As you have unfortunately come to know, there are tax forms which the Trust is required to have from you and which we are required to send you in the first calendar quarter of each year. These forms are required by the IRS and the Trust has no choice about it or any flexibility. Below is a discussion of each of the forms.
Forms We Have To Have From You
Why does the Trust need a W-9 from you?
The Trust is a passthrough legal entity which means it does not directly pay any taxes. All its income and losses are passed through to all the unit holders that have an ownership interest in the Trust or the Life Partners IRA Partnership. For this reason, the Trust needs to have your correct information on file to meet its obligations. MORE IMPORTANTLY, the Trust and the IRA Partnership use the W-9 to have your correct information on file, so when it comes time to send out your money to you, the Trust and the IRA Partnership will be able to send it out the right address. If the Trust and IRA Partnership do not have your correct address on file (maybe it is old or maybe you never gave it), you will not receive any money from the Trust.
Who needs to submit a W-9?
If you are a U.S. citizen or other U.S. person, including a resident alien and have an interest in the Trust or the IRA Partnership, you must provide the form to us.
Where do you get a W-9?
Please go to this IRS link which leads you right to the form. https://www.irs.gov/pub/irs-pdf/fw9.pdf
Why does the Trust need a W-8BEN from you?
A W-8BEN is essentially the same thing as a W-9 and applies only to non-resident aliens (an investor from a foreign country). If you are a citizen of the U.S. this form does not apply to you.
Who needs to submit Form W-8BEN?
The Trust needs this form from any investor who is from a foreign country that does not live in the U.S.
Where do you get a W-8BEN?
Please go to this IRS link which leads you right to the form. https://www.irs.gov/pub/irs-pdf/fw8ben.pdf
If you sent a Form W-9 or W-8BEN to the PHT after January 1, 2019, you do not need to send another form.
Forms We Have To Send To You
Why do you get a 1099-B?
If you received this form it is because the Trust redeemed your units in 2020. The amount listed under proceeds is the amount you were entitled to when the Trust redeemed your units.
If you also hold Continuing Fractional Holder (CFH) positions, this redemption does NOT impact your CFH position. This 1099-B is for redemption of your PHT units only.
Why did I get less than the amount listed under Proceeds?
You may have gotten less than what is listed under the proceeds if you owed the Trust any money. The amount you got was the amount you were entitled to minus any liens.
How should you report the 1099-B on your tax return?
Please click here to view a SAMPLE.
The proceeds reported on 1099-B fall under capital gains. This means you will need to fill out Schedule D, of Form 1040 for you to report gain or loss from sale of your units. Before you do that, you will need to fill out Form 8949.
The rule under the IRS is that if you have owned the units for more than one year then the proceeds fall under long-term capital gain (please be sure to consult your CPA to confirm if your units fall under long-term or short-term investment).
Since most of you have owned your units for more than one year, we will follow the process of filling out the long-term capital gains form.
Start by filling out Form 8949, Part II. First start with where it says “you must check Box D, E, or F below”. In this case, you will mark box “E” as your basis was not reported to the IRS.
Now continue to fill out section 1 of part II of Form 8949. Below is what you will fill out in each box in section 1.
(a) Description of Property – Life Partners Trust Units
(b) Date acquired – Input here when you acquired the investments
(c) Date sold – take the date in box 1c of 1099-B (11-03-2020 in the SAMPLE) and input it here.
(d) Proceeds – take the proceeds in box 1d of 1099-B (7,520 in the SAMPLE) and input it here.
(e) Cost Basis – Put your cost basis here. The Trust does not know your basis from when you invested into the insurance policies, so you must determine this for yourself. For this example, we will use (10,000).
(f) Ignore this column.
(g) Ignore this column.
(h) Subtract column e from column d and you can put that number here. In the example this would be (7,520 minus 10,000 = -2,480)
Now go down to section 2 of Part II of Form 8949 and total all of the columns.
Now we will start filling out Schedule D, of Form 1040. You will now take the information from Section 2 of Part II of Form 8949 and put that information on Row 9 for Schedule D. Once you have completed that go on to put the total of your gain or loss on row 15 and row 16.
Since many of you will have had a loss on these investments you will skip rows 17 through 20 and fill out row 21 with smaller of your loss or $3,000. In the example the total loss is 2,480.
Now take the number from row 21 of Schedule D and add it row to line 7 of Form 1040 or 1040-SR.
Why do you get a 1099-INT?
If you received this form it means you were paid interest by the Trust during calendar year 2020. The interest comes from one of two sources (1) you received an interest payment on a NIRAN note which you own or (2) it is your share of interest paid by an insurance company on death benefits under a policy.
How should you report the 1099-INT on your tax return?
Please click here to view a SAMPLE. The 1099-INT you receive from the Trust is like any other 1099-INT you receive from your bank or financial institution. Take the number in Box 1 of your 1099-INT and enter this amount ($2,000 in the SAMPLE) on Form 1040, Schedule B, Part I, line 1 and complete part I, which means fill out lines 2,3 and 4. Transfer the amount on line 4 to your Form 1040 to line 2b or Form 1040-SR to line 2b.
This should be all you need to do.
Why do you get a 1099-MISC?
If you received this form it is because you were paid your share of the death benefits from a policy which matured prior to the effective date of the Bankruptcy Plan which was December 9, 2016.
How should you report the 1099-MISC on your tax return?
Please click here to view a SAMPLE. Take the number in Box 3 of your 1099-MISC and enter this amount ($12,650 in the SAMPLE) on Form 1040, Schedule 1, line 8 and complete part I, which means fill out lines 9 by adding up lines 1 through 8. Transfer the amount on line 9 to your Form 1040 to line 8 or Form 1040-SR to line 8.
This should be all you need to do.
Why do you get a 1099‐R?
If you received this form it means you were paid your share of a life insurance policy for which the Trust received the death benefits in the year prior to when you were sent the form. This is the correct form. Please do not call to complain that it is the wrong form. The amount of the check you received very likely does not match the amount stated on the 1099-R because the amount reported on the form is before deduction of liens and servicing fees so it most likely is more than the amount of your check. We do not have the information to help you calculate your basis and we make no attempt to do so. We only report the gross amount (stated on the form) and calculation of your basis is up to you so please do not call us and ask for us to tell you your basis.
Why do you receive a Grantor Letter?
The Life Partners Position Holder Trust is what is known in the IRS world as a grantor trust. A grantor trust does not pay federal or state income tax. Instead, any tax liability which would normally be paid by the trust is passed through to the individuals or entities who are beneficiaries of the trust in a pro-rata amount. As the holder of units, you are a beneficiary of the trust and so your share of the taxable income and deductible expenses are passed through to you. I did not make up these rules or create the trust. The IRS makes the rules and I have to follow them, and the trust was created by the bankruptcy court through the plan process. I am sure that most of you did not understand the tax ramifications of the process and had I been in your position I doubt I would have understood it either. As a result, at the end of each tax year I am required to send each unit holder the Grantor Letter which contains the information relating to their share of the taxable income and deductions.
Timing as to when the Grantor Letters are sent.
The timing of when I can actually send the Grantor Letter depends on a number of factors, none of which are in my control. The first thing that has to occur is that the end of the year financial books and records of the trust have to be completed and closed. It is a complicated and time-consuming process.
We do not wait until the end of the year to begin this process; instead we close the books monthly and then close December at the beginning of the following year. Even so, it still takes a couple of weeks because of the thousands of transactions each month. The second thing that has to happen is an audit
has to occur. This is required by the SEC and the audit team is completely independent of me. They basically test and confirm that everything the trust did during the year was done correctly and properly documented. That process takes a couple of months. Once the audit is complete or almost complete, the trust can determine the amount of taxable income and any deductions. That information is then calculated on a per unit basis and each unit holder’s totals are determined and then reported on the Grantor Letter. For the tax year ending 2020, there are a total of 1,226,958,714 units and 6497 unit holders. It takes time to complete this process. The Grantor Letters (in the format required by the IRS) are then sent to the vendor which mails them. Given the number of mailings, this process takes a couple of days as well. This year we successfully completed all these activities in a little over 2 months and the letters were mailed on March 1. This allowed you about 6 weeks to still complete and timely file your tax return. I really can’t do this any faster. Under the IRS rules I actually have until April 15 of each year to send out the Grantor Letters.
The Grantor Letter
Now to the form of the Grantor Letter itself. Please click here to view a SAMPLE of a Grantor Letter. The actual letter sent to you will look the same except the numbers will be different. I will go through each line and give you the best explanation I can. Also attached are the various tax forms you will need in order to input the information from the Grantor Letter into your tax return. Since I don’t know anything about the rest of your tax information, I am going to show you how to fill out the forms as if you had no other information to put in the forms. Obviously, each of you do have additional information to put in your tax return so this is an example only. I’m just trying to show you where these items go on your tax return; not considering anything else, to provide you with a good starting point. In order to follow this you need to look at the attached sample Grantor Letter and then follow the instructions below to track the information on the sample letter as to where the numbers are placed on the tax forms.
During the year the trust earns interest on most of its bank accounts. This is your pro-rata share of the interest earned on those accounts for the calendar year 2020. Enter this amount ($165 in the sample) on Form 1040, Schedule B, Part I, line 1 and complete part I, which means fill out lines 2, 3 and 4. Transfer the amount on line 4 to your 1040 to line 2b or 1040-SR to line 2b. Now you are done with this item.
This is your pro-rata share of the income earned by the trust for calendar year 2020. This number takes into account the trust’s share of maturities received during the year less the trust’s share of premiums paid and some of the expenses of running the trust and certain other deductions we can claim that may not be stated separately, such as Legal and Professional Fees. What is left is the trust’s taxable income for the year before certain expenses. Go to Schedule E Part I. Locate under 1b on the left side of the form where it reads, type of property, next to the letter A, Enter 8. Go down on the left side of the page a few lines to where you see Type of Property – go over to the right and you will see option 8 Other (describe) – type in “Other Portfolio Income”. Now enter the Other Income number ($3543 in the sample) on Line 4 under Column A of Page 1 of Schedule E for form 1040. Although the form appears to be for rental properties you will note at the top of the form that it says the form is also for Income and Loss from, among other things, “trusts” so this is the correct form to use. Once you accomplish this you are done with this part of the form but keep it handy as we have more data to enter on it.
Legal and Professional Fees
This is your share of the legal and other professional fees (primarily accounting, portfolio management and servicing fees) paid by the trust in calendar year 2020. This amount ($1733 in the sample) should also be entered on Page 1 of Schedule E for form 1040 at line 10. Now complete the remainder of Schedule E, boxes 20-26. Then complete Part V of schedule E and transfer the amount on line 41 to Schedule 1 for form 1040 line 5 or 1040 SR to line 5. Now complete Part I of Schedule 1. Enter the result on form 1040 line 8.
You have now input all the information from the Grantor Letter into the proper tax form.
K-1s and why do you receive them?
The Life Partners IRA Partnership is the holder of a large number of units in the Trust. Instead of getting a Grantor Letter (which unit holders of the Trust get), you receive what is called a K-1 (it is just a tax form like any other, it just has a bit more complexity to it). The IRA Partnership receives a Grantor Letter for its ownership of Trust units just like every other unit holder. The IRA Partnership then passes your share of the taxable income and deductible expenses through to you by virtue of a K-1. A K-1 shows the share of income and expenses allocated to each investor in the partnership, based on their pro-rata share in the partnership. You get a K-1 if you hold units in the IRA Partnership (which are qualified to be held in an IRA). You will also receive this form even though you may have taken an in-kind distribution out of your IRA or if you closed your IRA. You still own partnership units, so you receive a K-1. Transfer the information from the K-1 to your personal tax return. If you are confused about how this information should be added to your personal tax return, then please consult a tax accountant or a CPA. You can also use a tax software such as Turbo tax and the software will guide you through the process of entering a K-1 for a partnership.
Starting for tax year 2021, we are going to have additional pages for the K-1 called schedule K-3. This is a new requirement by the IRS and is related to Foreign Tax Credit Limitations. This should not impact or change anything for the vast majority of the Partnership investors. We are required to provide this schedule even though it may not have an impact for you personally. Please consult with a tax accountant or CPA to see if this impacts you individually.
But I never received as much income from the Trust as you are indicating on the Grantor Letter and the K-1.
You are correct that you did not receive the amount of income, in the form of a distribution in your hands, as listed on your Grantor Letter or K-1. You are in a complex tax entity. An easier example to understand is, let’s say the Trust had 1 dollar in income, owed and paid 30 cents in debt and 40 cents in premiums. How much did we make in the example? 1 – 40 cents = 60 cents. The 30 cents in debt is not deductible. So, you are paying taxes on the 60 cents even though there is only 30 cents remaining (1 – 30 cents (debt) – 40 cents (premiums) = 30 cents). So, in this case, if the Trust or IRA Partnership distributed 30 cents, it will show we made 60 cents even though we only paid out 30 cents. The income was passed through to you and some refer to it as “phantom income”. It exists in the mind of the IRS but not in your pocket and you are supposed to report it on your tax return. Please click here to view a SAMPLE K-1.