Form 712 needed for life insurance in plan?

[Belgarath]

Had a question come up to which I think I know the answer, but not certain. Participant in a PS plan died, and had life insurance. Plan is owner and beneficiary of the policy. Beneficiary of participant's death benefit asked the PA if a form 712 needed to be completed. PA naturally passed along the question. I'd never heard of a 712, so looked it up on IRS website.

The Form 712 is used for estate tax purposes. Since the plan owns the insurance policy, the policy itself is not included in the estate's tax return. Presumably, the estate should include the participant's (decedent's) rights under the pension plan. But these rights are distinct from the funding mechanism (the life insurance policy).

So, I do not see a requirement to complete a form 712 in this instance. Anyone have any knowledge or experience with this? Thanks.

[Ron Snyder]

Is the insurance intended as key man insurance or a death benefit of the plan?

If the insurance is intended as key man insurance: (i) the plan receives the tax-free death benefit from the insurance company; (ii) payments to participants and beneficiaries of such amounts are taxable; (iii) the 712 does not need to be attached to the 706; (iv) the insurance is done as a plan investment (that pays off big-time if someone dies); (v) insurance proceeds are allocated to each of the participants' accounts proportionately (as with other investment gains); (vi) no PS58 amounts are reportable.

If the insurance is intended as a death benefit and is intended to be part of a single participant's account: (i) the death proceeds should be paid directly to the named beneficiary; (ii) the participant should report PS58 taxable income each year; and (iii) the beneficiary receives the death proceeds tax free. Some plans are drafted so that even though the death proceeds come into the plan, they are treated as a simple pass-through to the participant's beneficiary.

Look at the facts and the plan document for your answer.

[Belgarath]

Thanks for the response.

1. No, not key person insurance.

2. Yes, the participant declares the taxable term cost as income each year.

3. Proceeds are paid to the Plan. Plan participant has a beneficiary designation on file with the Plan Trustee, and Trustee takes the insurance proceeds plus whatever fund value 9s appropriate, and pays all this to the participant's designated beneficiary. Net amount at risk from the insurance proceeds is income tax free.

So, am I correct that no 712 is required? I'm operating on that assumption.

[Ron Snyder]

I believe that under those circumstances the 712 would need to be filed.