Tax Reform Favorably Impacts Life Settlements
By Joan A. Antoniello and David Weinstock
June 11, 2018
A provision of the Tax Cuts and Job Act of 2017 (“TCJA”) addressing the sale of life insurance policies is getting the attention of financial and estate planners, as well as insurance professionals.
The new law makes sales (life settlements) of existing life insurance policies more attractive for seniors who no longer need them. As a result of increases in the estate tax exemption and changes in income continuation or family needs, many will ask themselves whether or not to keep their life insurance. A life settlement may make sense rather than cancelling a policy or allowing it to lapse.
Revenue Ruling 2009-13 was published in 2009 and put the seller of a policy in a less advantageous tax situation than someone who surrendered a policy for its cash value.
The TCJA reversed 2009-13, and clients who now sell a life insurance policy in a life settlement transaction no longer need to reduce their basis or, conversely, increase their tax gain by the cumulative cost of insurance charges (COI).
The bottom line is these transactions will, in many cases, be more advantageous from a tax perspective than before, and many fiduciaries and advisors are discussing life insurance settlements as part of their practice. Some are even hiring life settlement companies to obtain independent fair market valuations of policies for other planning purposes without the intent to sell.
Actual Mazars USA Client Transaction
|Gain on Settlement of Life Policy|
|Before Tax Act (TCJA 2017)||After Tax Act (TCJA 2017)|
|Aggregate Premium (Tax Basis)||-795,708.10||-795,708.10|
|Cost of Insurance (Tax Basis Reduction)||533,887.24||0.00|
If you have any questions regarding the above issues or other client situations, please feel free to call us and we would be happy to review your client’s policies to determine if a life settlement makes sense.