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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11356
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I AM THE ONLY PARTICIPANT IN MY PROFIT SHARING PLAN WHICH OWNS

Customer Question

I AM THE ONLY PARTICIPANT IN MY PROFIT SHARING PLAN WHICH OWNS $500,000 POLICY ON MY LIFE FOR MANY YEARS. I AM OVER 80. CAN I CREATE A NON-REVOCABLE TRUST AND PUT MONEY INTO IT SO IT CAN BUY THIS POLICY FROM THE PLAN FOR ITS CASH VALUE? WHEN I DIE AND THE TRUST COLLECTS THE $500,000, WILL INCOME TAX HAVE TO BE PAID ON ANY PART?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.
Hi from Just Answer. I'm PDtax, and can assist.
Expert:  PDtax replied 1 year ago.
I like the idea behind the transactions, but there are a few problems with the strategy. There may be self-dealing issues with your trust buying the life insurance. There is also a problem with buying it for the cash value, which is likely a lot less than fair market value if sold to an unrelated third party. There are a few things to review. I would like to look into this, but I can see some time for the research. I will post an Offer for some professional time to review what you want to do. Accept, and I will look into this tomorrow. PDtax
Customer: replied 1 year ago.
I MUST DECLINE YOUR OFFER. YOU HAVE NOT DONE ANYTHING OF VALUE SO FAR TO EARN THE FEE YOU ADVERTISED. SORRY. B. GREENBERG
Expert:  PDtax replied 1 year ago.
Your question is very complex, and strikes me as taxable if you try to buy life insurance at such a discount to market value. I wanted to research the amount to value the policy at, the tax treatment of your transaction, your retirement status, whether the policy can be retained in the plan, your willingness to accept the insurance and be taxed on cash value, other estate tax issues, and a less tax costly alternative.
Thanks for considering just answer. I will opt out.
Expert:  Lane replied 1 year ago.
Hi,(Please don't shoot the messenger here) ... but there arew several issues.First the value needed ("Valuable Consideration"); You can either use (1) interpolated terminal reserve value* OR (2) PERC stands for Premiums, Earnings, and Reasonable Charges. (Both of these are complicted calculations)** Treas. Reg. 25.2512-6(a), Example (4)* Rev. Proc. 2005-25, Section 3.02.And more important (is the fact that) This is not Just the cash value, but likely a MUCH larger number. .The comments about self-dealing above were "down the right path." The objective of a retirement plan has to be funding a retirement with tax deferred dollars that (unless the person dies prematurely) eventually are taxed, ...And if the person dies pre-maturely, there are some options for deferring for a few more years, but eventually the beneficiaries have IRD (Income in respect of a decedent) the tax dollars eventually have to be paid..So, back to the "valuable consideration"If this is done appropriately for ENOUGH money ... THEN you would have funded the retirement plan (by having the ILIT - Irrevocable Life Insurance trust - buying for enough money that NOW the retirement plan has that money in it that WILL be taxed eventually..I think what you'll find is that cost for doing this (between coming up with enough money AND still having that money taxed when it DOES come out of the plan - the money that purchased the policy) the strategy will not have save you or your heirs anything in the long run..A few resources for you:http://benefitslink.com/boards/index.php/topic/45953-life-insurance-purchase-from-qualified-plan-by-ilit/http://www.vebaplan.org/https://www.law.cornell.edu/cfr/text/26/1.72-16.I hope you'll rate me positively, using the stars on your screen … (that's the only way we get credit for the work here) … based on thoroughness and accuracy, rather than any good news/bad news content ... Hopefully, having all the facts will help you "see around some corners."
Expert:  Lane replied 1 year ago.
Hi,
... just checking back in to see how things are going.
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Let me know ...
Lane

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