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Abstract: 

On May 1, 2009, the IRS issued two Revenue Rulings providing long awaited guidance with respect to certain U.S. federal income tax consequences of purchases, sales, and surrenders of life insurance contracts. This article focuses on an issue that the Revenue Rulings do not discuss, that is, whether and under what circumstances a foreign person that purchases life insurance policies in the secondary market can be deemed to be engaged in a U.S. trade or business. An owner of a life insurance policy who seeks to monetize the policy prior to maturity (i.e., the death of the insured) has two options: (1) surrender the policy to the life insurance company for the “cash surrender value” or (2) sell the policy to a third-party investor. The latter alternative is generally far more lucrative, and a large secondary market has developed to facilitate these transactions. The secondary market is known as the “life settlement market.” This article first provides a general description of the evolvement of the life settlement market. Next, it discusses existing authorities addressing when activities are considered to give rise to an active trade or business within the United States, and it applies those authorities to life settlement investors. Finally, it describes how the analysis may change if the life settlement investor was eligible for benefits of an income tax treaty.

Keywords: Life insurance contracts; secondary life insurance markets

Affiliations:  1: Sullivan & Cromwell LLP.