Springing Cash Value Annuity

[Guest Quinn]

Does anyone have information about a "Springing Cash Value Annuity" contract? It would be used in situation where the plan is greatly overfunded and would like to use all assets to buy a contract which in a few years would have a lump sum value that would pay back the excess.

[Guest]

I have dealt with these contracts in the past. One was called Lifetrend (?). Do you have a specific question. Send me a note.

[Guest Quinn]

Basically, I do not know what one is or the features of such a contract. Could you give me an explanation of some of the major features of this type of contract? Thanks.

[Guest]

It is a very sophisticated contract that has risky tax implications. As the name says, it is a contract that in the initial years is expensive with little cash value, causing the pension plan to utilize the excess assets. Conceptually, 7-10 years down the road, the cash value "springs" back to what it "should" be.

In the interim, the policy would have been distributed to the covered participant with little tax cost. This type of contract has been attacked by the IRS, looking to trigger constructive receipt in the participant.

If you want more, send me a private email.

[Kirk Maldonado]

Before you buy such a policy, you should read IRS Announcement 88-51 and Notice 89-25, Q&A #10.