Tax Information
- The following is provided for informational purposes only.
- Please be advised that Welcome Funds Inc. does not provide tax advice.
- The taxation of a life Settlement may vary on a state by state basis.
- Advice from a professional tax advisor is recommended.
Potential tax implications of a life settlement
The taxation for a Life Settlement transaction can be very complicated. We will attempt to provide a general guideline that has been used in past transactions, however, we cannot stress enough that each case can be treated differently by the IRS. Again, professional tax advice must be sought.
Glossary
CSV = Cash Surrender Value
Cost Basis = Total dollar amount of premiums paid into the policy
Settlement Amount = Purchase price paid to policy owner/seller for the sale of the policy
- If there is no CSV or if the CSV is lower than the cost basis in the policy, then the taxable income is the dollar difference between the settlement amount minus the cost basis of the policy. That amount is treated as a capital gain.
Capital Gains Tax = Settlement Amount - Cost Basis - If the CSV is higher than the cost basis, then that difference is treated as ordinary income and taxed according to the policy owner’s tax bracket. Then, the difference between the settlement amount and the CSV is treated as a capital gain.
Ordinary Income Tax = CSV - Cost Basis
Capital Gains Tax = Settlement Amount - CSV - If the cost basis in the policy is actually higher than the settlement amount, then there should not be any taxable income from the transaction.
No Taxable Income = Settlement Amount - Cost Basis = ( - ) Negative Value (Loss)
Please remember that these are general guidelines and cannot be relied upon as fact. The tax implications of a settlement should be considered prior to the transaction.
Welcome Funds Inc. strongly recommends that a policy owner seek professional tax advice prior to accepting any offers.
Additional affects
Receipt of payment under a Life Settlement may affect your eligibility for public assistance programs, such as medical assistance (Medicaid), aid to families with dependent children, supplementary social security income and AIDS drug assistance programs. Such payments may also be taxable and subject to claims of your creditors. Before applying for a Life Settlement, you should consult with the appropriate social services agency concerning how receipt could affect your eligibility and that of your spouse or dependents. Due to the potential tax consequences, please consult with a tax advisor.
Entering into a Life Settlement contract may cause other rights or benefits such as disability waiver of premium benefits that may exist to be forfeited by the owner; assistance should be sought from a financial advisor before pursuing and completing this transaction.
What Is The Next Step?
- Return to our Home Page.
- Learn more about Life Settlement Process.
- Review the qualification requirements for a Life Settlement.
- Read the most frequently asked questions on Life Settlements.
- Analyze the tax implications of a Life Settlement.
- Examine some recent Life Settlement Case Studies.
- Request our Free Educational Package or visit our Download Center!