DB Plans Funded with Life Insurance-Continued

Heck it is raining so I might as well keep ranting for a while. Getting back to DB Plans, I was commenting on other issues of fully insured plans. What about the death benefit? You cannot roll a life insurance contract to a IRA. So with that in mind you could just terminate the policy, wow what a waste of insurance related expenses, including that large commission you paid to the agent that sold this complex program. According to Stephen Leimberg, a fantastic attorney that writes about these things through the American College, you can purchase the the policy via a complicated formula for fair market value, great you get to purchase the policy twice, once in the plan, then outside the plan. If you purchase this insurance at less then FMV, according to Leimberg, the transaction could be deemed as a taxable distribution, ouch! Oh yeah, another issue is if you die while this policy is in force and part of you DB Plan. I will not get into this issue, however you just increased your estate, which could potentially increase your estate tax, which by the way, the DB Plan value also adds to the estate, wow, a double whammy! A couple of other issues, you cannot take loans from a fully insured plan, no flexibility in investment management, overfunding plan may cause a 50% excise tax, and does your business have the resources or cash flow to contribute year after year to a plan that is somewhat limited all for the thrill of a tax deduction!

Sources for this article: Tax Facts 2010, Stephen Leimberg, “Think About It” newsletter, Ed Slott IRA Advisor, Trusts and Estates, May 2007 issue, Roccy DeFrancesco, JD, Wealth Preservation Institute.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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