Can Insurance Policies by distributed in-kind?

[Guest Powers]

My client wants to terminate his Profit Sharing Plan that has Life Insurance policies as well as mutual funds as investment vehicles. He wants to have the insurance policies distributed in kind (I think it is because the participants insurability has changed). Does anyone see a problem with this?

[pmacduff]

The way I was taught, ownership of the policy can be transferred to the participant and they can take over premium payments. The problems lies in the cash value of the policy. If it transfers with the policy, it is really "taxable" to the participant and would need to be recorded on a 1099-R form for the year distributed. One way to avoid this (according to the "old school" way I was taught) is to take the entire policy cash value out as a loan and deposit that to the Trust. The participant can then roll the entire "side fund" monies. Note: It is just a transfer in of $ and NOT a contribution. The policy ownership is then transferred to the participant with the policy cash value at $0.00 (which avoids any taxable event to the participant). The participant must then, if they choose, repay the policy loan with personal funds to replenish the cash value. I'm no insurance expert, but I think if you talk to the agent, this is possible. Hope this helps.