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DC Plan with Life Insurance Strategy: DOL PTE 92-6
BenefitsLink Message BoardsLink to more items from this source
Oct. 21, 2021

"PC and wife (66/70 yrs) have $20 million in IRAs's. Already used lifetime gifting on other highly appreciated assets with a FLP many years ago. I'm told these assets are outside of his FLP.

He has said one strategy he's looking at has the following steps: [1] Set up qualified Defined Contribution (DC) plan. [2] Roll over $20 million tax-free from IRA into DC. [3] Use funds to purchase High Cash Value insurance at $2.5 million per year premium for 4 years. Per spouse. [4] After year 4, sell insurance policies to his FLP, relying on DOL PTE 92-6. My reading is that the DOL essentially allows sale of insurance policy out of insured's qualified plan. [5] PTE 92-6 seems to say that the fair market value to purchase the insurance policy is its cash surrender value. Which is far less than the tax if PC were to distribute all IRA funds.

I'm beginning to review for pitfalls/risks and asking the collective wisdom of the group if they have researched this transaction.

Q: My initial thought is that a traditional defined contribution plan has a limit of 51% insurance and max of 49% annuities. Is that correct? Therefore, under the above facts, it's doubtful a majority of funds can be used to purchase life insurance.

Q: Didn't IRS the IRS challenge welfare plans in the 2000's regarding their having a springing cash value in future years? Even if the insurance policy is purchase after year 4, this transaction seems to have similar issues. Or at least the potential issue for the IRS to raise in Tax Court.

I believe IRC 269 is the govt catchall fraud argument for any abusive transaction. Thoughts and comments appreciated."

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