Rule Atlas
IRC § 2035: Advanced Life Insurance Strategies: ILITs, Life Settlements, and Split-Dollar
Under IRC § 2035 (CFP Board / IRS / SEC), advanced Life Insurance Strategies: ILITs, Life Settlements, and Split-Dollar establishes the authoritative rules tested on the CFP® Certification. Master the mechanics and tax implications of Irrevocable Life Insurance Trusts (ILITs), life and viatical settlements, and split-dollar arrangements to solve complex client estate and business succession needs, with a focus on avoiding common, verified against VoraPrep's CFP® Certification blueprint.
Current Statutory Thresholds & Limits in Effect
Worked Example: Example: Calculating Taxable Gain on a Life Settlement
| Metric | Value |
|---|---|
| Sale Price | $250,000 |
| Cash Surrender Value (CSV) | $100,000 |
| Premiums Paid (Cost Basis) | $80,000 |
Michael, age 45, needs $1 million of life insurance coverage for the next 20 years until his children are financially independent. He is concerned that his health might decline during this period and wants to ensure he can continue his coverage beyond the 20 years without having to prove insurability. Which of the following life insurance policies is MOST appropriate for Michael's stated objectives?
Worked Example: Example: Calculating Taxable Gain on a Life Settlement
Scenario: Marco, age 75, decides to sell his universal life policy. He is not terminally or chronically ill. The policy details are presented in the following table:
- | Metric | Value | | :--- | :--- | | Sale Price | $250,000 | | Cash Surrender Value (CSV) | $100,000 | | Premiums Paid (Cost Basis) | $80,000 |
- Here is the step-by-step calculation of his taxable gain:
- 1. Calculate the Total Gain: The total gain is the sale price less the basis in the policy. Total Gain = Sale Price - Basis = $250,000 - $80,000 = $170,000
- 2. Bifurcate the Gain: The gain must be split into an ordinary income component and a capital gain component. - The portion of the gain up to the policy's cash surrender value is taxed as ordinary income. - The portion of the gain that exceeds the cash surrender value is taxed as a long-term capital gain.
Common CFP® Certification Distractors on IRC § 2035
- 1To remember who owns the policy under the two main split-dollar methods, use the mnemonic ICE:
- 2Insured (the employee) owns the policy in a Collateral Assignment.
- 3Employer owns the policy in an Endorsement Method.
- 4This lesson covered three powerful, advanced life insurance strategies tested on the CFP® exam.
- 5ILITs are the primary tool for providing estate liquidity and shielding death benefits from estate taxation, but proper setup is critical to avoid the three-year look-back rule.
Frequently Asked Questions: IRC § 2035
What is the core rule under IRC § 2035 (Advanced Life Insurance Strategies: ILITs, Life Settlements, and Split-Dollar)?
Under IRC § 2035 (CFP Board / IRS / SEC), advanced Life Insurance Strategies: ILITs, Life Settlements, and Split-Dollar establishes the authoritative rules tested on the CFP® Certification. Master the mechanics and tax implications of Irrevocable Life Insurance Trusts (ILITs), life and viatical settlements, and split-dollar arrangements to solve complex client estate and business succession needs, with a focus on avoiding common, verified against VoraPrep's CFP® Certification blueprint.
How is IRC § 2035 tested on the CFP® Certification?
To remember who owns the policy under the two main split-dollar methods, use the mnemonic ICE: Insured (the employee) owns the policy in a Collateral Assignment.
Where can I practice CFP® Certification questions on Advanced Life Insurance Strategies: ILITs, Life Settlements, and Split-Dollar?
Test yourself instantly with the free playable CFP® Certification question on this page, or launch VoraPrep's full CFP® Certification adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cfp.