Tax Implications of Life Settlement Transactions

With new clarification from the IRS, some of the proceeds of a life settlement are almost certainly taxable. After a 2009 hearing held by the Senate Select Committee on Aging, the IRS released Revenue Ruling 2009-13 to “clarify” the issue. Though this ruling is very complex and confusing and LISA has sought to have it clarified, that information is not yet available and some issues are sure to be negotiated. The general treatment requires determinations of cost of insurance which are not readily available to consumers. LISA welcomes feedback on this from affected consumers or their representatives. Historically, the amount recouped up to the cumulative premiums paid is tax free, but the IRS has determined that the “cost of insurance” must be addressed as an issue. Additional money up to the cash surrender value option is to be seemingly treated as ordinary income. Any excess cash above the cash surrender value is apparently to be considered capital gains. The assistance of a professional tax advisor should always be sought. The proceeds of a life settlement could also be subject to the claims of creditors. If the seller is within two years of death, other laws making the proceeds tax-free may apply. Please contact us if you have a perspective on this matter that you would like to share.