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Tax Reform Favorably Impacts Life Settlements

June 11, 2018

By Joan A. Antoniello and David Weinstock

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)
Settlement Proceeds 450,000.00 450,000.00
Aggregate Premium (Tax Basis) -795,708.10 -795,708.10
Cost of Insurance (Tax Basis Reduction) 533,887.24 0.00
Gain 188,179.14 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.

 


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  INDUSTRIES  
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       Sign up to receive Mazars USA The Ledger

 
 


Mazars USA LLP is an independent member firm of Mazars Group.

Legal and privacy policy    Contact us    Terms and Conditions