You may recall that our firm originally coined the phrase "Private Pension Plan" in 1987 shortly after Congress enacted what was then the "Excise Tax" on "excess plan distributions." Even though the excise tax has been repealed, the concept of a private pension plan still makes a LOT of sense, especially for younger clients (under age 50). Perhaps some numbers would be in order.

If you save $30,000/year in a "Qualified Plan" of some type vs. a "Private Pension Plan" here are the differences for a male, age 40.

Assumptions:

In the Qualified Plan, we assumed the employer/employee’s net deposit after other employee costs and plan administration would be $21,500/year.

In the "Private Pension" column, we assumed the net deposit was $18,000 per year (after tax.)

In the Private Pension Split Dollar, we assumed the net deposit was $25,500 per year (after tax.)

You can see that the SPENDABLE INCOME AFTER TAX is MUCH HIGHER with a Private Pension Plan than it is with a Qualified Plan. At age 85 with the Private Pension the client still has $641,000 left and in the Split Dollar variety, there is still $321,000 left vs. zero in the standard plan.

Why is that? The reason is simply that the distributions out of a life insurance policy are tax free up to the surrendered basis and continue to be tax free as policy loans thereafter, whereas distributions from a qualified plan of any type are all taxable as income.

Would you rather take out $137,000 per year and be broke at 85 or take out the same and have $641,000 left?

Would you rather have a death benefit to your heirs of zero at age 85 or $832,000?

The other benefits of this type of plan over a qualified plan are significant since the POLICY IS OWNED BY AN IRREVOCABLE TRUST.

These benefits are:

1. No Estate tax
2. No lawsuits
3. No creditors
4. No divorces
5. Completely Flexible (no IRS rules re: 59 _ and 70 _)
6. No penalties on "Early Withdrawal"
7. No Plan administrator
8. No Income Tax
9. Self Completing in the event of disability

Fundamentally, all we are doing is realizing that cash values of life insurance polices can grow just as rapidly as any mutual fund if you are using a "Variable Life" type of policy. Since this is true, we know that only life insurance can give us tax free access to the eventual "retirement fund."

Since the income tax rates are about 50%, we intuitively know that this plan should be better by about twice! Well, surprise! It is! In addition, you have the benefits of life insurance protection and the benefits afforded by a separate trust as outlined above.

When you put the power of an Irrevocable Life Insurance Trust (ILIT) along WITH life insurance and then couple these two ideas with the income tax savings of Split Dollar or Private Split Dollar, you get a very powerful mix.

Don’t forget, in order for this to work, you must sell the policy INSIDE THE IRREVOCABLE LIFE INSURANCE TRUST. Otherwise, you are exposed to Estate Taxes and lawsuits if you just sell the policy directly without the trust. You MAY STILL GET TO CASH INSIDE THE ILIT so there is no reason NOT to place the policies into an ILIT. (Refer to "Amendable Irrevocable Life Insurance Trust" article.)