ST. PETERSBURG, FLA. — Recent Internal Revenue Service life settlement revenue rulings, the new employer-owned life insurance notice and consent provisions, and increased IRS interest in life insurance took top billing here at the Advanced Sales Forum general session.
LIMRA International, Windsor, Conn., kicked off the 3-day event here Wednesday/
Stephan Leimberg, chief executive officer of Leimberg Information Services Inc., Bryn Mawr, Pa., and Thomas Commito, director of sales concepts at Lincoln Financial Distributors, Hartford, led a session — “What’s Hot…What’s Not” – that explored developments affecting life insurance, annuities, and estate and tax planning.
“When Tom [Commito] and I started doing these lectures more than 15 years ago, we had to scramble to find cases and rulings to talk about,” Leimberg said. “The IRS didn’t know anything about insurance. Now the IRS has gotten very sophisticated. It’s amazing how much the Service knows now that it didn’t know before.”
That knowledge, he added, is reflected in part in two revenue rulings–2009-13 and 2009-14–that featured prominently during the kick-off general session.
Revenue Ruling 2009-13 addresses the tax consequences of the surrender or sale of a policy to a person who lacks an insurable interest in the contract. The panelists talked about how 2009-13 applies to the surrender of a life insurance policy for its cash surrender value; the sale of a cash value policy to a life settlement company; and the sale of a term life policy to a life settlement company.
The ruling has proved “contentious,” the panelists said, because of the lack of guidance as to calculate the cost of insurance when determining the amount of ordinary or capital gain resulting from one of the three transactions. When the transaction involves a sale to a life settlement company, for example, the COI is used to determine a policy’s “adjusted basis,” which in turn is subtracted from the policy’s sale price (or amount realized) to arrive at the gain. In this case, the gain is part ordinary income and part capital gain.
However determined, said Leimberg, the COI’s inclusion in the gain calculation is likely to make both legitimate life settlements and controversial stranger-initiated life insurance policies less attractive for seniors who are well advanced in age.
“The rule makes these kinds of pie-in-the-sky transactions much less appealing,” said Leimberg. “If you have to subtract the cost of insurance for an 80-year-old woman over 2 years, you’re talking about a lot of subtraction from basis. And that means the gain from a policy will be astronomical compared to what people were told when then they originally got involved in stranger-initiated transactions.
“The same conclusion applies with a legitimate life settlement,” he added. “Clearly if you have to subtract COI and you’re in your 80s, the gain is going to be much greater than was anticipated just a couple of years ago.”
A policy’s cost of insurance also factors into Revenue Ruling 2009-14, a ruling that addresses the tax implications involving a policy transferee. But in discussing the rule, the speakers directed much of their attention to a loophole that could be used to circumvent the IRS transfer-for-value rule. When invoked, the rule requires that life insurance death benefits be included in one’s gross income, thus making the death proceeds taxable.
The speakers talked about the 2009-14 tax treatment of a policy’s death benefit in the event that a life settlement company receives the proceeds upon the death of the insured by the settlement company; a life settlement company resells the policy while the insured is still alive; or a sale of the policy is effected by a foreign corporation.
Under the first scenario, said Leimberg, all gain resulting from a transfer for value would be taxed as ordinary income, except for the sum of premiums paid (or basis).