Guest sammy Posted October 17, 2001 Posted October 17, 2001 Can an ESOP be the contingent beneficiary of a life insurance policy on the life of one of the owners of the plan sponsor if the ESOP is not the owner of the policy? On the owner's death, if the death benefit is paid into the ESOP, is it treated as an employer contribution? If not, what is it treated as?
IRC401 Posted October 18, 2001 Posted October 18, 2001 I'm guessing that the IRS would treat the transaction as a contribution to capital by the decedent (or his estate?) followed by an employer contribution. The plan adminstrator would need to figure out how to deal with the insurance proceeds because if they aren't treated as an employer contribution, the plan's definitely determinable allocation formula doesn't deal with it. Furthermore, if the money is deemed to be run through the company, the trustees should refuse to pay estate tax if the IRS comes looking for it (and if the money is not treated as being run through the Company, how do the trustees deal with the IRS looking for estate tax in a year after the year that the money is allocated?). I don't want to touch the generation skipping tax issue if the decedent has grandchildren participating in the ESOP. My instinct is that this is a very dumb idea. Is there an alleged reason for it?
RLL Posted October 24, 2001 Posted October 24, 2001 Hi sammy --- What are the objectives here? Why would someone want to do this?
Guest sammy Posted October 24, 2001 Posted October 24, 2001 Well, it was an idea by a business attorney who is attempting to find a way to satisfy the desire of the owners of the company (closely held by 2 individuals) to have the ESOP control the company when both have died. We agree with IRC401 that there are problems with this, but we wanted to see if anyone had any suggestions we hadn't thought about.
RLL Posted October 24, 2001 Posted October 24, 2001 sammy --- Why not just have the company redeem the stock upon death, along with contributions of stock to the ESOP? The ESOP will then own 100% of company stock when the other shareholders' shares have been redeemed. This avoids the potential tax problems and gives the company a deduction for the stock contributions.
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