Distributions of Life Insurance from DB Keogh Plan

[Guest]

Any thoughts on the following would be apprecitiated: Have a 75 year old retired attorney who established a defined benefit keogh plan several years ago. He is, and has always been, the only participant. He has been receiving distributions from the plan for the last few years but would now like to terminate the plan and roll everything over to an IRA. The plan still holds a life insurance policy with a cash value of about $100,000. Understand he cannot roll the policy to an IRA. He doesn't want to surrender the policy and doesn't want to take the tax hit on having it distributed. Is there a good way to terminate the plan, keep the policy, and avoid taxes? For example, could the participant buy the policy from the plan with other cash (perhaps taken from an existing IRA) and then roll all the assets (including proceeds from the sale of the policy) to an IRA in a lump sum?

[rcline46]

He can do the following:

1. Buy policy with personal assets - taking other IRA assets would be a taxable event for that IRA, personal assets would not be taxable.

2. In the plan borrow the cash value down to PS58 accumulated assets and distribute - no taxable event. Then would have a loan which he could pay off from personal assets.

3. DIstribute policy (gross up distribution for trust to pay taxes) - issue 1099.

That's about it. Don't forget the accumulated PS58. However if not incorporated technically there is no PS58 because the premiums were not deductible by the plan for a sole prop! At least that is how I remember the rules.