What is the procedure for a terminated participant to maintain ownership of life insurance?

[kwalified]

A terminated participant wants to keep her life insurance policy. at 12/31/12 it had appx $13,000 CSV. What would be the tax consequences of getting that in her name and out of the plan? If there is a thread on this already, I apologize.

[ETA Consulting LLC]

Just have her take a taxable distribution of the policy from the plan. It'll be taxable at FMV minus accumulated cost basis.

Good Luck!

[Belgarath]

Well, that's by no means the only solution, particularly if the participant wants to avoid current taxation and (possibly) premature distribution penalties.

First, think "Fair Market Value." Although Cash Value and FMV are often the same, often they are not. But let's assume they are for the moment.

Participant should be able to buy the policy from the plan for FMV. She writes a check to the plan for $13,000, plan assigns ownership of the policy to her. No taxation, and now she can roll her entire account balance in the plan over to an IRA if she wishes - (I'm assuming this isn't a DB plan that prohibits lump-sum distributions.).

Sometimes a maximum loan is taken by the plan trustee and policy immediately then assigned. This reduces taxable distribution, but participant now receives a policy with an outstanding loan.

There are additional "wrinkles" to this, potentially involving "taxable term cost basis" that require more detailed answers than I have time for now. The insurance company and/or agent should be able to provide you with this type of information - the fancier footwork typically involves policies with higher FMV.

Hope this helps.

[kwalified]

It does. Thanks for providing both responses.

[kwalified]

Belgarath,

Let me present this....Say she wants to replace the FMV with a $13,000 check to avoid taxation. She would be paying that with after tax dollars. Would would you be of the opinion that this would still be advantageous to her? She earns appx $35K a year.

[Belgarath]

First, although it sounds like nitpicking, she's trying to avoid CURRENT taxation. If she pays it to the plan, then rolls her account to an IRA, it'll get taxed eventually when withdrawn. On the other hand, she'll now have a policy with a FMV of $13,000.

I don't have an opinion as to whether this transaction is beneficial from a tax viewpoint or not. Dangerous to guess when you don't know someone's full financial situation, both current and expected. I'm only giving options.

In addition, I'm not a CPA or financial planner, so my free advice, if I were able to give it, would be worth the cost...