Summary Pension Rescue old school

What is pension rescue?

            Let me just give you an example of old school pension rescue and I think you’ll understand its power.  Remember that this concept is for people who have an estate tax problem and money in a qualified plan they will NOT need for retirement.  For our example client, I’ll assume he has a $6,000,000 estate and $1,000,000 in a profit sharing plan he doesn’t need for retirement. If he dies, 75% of the money will go to the IRS via income and estate taxes (although he can pass the money to a surviving spouse and temporarily delay the inevitable taxes).

            With “old school” pension rescue the client would have purchased, typically, a 5-pay life insurance policy inside his qualified plan. The premium would have been $200,000 a year for 5-years. Let’s assume the death benefit is $4,000,000.

            At the end of the 5^th year, the policy would have a cash surrender value (CSV) of $200,000 (and, with some policies there would be an interpolated terminal reserve (ITR) value of the same amount).

            After the 5^th year the policy would be sold from the profit sharing plan to an irrevocable life insurance trust (ILIT); not for a $1,000,000 (the premiums paid), but instead for the $200,000 CSV. During the five year period, the client would gift $40,000 to the ILIT each year for five years so it would have the money to purchase the policy (which would have taken place at the end of the 5th year).

            What did a client accomplish with “old school” pension rescue?  It’s rather simple, rather than having the client die and have $250,000 pass to the heirs after the 75% tax, $4,000,000 will pass income and estate tax free to the heirs via the ILIT.   Additionally, the client moved $800,000 out of the plan and avoided the 75% tax on that money.

            “Old school” pension rescue was one of the most powerful estate planning tools an affluent client could use to mitigate income and estate taxes at death while at the same time affectively using tax deferred dollars to purchase life insurance that would ultimately be owned by an ILIT.