Jump to content

Insurance Policy in Profit Sharing Plan


Guest boetgerinc
 Share

Recommended Posts

Guest boetgerinc

An insurance agent is trying to sell a "last to die" policy to the owner of a company, in the company's profit sharing plan. The owner and his wife will be on the policy, and after the death of both of them, the policy will payout. The husband (owner) is a plan participant, the wife is not even in the plan. I know very little about insurance in qualified plans. Can this be done? The plan is on a prototype document, is this type of policy a term or whole life policy? The agent's selling point is that they can escape estate taxes with this transaction - has anyone ever heard of this or done this in a plan. Thank you.

Link to comment
Share on other sites

Guest BobParks

The biggest issue as I see it is the answer to your question is it a term or whole life. Often Last To Die are a blend and therefore limited to 25% of the individuals share of the contribution in the first two years. If it is whole life then up to 50% of the allocated contribution can be used.

Profit sharing plans can purchase insurance on anyone where the participant has an insurable interest. Interesting things have been done funding buy sell arrangement life insurance within a profit sharing account.

All of the account including the insurance has the potential to be included for estate taxes. Something has to be done with the policy to get it out of the plan and/or out of the estate.

An attorney named Andy Fair proposes establishing a "subtrust" within the qualified plan trust. This can only be attempted with a custom document so in your case it is out of the realm of consideration.

The standard suggestion for attempting to get the policy out of both estates is to take action at the first death or retirement whichever comes first. Rollout the policy, put it into an IRT and live three years. Unless someone is involved with the client to insure everything is done properly it won't work.

Now depending on the age of the participant and the insurance policy more leverage might be available. I would suggest going to Inc magazine online and searching for "life insurance Cohen."

A fellow named Cohen described a technique where a policy was transferred from a qualified plan to the participant, taxable to the entent of the IPR (cash value) and then moved into an irrevocable trust. The acquisiton expense was paid with pre-tax dollars. Here death/retirement were not the sign posts to take action. As soon as the policy would support itself or the premiums would fit within the annual gift tax exemption the policy was transferred. With both insured living the odds are very high at least one would survive three years and perfect the transfer.

Of course the participants account was reduced but for some people the proceeds of a retirement plan are merely found money.

[This message has been edited by BobParks (edited 09-15-98).]

Link to comment
Share on other sites

If memory serves me correctly, there is some question as to whether this type of insurance policy (last to die) is permitted in a qualified plan.

Another issue is whether, if it is permissible, this is an appropriate investment of the trust.

the option to purchase insurance will need to be made available to all participants - and the same estate tax results may be better achieved by placing the insurance outside the plan. [more control on the amount of coverage, the persons who can buy it, the beneficiary designations, etc.]

[This message has been edited by Larry M (edited 09-15-98).]

Link to comment
Share on other sites

Guest BobParks

Some comments regarding LarryM's note.

First, Last to Die is a permitted form of life insurance. A PS plan can at the participants request insure anyone in whom the plan participant has an insurance interest. Generally, the participant and spouse are convered in a last to die so the insurable interest test is met.

As an aside our Defined Benefit prototype has a determination letter and Last to Die is a permitted form of insurance.

Second, in a profit sharing plan each participant has an individual account. By law less than 50% of the initial plan contribution can be used to purchase permanent life insurance (25% for term or UL) so if a participant elects to use a portion of his account the trustee is acting responsiblity.

I made reference to the Cohen procedure in an earlier comment. For estate planning purposes the purchase and subsequent rollout to an ILIT can be a very cost effective way fo funding an estate tax liability.

Link to comment
Share on other sites

Guest boetgerinc

After my original posting, I have found out the following:

1) A profit sharing plan (not a pension plan) can purchase life insurance that insures the life of the participant and their spouse.

2) All funds of a participant who has been in the plan for more than 5 years can be used to buy life insurance (Rev. Rul. 68-24, 1968-1 CB 150).

3) If not in the plan for 5 years, then all funds accumulated 2 or more years can be used (Rev. Rul. 61-164, 1961-1 CB 99).

4) It is unclear whether survivorship life on life of non-participant will be a prohibited transaction. The method has not received any IRS scrutiny at present.

Also, some insurers may raise obstacles to second-death coverage held by a qualified plan trustee because of the lack of explicit IRS approval. which leads to the comment of "QDROphile" - the customer is going to do this transaction in his plan no matter what. We are not the trustee, we are the TPA firm. However the trustee (bank) is calling for our opinion. My opinion was not to allow the transaction, but the plan will do it based on the company owner.

[This message has been edited by boetgerinc (edited 09-22-98).]

Link to comment
Share on other sites

Guest BobParks

Just a note on the above message from boetgerinc.

We have a prototype Defined Benefit document which expressly permits the use of Second or Last to Die life so the IRS has infact stated a position on using this type of contract in a qualified plan. Like you I haven't seen anything in a PLR but we did get approval on our document.

In my first posting I pointed out that business owners can have a Buy Sell agreement funded with life insurance purchased thru a profit sharing plan. No one commented on that topic but in the right situation not knowing, and offering information, about the technique does a disservice to the client.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...