insolvency and retirement funds

[JenMO]

I am trying to see if my client was solvent or insolvent at the time of the debt cancellation. His wife had cancer and lots of hospital and credit card bills which piled up. Instead of filing bankruptcy he made settlement with most of them. He has teacher retirement - how is that figured as an asset? Do I have to know his balance left in his account. I believe the retirement ends when he dies, so less if he dies soon, and will collect more if he lives a long time. I think that when he dies the only money heirs receive is the remainder of what he paid in if the teacher hasn't already recouped that amount.
Does the retirement add to his assets?

[travis bickle]

The way I understand

I am trying to see if my client was solvent or insolvent at the time of the debt cancellation. His wife had cancer and lots of hospital and credit card bills which piled up. Instead of filing bankruptcy he made settlement with most of them. He has teacher retirement - how is that figured as an asset? Do I have to know his balance left in his account. I believe the retirement ends when he dies, so less if he dies soon, and will collect more if he lives a long time. I think that when he dies the only money heirs receive is the remainder of what he paid in if the teacher hasn't already recouped that amount.
Does the retirement add to his assets?

Publication 4681 - "Canceled Debts, Foreclosures, Repossessions, and Abandonments" - your client's value of his total retirement account(s) on the day prior to figuring insolvency is indeed an asset that must be considered when calculating insolvency.

Take a look at the right column, page 4 of IRS Pub 4681. In the paragraph that ends immediately above the "TIP bullet", the text reads: ". . . .For purposes of determining insolvency, . . . and the value of your retirement account."

The real question now is "How is your value in a retirement account determined?" Is it your contributions? Vested portion? Total account value? Something else?

On pages 18 and following of Pub 4681 is a sample case for Kathy and Frank -- in that sample the IRS refers to deductible and non-deductible contributions made to their retirement plan. And, the IRS goes through the various considerations to show what figure Kathy and Frank are ultimately to use.

Sorry I do not have a more precise answer for you. But please review Pub 4681 and review the situation with your client.