Lecture Notes: Deemed Disposition Example

Key Concepts

• Deemed Disposition: Tax consequences occur even without actual transfer of ownership or policy surrender. It is treated similarly to an actual disposition for tax purposes.
• Examples of Deemed Dispositions:
  • Taking out cash exceeding the input amount.
  • Policy loans.
  • Receiving dividends from a participating policy.
  • Policy becoming non-exempt.
  • Death of policyholder not being the insured.

Scenario Overview

• Example: Withdrawal from an insurance policy without surrendering it.
  • Policy Details:
    • Insured amount: $250,000
    • Policy purchase date: November 15, 2000
    • Annual premiums: $3,000 for 18 years, totaling $54,000
    • Current cash value: $38,000
    • Received dividends: $9,000
    • Net cost of pure insurance (NCPI): $16,000
  • Withdrawal Amount: $30,000

Tax Liability Calculation

1. Proceeds of Disposition:
   • The amount withdrawn, $30,000.
2. Adjusted Cost Base (ACB):
   • Formula: Premiums paid - Dividends declared - NCPI
   • Calculation: $54,000 (premiums) - $9,000 (dividends) - $16,000 (NCPI) = $29,000
3. Policy Gain Calculation:
   • Proceeds of disposition ($30,000) minus ACB ($29,000) results in a taxable gain of $1,000.

Conclusion

• The client must report the $1,000 taxable gain on their income tax for the year of the withdrawal.
• If the withdrawal was $29,000 and the ACB was $30,000, the client would experience a tax loss and have no tax liability.

Summary

• The lecture emphasized understanding the implications of deemed dispositions and how to calculate potential tax liabilities based on policy details and withdrawal actions.
• By using the provided formula, one can determine whether any tax is owed due to a partial withdrawal.