MEC Loans

[scagnt83]

Im waiting on a reply from an advanced planning dept, but thought I would ask here in the meantime.

If a Loan is taken from a MEC, and paid back the same year its taken, is it taxable?

 

[Tahoe Ray]

Im waiting on a reply from an advanced planning dept, but thought I would ask here in the meantime.

If a Loan is taken from a MEC, and paid back the same year its taken, is it taxable?

We'll see what they say but my guess is yes, it is still taxable.

It should be no different than a NQ annuity. You can't put that money back once you touch it either.

 

[scagnt83]

We'll see what they say but my guess is yes, it is still taxable.

It should be no different than a NQ annuity. You can't put that money back once you touch it either.

So you think Loan provisions are no longer accessible once its a MEC?

 

[LostDollar]

Here is a MEC article:
https://theinsuranceproblog.com/a-complete-guide-to-the-modified-endowment-contract-mec/

While it does not address loan repayment in the same year the loan is taken, it suggests to me that tahoeray's answer is likely correct. To me, the article implies that once you put your hands on money from a MEC, you are going to owe taxes on it, regardless of whether or not it is a loan to be repaid.

I don't know, but assume, that means since income taxes have now been paid on the loan amount, they would become part of the cost basis in the MEC when the loan is repaid.

 

[Tahoe Ray]

So you think Loan provisions are no longer accessible once its a MEC?

I just meant that you can't put it back and not have it be taxable.

 

[Allen Trent]

Yes, it is taxable to the extent there is a gain in the policy. When paid back, the cost basis of the contract will adjust accordingly of total adjusted cost basis of all previous taxable distributions. Basically, if at the time of loan I have cost basis of $50k & $15k gain & take a 25k loan, 15k will be reported as taxable & 10k basis. When I pay back the loan & the collateral assignment is released, my adjusted cost basis will increase

MEC is treated just like a Non Qualified Annuity in that you have no ability to access the cost basis of the policy nor even use it as collateral without 1st being taxes on the built up gains first

 

[scagnt83]

When I pay back the loan & the collateral assignment is released, my adjusted cost basis will increase

Increase back to the original Basis? Or increase by the total amount of Loan Repayment?

 

[Allen Trent]

Increase back to the original Basis? Or increase by the total amount of Loan Repayment?

I believe the entire payment goes back into cost basis calculation because the entire loan & loan interest was also used in the cost basis calculation at time of distribution & each year the loan stayed open because the loan interest is always going into the taxable gain side of the calculation

 

[Lloyds of Lubbock]

Was there a gain on the policy when the loan was taken?

 

[scagnt83]

Was there a gain on the policy when the loan was taken?

In this scenario, no.