Life Insurance in Retirement Plans

Life Insurance in Qualified Plans : 

Life Insurance in Qualified Plans Presentation by Jerry Kalish, President National Benefit Services, Inc. for Lake County Estate Planning Council March 12, 2009 © 2009, National Benefit Services, Inc. All Rights Reserved

Defined Benefit Pension Plans : 

Defined Benefit Pension Plans What’s Old is New Again & Better Than Ever Presented by: Jerry Kalish National Benefit Services, Inc. © 2008

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The New Economic Realities for Business Owners, Employees, Beneficiaries, and Financial Service Providers

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Capital Markets Wholesaler Review Dated 28 February 2009 ► Produced by FIIS Investment Consulting Services For Investors NOT FDIC INSURED  MAY LOSE VALUE  NO BANK GUARANTEE

The Current Cycle: Bretton Woods II Derailed : 

The Current Cycle: Bretton Woods II Derailed

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Overview Reality check ahead Playing by the rules Putting all the pieces together

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The reality for business owners/plan sponsors Steep asset declines Heightened potential for fiduciary liability Tough decisions on plan funding Deadline for new compliance requirements

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The reality for employees Those that have jobs Those that don’t

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The challenge for us Law firms Accounting firms Advisors Service providers “Trust is an economic stimulus package.”

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Playing by the Rules

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The focus of advanced planning using life insurance Making premium deductible Protecting the business Part of the estate planning strategy

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Trying to get there in other ways Section 79 Retired Lives Reserve (RLR) Reverse split dollar Section 419 412(i) springing cash values

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1A. Making premiums deductible: “incidental death benefits” Defined benefit plans 100 Times Pension Amount $2000/mo. Pension X 100 = $200,000 Face Amount Rev. Ruling 74-307

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1B. Making premiums deductible: “incidental death benefits” Defined Contribution Plans Whole Life: cumulative premiums less than 50% of cumulative contribution Variable Universal & Term: cumulative premiums no more than 25% of cumulative contribution

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Exceptions to incidental death benefit rules 100% of rollover assets can be used to purchase life insurance Only for profit sharing plans 100% of account if participated for 5 years 100% of assets in plan for 2 Years

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2. Protecting the business More life insurance flexibility in profit sharing plans Funding a buy-sell agreement

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PLR 8108110 Is life insurance policy on B’s life and allocated to the profit sharing account of A permitted? “See the DOL.” Will payment of premiums from A’s account be taxable income to A: “Yes.” Will proposed transaction effect qualification of plan and tax-except status of trust? “See Key District Director.” Practical issues must be resolved

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3. Part of the estate planning strategy What about the subtrust strategy?

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How the subtrust is usually implemented: Plan amended to create subtrust to receive proceeds of insurance Subtrust names a “special trustee” to hold all incidents of ownership Subtrust to act as irrevocable life insurance trust, the beneficiaries of the subtrust usually participant’s children

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Does the subtrust work? Unpublished 2007 TAM: “The subtrust considered in the memorandum caused the pension plan to be disqualified …” August 2008 Leimberg’s Think About It. Other practical issues

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Putting All The Pieces Together

Two types of clients : 

Two types of clients Those who want to put more money away for retirement Those who need an exit strategy

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How recent tax legislation encourages DB plans for business owners DB limit has COLA adjustment: $185,000/yr beginning at age 62 (2008) DB and DC benefit limits uncoupled (Section 415) 401(k) doesn’t count against 25% deduction limit (Section 404) 25% combined plan deduction limit removed Extra 6% of pay for DC if not subject to PBGC 25% to DC + cost to fund DB if subject to PBGC

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Here’s an example:

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And here’s the maximum contribution to one plan:

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And here’s the maximum contribution to both DB and DC using new rules

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Adding a cash balance to existing PS/401(k)

Exit Strategies : 

Exit Strategies Many strategies Several variations to each strategy Match strategy to client’s goals

Exit Strategies : 

Exit Strategies Roll to new plan Surrender Annuitize Distribute Purchase original policy Purchase new policy

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Going forward Tax rules the best ever New economic realities Better planning

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Visit Our Blog:www.retirementplanblog.com

And our attorney wants me to remind you again that: : 

And our attorney wants me to remind you again that: This presentation is provided for general discussion purposes only and should not be considered tax or legal advice. Employers should always check with a qualified tax adviser to determine the application of the tax laws and rules to their specific situation. For information about our services call: Jerry Kalish National Benefit Services, Inc. 300 West Adams St. Suite 326 Chicago, IL 60606 (312) 419-9080, Ext.3 jerry@nationalbenefit.com www.retirementplanblog.com