I don't know if this situation has been discussed much on the board. Please tell me if my understanding of the tax law is correct. My is 56 years old. He is in great health. He has a whole life policy with a $115,000 death benefit, $50,000 cash value, $30,000 loan, and $29,000 basis.
We are considering a 1035 to UL or VUL because the current policy is going to implode (we've run the inforce).
What will be the tax consequence if he just transfers the NET cash value? As I understand it, the "boot" received by the loan being eliminated is taxable up to the amount of gain in the policy. In this case, he would owe income tax on $21,000. Am I correct in this assumption? If we go with a VUL, we may just transfer the loan with the 1035 and not have this tax problem. The VUL runs fine with the loan and an assumed return of 6.5%. Your thoughts?
We are considering a 1035 to UL or VUL because the current policy is going to implode (we've run the inforce).
What will be the tax consequence if he just transfers the NET cash value? As I understand it, the "boot" received by the loan being eliminated is taxable up to the amount of gain in the policy. In this case, he would owe income tax on $21,000. Am I correct in this assumption? If we go with a VUL, we may just transfer the loan with the 1035 and not have this tax problem. The VUL runs fine with the loan and an assumed return of 6.5%. Your thoughts?