Permanency Issue

[austin3515]

Owner of a business gets a windfall of cash after closing a big deal. He wants to set up a DB plan to shelter the income from taxes. Participants in the Plan will be himself, his son and two employees.

Here's the catch: He has cancer and will likely not survive beyond a year or two.

Can he set this plan up under the optimism that he will survive the cancer?

Take it as a given that the intent is to shelter the income for his heirs.

[WDIK]

I assume that the son (or another family member) will inherit the business and could maintain the plan thereafter. This lends legitimacy to the permanance issue.

[mbozek]

two things: Death does not affect permanency, e.g. people with cancer frequently live beyound the estimates given by drs. Two: If business is incorp it can be continued by children. Note : the owners vested benefits will be subject to estate tax unless they are payble to his wife.

Now for the interesting Q: How does he intend to shelter the income from the deal by establishing a DB plan in 04 and deducting the contributions since he needs to earn salary in order generate an accrued benefit and the max accrued benefit of 165k is phased in 10% a year for new plans, e.g., max accrued benfit for 04 is 16,500?

[Blinky the 3-eyed Fish]

The permanancy issue is always a gray area. DB plans that last at least 3 years usually avoid this scrutiny, thus that wouldn't be that much longer than the person is expected to live. I just had a plan that was adopted late in 2002, terminated 12/31/03 and just recently paid benefits. It received a PT determination letter without question from the IRS.

Mbozek, I don't understand your last point. Are you saying 16,500 is not enough of a benefit to shelter income? Anyway, if there is a past salary history, that can be used in lieu of current compensation.

[AndyH]

......plus you are funding for projected benefits including projected participation (subject to the full funding limit of course), not current accrued benefits, so you can perhaps "shelter" more than you can immediately accrue, and accrue it while in bed.

What a fun client this must be.

[mbozek]

B: I thought that the 10 year phase in for max $ benefit in a DB plan could only be applied for years of participation, not years of service.

[Blinky the 3-eyed Fish]

Yes, that is true, but like you said, 1/10th of $165,000 is $16,500 and that is a substantial benefit for one year of participation. The funding for this type of benefit could be $200,000 or more depending on his age.