Today TaxMama hears from Katherine in the TaxQuips Forum, who gets it.
“I settled a debt today and am doing a list of assets and liabilities. My question is about assets “Interest in a pension plan.” My husband has been receiving an annuity retirement check for about 20 years. How would we know the value of this?
We do not get statements. Since it is set up to pass on to me if he dies, how would you ever know the (total balance) “financial interest” or real value of his annuity/pension plan? And what about Social Security?”
Well done! I’m glad to see you working that calculation!
Sometimes, you have a pension plan, like a 401(k) or 403(b) that you can cash out. Find out if the plan has a cash value, if your husband were to get a lump sum.
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Sometimes, you cannot cash it out – you can only get monthly payments.
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Once the principal or beneficiary dies, there is no final lump-sum payout – like many government pensions.
In that case, you put -0- as the cash value on the list of assets. Same with Social Security. It’s not an asset either – it just provides monthly income in your lifetime.
Katherine did a little more research and learned – that an plan that has been “annuitized” (converted into a permanent stream of income), is no longer treated as an asset, but rather a source of income.
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3 thoughts on “Insolvency and COD”
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Thanks for the tip.
If we were looking at trying INCREASE her net worth, that’s excellent advice.
But, re-read her post.
She is trying to prove to IRS that she is insolvent.
She is trying to legally minimize her net worth at a specific point in time –
on the day a specific debt was cancelled or reduced.
For IRS purposes, for the insolvency calculation, there is no cash value in the pension or Social Security.
If the letter-writer is trying to get a picture of her/their financial position (rather than applying for a loan, say), would it not be appropriate to take the present value of the projected payment stream? Of course, this requires estimating remaining lifespan and choosing a discount rate for the calculation.
With a little more effort, she could price the cost of an annuity with the same payout terms, if purchased now.
When I worked in the finance industry, these were the primary methods institutions used to report the value of illiquid investments or liabilities.
If her intent is not a balance sheet but a projection of cash-flow, or a budget, that would be a different matter.