Determining Cost Basis

[gtown]

Is the Cost of Insurance calculated into the basis of a Variable Universal Life Policy? For example if the client has contributed $100,000 in premiums and the Cash Surrender Value is $99,999, does the client have to pay any taxes? Also can you 1035 exchange a life policy with a loss, and carry over the basis to a annuity contract to harvest the tax loss?

 

[Norwayguy]

Is the Cost of Insurance calculated into the basis of a Variable Universal Life Policy? For example if the client has contributed $100,000 in premiums and the Cash Surrender Value is $99,999, does the client have to pay any taxes? Also can you 1035 exchange a life policy with a loss, and carry over the basis to a annuity contract to harvest the tax loss?

No and Yes....If the client has contributed $100K into a policy and the CSV is $99,999 there should be no taxes assuming no prior withdrawals. Can you 1035 a policy with a cost basis that is higher than the CSV into an annuity and preserve the Cost Basis, Yes.

 

[VolAgent]

Is the Cost of Insurance calculated into the basis of a Variable Universal Life Policy? For example if the client has contributed $100,000 in premiums and the Cash Surrender Value is $99,999, does the client have to pay any taxes? Also can you 1035 exchange a life policy with a loss, and carry over the basis to a annuity contract to harvest the tax loss?

Cost basis = premiums paid - money removed from contract

Present cash value is irrelevant when calculating cost basis. And yes, half the point of a 1035 exchange is to preserve the cost basis. It avoids a taxable event now if surrender value exceeds cost basis, and if there is currently a loss, you get to preserve the cost basis in determining future gains.

 

[gtown]

I appreciate the responses. I thought that was the case, but I had a CPA who has been practicing for 25 years try to tell me different. Now I have to politely tell him he's been missing opportunities with his clients.

 

[VolAgent]

I appreciate the responses. I thought that was the case, but I had a CPA who has been practicing for 25 years try to tell me different. Now I have to politely tell him he's been missing opportunities with his clients.

That is scary. You'd think a CPA would understand as simple a concept as cost basis. Are you sure you were not misunderstanding him?

 

[gtown]

That is scary. You'd think a CPA would understand as simple a concept as cost basis. Are you sure you were not misunderstanding him?

I thought there might have been a misunderstanding, but I spoke to him today and he still thought the cost of insurance should be included. I'm having the company calculate the basis, so he can see it in writing.

 

[BNTRS]

Did I miss something or should I be lauging somewhat hard right, now?

Premiums = cost of insurance plus everything else.

The accountant is correct. Whatever the client has given to the insurance company is included in his cost basis.

This is one of the cool things about cash value life insurance.

 

[VolAgent]

Did I miss something or should I be lauging somewhat hard right, now?

Premiums = cost of insurance plus everything else.

The accountant is correct. Whatever the client has given to the insurance company is included in his cost basis.

This is one of the cool things about cash value life insurance.

Hopefully the OP will correct me if I am wrong, but it sounds like the CPA wants to back out cost of insurance from premium paid to determine cost basis. So only what netted to the cash surrender value gets counted in cost basis.

I can't believe a CPA would get this wrong, surely there is just a misunderstanding somewhere.