In the 2009 ruling, the IRS created a distinction in the tax basis between policies that are surrendered and policies that are sold in a life settlement. For policies that are surrendered at a gain, the law has long been that the policy owner’s basis is their cumulative investment in the contract, which is basically the cumulative premiums paid less withdrawals and dividends taken from the policy.
But for purposes of a life settlement, the IRS ruled that the basis would have to be reduced by the cumulative cost of insurance charges assessed against the policy. For no apparent reason, the ruling puts the seller in a life settlement transaction in a less favorable tax position than someone who surrenders a policy.
Furthermore, the ruling created a number of unanswered issues with respect to the tax treatment of a life settlement transaction to the seller:
This article was originally featured on ThinkAdvisor.com
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