Life policy in a terminating plan

[Lori H]

terminating single participant plan has a whole life equitable policy with a face of $52,800 and a CSV of $30,000.

The policy could be rolled over to an IRA, correct? They would just restyle the name of the policy and change the beneficiary on record. The participant is in poor health.

[Belgarath]

No. Life insurance cannot be rolled to an IRA.

[rcline46]

Insurance policies cannot be rolled into an IRA. However, accumulated PS 58 costs form a basis against the cash value of the policy (ie the PS 58 costs are recovered tax free). It is probably better to take the policy and enough cash to pay the taxes and keep the policy and roll the balance into the IRA.

[Belgarath]

Be careful on that. If the "single participant" is an unincorporated owner, then the taxable term costs are not recoverable as basis.

[rcline46]

Belgarath, and Lori - If unincorporated then the 'contribution' attributable to the cost of insurance was also not deductible. This leads to a real bag of worms, doesn't it. THe net effect we used was to deduct the premium and then issue PS58 because that seemed to 'undo' the deduction. But that was MANY years ago, so I might have forgotten something.

In any event our advice on recouping the PS58 was and is to always consult with their tax advisor. Of course almost no CPA or Tax Attorney knows the final answer to this! And of course even if audited I doubt the auditor could figure it out.

[Lori H]

So....if they shut down the plan, he is required to pay tax on the cash value? You can not change the ownership from the plan to the participant? Since the face amount is not really much coverage against the cash value and he is most likely not insurable, then that's basically his only option....pay the tax on the csv. I think this is one of the reasons why insurance in qrp's is a bad idea. Thanks for your input

[masteff]

Said entirely tongue in cheek.... What does the agent who sold him the insurance say?

[rcline46]

Lori, you do change ownership from the plan to the participant, of course. This makes a distribution of the policy and taxes are owed.

[Belgarath]

Well, hang on a minute. If he wants to keep the insurance in force and not pay current income tax, there are strategies for doing that - the simplest being to write a check to the plan for the full FMV, and the plan assigns the policy to him. He can then roll his entire plan benefit to an IRA. He just can't roll the policy ITSELF to an IRA. Might possibly also be able to have the Trustee/PA do a maximum policy loan to "strip" the CV out prior to assignment to minimize current taxation, but this may not be viable or desirable.

Rcline - see 1.72-16(b)(4). Seems that the taxable term costs are not included in "basis" by an owner-employee.

[Guest VEBAPLAN]

Good answers

[Lori H]

Said entirely tongue in cheek.... What does the agent who sold him the insurance say?

the agent is pretty much out of the picture.

Thanks Belgarath for the answer

[Lori H]

This participant is now deceased. Is the beneficiary(wife) subject to a tax? I believe the difference between the face amount(52,800) and the CSV (appx 35,000) is NOT subject to income tax. but only if the premiums were paid with pre tax dollars and if PS-58 costs were reported annually. Is this sound?