Chapter Overview
The federal income tax treatment of life settlement proceeds is one of the most important — and most frequently misunderstood — aspects of the settlement transaction. Tax treatment differs significantly depending on whether the viator is terminally ill, chronically ill, or neither; on the relationship between the settlement proceeds and the policy’s cost basis and cash value; and on how the proceeds are ultimately used.
The important points addressed in this chapter are:
- How HIPAA (1996) established income-tax-free treatment for viatical settlement proceeds paid to terminally or chronically ill viators
- The tax treatment of accelerated death benefits as an alternative to or supplement to a viatical settlement
- The three-tier tax framework applicable to senior (life) settlement proceeds for viators who are not terminally or chronically ill
- How the transfer-for-value rule affects the taxation of death benefits received by settlement investors
- State income tax considerations
Important disclaimer: This chapter provides a general overview of federal income tax principles as they apply to life settlement transactions. Tax law is complex and subject to change. Clients should always consult a qualified tax advisor before completing any settlement transaction.
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