August 7, 2026
2:59 pm

Life Settlements for Delaware CPAs and Tax Professionals: A 2026 Practice Guide

Delaware’s governing statute is the Delaware Viatical Settlements Act at Title 18, Chapter 75 of the Delaware Code, adopted by the General Assembly in 1999, and the tax treatment of a sale under it turns on a basis rule that changed in 2017. If you are picking this up because a client handed you a Form 1099-LS in February and nobody in the office has seen one before, start with basis: Congress repealed the cost-of-insurance reduction, retroactively, and a great many preparer worksheets never got updated.

Delaware presents an unusually clean state overlay. There is no Delaware estate tax for decedents dying after 2017, no inheritance tax, and a personal income tax that treats the transaction the same way the federal return does. That means the work is almost entirely federal, and the errors are almost entirely federal errors: mis-stated basis, a missed ordinary-income tier, a transfer-for-value problem created by well-intentioned family planning, and a closing-date decision made without reference to bracket or Medicare premium thresholds.

What follows is written for the practitioner rather than the policyholder — the CPA, EA, or tax attorney who has to put a number on a return, advise on timing, or tell a client whose parent is entering care whether the policy on the balance sheet is an asset or a liability.

In This Article

The Delaware statute, the regulator, and a naming quirk
Establishing adjusted basis after the 2017 change
Character: three tiers, and the middle one gets missed
Reconciling Forms 1099-LS and 1099-SB
Transfer for value, section 101(g), and the family-planning trap
Where Delaware’s own tax code lands
Long-term care funding, DSHP-Plus, and what to request
Frequently Asked Questions

Life Settlements for Delaware CPAs and Tax Professionals: A 2026 Practice Guide

The Delaware statute, the regulator, and a naming quirk

Delaware’s regulator is the Delaware Department of Insurance, headed by a separately elected Insurance Commissioner. The substantive law sits in Title 18 of the Delaware Code, the Insurance Code, at Chapter 75. The chapter is captioned the Delaware Viatical Settlements Act; section 7501 is the short title and section 7503 carries the license and bond requirements for providers and brokers. The General Assembly adopted the chapter in 1999, at a point when the market was framed almost entirely around terminally ill insureds.

There is a naming quirk that will confuse anyone reading secondary sources. Legislation has been introduced to re-caption the chapter as the Delaware Life Settlements Act, reflecting how the market actually works now — most transactions today involve insureds in their seventies and eighties with impaired but not terminal health, not people with a 24-month prognosis. Different sources therefore describe Chapter 75 by different names. Before you cite the chapter in an engagement letter or a written opinion, pull the current text from the Delaware Code and confirm the caption and the section numbering; do not lift it from a compliance summary, and if you need certainty, ask the Department of Insurance directly.

Two practical checks flow from the statute. First, the licensing requirement is real: providers and brokers dealing with a Delaware resident must be licensed with the Department, and the Department maintains a lookup. Verifying a counterparty before a client signs a HIPAA authorization takes a couple of minutes and prevents most of the ugly outcomes in this market. Second, the disclosure and form-filing regime means a legitimate transaction generates paperwork, and the absence of contract forms and disclosure statements is itself a warning. The consumer-facing summary is on our page on life settlement licensing in Delaware.

Establishing adjusted basis after the 2017 change

Revenue Ruling 2009-13 held that a seller’s basis in a life insurance contract had to be reduced by the cumulative cost-of-insurance charges the contract had absorbed. On a policy in force for twenty-five or thirty years the reduction was substantial, and it produced the strange outcome that a sale generated more taxable income than a surrender of the same contract, because the companion surrender ruling imposed no such reduction.

Section 13521 of the Tax Cuts and Jobs Act amended IRC section 1016(a)(1)(B) to remove the adjustment. The change is retroactive to transactions entered into after August 25, 2009. Adjusted basis in a life insurance contract is now, in substance, cumulative premiums paid less any cash dividends received, partial surrenders, and untaxed distributions. Mortality and expense charges do not reduce it.

Getting the number right is a documentation exercise more than an analytical one. Ask the carrier in writing for a full premium history and the current investment in the contract. Where the policy has been through a section 1035 exchange, the basis carries over from the old contract and the carrier’s records for the new contract will usually not reflect the pre-exchange premiums — that gap has to be bridged with the prior carrier’s records, and it is the single most common source of an understated basis in this area.

Finally, gross up for policy loans. A client with a $300,000 sale and a $75,000 loan repaid at closing has an amount realized of $300,000 even though $225,000 hits the bank account. Preparers who work from the wire amount understate gain, and the 1099-LS will not match.

Character: three tiers, and the middle one gets missed

One transaction produces three separate tax results, and they stack in a fixed order.

Recovery of basis. Proceeds up to adjusted basis are a nontaxable return of capital.
Ordinary income. The excess of the policy’s cash surrender value over adjusted basis is ordinary income. This is the inside build-up the client would have recognized on surrender; changing the exit route does not change the character.
Capital gain. Any amount the buyer paid above the cash surrender value is capital gain, long-term if the contract was held more than a year, reported on Form 8949 and carried to Schedule D.

Take a Wilmington client who paid $210,000 of premiums into a survivorship-era universal life contract with a current cash surrender value of $240,000 and receives $560,000. Basis recovery is $210,000. Ordinary income is $30,000. Long-term capital gain is $320,000. The same client surrendering the contract would have collected $240,000 and reported $30,000 of ordinary income — the entire difference between the two outcomes, $320,000, is the part of the analysis that never appears on a carrier statement.

Where the contract is term insurance with no cash surrender value, tier two is zero and the split is simply basis and capital gain. Where the insured is terminally ill, IRC section 101(g) can remove the transaction from income entirely, which is a materially different conversation and is covered below. Clients who are weighing a surrender against a sale often have not seen the arithmetic laid out; our page on surrender versus sale does it in client language.

Question	Answer for a Delaware client
Governing statute	18 Del. C. ch. 75, Delaware Viatical Settlements Act (adopted 1999)
Regulator	Delaware Department of Insurance, elected Commissioner
Licensing / bond provision	18 Del. C. sec. 7503 (confirm current numbering)
State estate tax	Repealed for deaths on or after January 1, 2018
State inheritance tax	None
State capital gains preference	None — gain taxed at ordinary rates, top marginal 6.6%
Basis reduced by cost of insurance?	No — repealed by TCJA sec. 13521, retroactive to 8/25/2009
Medicaid LTSS program	Diamond State Health Plan-Plus, administered by DMMA

Character: three tiers, and the middle one gets missed

Reconciling Forms 1099-LS and 1099-SB

TCJA section 13520 added IRC section 6050Y, and final regulations at T.D. 9879 apply the regime to reportable policy sales after December 31, 2018. Two forms result, from two different filers.

Form 1099-LS, Reportable Life Insurance Sale, comes from the acquirer and is furnished to the seller and to the issuing carrier. It reports the gross amount paid to the seller. Form 1099-SB, Seller’s Investment in Life Insurance Contract, comes from the issuer — the insurance company — and reports the seller’s investment in the contract and the policy’s surrender amount. The 1099-SB is the document that supplies tiers one and two; the 1099-LS supplies the top line.

Clients lose the 1099-SB more often than any other form in this transaction, because it arrives from an insurance company months after the money moved and looks like routine policy correspondence. Request a duplicate rather than estimating. And treat the carrier’s stated investment in the contract as a starting point rather than gospel: it is computed from the carrier’s own records and will not capture pre-exchange premiums or premiums paid to a predecessor company on an acquired block. Where your reconstruction and the carrier’s figure diverge, document the reconciliation and retain the supporting statements, because that difference is exactly what a notice will ask about.

Transfer for value, section 101(g), and the family-planning trap

IRC section 101(a)(2) strips the death benefit exclusion where a policy has been transferred for valuable consideration, leaving the transferee taxable on the excess of the death benefit over consideration paid plus subsequent premiums. The familiar exceptions cover carryover-basis transfers and transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. TCJA section 13522 added section 101(a)(3), turning those exceptions off for a reportable policy sale.

For an institutional settlement, that is the buyer’s issue and it is priced in. The trap sits in the parallel conversation your client may be having with a family member: an adult child offering to buy the parent’s policy, a buy-sell arrangement being restructured, a policy moved into an LLC for consideration. Each of those is a section 101(a)(2) analysis, each is fact-dependent, and each deserves a memo. Delaware practitioners run into a further wrinkle because so many client structures are Delaware entities and Delaware trusts — a directed trust under 12 Del. C. section 3313 or a qualified disposition trust under Title 12, Chapter 35 can hold a policy, and who is treated as transferring what depends on the trust’s grantor-trust status, not on the label on the document.

On the other side, section 101(g) treats amounts received on a sale to a licensed viatical settlement provider as paid by reason of death, and therefore excluded, where a physician certifies the insured is reasonably expected to die within 24 months. Chronically ill insureds under section 7702B(c)(2) get a narrower, per diem-limited exclusion. For a terminally ill client the difference between a taxable settlement and an excluded viatical is frequently larger than the spread between the best and second-best bid, and it depends on the buyer holding the right license. Verify it. Our page on what a viatical settlement is explains the distinction.

Where Delaware’s own tax code lands

Delaware’s overlay is short. The Delaware estate tax was repealed for decedents dying on or after January 1, 2018, and Delaware has no inheritance tax. That removes the most common non-tax argument for keeping an unwanted policy in force — the claim that the death benefit is needed to pay state death taxes — for essentially every Delaware client. At the federal level the exclusion was set at $15 million per decedent for 2026 under the 2025 federal legislation and is indexed thereafter; confirm the current figure before you build it into a projection.

Delaware’s personal income tax reaches a top marginal rate of 6.6% and does not provide a preferential rate for long-term capital gains, so the capital gain tier of a settlement is taxed at the same rate as the ordinary income tier at the state level. Delaware does exclude a limited amount of pension and eligible retirement income for taxpayers 60 and older — the figure commonly cited is $12,500 — and a large one-year spike in adjusted gross income can interact with that and with the state’s elderly credits. Confirm current-year amounts against the Delaware Division of Revenue schedules rather than a prior-year memo.

The timing levers that actually matter are federal. The capital gain tier is net investment income, so the 3.8% tax under IRC section 1411 applies above the statutory MAGI thresholds. A large settlement also lands in the two-year-lookback window for Medicare IRMAA surcharges on Part B and Part D premiums, which is a real and often unanticipated cost for a client in their seventies. Where the client has any discretion over the closing date — and in a competitive process there is often a few weeks of it — modeling a December versus January closing is worth doing. Compare the client-facing treatment on our page on life settlement taxes in Delaware.

Long-term care funding, DSHP-Plus, and what to request

Most of these conversations start with care costs, not with tax. Delaware long-term care Medicaid is administered by the Division of Medicaid and Medical Assistance within Delaware Health and Social Services, and managed long-term services and supports run through the Diamond State Health Plan-Plus program. Recent published cost-of-care surveys put the median semi-private nursing facility rate in Delaware in the range of roughly $12,000 to $13,500 per month, with meaningful variation across New Castle, Kent, and Sussex counties; treat those as planning ranges and confirm current pricing with the facility.

Two resource rules drive the policy question. Under 20 C.F.R. section 416.1230, the cash surrender value of life insurance is a countable resource unless the total face value of all policies on that insured is $1,500 or less, in which case the cash value is excluded entirely. Term insurance with no cash value is not a resource. Separately, a sale at fair market value is not an uncompensated transfer and does not trigger the 60-month look-back penalty — but the proceeds become a countable resource in the month after receipt, which can defeat eligibility if nobody has planned the spend-down. That sequencing point is the one families most often get wrong, and it is set out on our page on the Medicaid look-back and selling a policy.

For your file, the useful documents are the policy cover page with form number, issue date, face amount, and owner; the most recent in-force illustration; the full premium history from the carrier; and the current loan balance. Pine Lake Life Solutions provides education and a free policy review and does not purchase policies. We do not give legal, tax, or investment advice — that is your engagement, and this page is meant to support it. If you want an independent read on whether a client’s contract would draw interest before you build a projection around it, the review costs nothing and the number is (305) 209-7183.

Frequently Asked Questions

Is Delaware’s statute called the Viatical Settlements Act or the Life Settlements Act?

The Delaware Code captions Chapter 75 of Title 18 as the Delaware Viatical Settlements Act, and legislation has been introduced to re-caption it as the Delaware Life Settlements Act. Secondary sources use both names, which is why citations conflict. Pull the current chapter text from the Delaware Code before citing it in an opinion, or confirm the caption with the Department of Insurance.

Does Delaware tax the capital gain portion at a preferential rate?

No. Delaware’s personal income tax does not provide a separate lower rate for long-term capital gains, so the gain tier is taxed at the same graduated rates as ordinary income, topping out at 6.6%. That makes the federal analysis, including the 3.8% net investment income tax and Medicare IRMAA thresholds, the place where timing decisions actually generate savings.

My client’s policy came through a 1035 exchange. How do I establish basis?

Basis carries over from the surrendered contract, but the new carrier’s records usually start at the exchange date and will not include premiums paid to the prior company. Request the premium history from both carriers and reconstruct the full figure. This is the most frequent cause of understated basis and overstated gain in settlement reporting, and it is worth the correspondence.

Can a Delaware trust sell a policy it owns, and does that change the tax analysis?

A trust can generally sell a policy if the trust instrument permits it and the trustee can document that the sale is consistent with fiduciary duty. The tax analysis depends on grantor-trust status: a grantor trust’s sale is generally treated as the grantor’s for income tax purposes, a non-grantor trust reports at the entity level. Get the trust reviewed by counsel before closing.

Do I need to file anything with the Delaware Department of Insurance?

No. The filing and licensing obligations under Chapter 75 fall on providers and brokers, not on the seller or the seller’s accountant. Your practical use of the statute is verification: confirming that the counterparty holds a Delaware license and that the required contract forms and disclosure statements have been delivered before your client signs anything.

Will a settlement affect my client’s Delaware pension exclusion or elderly credits?

It can. A large one-year increase in adjusted gross income interacts with Delaware’s age-based exclusions and credits, several of which phase out or are computed against income. Model the state return for the year of sale rather than assuming the exclusion carries through unchanged, and confirm current-year amounts against Delaware Division of Revenue schedules.

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