by lisadiane777 » Sat Jun 26, 2010 11:16 am
For a retirement reasons a policy was taken for me with a payout of 300,000 at 15 years of service and more if by retirement age. My age is 56 and do to down sizing they let me go and paid out the 300,000 . I said was this being paid by the insurance company , no I'll cut you a check next week out of payroll and you'll need to pay taxes, so we'll deduct the taxes out and I received 2 months ago a net payout of $209,000. I assumed the policy is null and void; but it may not and I'm concerned. So I sent a letter this week to the Massachusettes based life insurance company requesting a status of this policy and to make a cancellation of this policy. I had the policy number from the lab testing paper work and do not have a copy of the policy, I was clear on my being no longer an employee of the policy holder. What suggestions do you have? I do not want this former employer to have life insurance interest on me.
Posted: Mon Jun 28, 2010 09:35 am Post Subject:
Again, your wants are meaningless. The insurance company shouldn't be willing to give you any information and they definitely can't cancel the policy at your request.
Your only chance here is to get your old company to agree to sell the policy to you in exchange for the $300,000 that they paid you.
Posted: Mon Jun 28, 2010 02:01 pm Post Subject:
All that said (wrong or right) I do not want my former company to insure my life as they do not have a vested interest in me. I'm bothered greatly about this
There is nothing to be "bothered" about. Your employer promised you a (nonqualitfied) retirement benefit that was 100% vested (as to your contributions, and possibly earnings) to your heirs if you died prior to retiring or leaving the company. It was, as the financial adviser told you, not a guaranteed benefit -- if the company failed, you would not have been likely to recover the deferred income (the one thing you still have not acknowledged) you had not received.
Without seeing the plan document, it is only speculation whether you had any options to receive your distribution in any manner other than a lump sum. If you did, and did not fully understand the differences between the options, then you might have a civil action against your employer for its lack of educating you about how the plan works. But that's about all you may have.
That benefit your employer "promised" you (which you have, fortunately, received) was backstopped with a life insurance policy. That's known as "informal funding", because the Internal Revenue Code does not actually permit "real money" to reside in a nonqualified plan, as is required in a qualified plan.
You did not receive the amount of income you deferred, and the company incurred a "liability" to you for it. Recognizing its responsibility to you and other plan participants, it did the "right thing" and purchased an insurance policy (actually a block of policies) WITH ITS OWN MONEY to help make sure there would be money available to make good on its nonguaranteed promise.
The company is entitled to keep the policy in force for as long as it chooses to do so, up until your death, at which time it would collect the death benefit. There is nothing unlawful or unethical in this, and because you are not the policyowner, there is nothing you can do to prevent it.
You can be as upset as you want about the fact that they have a policy on you and you no longer work for them, but what's your real complaint? That your "family members" will not receive any insurance proceeds when you die? If that's it, then you should purchase AND PAY FOR an individual life insurance policy WITH YOUR OWN MONEY.
I know a bit more now about key personal insurance
Actually, the concept is known as KEY PERSON insurance, and the policy in question which the company owns that covers you is NOT KEY PERSON INSURANCE. But even if a company purchases a key person policy on an executive, if that person leaves the business, the company can, and often does, keep the policy.
Every penny you spend on postage or phone calls to the insurance company about the policy is wasted money. As you have been admonished several times already, you are not the owner of the policy and the insurance company has no responsibility to you, cannot act in any way on your "instructions", and is probably going to send you a response that says so. Don't even think about getting an attorney to sue the insurance company, because that will be even more wasted money. Any good attorney would tell you so. But I'm sure you can find one who will take the case for an upfront fee, promise you the moon (which is more than your employer did), and take your money all the way to the bank without delivering on the promises.
As fksaskfakr states above, about the only thing you might be successful in accomplishing is getting your former employer to grant you an "absolute assignment" of the contract -- and you'll have to pay them at least as much as they paid in accumulated premium in order to prevent a taxable event as far as the death benefit is concerned.
You should really be spending your time, energy, and money talking to and working with a professional tax adviser about the effect this $300,000 distribution is going to have on your overall income tax situation when you file your return next year. At least you have six months left to try to minimize that impact. Don't wait until next April to discover that your tax bill is three times higher than it has ever been and complain then that you had no idea that would be the case.
1 million recommended --- It could be more which scares me, I never seen the policy.
It's unlikely that the policy in question is for an amount that large. Probably more like $500,000, the amount of benefit you thought you were going to get in retirement. But, again, there is no reason to be "scared" about anything. Do you think the company is going to hire a hitman to murder you to collect on the policy? :lol:
Posted: Tue Jun 29, 2010 12:23 am Post Subject: no - no hitman
I would be more resolute if the policy is in line with the benefit being paid out, as you say $500,000.00.
Thank you for your advice on this, I see more of the position I'm in and what this is. Sadly I thought I was to retire with this company and on the good side a competitor hired me 3 weeks later (less salary with a smile I took it), working is better than sitting home upset with your pride hurt.
This issue , I did not understand - I've spent my energy the last 8 weeks starting my new job. The insurance policy on me , was not something I'm comfortable with. I spent a week in the hospital for type 2 diabetes , very dangerous ... Dec 24th through Jan 1st on my vacation I was in the hospital and did not miss any work. I was in work everyday and had to take insulin during the day. I had a bit of vision problems that lasted 6 weeks. Then 2 months later 3-29-10 9:00 AM they laid me off after 18 years of service ---- I think it was for health reasons age related. The good I've recovered fully with a strict diet to keep my sugars down. Maybe they are planning on selling this policy now that I've had this health problem, is this legal? I was reading about any terminally ill person can sell a policy of there own to help pay bills.
This is not the position I wanted to be in----However I got my payout, should I thank them for this? - I wonder; if you have a retirement you shouldn't be begging to receive what's promised. So many people have lost due to false promises.
I paid 90,000 in taxes when i took the lump sum payout of $302,000.00 , it was a payroll check and I took this and invested $150,000 with an advisor and the rest $60,000 in savings, maybe a CD until next years taxes are resolved.
Again thanks for your help!
Posted: Tue Jun 29, 2010 07:02 am Post Subject:
Then 2 months later 3-29-10 9:00 AM they laid me off after 18 years of service ---- I think it was for health reasons age related.
Although the courts have mostly decimated the laws regarding age discrimination in employment, this could be the basis for a civil action against your former employer under the heading of wrongful termination. A labor law lawyer would be the right person to ask about it.
Maybe they are planning on selling this policy now that I've had this health problem, is this legal? I was reading about any terminally ill person can sell a policy of there own to help pay bills.
Lisa . . . you continue to try to erase the line that separates you from the contract. Your former employer is the owner, and can do with the policy as they please. They are not going to sell it to a third party -- you are not terminally ill (Dr. diagnosed as having 24 months or less to live), and too young to be the subject of a life settlement. They could "assign" ownership to you in exchange for a payment equal to the premiums they paid.
I got my payout, should I thank them for this? . . . I paid 90,000 in taxes when i took the lump sum payout of $302,000.00 , it was a payroll check and I took this and invested $150,000 with an advisor and the rest $60,000 in savings, maybe a CD until next years taxes are resolved.
While you are indeed fortunate that your employer did not renege on its liability to you (or go out of business instead), I'm not so sure the word "Thanks" should be in the same sentence.
$90,000 in income tax withholding is probably insufficient. The $302,000 is going to put you squarely in the 35% tax bracket for 2010 -- with little or no way to escape that.
As a result, all of your income in 2010 (which prior to your termination most likely had withholding applied at a much lower rate), less any adjustments/deductions/credits that reduce your AGI or taxable income, is unlikely to be within the range of any lower tax bracket. Which means, to date, you are SERIOUSLY underwithheld. So you tell me, are you going to be thankful for that? Some of your savings will probably have to be used to pay taxes, unless you deliberately choose to be overwithheld for the remainder of 2010. As I mentioned in a previous post, you need to seek a good tax adviser to figure out what your situation is probably going to look like six months from now.
Did your "financial adviser" explain any of this to you? Probably not. Instead, he saw a commission check at the end of $150,000. What that "investment" does -- + or - -- also has the potential to further complicate your tax situation. $60,000 in "savings" probably means a few hundred dollars of interest that will INCREASE your AGI.
A professional tax adviser would probably have recommended a tax-deferred vehicle such as an annuity, or at least tax-free bonds/bond mutual funds, which your "financial adviser" may or may not have recommended.
maybe a CD until next years taxes are resolved.
I don't know enough of your situation to make any recommendations to you, but most of us here probably think of CDs as "Certificates of DEPRECIATION" (you might know them by a different name). That choice is going to create a taxable event every year the money is in the account, whether you touch it or not. I rarely recommend CDs -- especially today with interest rates at historic lows. There are tax-free alternatives that would provide a much better rate of return (with some risk to principal that you would need to understand) than any CD.
Posted: Tue Jun 29, 2010 09:22 am Post Subject:
The fact that you have health problems would stop them from selling the policy if they think that the health problems would kill you. They want the death benefit. If they do sell the policy, it won't impact you and you won't know about it.
You received exactly what was promised to you so, yes, you should be thankful.
Ignore Max on the investment part. There is nothing here to indicate that the advisor has done anything wrong. I see no reason to assume that an advisor would recommend an annuity when exactly no facts have been presented. One simply can't say that something will give a better rate of return and at the same time mention a risk to principal.
As he did correctly mention, make sure that you do have available cash for tax time, because it appears as if you will owe more.
Posted: Tue Jun 29, 2010 02:38 pm Post Subject:
Ignore Max on the investment part. There is nothing here to indicate that the advisor has done anything wrong. I see no reason to assume that an advisor would recommend an annuity when exactly no facts have been presented.
fksaskfakr -- You need to re-read my post. I think you missed the major point -- protecting the OP from further insult in the form of taxation. Isn't it enough that her tax bite is going to be nearly 10% higher than she may be expecting?
No one said her adviser did anything "wrong", but the FA should have had all the facts in front of him/her and, I think, made a highly suitable a recommendation that would have protected the OP from more taxation in view of the fact that she has (1) been subject to about 30% withholding already -- which we both agree is going to be insufficient -- and (2) will be subject to a marginal tax rate of about 35% on ALL of her ordinary income and interest/short term capital gains.
[[ I've seen too many examples of FAs who take a large sum of money just like this and recommend things that "intend to grow the money" back to the pretax position, exposing the investor to both short and long term capital gains, as well as the potential for additional taxable income. In one case, an FA for a big "street name" firm, took a person's $450,000+ from his retirement plan as a lump sum (into a new qualified account, at least) and "created" a "private mutual fund" out of individual securities, that he (the FA) proceeded to trade in and out of, and reduced the client's account value by $160,000 in less than a year in a rising market. A significant part of the loss was found in the trading commissions that the FA generated, in addition to $1,600 per quarter in account maintenance fees. ]]
One simply can't say that something will give a better rate of return and at the same time mention a risk to principal.
Excuse me? Failure to discuss this FACT with a client is an egregious offense. A tax-free muni bond fund does expose the owner to a risk to principal (albeit less than most other types of bond funds), and it will provide monthly income greater than any CD or savings account (but perhaps not as great as other types of income funds).
Both statements are true, and the client needs to know that BEFORE making a decision as to which way to proceed. Even a money market mutual fund will provide a (taxable) rate of return slightly higher than most savings accounts (and even some CDs), but all of the income is taxable (like CDs), and the MMMF also has a risk to principal that a CD does not.
Not discuss risk and return in the same sentence? Please! This is a most basic tenet behind a Registered Rep's licensing.
Note that I have at least twice stated that the OP needs professional tax advice. Most FAs are prevented from giving that kind of advice to their clients.
A tax adviser will review the OP's entire financial situation and tax exposure and make recommendations that, ideally, make the most sense from both her tax perspective and long-term financial needs. If the tax adviser recognizes that being subjected to continued taxation on the remaining $200,000 or so that the OP received is financially hazardous, where else other than the tax-free muni bond fund or an annuity will she receive the tax-deferral she needs?
But we cannot forget the "risks" inherent in annuities either, principally, the restricted access to the funds due to the surrender penalties attached to most, but not all, contracts, as well as the LIFO tax rules that apply, and the fact that the OP is under age 59-1/2, which could trigger a 10% early withdrawal penalty. So, not knowing more about the whole situation, to me, a TF muni bond fund -- with its attendant risk -- on the surface, could be a reasonable proposition. Only the professional tax adviser will know for sure.
As you've indicated, due to current health concerns, the only other possibility, a life policy, is most likely not part of the discussion.
Posted: Wed Jun 30, 2010 03:09 am Post Subject: CD true
I was holding some ready cash for settling my taxes, true I need to address my tax liability - it's been 7 weeks and starting at a new job has it's stress. So I'll get on the horn and look into this. A point the money did go in an annuity for 10 years. And my "thanks" to my former employer was a thought - they did the right thing - do we thank people for doing the right thing ? In this case they held the door open like a gentleman would and tripped me as walked by, I'm in some respects flat on my face trying to get up. But gee they did hold that door for me!
Oh I fully funded my 401K already for this year totaling 22K max.
Posted: Wed Jun 30, 2010 04:32 am Post Subject:
they held the door open like a gentleman would and tripped me as walked by, I'm in some respects flat on my face trying to get up.
Unfortunately, things like this can happen when a company fails to fully utilize the services of an agency that specializes in nonqualified executive benefit plans. I worked for one of the largest in the field, and I can't think of any of the plans I administered that only offered a lump sum distribution as the distribution option upon termination. Some of our participants had seven-figure account balances. Distributing all of that in one year would be horrendous!
While it might be a "drag" having to wait for five years to fully receive one's account value, it does allow a participant to mitigate their tax liability instead of getting hammered all in one year.
Sorry your former employer did such a poor job of educating you (and presumably the other employees as well) in how your plan(s) worked. You may have recourse for your losses through a civil suit. Something to explore with a labor lawyer. ERISA Section 404(c) has some applicability to lack of education when it comes to qualified plans.
I fully funded my 401K already for this year
You are indeed a remarkable woman! Few plan participants, male or female, actually do the same. Your new employer is very fortunate to have your services at their disposal.
Posted: Thu Jul 01, 2010 03:42 am Post Subject:
Hmm a few thoughts.
A $300k payout does not guarantee that you are in the top marginal tax bracket. For 2010 you need an AGI above $373,650 to pay 35% on it. Income earned for the year may not be under withheld since the income tax works on a marginal system. Even if the OP earns $100k for the year that would only make a little more than $25k subject to 35% in tax liability, and that would assume zero tax deductions, which we know is bogus because she already told us she has placed $22k in her 401k.
As far as the payout itself, the company appears to have withheld about 31%, which will be very close to adequate. The OP should make her current employer's HR department aware of this payout and work with them to ensure that income for the rest of the year takes into account this withholding requirement.
Let's not get into whether the OP's financial advisor has made a good recommendation in investing her $150,000 no one here has earned the right to cast stones of doubt.
As has been stated, the company owns the policy they are free to do with it what they want, which would most likely be hold on to it. Keep in mind that the policy was only the funding mechanism for the plan that was established between you and the business. Using life insurance in this incident is common practice. If you are considering pursuing legal action, keep in mind there's likely disclosures that were signed from the get go that would make legal action tough if not useless.
Posted: Thu Jul 01, 2010 12:48 pm Post Subject:
At the 35% marginal tax rate, the tax is 35% on income in excess of AGI $373.650 . . . +$108,421.25 for a single filer, +$101,085.50 for married/joint, +$105,095 for head of household, and if married filing separately, 35% on income exceeding $186,825 +$50,542.75. So I have no idea where one would think there is only a tax liability of $25,000. Re-read the tax tables.
Understanding that $22,000 has already gone into a 401(k) in the first 6 months of 2010 is fine, but the OP will not be able to defer any other income for the year, and if the OP's new employment pays close to what she was earning, it will take a considerable amount of deductions to get below the 35% tax bracket.
Again, no one cast any "stones of doubt", and the OP indicated that her FA did, indeed, sequester her money in an annuity, so the taxation on any income there is adequately deferred rather than adding to her difficulties this year.
If there is anything fortunate in this sequence of events, it's that it occurred in 2010. If this had occurred in 2011, given the fact that Mr. Obama intends to let the Bush-era tax rates expire and return to 2001 levels (he'll be able to say, "I didn't raise taxes, they just went back to where they were before Bush"), the situation would be much worse, since the 36% tax bracket would begin at $200,000, and no one knows exactly where the 39.6% bracket would begin.
If you are considering pursuing legal action . . . there's likely disclosures that were signed from the get go that would make legal action tough if not useless
Absolutely! Only in the absence of any disclosures might there be a legal cause of action.
Add your comment