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One of the most frequently asked questions on life settlements is whether it creates a taxable event. The rest of the realized gain was afforded long term capital gain treatment. The IRS was silent on the issue until May 2009. If the premiums paid since inception were greater than the cash surrender value (the hallmark of a relatively new or relatively awful insurance contract) all of your gain was considered long term capital gain. However, if your agent sold you a good policy and you had surrender value in excess of cost basis then you were looking at gain taxed 2 different ways (two tiers). Possible because it depended on whether the premiums paid in (cost basis) were greater or less than the cash surrender value. To the extent cash surrender value exceeded cost basis that portion of the realized gain was recognized as ordinary income. Conventional wisdom prior to the issuance of Revenue Ruling 2009 13 was that a life settlement transaction created a possible two tiered taxable event. But it depends on how much premium you have paid in, the amount you receive, and how much cash value was in the policy on the date it was sold. |