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

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

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

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. 

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?

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.  

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.

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?

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

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.

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?  

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. 

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.

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!

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?

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.

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.

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.

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"?

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?

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.) 

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.

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.

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.

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.

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).

6 hours ago, david rigby said:

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

I'll repeat my concerns stated earlier about the language in the bene des.  If it refers to the policy directly, she could be ceding money by having the plan take some out via loan.  The whole scenario is obviously ill-conceived and needs way more care than can be provided by us throwing ideas around.   Not that any of the ideas are bad but I sense some other crap bombs here.

4 hours ago, Bird said:

I'll repeat my concerns stated earlier about the language in the bene des.  If it refers to the policy directly, she could be ceding money by having the plan take some out via loan.  The whole scenario is obviously ill-conceived and needs way more care than can be provided by us throwing ideas around.   Not that any of the ideas are bad but I sense some other crap bombs here.

Ed,  I don't think so.  If the bene des does as you suggest, they strip out the cash and still distribute the full amount. They distribute the cash (can be rolled over) and the distribute the contract.  If the bene want, she can pay back the loan to make the contract whole.  Does that help?

On 7/13/2018 at 6:04 PM, Larry Starr said:

Ed,  I don't think so.  If the bene des does as you suggest, they strip out the cash and still distribute the full amount. They distribute the cash (can be rolled over) and the distribute the contract.  If the bene want, she can pay back the loan to make the contract whole.  Does that help?

My concern was this:  the bene des may say "Mary gets the life insurance policy on her own life."  If that is literally what it says, and the policy CSV is worth, say $100K, and the plan follows Mary's instructions to borrow $90K out of it, then the policy is only worth $10K.  I don't think Mary is entitled to the money that was borrowed out.

14 hours ago, Bird said:

My concern was this:  the bene des may say "Mary gets the life insurance policy on her own life."  If that is literally what it says, and the policy CSV is worth, say $100K, and the plan follows Mary's instructions to borrow $90K out of it, then the policy is only worth $10K.  I don't think Mary is entitled to the money that was borrowed out.

1. I've never seen such a designation; I doubt it exists. But even if it does...

2. Mary's entitled to the $90k; the PA, in getting her the $90k, does the stripping and pays out both pieces.  No way she would not get the full $90k.

FWIW.

10 hours ago, Larry Starr said:

1. I've never seen such a designation; I doubt it exists.

How else would it be written?

10 hours ago, Larry Starr said:

2. Mary's entitled to the $90k; the PA, in getting her the $90k, does the stripping and pays out both pieces.  No way she would not get the full $90k.

I'm not so sure.  You don't have a spidey sense that this is totally screwed up?

On 7/17/2018 at 9:47 AM, Bird said:

How else would it be written?

 

I'm not so sure.  You don't have a spidey sense that this is totally screwed up?

"All values under the plan will be paid to my beneficiary Y, excluding any life insurance contract in the plan which full value of same (not taking into account any plan borrowing against the cash value) shall be payable to the EX via cash or distribution of the contract".

My spidey sense says it is probably totally screwed up because I wasn't ask to write the beneficiary provisions! :-)  

This solution came to mind and I found out the ex wife can afford it.  1. At the sole plan participant's death, the ex purchases the policy from the Plan for it's cash value, right now about $115,000.  She writes a check to the Plan for the $115k and the Plan Transfers ownership to her.  The Plan still owes her $115k, so she elects to have that rolled over to an IRA. That method works in every respect.  A new agreement would need to be written, but it would be simple. 

2.  Can anyone think of a way for her to buy the policy out now?  and get it over with?

I'm traveling without resources, but there is a simple way for the contract to be distributed now.

1) Trustee borrows max cash value from plan.

2) Trustee decides it doesn't want the life insurance in the plan any more; it can surrender it OR it can sell it to the insured. 

3) Trustee sells it to the insured for the reduced value left in the contract.  Ex writes a check; trustee executes transfer of ownership documents.

Voila!

So, Larry, you're saying a Trustee can sell a policy at will?  Even if the Trustee is an insured?

Absolutely;  If the plan has decided to get rid of the insurance (an investment decision), then the plan (whether it is the trustee or PA) has the absolute right to change the investments. NO QUESTION.  There's a PTE somewhere that allows the sale of the contract to the participant, or the bene, or the insured.

Yes, PTE 92-6.

PTE 92-6 (which amended PTE 77-8):

https://www.gpo.gov/fdsys/pkg/FR-2002-09-03/pdf/02-22376.pdf

29 minutes ago, Belgarath said:

Yes, PTE 92-6.

Thanks, Belgrath.  I decided not to take my resources with me in the North Atlantic. Left Iceland (an amazing place!) and steaming toward Norway now!

For those who the need the details about the uses of life insurance with tax-qualified retirement plans, still the best book is Life Insurance Answer Book (3d ed. 2002), with Gary S. Lesser and Lawrence C. Starr as the lead authors and editors.

I'm not so sure the exemption is available in this situation.

3 hours ago, jpod said:

I'm not so sure the exemption is available in this situation.

Jpod: what kind of comment is that?  Ok, if YOU are not so sure, what is it that makes you say so?  No one can refute or agree with you when you throw out something that is not backed up by any real information.  For what it is worth, I am sure!  Now tell us why I am wrong.  Larry.

4 hours ago, Fiduciary Guidance Counsel said:

For those who the need the details about the uses of life insurance with tax-qualified retirement plans, still the best book is Life Insurance Answer Book (3d ed. 2002), with Gary S. Lesser and Lawrence C. Starr as the lead authors and editors.

 

BLUSH! Thanks Peter; do I owe you another $10?  ;-)

I have reviewed PTE 92-6 (which amended PTE 77-8):

https://www.gpo.gov/fdsys/pkg/FR-2002-09-03/pdf/02-22376.pdf

and I think this is dealing with special exemptions to the rules governing prohibited transactions.

Selling a Plan asset to a related party (a participant, relative, etc.) is prohibited for obvious reasons.  But 92-6 and the amendment in 2002 are saying that, when it comes to a life ins. policy, we're going to waive the prohibited transaction penalties if the policy is sold to these specific exempt individuals, like a plan participant. And the the amendment expands the exemptions to include a Trust"established by or for the benefit of an individual who is a participant in the Plan."  So, this is all about exemptions from prohibited transaction treatment for selling Plan owned life insurance specifically.

In my case, the buyer of the policy (the ex-wife of the sponsor/trustee/sole Plan participant) meets none of definitions of a disqualified person.  There's no prohibited transaction so no exemption is needed.

Thank you for pointing me to this 92-6 etc.  It's all clear now.  The Plan can sell her the policy any time it wants and she can buy the policy any time she wants if the Plan is willing to sell.  And the Plan IS willing to sell.

Ray, bottom line is that the process I gave you will work in any situation, which is what you were looking for.  Take YES for an answer! :-)

Larry Starr, see Part II(a) of the exemption.  Ray, is a beneficiary not a disqualified person?  If not then you are probably right about there being no pt requiring an exemption. 

Also, Ray, even if she is not a dp by reason of being a beneficiary, if she is a relative of the fiduciary making the decision on behalf of the plan she would be a dp.  

Circling back on a couple of issues...

If she has the money to buy the policy, then just do it.  I certainly understand and have used Larry's approach of borrowing the money out to reduce the cash value and then distributing or buying it, but in that scenario the buyer is left with a somewhat crippled policy that needs an infusion of cash to keep it going, maybe not right away but over time.  Just buy it and be done with it.  The new owner could always take a loan or do whatever she wants to free up cash if needed.  Heck, simply distributing the policy as a taxable distribution is not the end of the world if she has enough cash to buy it - so she pays tax on it.  I think someone noted above that we are talking about deferring taxes, not avoiding them.

And I am really curious to know exactly how that bene des reads.  If it specifically references a/the policy, I still maintain that screwing around too much by buying it and/or borrowing against it might unwittingly change the value of the beneficiary's interest.

Section II(a) are conditions for selling a policy to a trust pursuant to 1(b) above.  She's an ex-spouse and that's not on the list of who is a relative.

I've been the pension business and the life insurance business over 30 years.  I know how to roll life policies out of Plans.  The Trust borrows the max loan on cash value we've done dozens of times.  Keep in mind, someone has the pay the loan interest every year, in this case about $5,000/yr.  Some policies have large enough annual dividends to pay the interest which is a better situation.  This policy has no dividends. The ex-wife is loaded with cash so buying the policy out for cash is best in this case.

The second part of that transaction has to ne the Trust distributing to her in cash the amount she paid for the policy. She elects to roll that cash distribution to an IRA.  So, nobody pays any taxes until she has to take RMD's. The policy pays off 100% tax free.  I'm wondering if the Plan distributing the cash to her is OK?

For those wondering how things got this way, its what happens every time lawyers thing they know what they're doing. Briefly: In divorce mediation it was agreed the wife (now ex) would get the policy at sole participants death. So, the decree says he has to make her beneficiary of the policy.  He's 16 years older and not well.  There are so many things wrong with doing that in a decree you can't name them all.  For starters it should have been in a QDRO (all ERISA attorneys agree) and second, what if he marries again, which he is.  New wife has 1st dibs on the policy, right? To be fair, the atty's didn't know any of that.  We have agreement from all parties concerned, new wife will waive her right to the policy and it's cash value.

Thanks everybody, I know I'm learning a lot from this lively exchange.  Thank God, I'm not too old to learn new tricks.

10 hours ago, jpod said:

Larry Starr, see Part II(a) of the exemption.  Ray, is a beneficiary not a disqualified person?  If not then you are probably right about there being no pt requiring an exemption. 

JPOD: we don't care if it is allowed by a PTE or not; it is allowed and I have given him the process.  Take YES for an answer means just that.

6 hours ago, RayJJohnsonJr said:

Section II(a) are conditions for selling a policy to a trust pursuant to 1(b) above.  She's an ex-spouse and that's not on the list of who is a relative.

Fine; why do we care.  You know how to make the distribution so go ahead and do it

I've been the pension business and the life insurance business over 30 years.  I know how to roll life policies out of Plans.  The Trust borrows the max loan on cash value we've done dozens of times.  Keep in mind, someone has the pay the loan interest every year, in this case about $5,000/yr.  Some policies have large enough annual dividends to pay the interest which is a better situation.  This policy has no dividends. The ex-wife is loaded with cash so buying the policy out for cash is best in this case.

The contract is transferred out, either with the loan (if the buyer can't come up with all the cash) or with no loan if the buyer can come up with the money.  If it is distributed with a loan, the buyer can always pay back the loan when she has the money or can find it.

The second part of that transaction has to ne the Trust distributing to her in cash the amount she paid for the policy

HUH?  Why?  You said WAY BACK at the beginning that she does not have an account in the plan.  So why are you paying her anything?  I thought there is no QDRO?  Explain.

. She elects to roll that cash distribution to an IRA.  So, nobody pays any taxes until she has to take RMD's. The policy pays off 100% tax free.  I'm wondering if the Plan distributing the cash to her is OK?

Not until you explain why there is a distribution to the ex of cash.  Is there going to be a QDRO? If and when there is, then just do a normal QDRO distribution (the insurance is already taken care of in a non-taxable distribution).  If there is no QDRO, no distribution is made at all.

For those wondering how things got this way, its what happens every time lawyers thing they know what they're doing. Briefly: In divorce mediation it was agreed the wife (now ex) would get the policy at sole participants death. So, the decree says he has to make her beneficiary of the policy. 

HUH? Those last two sentences are NOT the same.  If she gets OWNERSHIP of the contract on her life at his death, that has NOTHING to do with her being named beneficiary on her life contract.  When he dies, the contract is still in force.  What does making her beneficiary of her own contract do (by the way, you can't do that. The insured can not be the beneficiary of a contract on his/her own life BECAUSE HE IS DEAD!).  You have me very confused.

He's 16 years older and not well.  There are so many things wrong with doing that in a decree you can't name them all.  For starters it should have been in a QDRO (all ERISA attorneys agree) and second, what if he marries again, which he is.  New wife has 1st dibs on the policy, right? To be fair, the atty's didn't know any of that.  We have agreement from all parties concerned, new wife will waive her right to the policy and it's cash value.

If there's no QDRO, then the only thing that can be done is sell the contract to her. Why is there going to be a cash distribution??????

Thanks everybody, I know I'm learning a lot from this lively exchange.  Thank God, I'm not too old to learn new tricks.

What am I missing?