Rabbi Trust and Insurance

[Guest dsargent]

A COLI policy on an executive is likely to generate more proceeds than needed to fund a rabbi trust being set up in connection with a NQDC plan for the executive. I would like to arrange to pay to the spouse of the executive any proceeds from the policy in excess of that needed to fund the plan. Can this be done by (i) irrevocably naming the trust as a beneficiary of the policy to the extent needed to fund the plan and (ii) also irrevocably naming the spouse as a beneficiary of the policy to the extent of any excess, so that the policy pays the proceeds as their interests may appear?

[Guest EAKarno]

There are two ways you could accomplish this:

1. Endorse a portion of the death benefit to the executive's beneficiary (the economic value of the current term protection would have to be imputed into income of the executive based upon IRS Table 2001 rates). Although this might seem to interfere with the plan's unfunded status, I understand that there is a PLR approving this arrangement; or

2. Add a death benefit to the plan and simply pay it out of the trust

[Guest dsargent]

If the plan were amended to add a death benefit to be paid by the trust, wouldn't that payment be taxed as ordinary income to the spouse because the insurance proceeds lose their tax-free status after they are received by the trust?

[Guest EAKarno]

dsargent -- you are correct, the death benefit paid directly from the trust would be taxable. However, the benefit paid to the corporation (via the rabbi trust) will be tax-free, thus, the Company can gross-up the benefit at essentially no cost after-tax.