Tax guidance For Life Settlements
One of the most often asked questions on life settlements is either it creates a chargeable event. The retort is likely "yes". But - it depends on how much superior you have paid in, the number you receive, and how much cash value was in the policy on the date it was sold. Sound simple enough? Not really.
Tax guidance For Life Settlements
The Irs was silent on the issue until May 2009. Approved wisdom prior to the issuance of income Ruling 2009-13 was that a life settlement transaction created a potential two-tiered chargeable event.
Possible - because it depended on either 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 guarnatee 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 seeing at gain taxed 2 separate ways (two tiers). To the extent cash surrender value exceeded cost basis - that quantum of the realized gain was recognized as ordinary income. The rest of the realized gain was afforded long-term capital gain treatment.
Enter Irs income Ruling 2009-13. The Ruling "affirmed" much of the Approved wisdom discussed above, with one foremost difference. The Irs did not allow the cost basis to equal the net premiums paid. income Ruling 2009-13 said the cost basis had to be adjusted (reduced) by the number of the cost of guarnatee over the life of the contract. The cost of guarnatee would be considered the pure guarnatee security piece of the life guarnatee contract and could not be capitalized (added to basis). Basically the Irs is saying the gain has to be solely related to the speculation execution of the contract. Cost basis data has to be obtained from the carrier in order to properly record a settlement transaction on a Form 1040. What remains to be seen is how responsive the carriers will be to requests for cost of guarnatee illustrations. What the income Ruling did do is open the door for taking a long-term capital loss when your agent sold you a truly bad policy.
Disclaimer: These materials do not, and are not intended to, constitute legal or tax advice. You should consult an attorney or tax consultant for individual guidance about your own situation.
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