Life and Death Planning for Retirement Benefits

Chapter 11: Insurance, Annuities, and Retirement Plans

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Potential plan disqualification issue. Another serious problem with a QRP’s distributing part of the participant’s benefits, while the participant is still alive, to someone other than the participant is disqualification of the plan, since this would be a violation of the terms of the plan. Because of the risks associated with sale of an insurance policy to the participant’s beneficiaries caused by the final version of Reg. § 1.402(a)-1(a)(1)(iii) , it may be better to avoid this approach. Instead, have the plan sell or distribute the policy to the participant. Once the participant has the policy (either because he bought it from the plan or because he took it as a distribution from the plan), the participant can sell it to the beneficiary to avoid estate tax inclusion (but see ¶ 11.4.02 ). Reg. § 1.402(a)-1(a)(1)(iii) would not apply to a sale by the insured to the beneficiary; it applies only to sales by a QRP. There would be no income tax consequences; the valuation concerns would be solely for gift and estate tax purposes.

Sale to beneficiary: Prohibited transaction aspects

The DOL’s class exemption PTE 1992-6 (see ¶ 11.3.05 ) exempts the sale of a life insurance policy by the plan from various PT rules if certain requirements are met. The requirements that must be met if the purchaser of the policy is the participant-insured himself are described at ¶ 11.3.05 . If the sale is to someone other than the participant, and would be a PT if not exempted, the following three additional requirements must be met:

1. The buyer is a “relative” of the insured participant, or a “trust established by or for the benefit of” the insured participant or a relative. PTE 92-6, I(a), I(b).

2.

The buyer is the beneficiary of the policy. PTE 92-6, II(b).

3. The participant is “first informed of the proposed sale and is given the opportunity to purchase such contract from the plan, and delivers a written document to the plan stating that he or she elects not to purchase the policy and consents to the sale by the plan of such policy to such” relative or trust. PTE 92-6, II(d). “Relative” for purposes of the exemption means either a relative as defined in § 3(15) of ERISA, 29 U.S.C. § 1002(15) , and IRC § 4975(e)(6) (spouse, ancestor, lineal descendant, or spouse of a lineal descendant), or a sibling or spouse of a sibling. PTE 92-6, II(b). Note that the PTE’s definition of permitted buyers does not mention partnerships. If the strategy is for the plan to sell the policy to a partnership, the plan’s ERISA counsel must determine whether the transaction is a PT and, if it is, seek a DOL exemption. For how to apply for a DOL PT exemption, visit http://www.dol.gov/ebsa/regs/PTE_procedures.html .

11.4 Plan-Owned Life Insurance: Other Aspects

This ¶ 11.4 explains the estate tax aspects of holding life insurance in a retirement plan, planning principles regarding such insurance, and the rules regarding IRAs and life insurance.

Estate tax avoidance: The life insurance subtrust