The Department of the Treasury and the Internal Revenue Service have issued final regulations addressing reporting obligations for certain tax-free exchanges of life insurance contracts under Internal Revenue Code Section 1035 and transfers of life insurance contracts involving valuable consideration. The regulations are intended to improve reporting compliance following statutory changes enacted by the Tax Cuts and Jobs Act and to assist taxpayers in determining the proper tax treatment of life insurance transactions. The final regulations are scheduled for publication in the Federal Register on July 9, 2026.
Section 1035 generally permits taxpayers to exchange certain insurance contracts without recognizing gain if statutory requirements are satisfied. In addition, the Tax Cuts and Jobs Act significantly modified the long-standing transfer for value rules by creating reporting requirements for reportable policy sales and by limiting the traditional exclusion from income for certain death benefits. The final regulations implement these statutory provisions by establishing reporting requirements for insurers and acquirers and by clarifying the obligations of taxpayers involved in covered transactions.
Among other changes, the regulations provide guidance concerning information returns required when a life insurance contract is transferred for valuable consideration or exchanged under Section 1035 following a reportable policy sale. The rules are intended to ensure that insurers receive sufficient information to determine whether the transfer for value rules apply and to accurately report taxable amounts to policyholders and the IRS. The regulations also clarify reporting responsibilities in situations involving indirect acquisitions and certain successor transactions.
The regulations provide additional certainty by defining key terms, addressing exceptions to the reporting requirements, and coordinating the reporting framework with existing information return rules. Treasury and the IRS also adopted several revisions in response to comments received on the proposed regulations, including clarifications designed to reduce unnecessary reporting burdens while preserving the government’s ability to administer the transfer for value provisions.
Businesses involved in life insurance transactions, including insurance companies, institutional investors, and purchasers of existing life insurance policies, should review their reporting and compliance procedures before the regulations become effective. Although many Section 1035 exchanges continue to qualify for nonrecognition treatment, taxpayers should not assume that every exchange or transfer is free from additional reporting obligations. For more information about this update, contact Liskow attorneys Leon Rittenberg III, Caroline Lafourcade, and Kevin Naccari, and visit Liskow’s Tax Practice page.