Life and Death Planning for Retirement Benefits

Chapter 11: Insurance, Annuities, and Retirement Plans

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get a deduction for the deemed charitable contribution; that might offset the income tax hit (but not the 10% penalty). An additional complication: Would the deemed distribution be added to his basis in the IRA? It appears that realistically this deal should only be done if the applicable federal rate (or higher) is used for the loan. 3. What if the participant doesn’t die? Like all life insurance illustrations, the plan works great (for everybody except the participant) if the participant actually dies within 20 years. Maybe the church will get a windfall in that case, if the face amount of the policy exceeds the loan amount. I guess if the participant is already over 70 when the deal starts there are pretty good odds that he will die within 20 years. But what if the participant doesn’t die? Where is the church supposed to get the money to pay back the principal to the IRA in 20 years? If the church defaults on the loan, the IRA will have to foreclose on the policy. At that point, the IRA definitely will own the policy, thus disqualifying the IRA under § 408(a)(3) and causing an immediate income tax bill…not what someone likes to receive at age 90. Or is there an unwritten expectation or understanding that the participant will forgive the loan if he’s still alive at the end of the 20-year term? Such forgiveness would constitute another deemed distribution from the IRA to the participant, with a hefty income tax bill. What happens to the insurance policy? Does the participant personally buy it back from the charity, thereby giving them a chunk of cash they can use partly to pay back the loan? But then the policy ends up in the participant’s estate. Another exit strategy is for the participant to simply give the charity enough money at the end of the 20 years to pay back the loan; that assumes he is then rich enough to do so and is still friendly with that charity. But if he’s that rich and friendly why didn’t he just give them the money in the first place instead of lending it? As with all transactions, “don’t get in until you know how you’re going to get out.” 4. Church’s annual obligation. Where does the church get the money to pay the loan interest and the insurance premium each year? Is there an “understanding” that the participant will contribute that much in cash each year to the church? What if he fails to do so? What if he doesn’t like the new pastor and resigns from the church? I’m all for charitable gifts, but this amounts to a 20-year “marriage” and lots of marriages don’t last that long. Realistically, the deal only makes sense if the church has a strong enough operating budget to pay these annual charges without relying on the participant’s generosity. 5. Participant not a board member. In this PLR, the participant was neither a board member nor an employee of the church. If the participant later becomes a board member, will that invalidate his PLR? How useful is the CHIRA™ if the only person who can use it is someone who is not a board member of the charity? Isn’t the person who is most likely to be interested in this type of deal also most likely to be someone involved in the governance of the charity? 6. Prohibited transaction analysis limited. The IRS is not expert on prohibited transactions (PTS). In this PLR, they appeared to analyze only whether there was a “direct” PT (transaction between the IRA and a disqualified person (DQP)). They did not discuss whether there was an “indirect” PT (IRA transaction that benefits a DQP). Although there