Tax Guidance for Life Settlements
One of the most frequently asked questions on life settlements is whether it creates a taxable event. The answer is likely “yes”. But - it depends on how much premium you have paid in, the amount you receive, and how much cash value was in the policy on the date it was sold. Sound simple enough? Not really.
The IRS was silent on the issue until May 2009. Conventional wisdom prior to the issuance of Revenue Ruling 2009-13 was that a life settlement transaction created a possible two-tiered taxable event.
Possible – because it depended on whether the premiums paid in (cost basis) were greater or less than the cash surrender value. If the premiums paid since inception were greater than the cash surrender value (the hallmark of a relatively new or relatively awful insurance contract) all of your gain was considered long-term capital gain. However, if your agent sold you a good policy and you had surrender value in excess of cost basis then you were looking at gain taxed 2 different ways (two tiers). To the extent cash surrender value exceeded cost basis – that portion of the realized gain was recognized as ordinary income. The rest of the realized gain was afforded long-term capital gain treatment.
Enter IRS Revenue Ruling 2009-13. The Ruling “affirmed” much of the conventional wisdom discussed above, with one important difference. The IRS did not allow the cost basis to equal the net premiums paid. Revenue Ruling 2009-13 said the cost basis had to be adjusted (reduced) by the amount of the cost of insurance over the life of the contract. The cost of insurance would be considered the pure insurance protection piece of the life insurance contract and could not be capitalized (added to basis). Basically the IRS is saying the gain has to be solely related to the investment performance of the contract. Cost basis information has to be obtained from the carrier in order to properly report a settlement transaction on a Form 1040. What remains to be seen is how responsive the carriers will be to requests for cost of insurance illustrations. What the Revenue Ruling did do is open the door for taking a long-term capital loss when your agent sold you a really bad policy.
DISCLAIMER: These materials do not, and are not intended to, constitute legal or tax advice. You should consult an attorney or tax advisor for individual advice regarding your own situation.
Located in Manhattan Beach, California, Opulen Capital is a specialized financial services firm focusing on products and services tailored for senior citizens. Opulen Capital is one of the leading firms offering Life Settlement opportunities for high net worth clientele. We leverage unrivaled experience and exclusive relationships in the life settlement marketplace to structure, obtain, and sell life insurance products to maximize cash profits for our valued clients. Opulen Capital’s mission is to continue to provide the best solutions for our clients through the highest level of integrity and service. For more information, visit our website at http://www.OpulenCapital.com or call Opulen at 877-OPULEN-1 (877-678-5361)
