Tax Considerations
Tax ConsiderationsLife Settlement Tax Guidelines
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Please be advised that PolicyTrac does not provide tax advice.
The taxation for a Life Settlement transaction can be very complicated. We will attempt to provide a general guideline that has been used in past transactions, however, we cannot stress enough that each case can be treated differently by the IRS and the taxation of a life Settlement may vary on a state by state basis.
The following is provided for informational purposes only. Advice from a professional tax advisor is recommended. We strongly recommend that a policy owner seek professional tax advice prior to accepting any offers.
General Background:
In May 2009, the IRS released Revenue Ruling (2009-13), which provides guidance related to the sale of a life insurance policy. In Revenue Ruling (2009-13), the IRS outlines and defines the method for determining both the capital gain component and the ordinary income component, if any. By citing specific examples, the IRS also provides guidance related to the “adjusted basis” of the life insurance contract. The IRS also provides guidance related to the “substitute for ordinary income” doctrine. This important doctrine limits the amount that would be recognized as ordinary income if the contract were surrendered (i.e., to the inside build-up under the contract). Hence, if the income recognized on the sale or exchange of a life insurance contract exceeds the “inside build-up” under the contract, the excess may qualify as gain from the sale or exchange of a capital asset¹.
IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any information contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.
¹See e.g., Commissioner v. Phillips, 275 F.2d 33, 36 n. 3 (4th Cir. 1960).
