Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

insurance). In view of the many drawbacks of plan-owned insurance, and the costs and burdens of starting a QRP the participant would not otherwise want, it is hard to believe that it would not be more cost-effective to simply take the money out of the IRA, pay tax on it, and use what’s left to buy the life insurance. B. Own the policy through an IRA-owned entity. Another approach is for the IRA not to own the insurance directly, but rather to own an interest in an entity (such as a partnership) which in turn owns the insurance policy. There is no authority regarding what degree of control by the IRA (or other factors) might be considered sufficient to cause an entity-held life insurance policy to be deemed held by the IRA, causing disqualification of the IRA. There are “look-through” rules that apply to IRA-owned entities for prohibited transaction purposes: See the “plan assets” rule, 29 CFR § 2510.3-101(a)(2) , discussed at ¶ 8.1.06 (B). There is a different set of “look-through rules” for purposes of the tax on a retirement plan’s “unrelated business taxable income” (UBTI); see § 512(b)(13) , (c)(1) , discussed at ¶ 8.2 . To date, the IRS has NOT spelled out any look-through rule for purposes of § 408(a)(3) . C. Take a taxable distribution. Finally, the participant could simply take the money out of the IRA, pay income tax on the distribution, and buy the insurance with what’s left. If the participant is under age 59½, the distributions could be arranged as a “series of substantially equal periodic payments” (SOSEPP) under § 72(t)(4) to avoid the 10 percent premature distributions penalty under § 72(t) . See ¶ 9.2 . This solution is simpler than “A,” and less risky than “B.” A. Use insurance to fund credit shelter trust. The “pure insurance portion” of a life insurance policy held by a QRP is income tax-free to the death beneficiary. ¶ 11.2.06 . So, if it is possible under the plan to designate one beneficiary for the life insurance policy proceeds, and a different beneficiary for other plan death benefits, determine how much of the life insurance proceeds would be subject to income tax if the client died today, i.e. , the cash surrender value (CSV) of the policy (less the participant’s investment in the contract if applicable). If the income-taxable CSV is relatively small, and the client has insufficient other assets to fully fund a credit shelter trust, consider naming the credit shelter trust as beneficiary of the plan-held policy. Since most of the proceeds would be income tax-free, the usual drawbacks of funding a credit shelter trust with plan benefits would be minimized. The rest of the plan benefits, being fully income-taxable, could be left to the surviving spouse, who could roll them over to an IRA and continue to defer income taxes. Planning principles with plan-owned life insurance Here are some estate planning ideas for a client who has life insurance in his QRP account.

B. Buy favorable group insurance in plan. If the client is not insurable at standard rates, investigate the availability of group insurance through his retirement plan (and elsewhere).

C. Plan ahead for rollout. Be sure the client is aware of, and develops a realistic plan for, the issues that will arise regarding “rollout” of the policy at retirement. ¶ 11.3 . Consider ways to get/keep the policy out of the client’s gross estate following rollout, without triggering