In some circumstances, Life Settlements provide a no-lose way to receive value in excess of the simple cash value of a life insurance policy, while gaining a tremendous tax advantage and putting additional cash into a business or an individual's retirement.
In most cases, any amount paid for a policy in excess of the cash surrender
value is treated as a capital gain. Example: Assume a $175,000 proceeds
from a life settlement with a total face value of $1,000,000, a cumulative
premiums paid cost basis of $70,000 (no tax due) and a total cash surrender
value of $80,000. Then $10,000 (the difference between the cost and cash
surrender value would be treated as income and the remaining $95,000 would
be capital gains.
As estate tax rules change and the policies clients purchased to pay these taxes become unnecessary, this trend is likely to increase. Before you decide to abandon old policies, we can help you recover the potentially significant wealth that may be trapped there. Allowing unneeded policies to lapse can be a costly mistake. Both individual and corporate clients and even employers can sell the right to collect on these otherwise dormant assets and get a substantial cash payment now.
The amount paid in excess of the cash value usually is treated as a capital gain. Clients should discuss their individual tax consequences with a professional tax advisor. With the lowered capital gains rates provided in the Taxpayer Relief Act of 1997, selling a life insurance policy becomes an even more tax efficient transaction.
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