CPAs and Life Settlements: Due Care, Competence, and Objectivity

By Ronald M. Roth

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In just over five years, the life settlement marketplace has grown from an out-of-the-mainstream cottage industry into its own industry. Life settlements are now embraced by many wealth-management and estate-planning professionals. CPAs licensed to conduct life settlement transactions for high-net-worth seniors seeking an exit strategy from unwanted policies will find that the AICPA Code of Conduct will guide them in terms of due care, competence, and objectivity.

A life settlement is the sale of a life insurance policy by a senior for an amount greater than the cash surrender value. The proceeds are often used to purchase other financial products. This option may appeal to people with changing insurance needs. Most insurance policies are purchased for a particular reason. For example, a policy on the life of the head of a household may have been purchased as an income replacement vehicle; a policy on a key person in a closely held business may have been purchased to ensure the company’s survival following such a person’s death; or a policy may have been purchased solely as an investment vehicle.

Circumstances change, however, and an insurance policy may become obsolete for a variety of reasons:

  • The head of the household accumulates enough wealth to be essentially self-insured.
  • The key-person policy is no longer necessary because the business matures to the point where its fortunes no longer depend on any one person.
  • The premiums on the investment policy become so expensive that funding it is no longer economically feasible.

Often, a policyholder may believe that the benefits from selling an in-force policy outweigh the need to keep the policy. For example, a life settlement can remove the policy from the taxable estate (avoiding application of the three-year rule under IRC section 2035) in order to transfer additional assets tax-free to descendents. Alternatively, a policyholder may use the proceeds of a sale to do the following:

  • Replace property that was donated to a charity;
  • Pay for the costs of health care;
  • Purchase long-term care insurance;
  • Replace a single-life policy with a joint and survivor policy;
  • Pay gift tax on lifetime gifts;
  • Purchase a more efficient, more affordable policy.

Due Care, Competence, and Objectivity

According to the AICPA Code of Professional Conduct, a distinguishing mark of a profession is acceptance of its responsibility to the public. CPAs hold that due care requires them to discharge professional responsibilities with competence and diligence. The maintenance of competence requires a commitment to learning and professional improvement that must continue throughout a member’s professional life. CPAs involved with senior clients have a responsibility to learn about how life settlements can achieve clients’ financial objectives and the risks they present.

Financial advisors should keep the best interests of the client in mind. For example, if a 75-year-old individual plans to let a $1 million policy lapse because the premium payments are too expensive and the reason for the coverage no longer exists, the financial planner should inform the client that a life settlement might be a better option, including the option to donate the proceeds to charity to offset the tax consequences.


Ronald M. Roth, CLU, ChFC, is the managing partner of the National Organization for Business Development (NOBD), a consulting firm based in New York City. He can be reached at 888-330-4010 or rmr@nobdusa.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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