I was sitting in my office bored, which is what plan administration work will do to anyone, when the phone rang from our home office in Salt Lake City. The president of our company had a producer with him that had a client who was looking at a fully insured pension under 412 (e)(3) or a restrictive property trust.
“What?” I asked.
I have spent 30 years in tax law practice, three years in law school and taught as the lead faculty member for the Graduate Tax Program at Northeastern University and never saw restrictive property trust in the code or regulations.
I went to Google, which, of course, knows all. There in all its splendor were comments on the trust citing 419, section 83, 409 A. One website was bold enough to say they have a patent (even though this type of patent has been illegal for years). But, this type of plan has been dead since 2000 when the Third Circuit upheld Neonatology Associates v. Commissioner.
What confuses me is why anyone would persist to create a plan that, at best, will not work as well as a traditional pension, but more likely the deduction will be disallowed along with every penalty known to the IRS?
I prefer to follow the law as opposed to engage in “financial fantasies” (this was the wording the court used in Neonatology)
In a traditional pension, if you want to purchase insurance, you can use up to 50 percent of the pension contribution to purchase a whole life policy. Rev. Rul. 74-307, IRC section 401(a).
Second, if you want to purchase insurance you can use up to 50 percent of the pension contribution to purchase a whole life policy in a fully insured pension or 412 e 3 plan. Rev. Rul. 74-307.
Third, if you want to purchase insurance you can use up to 50 percent of the pension contribution in a cash balance plan to purchase a whole life policy. Rev. Rul 74-307.
Finally, if you do not like pensions, you can use up to 50 percent of the profit sharing contribution to purchase whole life insurance in the profit sharing plan. In all these cases, the purchase is 100 percent deductible (assuming at death the benefits are received as a taxable annuity).
Now, for the restrictive property trust, is this a plan under 419?-dead, section 83? or 409A? Have you read the 300 pages of regulations on 409A? The commentators are unclear. One claims to have a private letter ruling but does not publish it.
Before you engage in the financial fantasy think hard, do you want to buy a lawsuit? The plaintiff attorney is waiting for you!