Sale of Life Insurance

[AndyH]

DB plan is cancelling life insurance, allowing for purchase by participants.

Son of participant is interested in purchasing policy. Is that ok, or is there a problem with it such as a Prohibited Transaction?

Admittedly I have not had time to research it and am hoping someone can point me in the right direction to do so.

[WDIK]

It is my understanding that the applicable class exemption applies to a relative or member of the family of the participant as well. I believe that the relative must be the beneficiary.

See PTE 92-6.

[AndyH]

Thanks WDIK

That led me to PTE 92-6, but it seems to allow such a sale if the purchaser is a relative who is a beneficiary under the contract.

In my case, the son wants to purchase it but he is not a beneficiary (his mother is). Changing that could be messy and something I would rather avoid.

I think this needs to be a two step transaction, purchase by participant or spouse and then sale to son with a change in beneficiary at that time.

Anybody disagree?

[Belgarath]

Andy - I'd strongly recommend that you run this by the insurance company. There is a doctrine called "transfer for value" that may come into play here. There are exceptions, and I know very, very little about the subject. But the little I know would lead me to believe that the subsequent sale to the son would likely be a "transfer for value." The ramifications are pretty severe - the death benefit in excess of the consideration would no longer be treated as income tax free.

But as I said, this is way out of my area of knowledge, so I'd recommend contacting the insurance company (or someone on these boards likely knows this like the back of their hand.)

[AndyH]

Good advice. Thank you.

[AndyH]

Belgarath, I threw your curveball to the client's CPA and he thinks you are Dice-K. Yes, he agrees (after some research) that there are adverse income tax ramifications under the Belgarath Doctrine sufficient to discourage the proposed transaction. Of course he does not wish to explain them but he agrees with your comments.

Thank you.

Any willing elaborators out there are welcome to explain further.

[Belgarath]

This sort of screams (if the dollars involved are high enough) for the advice of an estate planning attorney. For example, why does the son want to buy this? Seems like setting up a trust might be possible, where the mother is the beneficiary, or mother and son jointly or whatever they have in mind, and then the trust could purchase it directly from the plan?

Now if I could just find some way of getting paid Dice-K's salary for sitting here tossing out vague and largely useless opinions and questions, my life would be perfect. Maybe if I start calling them "gyropinions" they will be worth more!

[AndyH]

You can have the salary but I'll take your exclusive negotiating rights fee.