How to Unwind 412i

[rex]

my older posts finally came through and are above. if i didnt answer any questions then please let me know. im actually relieved to hear some folks think the 412i might be fine although as mentioned above i have some reservations why it was done with whole life and not just annuities. i dont want to dwell on that at all and just want a reasonable exit strategy is to make the most of this. i understand the larger deduction but im not sure that is what should be driving this train. can someone please confirm that the PERC value is in essence very close to what u paid for the whole life at the time of closing the plan and thus the IRS will want that value early on but later on they would require the NITR since that would be greater. thus for me with a WL with yearly premiums around 36k after two years they will want me to place 70k and 3 years 100k of after tax dollars into the plan in order to buy out the whole life??? id have to try to budget this in addition to keeping the plan going that year i do it and hopefully enough so that i can switch to paying the WL yearly. Not sure at the moment i can do that but am worried the longer i go, the more unlikely it will be for me to be able to buy out the WL. Is there any chance the IRS would consider ending a 412i early such as 2-3 years a problem such as an abusive tax shelter if i dont close the company?

 

[scagnt83]

thanks for your excellent post franz
while i am upset, let me try and explain why and hopefully u can explain if im correct

the way this guy set up the plan. it costs 1.5k per year (i know normal cost). he also set it up so i pay monthly and thus the whole life is charged about another 1.5k per year. this was done bc i had zero in the bank and i still am cash flow poor bc of this plan although my total economics are fine but still such that i cant just come up with the 80k per year all at once. thus im paying 3k per year of fees to make 3% on the annuity and of course there are no dividends the first 2 years on whole life. as i told him, i wasnt sure id be doing this business for many years after just 2 years ill need to have 70k on hand at the end of the year to buy the whole life out using the PERC formula. The IRS will require this bc the cash value is low (thats why i care about it not that i dont understand WL has an initial low cash value). I dont think they will allow the NITR (which is what he told me they use). Ill also likely need to use after tax dollars at a higher tax rate (likely 39%). If i went 3 years then i might not even be able to buy it out and would have to cash convert it since i would no longer be a company and not have a plan where i can put it in. my existing 401k/ira wont have enough funds to carry the whole life to completion and thus ill be forced to cash out for a loss. Thus i now feel forced to end it after 2 years and im worried the IRS will consider this an abusive tax shelter since it was only in place 2 years and that there will be all kinds of fees and penalties.

im not trying to paint a bad picture for all 412i but i dont see it as the best plan for my situation. The sadly part is i didnt know any of this PERC stuff before i signed on.

again thanks for your post and any info u have.

What company is this 412i with????

What was the purpose for setting it up? Did you just need an avenue to save lots of money for retirement?

What are your future plans for retirement savings? How much are you looking at contributing per year? How long? What type of products?

Will your new job not allow for large contributions from you?

 

[rex]

just trying to save appropriately. I have 3 kids ages 8, 10, 12 that id like to put through college. They have expensive education needs due to a learning disability for 2 of them. that is actually currently my biggest expense even more than my house and cars combined.

i plan to work at least to 65 and hope until 70 bc i enjoy my job but of course any life/health prbs that arise could always change that but im not aware of any at the moment.

for the new job ill likely be an employee on a partnership track and thus limited to regular 401k options and not these large contributions. Given the number of employees of this group, them starting up a 412i isnt an option. im considering asking to be a contractor for this other position but not sure they will accept that. I think they would take it as though im not really committed to them. i should ammend my comment to say im not sure a 412i with whole life was appropriate. a 412i with just annuities might have been fine although im thinking i should have taken the money post taxes before they rise. of course hind site is always better.

 

[BNTRS]

I plan to work at least to 65 and hope until 70 bc i enjoy my job but of course any life/health prbs that arise could always change that but im not aware of any at the moment.

Time is on your side so one might be tempted to suggest 412i was a bad idea on that basis alone. There are some who might raise issue with that statement though, and I'd be in their camp.

For the new job ill likely be an employee on a partnership track and thus limited to regular 401k options and not these large contributions. Given the number of employees of this group, them starting up a 412i isnt an option.

You're probably right, but non-qualified deferred compensation might be an option. Based on the needs your kids have, and the opportunities you want to make available to them a plan can definitely be developed to provide you with very attractive benefits.

i should ammend my comment to say im not sure a 412i with whole life was appropriate.

I'm guessing this is because of the amount of time you planned to be self-employed and the time it would take for IRR to turn positive.

 

[somarco]

You have been given sound advice so far with regard to the 412(i). Your latest post addresses other issues that should be taken into account, most specifically, planning for the special needs children.

Depending on their limitations, a trust and additional life insurance may be in order. Also, since you plan on working for several years, disability income is another potential problem area that should be examined.

And to backtrack a bit, most accountants are not qualified to address questions about retirement plans. There probably are some in your area, but you will need to look to find one.

 

[rex]

i do have disability insurance of 15k per month and additional 3 million in term

can someone estimate the perc value for the first few years if the premium is 35-36k per year? im guessing around 30k per year. that is why im concerned about the WL, i wont be able to buy it out bc of cash flow when the business closes after 2 or maybe 3 years. im trying to figure out when i must close the 412i in order to still keep the WL intact. if it was just annuities i wouldnt have to worry about that.

 

[scagnt83]

can someone estimate the perc value for the first few years if the premium is 35-36k per year? im guessing around 30k per year.

In short; No.

The PERC value or "Interpolated Terminal Reserve" (agents, this is kind of sort of the same thing as Guaranteed/Surrender Value on a traditional WL/UL), is a calculation that only the insurance company that issued the 412i can do.
While we could make guesses that may or may not be correct, the insurance company can get you an accurate number most likely within 24 hours.

The PERC calculation is:

Aggregate premiums paid
+
Any dividends, earnings, or interest credited to those premiums
-
Any distributions made
-
Any reasonable mortality charges and expense charges
=
PERC


The PERC value will most likely be on the quarterly/monthly/annual statements that you get for the plan.
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that is why im concerned about the WL, i wont be able to buy it out bc of cash flow when the business closes after 2 or maybe 3 years.

It sounds like your in a bit of a sticky situation.

Do you know the current cash value of the WL?

Could you afford to continue contributions to a WL or Ul at a lower premium amount? Maybe $5K/$10K/or $20K? It sounds like you could pull off $5K-$10K fairly easily even with the job change.... correct?


If so, you could roll over the WL into your 401K, and then do a 1035 exchange (tax free) into a different WL or UL policy that is structured differently and has a lower contribution amount; then it could be funded through the 401K, but at a lower contribution amount that is feasible.
(when you go to the new job and stop contributions to your current 401K you can just roll your current one into the new one)

Also, it is possible to 1035 exchange a WL into an annuity. So it would most likely be possible to throw the current earnings from the WL into the existing annuity...
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im trying to figure out when i must close the 412i in order to still keep the WL intact. if it was just annuities i wouldnt have to worry about that.

This will depend on how the WL was structured.

Many 412i plans are structured to be "short pay" type policies. But it is usually customized for the clients particular situation. So it just depends. This is also something that the Insurance Company can tell you.
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just trying to save appropriately. I have 3 kids ages 8, 10, 12 that id like to put through college. They have expensive education needs due to a learning disability for 2 of them. that is actually currently my biggest expense even more than my house and cars combined.

i plan to work at least to 65 and hope until 70 bc i enjoy my job but of course any life/health prbs that arise could always change that but im not aware of any at the moment.

Here is the thing. You need to prioritize your savings goals.

Whats most important?
Is college #1?
Is a special needs trust #1 or #2?
Where does retirement savings fall? #3? #4?
Where is emergency fund on the list?


A 412i only helps accomplish one of the above 5 goals. And thats retirement.

Its a qualified pension plan which means that it is tied to a retirement age of at least 59 1/2.

If your goal is to fund education then a 412i is not the way to do it.

If your goal was to fund retirement at an age of 60+, then it might have been a suitable sale.


You really need to look into setting up and funding a special needs trust for your children if care for them is a concern if anything where to happen to you.

Yes, a 412i can sort of help with this, but there are much better avenues to utilize.


You have lots of advanced planning needs that need to be addressed, from the 412i to special needs issues, to what the best move is on entering the new business.

You need a financial planner who has a good grasp on all of this stuff...

 

[rex]

the cash value is zero. started the policy in dec 2009. will be zero for 2 years. At the end of year 4, every dolllar in will equal a dollar increase in CV. prb is the agent told me i could get it out for the NITR which i dont think is correct and thus i need the PERC. While NITR is tied mostly to cash surrender value, my idea on PERC is its pretty close to what u paid for it minus 25% or so.

i had all those types of folks when i set this up but its always hard to know how much of an expert u have on your team. i dont want to dwell on that or the company names since i dont want to offend anyone. PM me if u really want to know and when i hit 10 posts i think i can PM back. i feel i accidentally did so above and am trying to reduce chances of that sort of offense again. i currently am of the opion i need to know the little details of what i am doing much more than i previously thought i needed to. i have a larger plan after talking to you folks and if you dont mind ill post that later.

Again thanks for the info/opinions.

 

[somarco]

3 million in term

Depending on the disability, and how long you want to provide financial support, term may not be the way to accomplish your goal.

 

[rex]

the disability is dyslexia so i think once i get them through college they will be okay
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just to update folks

ive contacted the insurance company. the plan is even set up worse than i thought...bc the annuity is also paid monthly there is a 5% charge on that as well and thus i also lose money every year on the annuity portion alone.

fortunately the agent had sent me an email saying how great of a deal this is to get the WL for so cheap (so i have documentation) saying i could end the plan after 3 years for the NITR value (which isnt true of course) and they are deciding with how to deal with this issue.

does anyone know if there is an irs issue for just ending the plan after 1 year?

If there is my other thought are to have them reduce the defined benefit every year (making almost no contributions on the next few) until i get to the point where i can safely terminate the plan.