EBECatty Posted September 19, 2018 Share Posted September 19, 2018 Say a PS plan holds a life insurance policy. The participant was properly taxed on the cost of insurance each year. Cash value is $100,000 and death benefit is $1,000,000. The plan is the beneficiary of the policy. I understand under 72(m)(3) that if the participant dies the plan gets the $1,000,000 death benefit and pays it to the participant's PS plan beneficiary. The [edit; typo] taxable tax-free distribution to the beneficiary is $900,000 ($1,000,000 in proceeds less $100,000 in cash value). If the participant buys the policy from the plan while the participant is alive, and the values are the same as above at the insured's death, does the life insurance beneficiary get all $1,000,000 in proceeds tax-free under 101(a)? Or do you still need to exclude the cash value from the tax-free portion because the policy originally was purchased by a qualified plan? In other words, is the only relevant variable policy ownership at the time of death? The $100,000 of (taxable) cash value within the plan in the first scenario is being "replaced" with the $100,000 of cash the participant uses to buy the policy in the second scenario, so there is still a taxable distribution from the plan of $100,000. But there would only be one "bucket" of $100,000 that is potentially taxable ($100,000 from the plan) instead of two (one of $100,000 in cash value within the plan taxable upon distribution; another separate $100,000 that could have been used to buy the policy and potentially taxable upon death). Estate tax is by no means my strong (or semi-strong) suit, so I may be missing something here, but it seems like you get a slight benefit by buying the policy out of the plan. Link to comment Share on other sites More sharing options...
Bird Posted September 20, 2018 Share Posted September 20, 2018 21 hours ago, EBECatty said: I understand under 72(m)(3) that if the participant dies the plan gets the $1,000,000 death benefit and pays it to the participant's PS plan beneficiary. The [edit; typo] taxable tax-free distribution to the beneficiary is $900,000 ($1,000,000 in proceeds less $100,000 in cash value). Minus the cumulative PS-58 costs too. I think you are overthinking the rest. If the participant buys the policy for $100K, he owns it and that's that - the death benefit is all tax free to the beneficiary. As far as the plan is concerned, it now has cash from the policy that is just part of the total account balance. Nothing special there, all taxable...except for the cumulative PS-58s...unless I am mis-remembering something but I think the IRS came out with something way back that said you get to recover them even if the policy is surrendered or sold. Ed Snyder Link to comment Share on other sites More sharing options...
ErnieG Posted September 20, 2018 Share Posted September 20, 2018 2 hours ago, Bird said: Minus the cumulative PS-58 costs too. I think you are overthinking the rest. If the participant buys the policy for $100K, he owns it and that's that - the death benefit is all tax free to the beneficiary. As far as the plan is concerned, it now has cash from the policy that is just part of the total account balance. Nothing special there, all taxable...except for the cumulative PS-58s...unless I am mis-remembering something but I think the IRS came out with something way back that said you get to recover them even if the policy is surrendered or sold. Assuming the $110,000 is the Fair Market Value. The policy should be properly valued prior to the purchase. Link to comment Share on other sites More sharing options...
Luke Bailey Posted September 20, 2018 Share Posted September 20, 2018 The statutory basis for Bird's conclusion is 101(a)(2)(B). Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
EBECatty Posted September 20, 2018 Author Share Posted September 20, 2018 Thank you all. As a follow-up, my understanding is the P.S. 58 rates were replaced by Table 2001, but I still see references everywhere to P.S. 58 rates. Are people just referring to the current rates (wherever they are reflected) as P.S. 58 rates such that the term "P.S. 58" has just become shorthand for "the current IRS rates on cost of insurance"? Link to comment Share on other sites More sharing options...
Luke Bailey Posted September 21, 2018 Share Posted September 21, 2018 EBECAtty, it is short-hand. Luke Bailey Senior Counsel Clark Hill PLC 214-651-4572 (O) | LBailey@clarkhill.com 2600 Dallas Parkway Suite 600 Frisco, TX 75034 Link to comment Share on other sites More sharing options...
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