Can a 1 participant plan (or just the Trust) continue after the death of the sole participant?

[RayJJohnsonJr]

Can a 1 participant plan (or just the Trust) continue after the death of the sole participant?

[Peter Gulia]

If there is an undistributed benefit, doesn't the plan continue until all distributions are completed?

 

[RayJJohnsonJr]

That would make sense to me.  In this unique case, an ex-spouse is a beneficiary of a portion of the PS Trust holdings.  What is unique is that she would be better off not collecting on what she is due.  I'm wondering if she took no action to collect what she's due, and in fact would not sign anything that would be needed to distribute the asset to her, how long can the asset sit in the Trust?  How long can the Trust continue?  I'm talking possibly for decades. 

[Peter Gulia]

Are the circumstances that this beneficiary would be better off because she anticipates that the asset is likely to increase in value?

Does the other beneficiary share a desire not to take a distribution?

Who now serves as the plan's administrator?

 

[jpod]

Hmmm.  Care to elaborate?  Why couldn't she just roll to an IRA?  Are the assets illiquid?  She can probably find a trust company willing to hold them in an IRA and she can transfer in kind.  

[Bill Presson]

I would think it would depend on the sponsor. If the sponsor is a sole proprietor, how does it continue (other than a "wrapping up period") if there's no business? If it's a corporation, I would imagine it continues as long as the business is in operation.

[RayJJohnsonJr]

OK.  I knew I was going to have to elaborate.  The plan owns a life ins. policy on the ex-spouse and it has been agreed that at the death of the sole participant, her policy would go to her by beneficiary form saying so.  When she receives the policy, she will owe income tax on the $120,000 cash value which is not desirable.  Life Ins. policies cannot be rolled over to IRA's.  Several options in the future may be much more attractive:

1.  Her situation may change and she no longer wants the life ins. Then she tell the plan to cash it in, and she could roll the cash over to an IRA.

2. She leaves the life ins. policy in the plan until she dies.  In that case, the amount of the cash value would be income taxable to her estate, which is less painful than paying the tax while she is alive, and the portion of the death benefit minus the cash value is tax free to her estate.

Pretty much any way we slice it, she's better of not taking the policy out when the sole participant dies, which will likely be soon given his health.

I guess that qualifies as elaborate?

[jpod]

It sure does.  That means Bill Presson has hit the nail on the head.  I don't have an answer without researching.

[Peter Gulia]

If the beneficiary you describe prefers that the retirement plan be treated as an IRC 401-qualified plan for one or more Federal, State, and local income tax purposes, consider whether the plan's provisions to follow 401(a)(9) minimum-distribution rule might affect how long the plan's administrator is willing to allow the beneficiary to delay beginning a distribution.

 

[jpod]

Great point by FGC. Will the cash value support the MRDs to this non-spouse beneficiary?  By the way, just dotting all the i's, but there is no surviving spouse here, or is there a surviving spouse who had properly consented to this other beneficiary?  

[jpod]

Another thought.  Can the ex-spouse afford to buy the policy from the plan?  I am wondering if the PT exemption that allows these purchases can be used in this instance.  If she can do that than she can roll the $120,000 cash to an inherited IRA and there will be no immediate tax consequences to her. 

[RayJJohnsonJr]

FGC and jpod, I guess I learn something new every day.  A beneficiary is subject to RMD's?  Oh, maybe I should have said the life ins. policy is not in her account.  She never worked, so she has no account.  PS Plans allow a participant to purchase life ins. on spouse or children.  So the sole participant purchased the policy covering her while they were still married.

I'm thinking maybe when the sole participant dies, The Plan pays out everything except the policy (about $1.2 million), the next year files the 5500EZ marked "Final" since the Plan is below $250k, and see how things go thereafter. 

An optimum scenario might be that she starts a little corp. and does something to make a little money, puts in a PS Plan and contributes a little money. Then, when the participant dies, transfer the policy to her PS Plan.

[Larry Starr]

36 minutes ago, RayJJohnsonJr said:

FGC and jpod, I guess I learn something new every day.  A beneficiary is subject to RMD's?  Oh, maybe I should have said the life ins. policy is not in her account.  She never worked, so she has no account.  PS Plans allow a participant to purchase life ins. on spouse or children.  So the sole participant purchased the policy covering her while they were still married.

I'm thinking maybe when the sole participant dies, The Plan pays out everything except the policy (about $1.2 million), the next year files the 5500EZ marked "Final" since the Plan is below $250k, and see how things go thereafter. 

An optimum scenario might be that she starts a little corp. and does something to make a little money, puts in a PS Plan and contributes a little money. Then, when the participant dies, transfer the policy to her PS Plan.

          A beneficiary is subject to RMD's?  Oh, maybe I should have said the life ins. policy is not in               her account. 

Yes, you need to read up on the distribution rules;  suggest you (and everyone else!) purchase Natalie Coates reference Life and Death Planning for Retirement Benefits. The requirements will depend on whether the individual dies before or after his Required Beginning Date. 

Having said that, the insurance issue is different.  The only issue appears to be IF she wants to keep the contract in force when participant dies.  No problem.  The plan strips out the maximum cash value (via loan) and transfers the maximum loaned policy to the ex.  The taxable amount will be minimal (assume max  borrowing of 90% leaving $12k of value on which she will have to pay income taxes. The remaining 90% (or $108,000) can now go into an inherited IRA for the benefit of the beneficiary  along with the rest of the $1.2 million, out of which RMDs will now be required, based on the life expectancy of the beneficiary or the deceased depending on how old he was when he died.

Make sure there is someone who is authorized to wind up the affairs of the participant following his death who will be responsible for making the loan and distributions in accordance with winding up the affairs of the plan as well.

And lastly, PLEASE EVERYONE, start with a full explanation of what the situation is to avoid wasting the time of good people who are trying to help. The opening one line question is CLEARLY not the real question that needed to be asked.  Everyone should endeavor to give MORE information than you think we need, and then tell us what it is you are trying to accomplish (in this case, it wasn't keeping the plan in existence, it was dealing with the stupid life insurance in the plan!!!!!) which certainly wasn't covered in the opening volley!

 

 

[Bill Presson]

There still seems to be a whole lot of information missing here.

If there's $1.2 million in the policy (and that's not the face amount which is completely irrelevant here), then you can't say the plan has less than $250k. And you can't mark a 5500ez as final if there are still assets in the plan.

Are there still premiums due on the policy? How long will they have to be paid or is it a "paid up" policy?

[RayJJohnsonJr]

I failed to communicate well, Bill.  The 1.2 million is the assets being paid out exclusive of the ins. policy.  The ins. policy cash value is $120,000.

[RayJJohnsonJr]

Very sorry, when I said "The Plan pays out everything except the policy (about $1.2 million)" I meant the $1.2million goes to others, not to the ex.  The only gets the policy currently having a cash value of $120,000.

[Larry Starr]

41 minutes ago, RayJJohnsonJr said:

I failed to communicate well, Bill.  The 1.2 million is the assets being paid out exclusive of the ins. policy.  The ins. policy cash value is $120,000.

Indeed.  All the more reason to give us everything up front and complete.  Change my response with regard to adding the $1.2mill to the payout.

[david rigby]

4 hours ago, RayJJohnsonJr said:

I meant the $1.2million goes to others, not to the ex. 

Still ambiguous.  The title of the thread says "sole participant", so who are "others"?

[Bird]

10 hours ago, david rigby said:

Still ambiguous.  The title of the thread says "sole participant", so who are "others"?

I'm guessing there are other beneficiaries.

I'd love to see the wording of the bene des.  I wonder if it specifically refers to the policy, and what happens if the ex says "surrender the policy and I'll take the cash."  Does that effectively disinherit herself since there is no policy?

[ESOP Guy]

15 hours ago, RayJJohnsonJr said:

FGC and jpod, I guess I learn something new every day.  A beneficiary is subject to RMD's?  Oh, maybe I should have said the life ins. policy is not in her account.  She never worked, so she has no account.  PS Plans allow a participant to purchase life ins. on spouse or children.  So the sole participant purchased the policy covering her while they were still married.

I am not trying to be mean here but please go back and re-read the whole document regarding distributions.   If it is a prototype plan make sure you include the base document.  There is AlWAYS a section on what happens if a participant dies before or after they have started their RMDs.  It will always tell you  how long a spousal or non-spousal beneficiary can keep the money in the plan before they have to take some RMDs or all the money out of the plan. 

In fact isn't there a very good chance the plan document is going to say a non-spousal beneficiary HAS to take the  benefits within 5 years of the death?   In fact I am struggling to think of an exception to the 5 year rule but it is early and I don't have my chart in front of me.  (Yes, I keep a chart I got on these rules by my desk as I for some reason find these rules some of the hardest to keep right.) 

[Larry Starr]

8 hours ago, ESOP Guy said:

I am not trying to be mean here but please go back and re-read the whole document regarding distributions.   If it is a prototype plan make sure you include the base document.  There is AlWAYS a section on what happens if a participant dies before or after they have started their RMDs.  It will always tell you  how long a spousal or non-spousal beneficiary can keep the money in the plan before they have to take some RMDs or all the money out of the plan. 

In fact isn't there a very good chance the plan document is going to say a non-spousal beneficiary HAS to take the  benefits within 5 years of the death?   In fact I am struggling to think of an exception to the 5 year rule but it is early and I don't have my chart in front of me.  (Yes, I keep a chart I got on these rules by my desk as I for some reason find these rules some of the hardest to keep right.) 

It generally will apply the 5 year rule OR start immediate annual distributions.

[RayJJohnsonJr]

Here goes:

Others: When I said $1.2 million to others, I meant other beneficiaries, other than the ex wife.  She only gets the ins. policy.  The sole participant has not remarried so the other beneficiaries are his grown children. 

In reading the Trust, it says after the death of the participant,  a beneficiary may take distributions  in any form that was available to the participant upon participant's retirement.  One of the choices the participant has is "in a non-recurring partial payment."  However, sole participant age 73 has taken RMD's therefore ex-spouse beneficiary mu begin RMD's over her life expectancy, she is age 65, expectancy is 84.3. 19.3 years. 

The Trust also says a beneficiary has to submit a written request for their benefit.  What if she never does that?

Larry, I'm with you on the pension rollout of the policy, I've done quite a few.  The loan of $112k using 5% interest would cost about $5,600 annually.  Maybe she could pay that or take it out of the IRA rollover account.  Still worth considering.

I'd still like to see if we can get the ex a little company where she could make a little money, sponsor a PS Plan, contribute a little and roll the policy into it.

Thanks all for your comments.

[david rigby]

On ‎7‎/‎11‎/‎2018 at 2:44 PM, RayJJohnsonJr said:

When she receives the policy, she will owe income tax on the $120,000 cash value which is not desirable.  

At the risk of solving this problem simply, so what?  Pay the tax.

[Larry Starr]

20 minutes ago, david rigby said:

At the risk of solving this problem simply, so what?  Pay the tax.

Because it's very easy NOT to have to.  Go back to my prior response; strip out the cash value via a max loan and then distribute the contract. Pay tax on only 10% of the value and the rest can end up in an IRA.

[david rigby]

9 hours ago, Larry Starr said:

Because it's very easy NOT to have to.  Go back to my prior response; strip out the cash value via a max loan and then distribute the contract. Pay tax on only 10% of the value and the rest can end up in an IRA.

OK, I missed that.  Of course, the portion going to an IRA will also be taxable (eventually).