How long can a one-participant Profit Sharing Plan Trust remain in effect after death

[RayJJohnsonJr]

The sole participant of the PS Plan passed away and all Plan assets have been distributed except for one. The Plan held a survivorship (2nd to die) life insurance policy insuring the sole Participant and Spouse (who as of 2012 became ex-spouse). The policy was to be transferred to the ex-spouse (who is still a Trustee of The Pan) at the participants death. 

Upon transfer the ex-spouse would owe income tax on the cash value of the policy. That cash value is approximately $200,000. The ex-spouse doesn't want to, or can't pay the income tax and proposes an alternative:

1. Leave the policy in the Plan Trust so the ex pays no income tax.

2 The ex pays the annual premiums each year to keep the policy in effect. 

The ex desires to keep the the policy because, besides being a life insurance policy, it also pays Long-Term-Care benefits of up to $17,000 per month for life. 

Can the Plan Trust remain in existence. Can the ex pay the premiums.  The ex is still a Trustee of The Plan because the couple remained on good terms as friends following their divorce.

 

I had a case not dissimilar a while ago. A client had a a piece of investment real estate in his Plan for many years. After death, it was determined that plot of land was toxic because a paint factory once operated there. No one would buy it because the cost of environmental clean-up far exceeded the value of the land. The land could not even be transferred to a new owner under environmental law unless it was cleaned up. I actually don't know the end of that story but I know the Plan Trust sat there a long time. 

 

[Bird]

Is the ex-spouse still the beneficiary? That seems odd. When you say "The policy was to be transferred to the ex-spouse..." that implies s/he is the bene. Being the trustee and being the bene are two very different things.

In any event, no the spouse cannot pay the premiums. There is no way to get money into the plan.

This is a good example of why life insurance does not belong in plans. And it being a second-to-die policy compounds the problems, and the long term care benefits, oof. I'm honestly not sure that is even a legit benefit but I really don't know.

It's probably best to surrender the policy and take the $200K. The only other alternative I can think of is to have the plan borrow money from the policy to strip down the cash value, then distribute the policy and the cash. Unfortunately that leaves a policy that has a heavy debt load so it will require not only premiums but debt payments. It might make sense to repay the debt over time with the cash that has been presumably rolled to an IRA. 

This all assumes the ex-spouse is the beneficiary, which again seems odd. It's a mess any way you look at it.

[RayJJohnsonJr]

Yes, it is odd. It is the divorce decree that specified the policy would go to the ex. I argued against that methodology at the time, but the lawyers did want they wanted to do, as usual.

I understand the problem with the ex paying the premium, there's no way to substantiate that. But I don't know what the ramifications are. 

Maybe the ex could start a small business, put in a qual Plan, roll the policy into The Plan, avoid the income tax. 

Thanks, Bird.

[EBP]

Is it possible the policy could be rolled over to an IRA?

[RayJJohnsonJr]

If you're as old as I am, you can remember when IRA's could buy life insurance policies. But for reason's unknow, that was illegalized during the Carter administration.

 

Thx, EBP

[Bird]

16 hours ago, RayJJohnsonJr said:

Yes, it is odd. It is the divorce decree that specified the policy would go to the ex.

A divorce decree doesn't supersede a beneficiary designation. Who is the beneficiary?

[RayJJohnsonJr]

The Plan beneficiary is the participant's estate. 

The divorce decree says: "{The} Profit Sharing Plan shall name {the ex} as the
beneficial owner of The GR Policy so that, in the event that {The Participant}
predeceases {the ex}, {the ex} shall become the owner of The GR Policy."

However, the Plan Beneficiary designation was never changed from "Estate"

Which gives me an idea: Make them distribute the Policy to the estate (let the estate pay the income tax). Then the estate gives the policy to the ex. I'm pretty sure the ex would avoid any taxation under "Transfer for Value" rules on the taxation of life insurance.

 

Thx again, Bird. Your questions are right on point. 

[Bird]

Agreed that the estate gets the policy, or the policy proceeds (cash) if it is cashed in within the plan.

But now we're back to who is the beneficiary of the estate? I'm pretty sure the language in the divorce decree is irrelevant at this point since it was not implemented.

[RayJJohnsonJr]

I'm looking at it this way: If the ex doesn't get the policy (one way or another), the ex has a claim against the Estate for failing to meet it's obligation clearly spelled out in a binding Divorce Decree.

 

So, I have written the attorney for the estate and pointed out that the Estate is the sole Plan Beneficiary, therefore ownership of the Policy must be transferred to The Estate. I included the Ins. Co. form to change the policy's ownership to the Estate. I pointed out to the attorney that the Estate could then transfer the ownership to the ex, so as not to run afoul of the Divorce Decree. 

I think the attorney will go ballistic, but that doesn't change the fact that I'm right. The Plan Beneficiary says "Estate."  If the Estate doesn't give the Policy to the ex, the Estate will lose a slam-dunk lawsuit. The Estate could even pay punitive damages for intentionally failing to perform. 

I'm waiting for a reply.

 

Bird, you helped a great deal with the definitive question, who is the Plan Beneficiary?  

[Bird]

Agreed that the estate gets the policy. Not so sure about the slam dunk part after that; there was just a thread here that indicated that a pre-nup agreement (I think that was it) to name a beneficiary is unenforceable and I'd guess a divorce decree has a similar problem. 

[RayJJohnsonJr]

Thanks for that point, Bird. I'll post what the attorney has to say.