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Guest Duberstein

Overfunded single beneficiary DB plan planning

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Guest Duberstein

I have a client in his late 80's that set up a DB plan for his professional corporation many years ago. He has been taking regular distributions under the original plan since he retired. His wife is in her late 70's and they have 4 children. The PC has been inactive for several years. The DB plan is quite overfunded (and with fairly substantial assets - around $3 million) and we are looking for options.

Among the ones that I have considered are employeeing one child (same profession as client) by PC or all children if possible and include them in the plan. Also, amending the plan so that we can minimize the penalties on a distribution to the PC. The distribution would be held by the PC until client's and spouses death then liquidate PC. Any other ideas or recommendations for sources to look at for ideas?

My fear is that if no changes are made that upon client's and spouse's death the DB will terminate and the combined penalties and income taxes (federal and state applicable here) will exceed the value of the DB.

Thanks for any and all suggestions.

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Your client has three problems on the $3 M excess: income tax, 50% excise tax on a reversion of plan assets and estate tax at 49% since the business is an asset of his estate (State tax may also apply). Total taxes could exceed 100% of surplus. If your client dies, the plan surplus will be taxed in his estate unless his spouse inherits the ownership interest in the business. Upon her death the estate tax will apply (assuming there is an estate tax). Your client should consider selling the business to another person. There are entites that will purchase surplus assets at a discount as part of the sale of his business. He could also sell the surplus assets to a relative for installment payments. But counsel will be needed to advise him on the tax issues.

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Guest Duberstein

My client is a bit wary of selling or merging his corporation. However, I think in view of the severe consequences if something is not done then I might persuade him to consider that alternative.

The benefits that I think might sway him are:

Transfering compliance for the plan to someone else, lowering his involvment.

Significant tax and penalty savings. He should realize a gain on the business and income on the ongoing distributions from the plan but the excise tax penalties and other tax consequences of the overfunding should disappear.

I am a tax practitioner with relatively limited DB experience. Are there organizations that specialize in buying and selling companies with these assets (overfunded DB)?

Thanks for the replies.

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The alternative of bringing children into the business would seem to head in the direction of passing on the excess, assuming they can earn a meaningful benefit.

If they children aren't interested, I can be adopted.

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There are financial intermedaries who buy surplus pension plan assets as part of the sale of the corporation that sponsors the plan. The assets are sold to underfunded plans. The sale must have a business reason which requires that other corporate assets be included along with the sale of the surplus pension assets. The IRS dosent like it but there is no formal prohibition against an asset sale. The PBGC is in favor of such sales because it reduces underfunding of DB plans. Some non profit hospitals will buy assets directly from the owners of smal medical practices.

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Mbozek, I'm selling an overfunded plan and want to get some competitive bids from financial intermediaries or directly from buyers. Do you have referrals?

 

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