Ask the expert: reporting settlement transactions

The question was: I heard recently that the proposed federal budget includes a proposal that affects life settlements and would require reporting of life settlement transactions to the Internal Revenue Service. Is that correct and how will it affect policyowners who are selling their policies pursuant to a life settlement?

The answer is: President Obama’s proposed budget for fiscal year 2010 does include a proposal regarding life settlements.

The President’s proposal would require entities that purchase an interest in an existing life insurance contract-a life settlement-with a death benefit equal to or exceeding $1 million to report the purchase price, the buyer’s and seller’s taxpayer identification numbers (TINs), and the issuer and policy number to the IRS, to the insurance company that issued the policy and to the seller.

If adopted, the proposal would apply to life settlements entered into after December 31, 2010. Reporting would likely be made by a life settlement provider, or possibly an investor that takes an interest in a life insurance policy through a life settlement contract, using a 1099 report form to be developed by the Internal Revenue Service.