Page 309 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 295

Since the IRS views any assignment made within three years of death null and void, there
is a three-year period during which the benefits are at risk. One way in which a company
could assist is to take out a separate three-year term assignment protection policy on the
executive equal in amount to the estate taxes on the assigned policy (not the face value) plus
the new policy, making the estate the beneficiary. Since the company has no rights of owner-
ship, it could take a tax deduction; the executive probably will have a tax liability in accord
with Section 79 Uniform Premium Table requirements discussed earlier in this chapter.
To meet the assignment test, all incidents of ownership must be completely relinquished.
Even the ability to borrow a limited amount of money against the policy may be sufficient
for the entire policy (not simply the amount available for loans) to be considered part of
the estate for taxation. For those concerned about a possible subsequent divorce that might
place the insurance in the wrong hands, the policy could be assigned to a trust rather than
directly to the spouse. The trust in turn would name the “wife” or “husband” (whichever is
appropriate) as the beneficiary, carefully avoiding a specific name.
A change in insurance carriers by the employer should not affect the assignment
(Revenue Ruling 80-239) as long as the two contracts are identical in all relevant aspects.
This ruling reversed a position in Revenue Ruling 79-231, which stated that such an action
by the employee would begin a new three-year period before the assignment was considered
effective. Overall, assignment is probably of moderate executive importance.

Form of Settlement. While the normal form of payout from the above-described policies
is a lump-sum amount, some policies could be structured to provide annuity payments.
Annuities have a certain appeal, since they resemble the regularity of the paycheck that no
longer arrives.
A prime source for the annuity is the company pension plan, which we will discuss in
more detail in the next section. The important point is that the pension plan can be con-
structed to pay the surviving spouse an annuity if the employee died while actively employed
but was eligible for retirement. In such instances, the plan will calculate a joint and survivor
benefit as if the employee retired the day before death. This is more liberal coverage than
prescribed in the 1974 Employee Retirement Income Security Act (ERISA). This type of
benefit in the pension plan has increasing significance as the employee’s creditable earnings
and service accumulate; however, it is of little or no help for a younger executive.
Living Benefit. Sometimes the insured needs the proceeds from life insurance to pay large
expenses. A chronically or terminally ill patient with large, nonreimbursed medical expenses
for qualified, long-term care would be an example. For this reason, some plans permit a with-
drawal prior to death. This is called a living benefit or viatical settlement. It is believed the
word comes from the Latin word viaticum, used for the Eucharist given in Catholic last rites.
In other cases, a company specializing in such situations will buy the insurance policy of the
terminally ill person. Section 101(g) of the IRC identifies a viatical settlement provider (VSP)
as one “regularly engaged in the trade or business of purchasing or taking assignment of life
insurance contracts. But the person does not have to be near death to cash in the policy. Some
carriers are permitting others to cash in the policy because the coverage is no longer needed.
These are called life settlements. The purchasers of these policies do so on behalf of investors.
In return for an irrevocable assignment of the policy, the VSP returns pay amounts up to 80
percent of face value. The longer the life expectancy, the lower the payment amount. At time
of death, any amount left over after meeting the assignee’s expenses could be paid to the