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Ask the expert: the taxing question

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The question was: Once a life settlement transaction is completed, are the funds my client receives subject to taxation?

The answer is: “…Once the transaction closes and the funds are disbursed by the escrow agent, the parties typically have one question when they begin to focus on the taxation of the transaction: “How much do I owe?”

“In this regard, the marketing materials provided to policyowners may not be of much help, and often contain a standard tax disclosure that is similar to the following:

‘The proceeds from a life settlement are generally tax-free up to the amount of the premiums paid for the policy. The difference between that amount and the cash surrender value is generally taxable as ordinary income. Amounts received in excess of cash surrender value are generally taxed as capital gain. Sellers are strongly encouraged to consult their own tax and financial advisors before completing a transaction.’

“The word ‘generally’ and the strong encouragement to consult your own tax and financial advisors often leave policyowners looking for clarity where there may be little.

“The bottom line is that tax ramifications of life settlement transactions are far from clear or certain and nowhere near as simple as marketers would have either the client or other professionals believe…”

Source: This is an excerpt from Chapter 12 of Life Settlement Planning, a 2008 book in the Tools & Techniques serried published by The National Underwriter Company, Cincinnati, Ohio, which also publishes Settlement Watch. The book is co-authored by: Stephan R. Leimberg, Caleb J. Callahan, Bryan T. Casey, James Magner, Barry Reed, Lawrence J. Rybka, Paul A. Siegert. In amplifying on this question, the co-authors present a five-step method that may be used to calculate the gain from a life insurance policy. read more about this book


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