The leaders of a House Ways and Means subcommittee have called on the Treasury Department to alert seniors about the potential tax issues caused by involving themselves in stranger-originated life insurance schemes.
In a letter to Treasury Secretary Henry Paulson, Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., and ranking minority member Phil English, R-Pa., said they were concerned that “STOLI transactions take advantage of the secondary market in life insurance settlements at the expense of elderly Americans who are left with an unexpected tax liability.”
The two said in the letter that they understand several variations on the scheme exist in the market, with some of them making use of trusts to hold the policies, but that “in each case” the insured is elderly and often with a high net worth.
“In a typical STOLI transaction, an elderly individual, on average 80 years old, is marketed a policy that claims to provide millions of dollars worth of ‘free’ insurance coverage on his or her life,” they said. “We understand that these policies are aggressively marketed, and in some cases, the individual receives an expensive dinner voucher or cruise as part of the promotion.”
Neal and English acknowledged that the state law treatment of STOLI policies is outside the jurisdiction of the Treasury Department, but argue that the tax consequences of such arrangements “have been the subject of increasing commentary and concern.” Depending on how the deal is structured, the transaction could be considered a split dollar arrangement, they noted, and the rules regarding cancellation of indebtedness may also come into play on settlement of the policy.
“In certain cases, the terms for the initial arrangement may not qualify as true indebtedness, thus exposing the insured to income inclusion,” Neal and English argued. “Also, depending upon the value of the promotional incentive or cash payment, the insured could be taxed on the value of the promotion received. Depending upon the structure of the product promoters may also be liable for information reporting.”