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Can a 1 participant plan (or just the Trust) continue after the death of the sole participant?


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6 hours ago, david rigby said:

OK, I missed that.  Of course, the portion going to an IRA will also be taxable (eventually).

I'll repeat my concerns stated earlier about the language in the bene des.  If it refers to the policy directly, she could be ceding money by having the plan take some out via loan.  The whole scenario is obviously ill-conceived and needs way more care than can be provided by us throwing ideas around.   Not that any of the ideas are bad but I sense some other crap bombs here.

Ed Snyder

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4 hours ago, Bird said:

I'll repeat my concerns stated earlier about the language in the bene des.  If it refers to the policy directly, she could be ceding money by having the plan take some out via loan.  The whole scenario is obviously ill-conceived and needs way more care than can be provided by us throwing ideas around.   Not that any of the ideas are bad but I sense some other crap bombs here.

Ed,  I don't think so.  If the bene des does as you suggest, they strip out the cash and still distribute the full amount. They distribute the cash (can be rolled over) and the distribute the contract.  If the bene want, she can pay back the loan to make the contract whole.  Does that help?

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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On 7/13/2018 at 6:04 PM, Larry Starr said:

Ed,  I don't think so.  If the bene des does as you suggest, they strip out the cash and still distribute the full amount. They distribute the cash (can be rolled over) and the distribute the contract.  If the bene want, she can pay back the loan to make the contract whole.  Does that help?

My concern was this:  the bene des may say "Mary gets the life insurance policy on her own life."  If that is literally what it says, and the policy CSV is worth, say $100K, and the plan follows Mary's instructions to borrow $90K out of it, then the policy is only worth $10K.  I don't think Mary is entitled to the money that was borrowed out.

Ed Snyder

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14 hours ago, Bird said:

My concern was this:  the bene des may say "Mary gets the life insurance policy on her own life."  If that is literally what it says, and the policy CSV is worth, say $100K, and the plan follows Mary's instructions to borrow $90K out of it, then the policy is only worth $10K.  I don't think Mary is entitled to the money that was borrowed out.

1. I've never seen such a designation; I doubt it exists. But even if it does...

2. Mary's entitled to the $90k; the PA, in getting her the $90k, does the stripping and pays out both pieces.  No way she would not get the full $90k.

FWIW.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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10 hours ago, Larry Starr said:

1. I've never seen such a designation; I doubt it exists.

How else would it be written?

 

10 hours ago, Larry Starr said:

2. Mary's entitled to the $90k; the PA, in getting her the $90k, does the stripping and pays out both pieces.  No way she would not get the full $90k.

I'm not so sure.  You don't have a spidey sense that this is totally screwed up?

Ed Snyder

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On 7/17/2018 at 9:47 AM, Bird said:

How else would it be written?

 

I'm not so sure.  You don't have a spidey sense that this is totally screwed up?

"All values under the plan will be paid to my beneficiary Y, excluding any life insurance contract in the plan which full value of same (not taking into account any plan borrowing against the cash value) shall be payable to the EX via cash or distribution of the contract".

My spidey sense says it is probably totally screwed up because I wasn't ask to write the beneficiary provisions! :-)  

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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  • 4 weeks later...

This solution came to mind and I found out the ex wife can afford it.  1. At the sole plan participant's death, the ex purchases the policy from the Plan for it's cash value, right now about $115,000.  She writes a check to the Plan for the $115k and the Plan Transfers ownership to her.  The Plan still owes her $115k, so she elects to have that rolled over to an IRA. That method works in every respect.  A new agreement would need to be written, but it would be simple. 

2.  Can anyone think of a way for her to buy the policy out now?  and get it over with?

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I'm traveling without resources, but there is a simple way for the contract to be distributed now.

1) Trustee borrows max cash value from plan.

2) Trustee decides it doesn't want the life insurance in the plan any more; it can surrender it OR it can sell it to the insured. 

3) Trustee sells it to the insured for the reduced value left in the contract.  Ex writes a check; trustee executes transfer of ownership documents.

Voila!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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Absolutely;  If the plan has decided to get rid of the insurance (an investment decision), then the plan (whether it is the trustee or PA) has the absolute right to change the investments. NO QUESTION.  There's a PTE somewhere that allows the sale of the contract to the participant, or the bene, or the insured.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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29 minutes ago, Belgarath said:

Yes, PTE 92-6.

Thanks, Belgrath.  I decided not to take my resources with me in the North Atlantic. Left Iceland (an amazing place!) and steaming toward Norway now!

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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For those who the need the details about the uses of life insurance with tax-qualified retirement plans, still the best book is Life Insurance Answer Book (3d ed. 2002), with Gary S. Lesser and Lawrence C. Starr as the lead authors and editors.

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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3 hours ago, jpod said:

I'm not so sure the exemption is available in this situation.

Jpod: what kind of comment is that?  Ok, if YOU are not so sure, what is it that makes you say so?  No one can refute or agree with you when you throw out something that is not backed up by any real information.  For what it is worth, I am sure!  Now tell us why I am wrong.  Larry.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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4 hours ago, Fiduciary Guidance Counsel said:

For those who the need the details about the uses of life insurance with tax-qualified retirement plans, still the best book is Life Insurance Answer Book (3d ed. 2002), with Gary S. Lesser and Lawrence C. Starr as the lead authors and editors.

 

BLUSH! Thanks Peter; do I owe you another $10?  ;-)

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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I have reviewed PTE 92-6 (which amended PTE 77-8):

https://www.gpo.gov/fdsys/pkg/FR-2002-09-03/pdf/02-22376.pdf

and I think this is dealing with special exemptions to the rules governing prohibited transactions.

Selling a Plan asset to a related party (a participant, relative, etc.) is prohibited for obvious reasons.  But 92-6 and the amendment in 2002 are saying that, when it comes to a life ins. policy, we're going to waive the prohibited transaction penalties if the policy is sold to these specific exempt individuals, like a plan participant. And the the amendment expands the exemptions to include a Trust"established by or for the benefit of an individual who is a participant in the Plan."  So, this is all about exemptions from prohibited transaction treatment for selling Plan owned life insurance specifically.

In my case, the buyer of the policy (the ex-wife of the sponsor/trustee/sole Plan participant) meets none of definitions of a disqualified person.  There's no prohibited transaction so no exemption is needed.

Thank you for pointing me to this 92-6 etc.  It's all clear now.  The Plan can sell her the policy any time it wants and she can buy the policy any time she wants if the Plan is willing to sell.  And the Plan IS willing to sell.

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Ray, bottom line is that the process I gave you will work in any situation, which is what you were looking for.  Take YES for an answer! :-)

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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Larry Starr, see Part II(a) of the exemption.  Ray, is a beneficiary not a disqualified person?  If not then you are probably right about there being no pt requiring an exemption. 

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Also, Ray, even if she is not a dp by reason of being a beneficiary, if she is a relative of the fiduciary making the decision on behalf of the plan she would be a dp.  

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Circling back on a couple of issues...

If she has the money to buy the policy, then just do it.  I certainly understand and have used Larry's approach of borrowing the money out to reduce the cash value and then distributing or buying it, but in that scenario the buyer is left with a somewhat crippled policy that needs an infusion of cash to keep it going, maybe not right away but over time.  Just buy it and be done with it.  The new owner could always take a loan or do whatever she wants to free up cash if needed.  Heck, simply distributing the policy as a taxable distribution is not the end of the world if she has enough cash to buy it - so she pays tax on it.  I think someone noted above that we are talking about deferring taxes, not avoiding them.

And I am really curious to know exactly how that bene des reads.  If it specifically references a/the policy, I still maintain that screwing around too much by buying it and/or borrowing against it might unwittingly change the value of the beneficiary's interest.

Ed Snyder

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Section II(a) are conditions for selling a policy to a trust pursuant to 1(b) above.  She's an ex-spouse and that's not on the list of who is a relative.

I've been the pension business and the life insurance business over 30 years.  I know how to roll life policies out of Plans.  The Trust borrows the max loan on cash value we've done dozens of times.  Keep in mind, someone has the pay the loan interest every year, in this case about $5,000/yr.  Some policies have large enough annual dividends to pay the interest which is a better situation.  This policy has no dividends. The ex-wife is loaded with cash so buying the policy out for cash is best in this case.

The second part of that transaction has to ne the Trust distributing to her in cash the amount she paid for the policy. She elects to roll that cash distribution to an IRA.  So, nobody pays any taxes until she has to take RMD's. The policy pays off 100% tax free.  I'm wondering if the Plan distributing the cash to her is OK?

For those wondering how things got this way, its what happens every time lawyers thing they know what they're doing. Briefly: In divorce mediation it was agreed the wife (now ex) would get the policy at sole participants death. So, the decree says he has to make her beneficiary of the policy.  He's 16 years older and not well.  There are so many things wrong with doing that in a decree you can't name them all.  For starters it should have been in a QDRO (all ERISA attorneys agree) and second, what if he marries again, which he is.  New wife has 1st dibs on the policy, right? To be fair, the atty's didn't know any of that.  We have agreement from all parties concerned, new wife will waive her right to the policy and it's cash value.

Thanks everybody, I know I'm learning a lot from this lively exchange.  Thank God, I'm not too old to learn new tricks.

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10 hours ago, jpod said:

Larry Starr, see Part II(a) of the exemption.  Ray, is a beneficiary not a disqualified person?  If not then you are probably right about there being no pt requiring an exemption. 

JPOD: we don't care if it is allowed by a PTE or not; it is allowed and I have given him the process.  Take YES for an answer means just that.

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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6 hours ago, RayJJohnsonJr said:

Section II(a) are conditions for selling a policy to a trust pursuant to 1(b) above.  She's an ex-spouse and that's not on the list of who is a relative.

Fine; why do we care.  You know how to make the distribution so go ahead and do it

I've been the pension business and the life insurance business over 30 years.  I know how to roll life policies out of Plans.  The Trust borrows the max loan on cash value we've done dozens of times.  Keep in mind, someone has the pay the loan interest every year, in this case about $5,000/yr.  Some policies have large enough annual dividends to pay the interest which is a better situation.  This policy has no dividends. The ex-wife is loaded with cash so buying the policy out for cash is best in this case.

The contract is transferred out, either with the loan (if the buyer can't come up with all the cash) or with no loan if the buyer can come up with the money.  If it is distributed with a loan, the buyer can always pay back the loan when she has the money or can find it.

The second part of that transaction has to ne the Trust distributing to her in cash the amount she paid for the policy

HUH?  Why?  You said WAY BACK at the beginning that she does not have an account in the plan.  So why are you paying her anything?  I thought there is no QDRO?  Explain.

. She elects to roll that cash distribution to an IRA.  So, nobody pays any taxes until she has to take RMD's. The policy pays off 100% tax free.  I'm wondering if the Plan distributing the cash to her is OK?

Not until you explain why there is a distribution to the ex of cash.  Is there going to be a QDRO? If and when there is, then just do a normal QDRO distribution (the insurance is already taken care of in a non-taxable distribution).  If there is no QDRO, no distribution is made at all.

For those wondering how things got this way, its what happens every time lawyers thing they know what they're doing. Briefly: In divorce mediation it was agreed the wife (now ex) would get the policy at sole participants death. So, the decree says he has to make her beneficiary of the policy. 

HUH? Those last two sentences are NOT the same.  If she gets OWNERSHIP of the contract on her life at his death, that has NOTHING to do with her being named beneficiary on her life contract.  When he dies, the contract is still in force.  What does making her beneficiary of her own contract do (by the way, you can't do that. The insured can not be the beneficiary of a contract on his/her own life BECAUSE HE IS DEAD!).  You have me very confused.

He's 16 years older and not well.  There are so many things wrong with doing that in a decree you can't name them all.  For starters it should have been in a QDRO (all ERISA attorneys agree) and second, what if he marries again, which he is.  New wife has 1st dibs on the policy, right? To be fair, the atty's didn't know any of that.  We have agreement from all parties concerned, new wife will waive her right to the policy and it's cash value.

If there's no QDRO, then the only thing that can be done is sell the contract to her. Why is there going to be a cash distribution??????

Thanks everybody, I know I'm learning a lot from this lively exchange.  Thank God, I'm not too old to learn new tricks.

What am I missing?

 

Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC
President
Qualified Plan Consultants, Inc.
46 Daggett Drive
West Springfield, MA 01089
413-736-2066
larrystarr@qpc-inc.com

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