Survivorship Life Insurance In A Profit Sharing Plan

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Survivorship Life InsuranceIn A Profit Sharing
Plan
Distribution of this material is limited to
marketing representatives, brokers and client
advisers. Not for use with the public. This
material is for informational purposes only and
is not intended to constitute legal or tax advice.
John Hancock Life Insurance Company John
Hancock Variable Life Insurance Company Signator
Investors, Inc., Member NASD, SIPC Not licensed
in New York Boston, MA 02117 ADV-1233 06/02
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Advantages of SurvivorshipLife Insurance/Profit
Sharing

• Economic benefit cost to participant for
  survivorship coverage is generally substantially
  less than single life coverage.
• 2 year/5 year aged money may all be utilized
  for insurance premium.pre-tax!
• Special plan beneficiary designation may remove
  life insurance policy from plan when participant
  dies without triggering three year rule under IRC
  2035.
• Profit sharing is the only type of QRP that
  permits life insurance on family members of
  participant.
• Enabling language of prototype plan permits
  profit sharing trustee to be applicant, owner,
  and beneficiary of survivorship life.

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Plan Participant Dies FirstMechanics of Policy
Transfer

• Participant creates irrevocable trust to receive
  policy after first death.
• Participant executes special plan beneficiary
  designation with profit sharing trustee which
  allows transfer of policy to irrevocable trust
  (also QPSA and simultaneous death provision).
• Surviving spouse is plan beneficiary only of
  profit sharing investment account (Spousal IRA
  Rollover).
• Irrevocable trust pays income tax on total cash
  value distribution of policy from plan less
  Participants basis in the policy.
• Cash value is included in participants gross
  estate and does not qualify for the marital
  deduction. If it exceeds the applicable
  exclusion amount, there will be first death
  estate taxes due.

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Spouse Dies FirstMechanics of Policy Transfer

• Distribution
• A) Step 1
• ?Distribution of policy to Participant
• Income tax on cash value (less basis in
  policy) plus 10
• penalty if under 59 1/2
• Step 2
• ? Absolute assignment by Participant is
  considered a gift to the trust
• IRC 2035 three year rule
• Form 709 adjusted taxable gift
• Note This two-step process also applies if both
  Participant
• and spouse are still alive.
• Purchase
• B) Step 1
• ? Purchase of policy by the Participant or
  their trust
• No income tax on cash value and PTE 92-6
• Step 2
• ? Absolute assignment gift to trust
• IRC 2035 three year rule
• Form 709 adjusted taxable gift

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Participant Dies First(Plan Beneficiary
Designation)
Profit Sharing Trust
ILIT (Form 1041)
Trust Beneficiary
Survivorship Insurance
Income Taxable Distribution (CSV)
Investments
Spouse Beneficiary

• IRC 2035 does not apply
• Taxable income to ILIT
• Spousal IRA rollover of investment funds

Spousal IRA Rollover
Spouse Dies First(Distribution to Participant)
Profit Sharing Trust
Participant (Form 1040) (Form 709)
Income Taxable
Survivorship Insurance
Distribution (CSV)
Investments
Absolute Assignment /Gift

• IRC 2035 does apply
• Taxable income to Participant
• Taxable gift by Participant to ILIT
• Participant still has investments in
• Profit Sharing Plan

ILIT
ILIT may purchase policy from profit sharing plan
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Steps to Implement the Plan

• 1. Purchase Survivorship Life Insurance in the
  Profit Sharing Plan. Plan Trustee is applicant,
  owner, and beneficiary.
• 2. Set up an Irrevocable Life Insurance Trust
  outside the plan.
• 3. ? Make sure that the Profit Sharing Plan has
  the proper enabling
• language (amend plan if necessary)
• Require policy distribution if spouse dies before
  participant
• Allow purchase of Life Insurance on spouse of
  participant
• Permit use of aged money for insurance purchase.
• (2 year rule 5 year rule)
• Allow for rollover from another plan. (optional)
• 4. Establish Special Plan Beneficiary
  Designation.
• Irrevocable Trust is plan beneficiary of policy
  if participant dies first
• Spouse completes Spousal Waiver form.
• Non-participant spouse is named beneficiary of
  the investment portion of the plan (Spousal IRA
  Rollover)
• 5. Norris case unisex implications?
• In 1983, Arizona vs. Norris resulted in a
  Supreme Court decision that required unisex rates
  when funding QRPs with life insurance or
  annuities. John Hancock uses male rates to
  achieve the aims of the Norris Decision.

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Survivorship Life Insurance Owned by Profit
Sharing Trust Plan Beneficiary Designations

• I, PARTICIPANT, a Participant in the NAME OF
  PLAN. PROFIT SHARING PLAN, (hereinafter the
  Plan), hereby designate my HUSBAND/WIFE,
  SPOUSES NAME, as the beneficiary of the
  amounts payable as a death benefit under the
  Plan, other than any life insurance policy under
  which my HUSBAND/WIFE, SPOUSES NAME, is the
  insured or one of the insureds. Should my
  HUSBAND/WIFE, SPOUSES NAME, predecease me,
  such death benefit shall be payable to
  CONTINGENT BENEFICIARY.
• I hereby designate NAME OF TRUSTEES or their
  successors, Trustees of theNAME OF IRREVOCABLE
  TRUST dated the DAY day of MONTH, 20YEAR,
  as the owner and beneficiary of any life
  insurance policy under which my SPOUSES NAME,
  is the insured or one of the insureds, and direct
  that such policy ownership be transferred by
  absolute assignment to the said Trustees at my
  death.
• In the event that PARTICIPANT and SPOUSE
  shall die under circumstances that the order of
  death cannot be determined, it shall be presumed
  for purposes of this plan beneficiary designation
  that PARTICIPANT predeceases SPOUSE.
• This beneficiary designation constitutes an
  election not to receive a joint and survivor
  annuity in the event of my retirement, and
  further constitutes an election not to have my
  HUSBAND/WIFE receive a survivor annuity under
  the Plan in the event I shall die before I
  retire.
• This beneficiary designation supersedes all prior
  beneficiary designations I have made with
  reference to the subject death benefits, and all
  such prior designations are hereby revoked.
• ____________________________________
  ____________________________________
• (TRUSTEE OF PROFIT SHARING PLAN)
  (PARTICIPANT)
• I SPOUSES NAME, hereby consent and waive my
  right to a qualified pre-retirement survivor
  annuity and/or a qualified joint and survivor
  annuity as provided for in section 401(a)(11) and
  417 of the Internal Revenue Code. My rights
  under these sections have been fully explained to
  me and I have made this waiver fully
  understanding such rights.
• For purposes of this plan beneficiary designation
  only, I waive any and all community property
  interest I may be entitled to under the laws of
  (State) or any other state, in any policies of
  life insurance held by the Plan and such
  policies shall be deemed to be the separate
  property of my HUSBAND/WIFE, SPOUSES NAME.
• __________________________________
• (SPOUSES NAME)

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Subject EBP Position on Survivorship Life
Insurance Policy Purchased in Profit Sharing
Plan by Plan Trustee Facts A defined
contribution profit sharing plan trustee wishes
to purchase a survivorship life insurance policy
insuring the joint lives of the participant and
non-participant spouse. The trustee desires to
be applicant, owner and beneficiary of the
survivorship policy using existing profit sharing
plan account values to pay the premium. Issue
Is the trustee permitted to acquire and hold the
survivorship policy in the profit sharing plan
under existing cases, regulations and
rulings? Discussion No cases, regulations or
rulings specifically address whether survivorship
life insurance policies may be purchased in a
profit sharing plan. However, Treasury
Regulation Section 1.401-1(b)(1)(ii) suggests
that life insurance in a participants account is
not limited to policies that insure only the
participant (amounts allocated to the account of
the participant may be used to provide for him or
his family incidental life or accident or health
insurance). Also, in PLR 8445095, the IRS noted
that the participant could elect to have part of
his/her employer account balance invested in one
or more permanent life insurance policies on the
life of the participant and/or his spouse. In
late 1997, it was reported that some officials in
the IRS had publicly questioned the acceptability
of a survivorship policy in a profit sharing plan
where only one insured is a plan participant.
The officials felt that insurance on the life of
someone other than the participant would violate
the exclusive benefit rule under IRC Section
401(a)(2). Conversely, it could be argued that
since 100 of the cash surrender value of a
proposed survivorship policy would be allocated
solely to the participants account, such a
purchase would not violate the exclusive benefit
rule. In addition, 100 of any death benefits
from insurance owned by and payable to the profit
sharing trustee would be paid solely for the
benefit of the participants account in
accordance with the exclusive benefit rule. It
has also been reported that no official guidance
on this issue is expected from the IRS in the
immediate future. Existing profit sharing plan
documents may need to be amended to authorize the
use of accumulated funds to purchase survivorship
life insurance in the plan. In addition,
existing plan beneficiary designations and/or
qualified pension survivor annuity elections may
need to be modified if survivorship insurance is
purchased in the plan. Conclusion It is the
position of the Estate and Business Planning
Group that a profit sharing plan should be able
to hold a survivorship policy even if one of the
insureds is not a plan participant.