Retirement Assets when claiming insolvency for cancellation of debt

[origun]

Taxpayer is a state retiree with a defined benefit pension for life. I know that when determining assets when considering insolvency as an option to avoid claiming COD income, you must count retirement accounts such as IRAs and 401(k)s.

What, if anything, do you do with a defined benefit plan? The taxpayer has no separate individual retirement account he is drawing from and will get a pension for life with some cost-of-living adjustments over the years. (When working he had a separate account with a known balance that was used to calculate his starting pension but since then he has no personal retirement account, just a check that comes every month.) I presume there are ways to actuarily compute the present value of his "annuity". Is that necessary and, if so, could someone give me some hints as to how to do it?

Thanks.

[JON]

Good luck

I believe you are on the right track. If the debt cancelled makes the person not insolvent then to that extent some income could result. I think the fiduciary has you number, but if not you take the flow of dollars anticipated to his death (average) discounted back at some rate to get its net present value.

[New York Enrolled Agent]

Taxpayer is a state retiree with a defined benefit pension for life. I know that when determining assets when considering insolvency as an option to avoid claiming COD income, you must count retirement accounts such as IRAs and 401(k)s.

What, if anything, do you do with a defined benefit plan? The taxpayer has no separate individual retirement account he is drawing from and will get a pension for life with some cost-of-living adjustments over the years. (When working he had a separate account with a known balance that was used to calculate his starting pension but since then he has no personal retirement account, just a check that comes every month.) I presume there are ways to actuarily compute the present value of his "annuity". Is that necessary and, if so, could someone give me some hints as to how to do it?

Thanks.

You might find some help in SCA 1998-039. There is a section on insolvency and "exempt assets" which you should read in full. I'm pasting one paragraph which appears to be relevant.

In a case where an individual has commenced the receipt of benefits under a defined benefit plan and, accordingly, has elected a form of benefit payment that includes an annuity or installment payments, we believe that value of the benefit should be the actuarial present value of the payments that are to be made under the annuity or series of installments on or after the relevant date (that is, the date as of which the insolvency determination is made). We suggest that the actuarial present value be determined using the interest rate and the mortality tables set forth in section 20.2031-7 of the regulations (which are used to value annuities for Federal estate tax purposes). This would appear to be consistent with the valuation requirements of section 7520 of the Code.

[origun]

Thanks

Many thanks to both of you who responded. What you both wrote seems logical and was what I suspected to be true. I appreciate the reference to SCA 1998-039--for some official documentation. And...I know that several years ago, as a novice, I did one wrong as I omitted a PERS pension in assets! Oh well, I think the statute of limitations has expired! I'll do it right this time.

[origun]

Another related question--taxes on pension

After you figure out the "present value" of the annuity, can you deduct a reasonable estimate of what taxpayer will be paying out for fed and state taxes on that income and adding the net in as an asset? It seems only fair to me...but what does the IRS say?