effective immediately.


© 2003 Goldman Antonetti