Irrevocable Life Insurance Trust

[QNPG]

Can an ILIT (irrevocable life insurance trust) buy a individual participant’s policy directly from a qualified plan. If yes, do they then avoid “the three year contemplation of death rule”?

Any particular cite to which someone can direct me?

[Bird]

Are you talking about buying a brand new policy in a plan, in a sub (irrevocable) trust? Or is it an existing policy that is being bought from a plan and going to a separate trust?

If the latter, I don't believe there's any way to avoid the 3 year rule.

If the former...I never ever encouraged the sale of insurance in plans but used to be quite familiar with it; companies such as Guardian had all kinds of literature explaining how the sub-trusts worked and why it was ok. I never saw it proven (i.e. a case where it was challenged, a PLR or anything) but I always found it kind of bogus to have a plan own a policy and yet not own it at the same time. I don't know of any current developments so I think it's status quo - maybe ok but nothing definitive.

[ETA Consulting LLC]

If they buy it, then the 3 year rule does not apply. If the policy is gifted to the ILIT, instead, then the 3 year rule would apply.

Good Luck!

[QNPG]

If they buy it, then the 3 year rule does not apply. If the policy is gifted to the ILIT, instead, then the 3 year rule would apply.

Good Luck!

Would you happen to have an IRS Notice or DOL publication to reference?

Thanks for your response. I appreciate the information.

[QNPG]

Are you talking about buying a brand new policy in a plan, in a sub (irrevocable) trust? Or is it an existing policy that is being bought from a plan and going to a separate trust?

If the latter, I don't believe there's any way to avoid the 3 year rule.

If the former...I never ever encouraged the sale of insurance in plans but used to be quite familiar with it; companies such as Guardian had all kinds of literature explaining how the sub-trusts worked and why it was ok. I never saw it proven (i.e. a case where it was challenged, a PLR or anything) but I always found it kind of bogus to have a plan own a policy and yet not own it at the same time. I don't know of any current developments so I think it's status quo - maybe ok but nothing definitive.

Thank you for the information. I appreciate it. I also saw a link to BenefitsLink from Google relating to this topic as well. It was a big help.

[ETA Consulting LLC]

The 3 year rule is for gifts. If you sell something for fair market value, then (by definition) it is not a gift.

Good Luck!

[Bird]

Repeating that I have less exposure in this area than I used to and am not 100% certain, but...

I'm not so sure an ILIT can buy an existing policy from a plan. The participant can buy it, but otherwise might it not be a PT? And I think there's a potential problem w/taxation of proceeds (i.e. losing the tax-free death benefit) if it is bought by someone other than the insured. Something tells me that the only way to avoid that is to have incidents of ownership somewhere along the way which creates a gifting scenario.

[Belgarath]

Let's see. FWIW, I also have never thought much of the "subtrust" concept. I have grave doubts of its validity.

Bird - as to the sale by the plan to the ILIT, this is permissible. PTE 92-6 was amended back in 2002 to allow it, assuming you satisfy the requirements. And I think there is no "transfer for value" issue if the sale is to a trust that meets certain requirements - however, like you, I'm rather foggy on that - the one time I looked into it years ago, the sale was to a grantor trust, and I did determine that a sale to a grantor trust that met certain requirements was treated as a sale to the insured, which was exempt from the transfer for value rule. I would most certainly tell them to speak with tax/legal counsel!!!

[Bird]

Thanks, you're right about it being ok if it is a grantor trust. My knowledge on this is now exhausted - you're right about needing an attorney.