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Reprinted from the “Orange County Lawyer,” March 2004 - page 6 / 6

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excess of the incidental death benefit rule. Their next response was, “lets name the trust as beneficiary who will then pay out the appropriate maximum death benefit.” What happens to the plan in the event of such a windfall? If, for example, only 2.5 million out of a 6 million dollar death benefit is paid out the plan will become fully funded and be subject to all kinds of problems besides not permitting any future contributions on behalf of the remaining owners.

The IRS has stated that they are fully aware of the abuses in this area (including the usage of policies with jumping cash values) and will be taking steps to correct the problems and revisit those plans that have already been approved to determine if there have been any violations.

There is nothing wrong with including insurance in a qualified Defined Benefit plan. If this is what the client wants and understands the advantage and disadvantages of providing life insurance in a plan, then you can achieve similar results without implementing a 412(i) plan. Our experience shows that we can achieve equal or better results with a Defined Benefit plan that incorporates whole life insurance with far greater flexibility since 412(i) plans can use only one funding method and cannot have any investments outside that of insurance or annuities.

419A(f)(6) PLANS

With the passage of TEFRA in 1982 section 419A(f)(6) of the IRC was of interest once again. It appeared to be the answer to the cutbacks imposed by TEFRA except that it could not be used to provide retirement benefits of any kind. It could make available all kinds of ancillary benefits, almost all of them requiring some form of insurance. This plan could provide a “severance” benefit of up to two times the individual’s salary. Since this had to be funded by insurance it required a large face amount and premium in order to generate the required cash values.

While a number of prestigious law and accounting firms have issued their own favorable opinion letters on 419A(f)(6) plans, the one opinion letter that truly counts, the one from the IRS, has never been issued.

If you are going to venture down this road, our recommendation is to first implement a plan where you can get a favorable IRS Determination Letter. This not only provides added protection for the client, but you as well.

CONCLUSION

EGTRRA was passed with a ten-year “sunset” provision, which means that in the absence of any new legislation extending this law, all benefits that have not been properly grandfathered will revert back to the 2001 limits after 2010. If you have clients that are able to take advantage of the larger deductions now permissible it is our recommendation that they do so while they can.

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