With the estate and gift tax exemption
increasing to
a new $10 million base (good for tax years 2018 through 2025),
some of your clients may be calling to determine if they have excess life insurance coverage.
The reform enacted in the 2017 Tax Cuts and Jobs Act eliminates an IRS burden, making life settlements even more attractive for those that may have life insurance policies they no longer need or want. Simply put, a policyholder that sells a life insurance policy will now receive the same IRS tax treatment as a policyholder who surrenders a policy.
The simplified life settlement taxation for sellers included in the Act is summarized below:
- Total premiums paid are now considered the cost basis of a life insurance contract (PG 259 Sec. 13521 – Clarification of Tax Basis of Life Insurance Contracts).
- The previous IRS position (IRS Revenue Ruling 2009-13) did not include cost of insurance as part of the cost basis, requiring sellers to subtract the cost of insurance from total premiums paid to determine an adjusted cost basis when selling a life insurance policy. This was extremely difficult to comply with due to the complexity of determining the total cost of insurance in a contract dating back to the issuance of a life insurance policy.
- The amendment also seems to indicate that the effective date of this change is retroactive to August 25, 2009 – the day before the effective date of the 2009 IRS Ruling.
To learn more about how a life settlement may be an effective exit strategy for your clients, please contact us at (440) 630-9400.
