IRS Issues Rulings Addressing Secondary Market Transactions in Life Insurance

Morrison & Foerster LLP

Over the years, a substantial secondary market in life insurance contracts has developed, giving individuals owning these contracts what may be an important source of income, and allowing investors to gain exposure to a new asset class. Investors may purchase policies directly or through an investment vehicle such as a limited partnership. The Internal Revenue Service (“IRS”) has now issued two published rulings that will help clarify the tax treatment of transactions in this market. The rulings clarify the tax treatment of both the original owner of the contract and the investor in the secondary market. The rulings do not address the special rules applying to viatical settlements in which a policy is sold by certain terminally ill or chronically ill individuals.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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