Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Contract’

Treatment Life Insurance Contracts—Part II: Secondary Market Participants

Posted by William Byrnes on October 20, 2010


Why is this Topic Important to Wealth Managers?  Provides general taxation of life insurance contracts owned by a third party transferee, including the payment of death benefits as well as sale or exchange gain treatment.     

Today’s blogticle will discuss taxation of life insurance contracts from the purchaser’s prospective. 

As discussed yesterday, an insurance contract that carries a built-up cash value can be loaned against, collected by the beneficiary, surrendered or sold to a third party.   This blogticle deals in particular with payment of the face value to the third party caused by the death of the insured as well as another sale or exchange of the contract by the third party.  

What are the tax implications if the third party collects the death benefits?  What are the tax implications if the policy is sold to a third party? 

As a starting point, gross income includes all income from whatever source derived including (but not limited to) income from life insurance contracts (unless otherwise excluded by law).  Gross income specifically excludes amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.  For the complete article see AdvisorFYI….

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Treatment of the Sale or Exchange of a Life Insurance Contract—Part I

Posted by William Byrnes on October 19, 2010


Why is this Topic Important to Wealth Managers?  Provides general taxation of life insurance contracts that are surrendered, sold or exchanged.  Gives examples that are easy to follow and provides an educational foundation for real-world gain determinations.   

This is a two-part series in relation to the taxation of life insurance contracts once it is surrendered, sold or exchanged to a third party.  The first blogticle will examine the issue from the seller or insured’s perspective, and tomorrow’s blogticle will discuss the matter from the purchaser’s prospective. 

An insurance contract that carries a built-up cash value can be loaned against, collected by the beneficiary, surrendered, or sold to a third party.   This blogticle deals in particular with the sale or exchange of the contract, i.e., surrendered or sold. 

What are the tax implications if the life policy is surrendered?

As a starting point, gross income includes all income from whatever source derived including (but not limited to) income from life insurance contracts (unless the income is otherwise excluded by law). [1]

In general, a life insurance contract that is not collected as an annuity is included in gross income in the amount received over the total premiums or consideration paid. [2]  “The surrender of a life insurance contract does not, however, produce a capital gain.” [3] The amount collected over basis is therefore ordinary income

To read the remainder of this article please see AdvisorFYI.

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Planning Concept: Traditional Private Annuity in Trust Variation

Posted by William Byrnes on September 23, 2010


The traditional private annuity is a transaction used by some wealth managers for clients whose circumstances permit.  Generally a private annuity transaction occurs where the grantor transfers assets to a third party who pays the grantor an annuity, usually for the life of the grantor.

When a trust is involved with a traditional private annuity, the common transaction may look like this:  “The owner of highly appreciated commercial real estate transfers the property to an irrevocable trust in exchange for the trust’s promise to pay an annuity for life. The present value of the annuity equals the fair market value (‘FMV‘) of the property. The trust then sells the property to a third party for a sale price equal to its FMV.”  For additional introductory discussion on private annuity contracts see AUS Main Private Annuity

Planning Concept:  Some wealth managers have recently begun to structure private annuities for their clients slightly differently than the traditional methods.  For a discussion and analysis, please see AdvisorFYI

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