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Private annuity to avoid estate tax on large DC balance!


Guest Philip Simpkins
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Guest Philip Simpkins

Any input would be helpful. Creative ERISA tax attorney asking about the creation of new DC or DB plan to accept $5,000,000 rollover. A private annuity would be created for older participant. Upon death of participant, funds would be used to either fund DB or DC. Goal is to avoid probate of this major asset. Any observations, methods, etc. would be greatly appreciated. I am drawing blanks. My feeling is NO CAN DO.

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Guest Harry O

I have no idea what is going on here!

Please post some more facts as there simply aren't enough facts to make even a remotely intelligent comment.

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Guest Philip Simpkins

Thanks Harry O.

Sorry, do not have alot of additional information. The elderly gentleman has a DC balance of $5,000,000. He is looking for a way to avoid probate on this asset and have the assets either reallocated to his sons or fund a benefit.

His current plan has outside participants. He would start a plan for a company that only has his sons as participants. He would roll the $5,000,000 to the new plan. The new plan would create a private annuity. Upon the participant's death, the sons would utilize the unused portion of the now private annuity to receive allocations of $30,000 or fund the maximum DB benefit.

Thanls, any ideas............

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Guest lminsky

Are you looking to avoid estate inclusion or avoid probate. You do not need to do any of this "fancy planning" to avoid probate- just designate beneficiaries. It sounds to me like your client really wants to avoid including the $5,000,000 in his gross (taxable) estate. On top of that, the strategy appears to be geared toward avoiding income tax as well. There is no doubt that this client can benefit from some individualized planning; however, I am reminded of the popular refrain- if it looks (or sounds) to good to be true, it probably is.

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  • 1 month later...
Guest M Becks

Certainly avoiding probate is as easy as mentioned earlier, beneficiary designation. If, however, goal is to minimize or eliminate income or estate taxes, there are techniques to do so. Income taxes can be markedly reduced by using stretch out options of ira beneficiary designations. Eliminating estate taxes is much more complex but doable and using a corp qual plan is only one way to approach. Using surivorship insurance in plan is an easy way to transfer some assets to ILIT and avoid estate tax.

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Guest RARogers

Interesting to think about. Just a guess but the idea might be to convert the dc plan to a db plan with the $5,000,000 being the assets of the db plan. When you do this, you'd have to convert the $5 mill for the father to an annuity type of benefit, which would have to be protected. If the actuarial factors for the conversion were such that the full $5 mill wouldn't actually have to be used to provide the protected db benefit for the father, the excess could be used to provide benefits for the other beneficiaries - that is the children. Your actuary would have to tell you if this makes sense. Also, the db plan might be designed such that participants are entitled only to a lifetime benefit - if the father died early, any excess would belong to the plan (that is the other participants - presumably the children). To get the money into the plan, and to eliminate the dc features of the dc plan when it is converted to a db plan, you'd have to be very careful (want to have someone who knows what he or she is doing).

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Not sure. Is there a 415 problem there?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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