Creditor Protection for Inherited IRAs

retirement savingsIn June 2013, North Carolina’s Governor signed Senate Bill 279 into law, which made changes to statutes related to estates, trusts, and guardianships. One change provides additional creditor protection on retirement accounts in North Carolina.

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What if Stretch IRAs are Lost?

stretch iraStretch IRAs have been a popular tool for preserving wealth for future generations as distributions are tax-deferred. However, the Obama Administration has proposed disallowing stretch IRAs.

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Preparing for Early Retirement

early retirementThose who plan an early retirement need to take steps to preserve their assets in the face of shrinking resources and ever-increasing costs. Our North Carolina estate planning lawyers reviewed the consequences of drawing too soon on IRAs, but now changes in our nation’s health care system will affect health care costs.

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3 Steps to a Better Retirement Plan

retirement planningWhat is your ideal retirement? Everyone takes their own strategy toward retirement, but generally individuals try to create a retirement plan that will provide enough money to care for themselves while affording them the means to do the things they enjoy. Retirement planning mistakes may prevent retirees from enjoying their senior years the way they envisioned, and these mistakes are not always simple to fix. Some mistakes in retirement planning are only resolved if they are caught early, otherwise years or decades of saving strategies may be limiting financial resources later on.

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Estate Planning for Unmarried Couples in North Carolina

north carolina estate planningThere are thousands of couples living together in North Carolina who are not married. Relationships may be just a year old or spanning a few decades. How can unmarried couples protect their rights in the event their partner becomes incapacitated or passes away? Long-term relationships, regardless of marital status, likely involve purchasing real property, joint assets, debt, illnesses, and other major life events. Outside of marriage, how can cohabiting adults plan their estate?

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What is an Heir Search Firm?

heir searchWhen an individual dies without a surviving spouse, siblings, parents, descendants, or named beneficiaries, their estate still needs to be distributed. In cases when this happens in North Carolina, how will the estate be settled?

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Drawing Too Soon on IRAs

early retirementAmericans between the ages of 61 and 70 are withdrawing money from their IRA accounts earlier than necessary. Required Minimum Distributions (RMDs) are enforced starting at age 70 ½, however research completed in May 2013 shows individuals are withdrawing on average over $16,000 before RMDs begin.

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3 Reasons Why You Need IRA Beneficiary Trusts

Naming a trust as an IRA beneficiary has become a popular estate planning tool in recent years.* There are many advantages to using an IRA Trust:

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What Happens if Your Beneficiary Dies Before You Do?

north carolina estate planningAs you prepare your Will and estate plan, you will choose beneficiaries to receive your financial and personal assets. What happens if a beneficiary dies before you do? If you pass away before updating your Will to reflect the beneficiary’s death, how will your assets be divided?

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Retirement Savings Change Based on Income Projections

north carolina retirementThe Boston College Center for Retirement Research released a study that involved over 15,000 employees who were offered projections of their retirement income based on potential voluntary contributions. The projections changed the way individuals decided to contribute to their savings.

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Distribution Advantages for Spouse IRA Beneficiaries

Designating a spouse as a beneficiary of an IRA not only ensures they will have access to retirement accounts in the event their partner passes away, but it offers them unique advantages to which non-spouse beneficiaries are not entitled.

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Why You Should Update Your Beneficiaries

north carolina estate planning attorneyNeglecting to update beneficiaries, or failing to name them, may leave life insurance and retirement accounts to unintended recipients, create probate expenses, and cause tax problems. Having a Will does not avoid these issues. The best prevention is having updated beneficiary designations.

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$3M Limit on IRAs in Obama's Proposal

ira limitsIndividual Retirement Accounts are a top retirement choice for individuals who want to enjoy tax-deferred savings. However, Obama’s new budget plan includes caps on IRA accounts. Retirement account holders would no longer be able to maintain an IRA balance in excess of $3M.

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Traditional IRAs: 3 Penalty-Free Withdrawals are Allowed Before Retirement

Making withdrawals from retirement accounts before actual retirement is usually a last resort. Individuals fear penalties and taxes—expenses they were not anticipating when they took the financially responsible step to contribute to their retirement. In addition to potential penalties, withdrawing funds early means they may not be accessible when intended: Retirement.

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More Estate Planning Opportunities Forecasted for Roth 401(k)s

north carolina estate planningA new study reveals more employers will offer Roth 401(k)s to their employees in 2013. About a third of all employers surveyed by Aon, a human resource services provider, have plans to add a Roth contribution option. Since there are no income restrictions for Roth 401(k)s, the rising trend will catch the eye of many employees. 

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What the Fiscal Cliff Deal Means for Retirement Accounts

Roth 401k rolloversThe fiscal cliff deal has not only affected income and estate taxes, but it has also changed how retirement rollovers are handled.

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How to Determine Date of Death Values

When administering an estate, determining the date of death values of the decedent’s assets is essential. Filing federal and state estate tax returns and paying any taxes due can only be done when the value of all the decedent’s property is known.  In addition, the date of death values establish the new cost basis for capital assets. Delays in probate may stem from valuation complications since the methods to determine date of death values is different for each asset.

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Don't Let Them Boss You Around!

Dealing with financial institutions is not always easy; nor are the institutions always in the right.  This is a big frustration in practicing estate planning and probate law.

Financial institutions often set policies or mandates for their customers that are not always consistent with the law or even the institution's own prior agreement with the customer.  Let me give you an example:

Last year one of my long-time clients died.  He had an IRA of about $800,000 that named his grandchildren as beneficiaries.  Given their young ages (around 30), they had the potential of stretching out the account over their life expectancies, which would allow for tremendous tax-deferred growth.

However, the life insurance and annuity company that served as IRA custodian refused to cooperate. After first saying that while they could not accommodate "stretching" themselves, they would allow a rollover to a beneficiary IRA in another company, they then said the account had to be paid out in one single, taxable payment.  This position was contrary to the company's IRA/Annuity agreement put in place when the IRA was established.

Luckily, after a sternly-worded letter pointed out that the company was in breach of its contract and that my client's grandchildren intended to sue for the more than $100,000 in damages they would likely incur in extra taxes and loss of growth, the company quickly relented.

The moral of the story is that one should not always give up easily when in a dispute with a bank or insurance company.  Sometimes one can even score a victory with a minimum of time or attorneys fees.


Self-Directed IRAs - Exercise Caution

A self-directed IRA is an IRA held by a custodian that allows investments in a broader class of assets than allowed by most IRA custodians, such as real estate, promissory notes and private placement securities. Because they normally include such alternative assets, the risk and rewards of self-directed IRAs may be greater than those of traditional IRAs.

Self-directed IRAs are becoming increasingly common, and while there are many legitimate investments available, there is more risk of investors becoming defrauded due to the nature of the assets involved.

To help raise public awareness of how to avoid fraud, the Retirement Industry Trust Association and the North American Securities Administrators Association are offering a free webinar on July 18 at 2:00 p.m. Eastern.  Click here to register.

Among the topics to be discussed are:

  • What are self-directed IRA accounts and why are they useful?
  • What are the warning signs of investment fraud in self-directed IRAs?
  • What should investors do if they suspect fraudulent activity?       
  • How do securities regulators help protect investors who use self-directed IRA accounts?

Owners of self-directed IRAs should also be careful when purchasing and operating rental real estate within the IRA, as violations of a "prohibited transaction" could trigger tax penalties.

Keep Track of IRS Rules on IRAs and Other Retirement Accounts

Owners of individual retirement accounts might face increased scrutiny by the IRS in the near future, posing the danger of hefty penalties for account mistakes that have previously gone unnoticed. As this recent online Wall Street Journal article notes, the IRS recently has been cracking down on secret foreign accounts and high earners. Now its attention is likely to turn to IRA account holders as the agency implements more aggressive enforcement strategies in reviewing IRA accounts. The agency will report its new policy regarding taxpayer errors to the Treasury Department by October 15, but until then, account owners should take extra care to ensure that any past withdrawal and contribution errors are corrected proactively and to prevent future errors, as the penalties for such errors can amount to 50% of the amount IRA holders failed to withdraw.

Here are some rules to keep in mind when reviewing your account with your lawyer, CPA or financial planner.

  • IRA owners are required to start making withdrawals from traditional IRAs by April 1 of the year after they turn 70½. Such withdrawals are calculated by dividing the total IRA balance as of December 31 of the year prior to turning 70½ by life expectancy, which can be found in IRS Publication 590.
  • IRA owners who have a spouse more than a decade younger who is their sole heir must consult a separate life-expectancy table in the same publication.
  • Workers whose money is in a 401(k) who don’t own more than 5% of the company do not have to make withdrawals from that account when the turn 70 ½, provided that they still work for the company sponsoring the account. However, withdrawals do have to be made if you roll your 401(k) over to an IRA, regardless whether you continue working for that employer after you turn 70½.
  • Traditional IRA owners cannot contribute more than $5,000 a year, or $6,000 if age 50 or older. IRA owners also cannot contribute more than their “earned income,” which includes wages, commissions, and alimony, but does not include rental-property income, pension, or deferred compensation. 
  • Mistakes regarding excess contribution can be corrected before October 15 of the following year by withdrawing the excess amount plus interest.
  • Inherited IRA accounts allow for tax-deferred growth and annual minimum required distributions. However, the person inheriting the account must make the required withdrawal and report it as ordinary income on his or her own tax return if the decedent account owner was over 70½ and failed to make the withdrawal for that year prior to death. Designated beneficiaries who inherit accounts from anyone other than a spouse must take withdrawals across their own life expectancies starting the year after the death of the original account holder. Beneficiaries who inherit an IRA account from a spouse can either roll the account into their own IRA or set up an inherited IRA and postpone taking required distributions until the decedent would have turned 70½.


IRS Allows Rollover of IRA from Estate to Spouse

As I tell my clients and audiences during presentations, one should never name one's estate as beneficiary of an IRA or other retirement account.  If the estate is the beneficiary, whether from a purposeful designation, failure to name a beneficiary, or failure update when a named beneficiary dies, the account must go through probate and stretching is unavailable.  The result is more fees and more taxes.

However, in some cases, the IRS will allow a surviving spouse who is the sole beneficiary of the decedent's estate to effectuate a rollover.  In Private Letter Ruling 201211034, the IRS stated that the surviving spouse and sole beneficiary of decedent's estate may either:

(1) by means of a trustee-to-trustee transfer, transfer the proceeds from the original IRA into an new IRA established and maintained in the spouse's name; or

(2) take a distribution of the proceeds of the original IRA and rollover the proceeds into a new IRA established and maintained in the spouse's name as long as the rollover transaction occurs no later than the 60th day from the date said proceeds of the original IRA are distributed.

The IRS further ruled that in either case, the proceeds in the trustee-to-trustee transfer or the timely rollover will be exempt from the withholding requirements under section 3405(c)(2) of the Code.


Another Flip-Flop on Inherited IRA Stretch

Tax season is in full swing, and I was recently out of the office for a few days, so I'm a bit late in reporting this, but the provision to do away with the ability of most IRA beneficiary's to stretch distributions over their life expectancies is now back on the table as part of the Senate Highway Bill.  See Page 28 for details.

Let's hope it goes away again, for good!

Stretch IRAs No Longer on the Chopping Block

The the provision that would limit stretch IRAs (I blogged about it yesterday) has been removed from the proposed Highway Bill.  Good news!  See this article on

No More IRA Stretching?

Senator Baucus' proposal to do away with stretching for most inherited IRA has not gone away as was anticipated earlier this month. A recently introduced Senate bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would disallow lifetime tax deferred stretching of IRAs for beneficiaries other than a spouse, minor children or the disabled. Other beneficiaries would be required to withdraw and pay taxes on the entire account within five years. The new law would be effective January 1, 2013.

See Senate Bill Threatens Life of Stretch IRAs

Senator Baucus Proposes Big Changes to IRAs

I've been a big proponent of planning to preserve the ability to "stretch" inherited IRAs over the life expectancy of the beneficiary, which allows for tremendous tax-deferred growth.  In what came as a big surprise, to me anyway, Senator Max Baucus recently proposed requiring that most inherited IRAs be paid out within five years.  Now, however, it appears that Baucus is backing off his revenue raising proposal.  This brings a collective sigh of relief from IRA owners, financial advisors, custodians, and tax professionals.

Sen Baucus Eyes Inherited IRAs for $4.6 Billion.

Drafting an IRA Trust - What You Need to Know

I have previously blogged about IRA Trusts, which are one of my favorite estate planning tools.  This afternoon I presented a 90 minute national continuing legal education teleconference and webinar on the topic.  It was my fourth presentation this week!  I'm thinking about becoming a professional speaker and giving up actually practicing law.  (That's not really true, but I have really come to enjoy helping to educate others).

For those who want an analysis of why and when IRA trusts make sense, an overview of the IRA Required Minimum Distribution rules, and an explanation of the tax issues involved, I offer the manuscript here for the benefit of my readers.

How to Draft IRA Trusts - Teleconference

Attorneys interested in learning more about IRA Trusts may wish to sign up for my 90 minute teleconference, How to Draft IRA Trusts, to be held on January 27, 2011 at 2:00 p.m. Eastern.  The program may also be of interest to CPAs, financial planners and trust officers.

IRA Trusts are great tool for protecting large IRAs for the benefit of younger generations.  Anyone with an IRA or retirement account over $250,000 or so should consider implementing one.

12 Scary Beneficiary Designation Mistakes

It's Halloween, and tonight kids of all ages will be dressed in an assortment of costumes, many designed to frighten.  What frightens an estate planner?  Here are a dozen examples of scary planning (or lack thereof) with regard to life insurance and retirement plan beneficiaries:

  1. Not naming a beneficiary at all (usually defaults to estate or next of kin).
  2. Naming your estate as beneficiary of your IRA or retirement plan.
  3. Naming a trust as beneficiary of your IRA or retirement plan (unless the trust is specifically drafted for that purpose).
  4. Not changing your beneficiary designation when you divorce.
  5. Not changing your beneficiary when your original beneficiary dies.
  6. Naming minor children as beneficiaries.
  7. Naming a beneficiary who is unable to properly manage money.
  8. Naming a beneficiary who is receiving needs-based governmental benefits.
  9. Naming a bankrupt beneficiary or one who has creditor problems.
  10. Naming a relative to take care of and use the money for another relative (instead of using a trust).
  11. Thinking your Will or Trust will control your life insurance or retirement account (it does not unless you specify it in the beneficiary designation.
  12. Failing to get confirmation of any change of beneficiary from the financial institution.

Talk to your estate planning attorney to make sure that your beneficiary designations are properly coordinated with your estate plan/  This will best protect your family, preserve your assets and save taxes.

Bankruptcy Courts Agree - Inherited IRAs Exempt

With the Texas case of In re Chilton reversed in U.S. District Court, which held that the debtor's inherited IRA was exempt from the claims of creditors, all bankruptcy courts that have ruled on the issue have determined that inherited IRAs are exempt in bankruptcy.  Citizens in Florida, Minnesota, California, Ohio, and Washington (and essentially any other state that relies on the federal, rather than state, exemptions) can rest assured that any inherited IRAs will be protected should they have to file for bankruptcy.*

However, bankruptcy trustees in the Chilton and In re Hamlin (Arizona) cases have appealed the decisions to the Fifth and Ninth Circuit Courts of Appeal, respectively.  (The links lead to Amicus briefs have been filed the the National Association of Consumer Bankruptcy Attorneys.)  The Tabor (Pennsylvania) case is on appeal to the Third Circuit.  I believe the lower court holdings will be upheld, but in the meantime, at least, there is no certain protection for Texas, Arizona and Pennsylvania residents.

In non-bankruptcy situations, and for residents of other states, such as North Carolina, the issue of protection of inherited IRAs remains unsettled.  Use of an IRA trust to protect the IRA you leave to your children or grandchildren can ensure protection and proper management.

*Selected citations: In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010), In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010), Bierbach v. Tabor, No. 10-cv-1580 (M.D. Pa. Dec. 2010) (unreported) (appeal  pending), No. 10-4660 (3rd Cir.), In re Weilhammer, 2010 WL 3431465 (Bankr. S.D. Cal. Aug. 30, 2010); In re Kuchta, 434, 463 B.R. 837 (Bankr. N.D. Ohio 2010); In re Thiem, 2011 WL 182884 (Bkrtcy. D. Ariz. 2010); and In re Johnson, 2011 WL 1674928 (Bkrtcy W.D. Wash. 2011)

Separate Accounts for Your IRA Will Help the Beneficiaries

The distribution rules for inherited IRAs generally make it advantageous to have separate accounts, which can be done during your lifetime or by December 31 of the year following your death. If you plan to leave an individual retirement account (IRA) balance to several beneficiaries, consider splitting each beneficiary's share into a separate account during your life. Why is it so important to have separate accounts?

Your spouse has more alternatives available if he/she is the sole beneficiary. A surviving spouse can roll over the IRA to an IRA in his/her name or treat your IRA as his/her IRA. With the rollover IRA, the surviving spouse can name his/her own beneficiaries, thus extending the IRA's life, and can defer payouts until age 70 1/2. However, to roll over the IRA, the surviving spouse must be the sole beneficiary.

When there is more than one non-spouse beneficiary for an inherited IRA, distributions must be taken over the oldest beneficiary's life expectancy. By splitting the IRA into separate accounts, each beneficiary can take distributions based on his/her life expectancy.

Separating accounts is especially important when one of the beneficiaries is not an individual or qualifying trust, such as a charitable organization. If you die before required distributions must begin at age 70 1/2, then the entire balance must be paid out in five years. If you die after required distributions begin, then the balance can be paid out over your remaining life expectancy. When the account is split, the individual beneficiary can take distributions over his/her life expectancy.

An important estate planning strategy for inherited IRAs is the ability to disclaim all or a portion of the IRA. If a beneficiary disclaims an IRA within nine months of the decedent's death, the disclaimed IRA is not considered a gift and would then go to the contingent beneficiary. By splitting the IRA into separate accounts, you can better control what would happen if each beneficiary disclaims his/her share. For instance, your beneficiaries might be your two children, with your grandchildren named as contingent beneficiaries. With separate accounts, each child could decide whether to disclaim the IRA, knowing the proceeds would then go only to their children.

From an administrative standpoint, it is often easier to have only one IRA rather than several. But with separate accounts, you can ensure that your IRA is set up to work to the best advantage of your beneficiaries.

Source:  TrustCounsel's May 24 , 2011eNewsletter by BizActions.

NC Supreme Court Decision Kinlaw V. Harris IRA Exemption Case

 I previously blogged about the ruling by the North Carolina Court of Appeals that in addition to IRA accounts being exempt from creditors, distributions from IRAs were also exempt.  On appeal, the North Carolina Supreme Court held that “there may be some circumstances under which withdrawn funds are no longer exempt from execution.” 

The Court stated that the trial court had acted within its broad equitable power when it approved a framework that the parties had established on their own to determine the exemption status of any IRA withdrawals. The Court then affirmed the Court of Appeals in its ruling that IRAs are exempt from the owner’s creditors, but it reversed the other part of the appellate court’s decision that had invalidated the escrow agreement. The Supreme Court then ordered the case remanded to the appellate court for additional proceedings.  Kinlaw v. Harris, No. 20A10, N.C. 11/5/10


Texas Court Rules Inherited IRA Protected in Bankruptcy

In a ruling entered on March 16, 2011, the U.S. District Court for the Eastern District of Texas, in Chilton v. Moser (2011, DC TX) 2011 WL 938310,  reversed the bankruptcy court and held that a debtor's inherited IRA met the requirements for a bankruptcy exemption under Bankruptcy Code §522(d)(12).

While this case is encouraging given other cases that have held that inherited IRAs were not protected, this holding applies only to bankruptcy cases, and is law only in the Fifth Circuit.  North Carolina is under the jurisdiction of the Fourth Circuit Court of Appeals.

See these earlier posts (1) (2) about the Chilton ruling in the bankruptcy court and other cases.

I continue to recommend IRA Trusts as the best way to protect IRA funds for beneficiaries.

Missed Your IRA Rollver Deadline? All May Not be Lost

The IRS is often accused of being heartless, but it does show some compassion to taxpayers who cannot complete an IRA rollover within the deadline because of extenuating circumstances.

The General Rules

Normally, you can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. (However, tax is automatically withheld unless the funds are directly transferred from one trustee to another.) The IRS has the discretion to waive the 60-day requirement if its imposition would

Factors Considered by the IRS

When considering whether or not to waive the 60-day requirement, the IRS considers all the relevant facts and circumstances, including:

  • Errors made by financial institutions.
  • An inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country and postal errors.
  • How the funds were used. For example, if a payment was made by check, was the check cashed?
  • The passage of time since the distribution.

 The IRS "will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer." (IRS Revenue Procedure 2003-16)

go against equity or good conscience. If you inherit an IRA from your spouse, you can choose to roll over the funds into your own IRA, as long as you meet the 60-day deadline.

What if the deadline is missed? Any taxable amount that is not rolled over must be included as income in the year received. If the taxpayer is under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10 percent additional tax on early distributions.

In a series of private letter rulings, the IRS has granted taxpayers relief from tax bills and penalties.

For example, one taxpayer from Maine was unable to complete a rollover transaction on time because a major snowstorm made it impossible to get to the bank. The IRS granted a hardship waiver because bad weather was beyond her control. (IRS PLR 200406054)

In another case, a 68-year-old taxpayer who was diagnosed with progressive Alzheimer's disease made a series of withdrawals from his IRA to purchase a house -- even though he had other funds available. Based on a medical evaluation requested by his daughter, it was determined that the taxpayer was incapable of understanding the tax consequences of making IRA withdrawals. The IRS waived the 60-day rollover requirement. (IRS PLR 200401025)

Reprieves have also been given to taxpayers whose financial institutions made errors. And in another case, a widow who did not meet the rollover deadline was granted a waiver because she was still in mourning.

Facts of the case: The taxpayer's late husband owned an IRA. Before he turned age 70 1/2, he withdrew some of the funds. After his death, the taxpayer -- who was the sole beneficiary and under age 70 1/2 at the time -- cashed in the funds and deposited the money in an IRA in her own name. However, she did not complete the rollover within 60 days.

The taxpayer told the IRS she was in mourning over the death of her husband during the time frame for the rollover. She was also involved in arranging her husband's funeral and taking care of his estate. While handling the estate proceedings, she rolled over the IRA proceeds.

After reviewing the facts, the IRS accepted the widow's claim. Her failure to comply with the rule was due to the death of her husband and the aftermath. The IRS also noted that the waiver request was submitted shortly after the taxpayer discovered she had missed the deadline. (IRS PLR 200415012)

These are only a few of the examples of waivers granted by the IRS. If you think you -- or a loved one -- might qualify for a hardship waiver, consult with your attorney about requesting a ruling from the IRS.

Source:  TrustCounsel's March 22, 2011 eNewsletter by BizActions.

Decision Time is Here if You Did a Roth IRA Conversion in 2010

The rule that made higher-income folks ineligible for Roth IRA conversions expired at the end of 2009. That made 2010 a big year for conversions, because even billionaires could make the transactions. If you are among the many who took advantage last year, that's great, but there's more to the story. You still have some major decisions to make in 2011.

Here's what you need to know.

When to Report the Taxable Income from a 2010 Conversion?

You have the option of deferring the taxable income triggered by a 2010 Roth conversion and then spreading it evenly over 2011 and 2012 (50 percent in each year). Other things being equal, the deferral option is obviously a good idea.

You also have the alternative option of reporting 100 percent of the conversion income on your 2010 return instead of deferring it to 2011 and 2012.

Now that the Bush-era tax cuts have been extended through 2012, the deferral option is the best choice for most taxpayers. However, there are exceptions.

If you believe you'll pay a significantly lower tax rate on the conversion income by reporting it all in 2010, you should probably do that. For instance, say your 2010 income was depressed, but 2011 and 2012 are looking good. In this scenario, reporting all the conversion income on your 2010 return and paying a lower conversion tax bill might make it worthwhile to pay the bill sooner rather than later.

You make the choice to report 100 percent of the conversion income in 2010 by including a certain form with your 2010 Form 1040. This is how you also make the deferral choice -- by filing an IRS form with your tax return. Your tax adviser will take care of the details.  

Deciding Whether to Reverse an Ill-Fated 2010 Conversion

You have until the October 17, 2011 extended deadline for filing your 2010 Form 1040 to reverse an ill-fated 2010 Roth conversion by "recharacterizing" the converted account back to traditional IRA status. Note that the October 17, 2011 deadline applies whether you actually extend your 2010 Form 1040 or not.

Why would you want to reverse a conversion? Consider the following example.

Example: In 2010, you converted three traditional IRAs into three Roth accounts. We'll call them Roth IRA-1, Roth IRA-2, and Roth IRA-3.

In 2011, the value of Roth IRA-3 takes a big dive due to horrible performance by the investments chosen for that account. If you take no action, you'll owe income tax on Roth IRA-3 value that no longer exists. This is not good!

But you have until October 17, 2011 to reverse the Roth IRA-3 conversion by recharacterizing that account back to traditional IRA status. After the reversal, it's as if the Roth IRA-3 conversion never happened, so the related conversion tax bill simply goes away.

Deciding Whether to Extend Your 2010 Return

If you did a Roth conversion last year, there may be two good reasons to consider extending your 2010 Form 1040 to October 17, 2011.

Reason No. 1:  Extending gives you more time to decide if you should choose the deferral option (which would result in splitting the taxable income from your 2010 conversion evenly between 2011 and 2012) or choose the alternative option of reporting 100 percent of the conversion income on your 2010 return. As we explained earlier, the deferral option is probably the right choice in most cases, but it depends on how your 2010 tax rate compares to your expected rates for 2011 and 2012. By October, you'll have a better handle on those years than you do right now. So extending is a no-brainer. Do it by filing Form 4868 on or before April 18, 2011.

Reason No. 2:  Filing an extension makes it simpler to handle the reversal of a 2010 conversion, if a reversal becomes advisable. If you extend your 2010 Form 1040, you report a reversal by simply showing no income from the now-reversed conversion on your return. That would be easy. But if you decide on a reversal after shipping off your return, you'll have to file an amended return (using Form 1040X) to delete the conversion income. That is still possible but not as easy.

The Bottom Line

The book is still open on your 2010 Roth conversion deal, because you must make important decisions in 2011. First and foremost, you may want to extend your 2010 return to give yourself extra time to make those decisions. Even if you've never extended before, doing it this time around might be a good idea. Consult with your tax adviser if you have questions about your situation.

Source:  TrustCounsel's March 22, 2011 eNewsletter (BizActions).

IRA Charitable Rollover is Back

There's good news if you've reached age 70 1/2, and you have an IRA and philanthropic inclinations. Through 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 resurrected the opportunity to make cash donations to IRS-approved charities directly out of your IRA.

Such qualified charitable distributions are federal-income-tax-free, but you get no itemized charitable deduction on Form 1040. But that's okay. The tax-free treatment of qualified charitable distributions equates to an immediate 100 percent deduction, since the otherwise-taxable IRA dollars are sent directly to charity.

Who Benefits Most
From this Strategy?

The qualified charitable distribution opportunity is beneficial for taxpayers who:

1. Have reached age 70 1/2.

2. Make charitable donations, but don't itemize deductions. (Under the normal rules, only itemizers get tax-saving benefits from charitable gifts).

3. Make large charitable donations, but their deductions would be delayed by the 50 percent-of-AGI limitation.

4. Want to avoid being taxed on required minimum distributions that they are forced to take from IRAs.

5. Are looking for a quick and easy estate-tax-reduction strategy.

Here is a detailed explanation of the qualified charitable distribution privilege, which was extended in the latest tax law.

The Basics

A qualified charitable distribution is a payment of an otherwise taxable amount out of a traditional or Roth IRA directly to an IRS-approved public charity. No more than $100,000 can be donated during any one year. However, if both you and your spouse have IRAs set up in your respective names, each of you is entitled to a separate $100,000 limitation.

As things currently stand, the ability to take advantage of this strategy is scheduled to expire at the end of 2011, but Congress may extend it again.

Income Tax Advantages

Qualified charitable distributions are not included in your adjusted gross income (AGI). This lowers the odds that you'll be affected by unfavorable AGI-based provisions -- such as the rule that can cause more of your Social Security benefits to be taxed and the rules that can reduce or eliminate deductions for medical expenses and passive losses from rental real estate.

In addition, you don't have to worry about the 50 percent-of-AGI limitation that can delay itemized deductions for garden-variety charitable donations of cash.

Finally, a qualified charitable distribution from a traditional IRA counts as a payout for purposes of the IRA required minimum distribution rules. Therefore, you can arrange to donate all or part of your 2011 required minimum distribution amount (up to the $100,000 limit) that you would otherwise be forced to receive and pay income taxes on. In effect, you can replace taxable required minimum distributions with tax-free qualified charitable distributions that go to your favorite charities.

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Don't Pay more than 24.5% Tax on Your Roth Conversion

Do you think you have to pay income tax on large ($500k++) Roth IRA conversions at the top marginal tax rates? Think again.  I have recommend the following strategy to several of my clients.  In most cases, you can stay with your current investment manager.

By utilizing the Jagen™ investment strategy, you may be able to lock in a 24.5*% rate on big IRA conversions.

A lot of advisors don’t like the idea of clients paying taxes early. They adhere to the mindset of “never pay a tax if you don’t absolutely have to.” Some advisors also still believe that clients might be in lower tax brackets later in life and don’t want to recommend taxable transactions at today’s top federal rate of 35%. But what if clients didn’t have to pay at top rates today? A Roth conversion at a 25% or less tax rate now will almost guarantee long-term tax savings for high net worth clients with large IRAs. How many clients with large IRAs will be in a retirement tax bracket less than 25%?

Jagen™ funds are eligible IRA investments and offer access to very high level institutional money management platforms. In addition, the Jagen™ fund design provides for a variance between the net asset value (NAV) and fair market value (FMV) of each investor’s interest in the funds.

For example, an investor might have an IRA holding Jagen™ fund units valued at $1 million NAV. This same account may only have a $700,000 FMV based on a qualified appraisal of those fund units. The reason for this valuation adjustment involves various features of Jagen™ funds which must be taken into account when determining FMV. Each fund is privately owned by a limited number of investors and fund units are not traded on open exchanges. Investors must commit to holding their fund units for specified terms. Thus FMV will typically be less than NAV during the holding period.

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Operation of Law: Coordinate your Will and Property Ownership, etc.

You know the importance of having a will. If you die "intestate" (without a will in legal language), your state's laws will determine the disposition of your assets. Your actual wishes will be irrelevant, even though they may be well-known to your friends and relatives.

An Effective Will

    Here are three basic things you should cover:
    Executor Designation. The executor is the person who becomes legally responsible for wrapping up your affairs after you die. He or she will pay outstanding bills, file any necessary tax returns, make tax payments, and dole out the remaining assets as instructed by your will. You should name at least one alternate choice, in case the first choice doesn't work out.
    Asset Disposition Instructions. A properly drafted will generally heads off disputes regarding which heirs get which assets.
    Guardian Designation. The guardian takes legal charge of your minor children, if you (and your spouse) die. Designate at least one alternate in case your first choice is unable to fulfill the role. For more information, click here to read our previous article, "Picking a Guardian for Your Kids"

But even if you do have a will, here is a critical point: Your will has no effect on asset distributions that automatically occur upon your death under "operation of law."

The most common applications of the "operation of law" principle is with life insurance death benefits and tax-advantaged retirement accounts.

For example, whoever you designate as the beneficiary of your life insurance policy will automatically receive the death benefit proceeds. It doesn't matter what your will says about who should receive the money.

Similarly, the person or persons designated as the beneficiary of your tax-deferred retirement account, traditional IRA, or Roth IRA will automatically receive that money by "operation of law." It makes no difference if your will contains contrary instructions.

Another example: When you co-own real estate with someone in "joint tenancy with right of survivorship," that co-owner automatically inherits the whole property, regardless of what your will says.

You may have other assets that are affected by the "operation of law" rules. Talk with your estate planning adviser to ensure your wishes are carried out.

Finally, at the same time you have your will drafted or revised, be sure to get all your beneficiary designations and real property ownership arrangements in line with your current intentions about who should receive what, after you die.

From today's TrustCounsel eNewsletter.

NC Court of Appeals Holds IRA Withdrawals Exempt from Creditors

The North Carolina Court of Appeals, in Kinlaw v. Johnson, confirmed statutory law protecting IRAs from creditors, and extended the protection to the account owner's legal use of IRA funds from collection on a creditor's judgment.  The court stated:

"We therefore hold, liberally construing the statute in favor of Defendant, Elmwood, 295 N.C. at 185, 244 S.E.2d at 678; Laughinghouse, 44 B.R. at 791, that N.C. Gen.Stat. § 1C-1601(a)(9) exempts Defendant's IRAs and Defendant's legal use of funds contained within those IRAs, from Plaintiff's judgment. As the issue is not before us, we do not make any holding regarding any question concerning contributions Defendant may have made, or may in the future make, to his IRAs." (Emphasis added)

Michael Kinlaw, Plaintiff, v. John J. Harris, Jr., M.D., Defendant, NC App No. COA08-1584, December 08, 2009

Retirement Accounts and Estate Tax Planning

Successful estate planning generally involves passing on your assets to your heirs at a low tax cost. To help achieve that goal, there are a few things to keep in mind about retirement accounts.

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IRA Experts Keen On Roth Conversions

Three of four prominent IRA experts have either already utilized a Roth conversion or plan to do so, and the fourth says he plans to if the market gets even worse.

Click here to see what Ed Slott, Robert Keebler, Seymour Goldberg and Natalie Choate have to say about their personal Roth conversion decisions.

While I have attended programs by Slott, Keebler and Choate, I certainly don't have the same status in the tax world as do they (nor their wealth, I would venture to guess).  But for what it's worth, at age 49 I am leaning against doing a Roth conversion for two primary reasons:  1)  Even with the coming tax increases, I believe my tax rate during retirement will be lower that it is presently, and 2)  I don't want to spend my cash reserves paying the taxes that will be due as a result of the conversion.

Roth IRAs offer Tax and Estate Planning Advantages

Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.

In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages - especially if you can get a large portion of your wealth into an account.

Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way - by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.

* You don't have to pay the 10 percent premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.

* Your conversion tax bill is significantly lower, thanks to the individual income tax rate cuts made in the 2003 tax law. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.

* The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.

(See below for an important future change regarding an income limit for Roth conversions.)

Under prior law, an individual with modified adjusted gross income (MAGI) above $100,000 could not convert a traditional IRA into a Roth IRA. But the income limitation was eliminated beginning in 2010. For Roth conversions that occur in 2010 only, half of the taxable income triggered by the conversion generally can be reported in 2011 and the other half in 2012. For conversions in 2011 and beyond, all the income must be reported in the conversion year -- as under prior law.

There are only two requirements for tax-free withdrawals. You must:
1. Have a Roth account that's been open for more than five years.
2. Be age 59 1/2 or older.

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What Will Happen to Your Retirement Accounts After You Are Gone?

When Trusts Meet Retirement Accounts, a recent article on, explains the benefits of using a trust to pass on IRAs and other retirement accounts to children.  Properly drafted trusts can provide protection against losing or depleting the funds due to mismanagement, creditors, and divorce.  What's more, since the accounts can then be "stretched" over the beneficiaries' lifetimes, the effect of tax-deferred compounding on the account values is simply astounding.

Due to the complexities in this area of the law, working with an attorney experienced in drafting such trusts and well-versed in applicable law is imperative.

I regularly recommend Standalone Retirement Plan Trusts to clients who have $200,000 or more in retirement savings and want to ensure that the funds will be protected after their deaths.

Inheriting an IRA from a spouse? Make sure you know the rules.

When it comes to inheriting an IRA, spouses have more flexibility than other heirs. Here are the basic rules:

  • The surviving spouse may treat the inherited IRA as his or her own, roll it over into an existing IRA, or remain the beneficiary on the account.
  • As a surviving spouse, you may only treat the IRA as your own if you are the sole beneficiary. If there are multiple beneficiaries, the account can be separated so the spouse's share is in its own account.

If you elect to treat the IRA as your own, the IRA is simply retitled as the spouse's IRA. As an alternative, you can roll the balance over to your own IRA. Since the account is then considered the yours, you can then name your own beneficiaries. Withdrawals are subject to a 10 percent federal income tax penalty if you have not reached age 59 1/2 and you must start taking required minimum distributions (RMDs) at age 70 1/2. RMDs are calculated using the uniform IRS table, which assumes a joint life expectancy with the beneficiary considered 10 years younger.

  • If the surviving spouse remains the beneficiary of the IRA and is the sole beneficiary, distributions are required by the later of the year the original IRA owner would have reached age 70 1/2 or by December 31 of the year following the IRA owner's death. If the spouse is not the sole beneficiary, then distributions must begin by December 31 of the year following the IRA owner's death.
  • Required distributions are calculated based on the single life expectancy table for beneficiaries. However, spouses recalculate their life expectancies every year by looking up the factor on the IRS table. Non-spouse beneficiaries get the life expectancy figure from the table in the first year, but in each subsequent year, they reduce the factor by one year. Since the table assumes a single life expectancy, distributions would be higher than if the spouse treated the IRA as his or her own.

Although lower RMDs are required when a spouse rolls over or treats the IRA as his or her own, there are circumstances when the spouse might want to remain the beneficiary:

  • A spouse under the age of 59 1/2 can make withdrawals from the beneficiary account using the life expectancy table, without paying the 10 percent federal income tax penalty. Once the account is rolled over, withdrawals before the age of 59 1/2 would result in a 10 percent federal income tax penalty.
  • A spouse who is significantly older than the deceased IRA owner can delay RMDs by remaining the beneficiary. He or she would not have to take RMDs until the deceased spouse would have reached age 70 1/2, even if the surviving spouse is already past age 70 1/2.
When a Roth IRA is involved, the surviving spouse would normally want to roll the Roth IRA over or treat it as his or her own. Then, no distributions would be required during his or her lifetime. If the surviving spouse remains the beneficiary, then distributions would be required as described above for traditional IRAs.

Finally, depending on the provisions in your spouse's will or trust, and the total value of all of your assets, it may make sense to disclaim the IRA to save estate taxes at your death.  With a properly worded will or trust, you can still use the IRA during your life time. Consult with your estate planning attorney for more information.

From TrustCounsel's Jume 22 email newsletter.


How about an estate tax-free IRA?

With the federal estate tax returning next year at a rate of 55%, with only a $1 million exemption, planning to reduce estate tax should be on the forefront of the minds of those fortunate enough to have assets in excess of that amount.

One technique that was shared with me recently by Chad Virgil, CFP, works as follows (example scenario):

  • 75 year old man in standard health
  • $500,000 IRA
  • Taxable estate
  • The IRA is converted into a $500,000 single-life qualified annuity, which generates $48,145 annually for life, with no residual estate tax value.
  • After income taxation at the highest rates (35% federal, 7.75% NC), the net income per year is $27,563.
  • An irrevocable life insurance trust (ILIT) is formed, and purchases a $500,000 single person guaranteed universal life policy - premium is $24,058 per year.  This amount would be covered by the gift tax annual exclusion of $13,000 for just two beneficiaries of the ILIT (e.g two children).  The ILIT means that the $500,000 will be received estate tax-free by the children.
  • $3,505 of net income is left over each year - enough for a nice trip to the Caribbean!

Note:  the numbers used in this illustration are from March, 2010, with a MetLife annuity and Hartford life insurance policy.

Inherited IRAs - the continuing saga in bankruptcy

I previously blogged about inherited IRAs being subject to the claims of creditors, both in (In Re: Jarboe) and outside of (Robertson v. Deeb) bankruptcy, and one case (In Re: Nessa) where an inherited IRA was determined to be protected under federal law.

Here's a summary of the latest ruling, which contradicts the Nessa holding, courtesy of Robert Keebler, CPA:

In In Re: Chilton, the United States Bankruptcy Court for the Eastern District of Texas found that an inherited IRA is not equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. § 522(d)(12).  The Court also found that an inherited IRA is not a traditional IRA exempt from taxation under IRC § 408(e)(1).   In Re: Chilton, 105 AFTR 2d 2010-XXX, 03/05/2010;

There is really no way to reconcile the holdings in Nessa and Chilton, but the Nessa decision is clearly the minority view.  If you want to protect your IRA from your heirs creditors, it is vitally important to utilize a standalone IRA trust .



Roth Conversions - Just Because You Can Doesn't Mean You Should

Some financial advisors are warning against a Rush to Roth.  The key to is to approach the idea cautiously and do a comprehensive analysis.  Whether a Roth conversion makes sense is a highly individual decision, to be made in consultation with your advisors.

I did a Roth conversion the last time the IRS allowed us to pay the taxes over a couple of years, which was about 10 years ago. This time around, however, I'm not so keen on the idea.

I have not completed an analysis of my own situation at this point, but I will probably decide against a conversion of my traditional IRA, as most of the additional income would likely be taxed at combined federal and state rates of over 40%.  Even with virtually certain future income tax rate increases, I expect that my taxable income will be lower in retirement.  That's particularly true if I head to sunny Florida, where there's no state income tax!  Plus, I'm not keen on giving Uncle Sam and the NC Department of Revenue $40,000 + of my savings - I may need it down the road (or even next year, as my son heads off to college)!

8 Reasons to Convert to a Roth IRA

As most people know by now, the $100,000 income limit on the ability to convert a traditional IRA to a tax-free Roth IRA will disappear next year.  In addition, a taxpayer who does a conversion in 2010 can pay the tax due from the conversion in 2011 and 2012 (by including 50% of the conversion income in each year).  There are innumerable articles about Roth conversions and the math involved, with many differing opinions about the advisability of converting.  Bottom line, make sure you hire the appropriate professionals to crunch the numbers and otherwise advise you before making a decision.  You really need to consult your financial advisor, CPA and estate planning attorney to ensure that you are fully informed.

Here's a quick list from tax guru Bob Keebler, CPA:

(1)  Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, high basis non-deductible traditional IRAs, etc.

(2)  Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder.

(3)  Taxpayers benefit from paying income tax before estate tax (when a Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

(4)  Taxpayers who can pay the income tax on the IRA from non-IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields.

(5)  Taxpayers who need to use IRA assets to fund their Unified Credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds.

(6) Future distributions to beneficiaries are generally tax-free.

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The IRS Loves Retirement Accounts

Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.

There are several strategies available to help reduce the impact of these taxes:

  • Structure accounts to provide the longest term payout possible (stretch).
  • Name a Retirement Trust as Beneficiary
  • Take the money out during lifetime and pay the income tax, then gift the remaining cash either outright or through an irrevocable life insurance trust.  Or consider a Roth conversion.
  • Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a wealth replacement trust.
  • Name a Charitable Remainder Trust as beneficiary with a lifetime payout to your surviving spouse. The remaining assets would pass to charity at the death of your spouse.
  • Give the accounts to charity at death.



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IRS Provides Guidance on 2009 RMD Waivers

From IR 2009-85:

WASHINGTON ― The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.
Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year.  Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.





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Inherited IRAs are Not Creditor Protected - #2

I previously blogged about a Bankruptcy Court in Texas holding that an inherited IRA was not exempt from claims of the new owner's creditors.   In re Jarboe, 2007 WL 987314 (Bkrtcy S.D. Tex. 2007).

A new ruling out of Florida reaches the same conclusion, stating:

"[t]he purpose of the . . . Legislature in exempting individual retirement accounts is to allow debtors to preserve assets which have been earmarked for retirement in the ordinary course of the debtor's affairs. Such a purpose would not be served by upholding [the beneficiary's] request to keep his interest in the IRA as exempt."   (Second District Court of Appeals in Robertson v. Deeb (2D08-6428))


Given that Texas and Florida are perhaps the two most debtor-friendly states in the nation, this trend is certainly something to be concerned about.  It's probably just a matter of time before we see such a ruling in North Carolina.

Don't wait until it's too late - protect your legacy by using a standalone IRA Trust.


Is Your Advisor IRA Savvy?

Last week I attended a presentation by Ed Slott, CPA, America's foremost IRA expert.  A couple of years ago I participated in an extensive two-day training with Slott, and found him to be both informative and entertaining.  One word of wisdom from Slott - check with your retirement plan custodian to review your beneficiary designations!  Often these are outdated, incorrect, or even missing.

The Required Minimum Distribution (RMD) and other rules for IRAs and qualified plans (such as 401(k)s) are complex and require constant study to stay current.  The truth is that very few advisors, whether they are attorneys, CPAs or financial planners, are fully aware of the rules.  So, if you have an IRA or other retirement account over $100,000, make sure that you find an advisor who is an IRA expert.  Failing to plan properly could cost you or your family thousands of dollars in extra income taxes or even unnecessarily subject the IRA to the claims of creditors.

Your IRA may be at Risk

In North Carolina standard IRAs are exempt from creditors' claims, under state law and federal bankruptcy law.  Also, qualified retirement plans, such as 401(k)s and 403(b)s, are protected under the federal ERISA law.

However, ERISA treats employer funded IRAs like SEP-IRAs and SIMPLE IRAs differently from qualified plans, and does not offer creditor protection for such IRAs.  In addition, since ERISA states that it trumps state law with regard to plans covered by ERISA, it is doubtful that the North Carolina statutory exemption for IRAs works to protect SEP and SIMPLE IRAs.

Also, it is questionable whether inherited IRAs are protected from creditors.  At least one federal bankruptcy court has ruled that inherited IRAs are not exempt in a bankruptcy proceeding.

Thus, if you have a SEP, SIMPLE, or inherited IRA, it may be at risk if you are ever sued.

So, what to do?

If you are no longer contributing to the SEP or SIMPLE, you may be able to roll it into a standard IRA so that it's fully protected (under NC law and up to $1 million in bankruptcy).

Another way is to move your IRA offshore to a jurisdiction like Nevis or the Cook Islands.  Your IRA can establish a limited liability company (LLC) in one of these jurisdictions, and then the custodian transfers your IRA funds to the foreign LLC in exchange for the foreign LLC’s membership interest. Your IRA then owns the foreign LLC. Your IRA has no assets within the United States - it owns only the membership of the foreign LLC.

Your IRA would then be protected in the same manner as any LLC in that jurisdiction.  The creditor would have to initiate a lawsuit in the foreign jurisdiction, and in the event it prevailed, would have only a charging order remedy.  This remedy does not allow the creditor to invade the IRA to satisfy its claim, but only get its proportionate share in the event of a distribution from the LLC.

Is your IRA heir-tight? Probably not...

The recent article How to leave an IRA that's heir-tight contains lots of good information and advice about IRA distribution planning, but there's a glaring omission - no discussion of the use of trusts to protect IRAs for the benefit of one's heirs.

A stand alone IRA trust provides for maximum stretch out of the IRA payments will providing maximum flexibility and protection.  Anyone who has an IRA or other retirement plan over $200,000 (all accounts combined) or so who ultimately wants to leave it to children or grandchildren should seriously consider using an IRA Trust.

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U.S. Tax Court Rules on Exceptions to IRA Early Distribution Penalty

The United States Tax Court, in Benz v. Commissioner, 132 TC No 15, recently ruled that a taxpayer taking a series of equal periodic payments as an exception to the 10% early distribution penalty for IRA withdrawals could also take advantage the early distribution penalty exception for payment of higher education expenses without the education payment being considered a modification of the series of equal payments.

Those taxpayers who treated a similar situation in the last three years as a modification of their series of equal periodic payments and ended up paying the 10% penalty should consider filing amended returns.


Public Good IRA Rollover Act of 2009

This bill was recently introduced in the U.S. House of Representatives, and is for the expansion of IRA charitable rollovers, which are currently limited to those who have reached 70 1/2, may be no more than $100,000, and must go to a 501(c)(3) organization.

The bill does away with the $100,000 limit, lowers the eligible age to 59 1/2, and expands the permissible recipients for those at least 70 1/2 to split interest entities (e.g. charitable remainder trusts).

Click "Continue Reading" for the full text of the bill.


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Obama's Budget Proposal - Automatic IRAs

From my CPA colleagues at Virchow, Krause & Company - a summary of the proposals to help expand retirement savings.

10 Ways to Wreck Your Retirement

Here's a great, to the point article on what NOT to do to ensure you have sufficient retirement savings - from the National Center for Policy Analysis.

Top 10 Facts About Taking Early Retirement Plan Distributions


From the IRS:

If you took an early distribution from your retirement plan, here are some things you need to know:

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.

2. Early distributions are usually subject to an additional 10 percent tax.

3. Early distributions must also be reported to the IRS.

4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.

5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.

7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.

8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

9. There are several exceptions to the additional 10 percent early distribution, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled. Other exceptions can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs).

10. More information about early distributions from retirement plans and the additional 10 percent tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available on or by calling 800-TAX-FORM (800-829-3676).


  • Publication 575, Pensions and Annuities (PDF 227K)
  • Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)  
  • Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts   (PDF 72K)
  • Form 5329 Instructions (PDF 40K)


Teitell Urges More Favorable IRA Charitable Gift Rules

Conrad Teitell, one of the nation's most foremost charitable gift planning attorneys, has, on behalf of the American Council on Gift Annuities and the National Council on Planned Giving, written Congress urging changes to IRA distribution laws:

  • Removing the $100,000 cap on IRA charitable rollovers
  • Allow similar transfers to charitable gift annuities and charitable remainder trusts
  • Make the law permanent

Click "Further Reading" for the full text of the letter and the proposed bill.  The same letter was sent to House leaders.

BTW, Teitell is a former professor of mine, and a very entertaining speaker.  I'll never forget how he incorporated a rubber chicken into a talk on income and estate rules relating to charitable giving!

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Finance Charity-Owned Life Insurance with your IRA

In a Private Letter Ruling issued late in 2007, the IRS approved a clever technique to leverage a gift  to your favorite charity using your IRA and life insurance.  Developed by Douglas Delaney, a CPA and attorney in South Carolina, the "CHIRA®"  works something like this:

  1.  The donor rolls over funds from a regular IRA to a self-directed IRA. The donor and the charity apply for the life insurance.
  2. An loan (with market rate interest due) is made to the selected charity from the donor's new IRA. The loan is secured by a new life insurance policy purchased by the charity on the life of the donor.  The charity signs a promissory note payable to the IRA.
  3. The charity assigns to the IRA the portion of the death benefit equal to the outstanding loan from the IRA.

Here's an example for the CHIRA® website:

A 74 year old donor decides to loan $1 million from her IRA to her favorite charity. The charity uses $30,000 each year to purchase a $1 million life policy on her life. The death benefit is used to fully repay the loan. Today, the charity will have $970,000 to allocate to their charitable purposes as well as a prudent interest and premium reserve. Whether it is cash to sustain their budget for a few years, or to put shovels in the ground two years early, the CHIRA® plan provides immediate capital without income tax to the donor.

The IRS concluded that (1) this is not a prohibited transaction within the meaning of Section 4975 of the Internal Revenue Code which would terminate the IRA under Section 408(a)(3), and (2) is not a prohibited investment in life insurance by an IRA under Section 408(a)(3) of the Code.  What this means is that this technique results in no taxable income to the donor.

However, this a complex, multi-step technique, and everything must be done correctly in order to achieve the intended consequences.  If you decide that a CHIRA® makes sense for you, make sure that you consult with tax counsel to ensure that you will face no adverse tax consequences.

Click "Continue Reading" for the full text of PLR 200741016.

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Bush Signs Worker, Retiree and Employer Recover Act of 2008

This morning President Bush signed H.R. 7327, the “Worker, Retiree and Employer Recovery Act of 2008” (WRERA). The law suspends Required Minimum Distribution (from IRAs and qualified plans) requirements for 2009 and requires employers to offer non-spousal rollovers from qualified plans to inherited IRAs beginning January 1, 2010.

Required Minimum Distributions to be Suspended?


This update is courtesy of Barry C. Picker, CPA:

It looks as if Congress has passed, and sent to Pres. Bush, H.R. 7327; Worker, Retiree, and Employer Recovery Act of 2008, which among other things, suspends the excise tax on the failure to take a minimum distribution.  In other words, it suspends the requirement to take a minimum distribution.

However, this provision is effective for 2009 RMDs; unfortunately for most retirees, the problem is that they have to take their 2008 minimum distribution that was computed on a higher asset value, and must take it now from a possibly depleted account.  So retirees who have not taken their 2008 minimum distribution will have to sell potential loss assets to meet the 2008 distribution requirement.  They could alternatively take a distribution in kind, but if asset values have decreased, they will have to take more shares in order to meet the distribution amount.

The Act states that it does not change the required beginning date for someone whose RBD would be in 2009, nor does it suspend (I think, someone can check me on this) the distribution requirement for someone whose RBD is 2008.  So if someone dies, the after death determination of death before or after RBD is not changed.  However, if someone is currently a beneficiary under the five year rule, 2009 does not exist, so if the fifth year is 2009, it’s now 2010.  If the fifth year would be 2012 it’s now 2013.


Big Tax Losses in 2008? Consider a Roth Conversion

Self-employed persons or small business owners such as home builders with big tax losses for the year should consider converting their traditional IRAs to Roth IRAs this year to "soak up" some or all of the loss.  This planning could be even more beneficial given that the securities or mutual funds in the original IRA are likely to be depressed in value, which means less income will be realized.

Make sure you speak to your tax advisor soon if you think a rollover may be of benefit to you in 2008.  This plan will not work if you have long term capital losses (e.g. from stock sales) rather than ordinary losses (for example, from a S Corporation or LLC), as only $3,000 in capital loss can be used to offset ordinary income.

Update Your Beneficiary Designations

Failure to update one's beneficiary designations for life insurance, annuities and retirement accounts is all too common.  One of the more common problems stems from not changing beneficiary designations after a divorce.  The law does not automatically cancel beneficiary designations in favor of a former spouse.  This can cause a major disruption of one's estate plan, have unintended tax consequences and create conflict among family members.

Earlier this month the United States Supreme Court heard oral arguments in the case of Kennedy v. Plan Administrator for DuPont Savings.  This case involves a deceased father who never changed his retirement plan beneficiary after his divorce, and has pitted daughter against mother (the ex-wife).

Here is an excerpt from the Legal Information Institute Bulletin at Cornell University Law School:

"[T]he Supreme Court will determine whether a divorcing spouse must obtain a Qualified Domestic Relations Order to waive the right to receive an ex-spouse's pension benefits under the federal Employee Retirement Income Security Act ("ERISA"). A decision upholding the Fifth Circuit will make Qualified Domestic Relations Orders ("QDRO") the only method by which an ex-spouse can waive rights to pension plan benefits, while a reversal would permit voluntary non-qualified waivers as well. In either case, the Supreme Court's decision will impact pension plans, their employee plan members, and beneficiaries. "


Other common problems are naming minor children as beneficiaries, or not naming a new spouse if such is desired.

So, please check all of your beneficiary designations, and update them if necessary.  If you have any questions about the best way to handle the designations, consult with an estate planning attorney.  And finally, make sure that your designations are acknowledged by the institution!


Should You Roll Your 401(k) Over into an IRA?

Once you cease working for an employer, you have the option of rolling over to an Individual Retirement Account (IRA) any retirement plan (such as a 401(k)) established for you while employed.

In most cases, it is beneficial to do such a rollover because of the advantages offered by an IRA.  However, in certain cases it might make sense to leave the funds in the original account.  Read on:

Advantages of IRAs:

  • Early retirement choices - Unlike in a 401(k), penalty-free withdrawals may be had from an IRA before age 59 1/2 under the "substantially equal periodic payments" rule.  This rule allows an account owner to make withdrawals of a specific amount over the longer of a period of five years or until attaining age 59 1/2.
  • More favorable beneficiary options - Some employer sponsored plans require non-spouse beneficiaries to take withdrawals from the plan over a five year period, lessening the opportunity for tax-deferred growth and triggering more income tax.  With IRAs, non-spouse beneficiaries may "stretch" withdrawals over their lifetimes, creating tremendous growth potential for younger beneficiaries.
  • Penalty-free withdrawals - With IRAs, these are allowed for higher-education expenses and first-time home buying.  Not so with employer plans.
  • Greater investment choices - Some employer plans have limited investment options, and only one account is permitted.  IRAs offer much more freedom in choosing investments, and different accounts with different investment strategies (and/or beneficiaries) may be set up.
  • Fee payment options - IRA administrative fees may be deducted from the account, or may be paid from non-retirement funds.  The latter type of payments, which are not allowed in employer plans, are deductible as a miscellaneous itemized deduction.

Advantages of Employer Plans:

  • Reduction of capital gains in company stock - company stock moved out of a 401(k) into a non-retirement account is taxed based on the value of the stock when purchased, rather than the date of transfer.  If the stock is first moved to an IRA, this tax break is not available.
  • Penalty-free withdrawals at age 55 - employees who cease employment at 55 (or anytime before 59 1/2) can take penalty-free withdrawals starting immediately.  Except for the substantially equal periodic payments rule, IRA account owners must wait until 59 1/2.
  • Avoidance of North Carolina income taxes - Certain retired government workers can claim an exemption from state income for their retirement plan payments.  If the account was rolled over into an IRA, the exemption would not be available.


Bailout Includes IRA Charitable Rollover

The Emergency Economic Stabilization Act of 2008 (H.R. 1424) passed the House yesterday, and was quickly signed by President Bush.  The law includes an extension of the IRA Charitable Rollover, which allows individuals age 70 and older to transfer up to $100,000 per year to public charities, tax-free.  It is in effect for 2008 and 2009.

House and Senate Bills have same IRA Charitable Rollover Provision

Both the Senate's Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (H.R. 6049), which was passed on September 23, 2008, and the House's Renewable Energy and Job Creation Tax Act of 2008 (H.R. 7060), which is expected to pass this week, contain identical IRA Charitable Rollover provisions.  Both bills extend the IRA charitable rollover from January 1, 2008 to December 31, 2009. As was in for 2007, IRA owners over age 70½ would be allowed to transfer up to $100,000 per year to qualified public charities, tax-free.

Tax Extenders Bill Still in Limbo

Democrat and Republican Senate leaders continue to clash over the tax extenders bill, which contains an extension of the $100,00 IRA charitable rollover and other income tax benefits.  Stay tuned...

Separate Retirement Plan Trust is the Best Choice

I generally recommend that persons with IRA or qualified plan assets of at least $200,000 should consider a Standalone IRA/Retirement Plan Trust. 

There are many reasons that justify creation of a separate trust just to receive retirement plan assets. Though most attorneys think it can be done with only one master trust, there are various drafting problems and post-mortem administrative problems that are lessened by using a separate trust for retirement benefits alone. Many of the benefits of a separate trust(s) established to solely hold retirement plan or IRA assets after death are included below.

This posting is adapted from a presentation by Ed Morrow, J.D., LL.M.

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Assignment of IRA by Estate to Charity is Not a Transfer

These are the facts from a recent Private Letter Ruling from the IRS:

The Decedent had a "pour-over" will requiring that his probate estate be added to his living trust. The trust provided that upon Decedent's death distributions are to be made to certain beneficiaries with the remainder going to four charitable organizations. The Decedent had an IRA at the time of his death but there was no designated beneficiary as the named beneficiary was deceased. Therefore, the Decedent's estate became the beneficiary by default. The Trustee of the living trust and the personal representative of the estate proposed to satisfy the residuary bequest to the charities by assigning the IRA to the four named charities.

IRC Section 691(a)(1) provides that income in respect of a decedent (IRD) assets owned at death are included in the gross income of the estate or the person, who, by reason of the owner's death, acquire the right to receive the asset. A traditional IRA is an IRD asset (Rev. Rul. 92-47, 1992-1 C.B. 198). Under Sec. 691(a)(2), if a right to an item of IRD is transferred by an estate who received the asset by reason of the owner's death, the asset is included in the gross income of the estate.

However, the term "transfer" under Sec. 691(a)(2) does not include the transmission of an IRD asset at death if the transmission occurs pursuant to the right of the person receiving the asset by reason of a decedent's death by bequest, devise or inheritance. The IRS held that the transfer of the IRA in satisfaction of the Decedent's residuary bequest from his trust is not a transfer within the meaning of Sec. 691 and is thus not includable in the gross taxable income of decedent's estate.

The IRD will be considered income to the four charities, but since they are tax exempt organizations, no tax will be due.

To see the full text of PLR - 200826028, click "Continue Reading."
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Renewable Energy and Job Creation Act of 2008 Fails

The Renewable Energy and Job Creation Act of 2008, the latest version of legislation featuring several tax extenders, alternative minimum tax relief and energy provisions failed to pass the Senate.  Championed by Senate Finance Committee Chair Max Baucus, the bill faced stiff opposition from Republicans who objected to the tax offsets, most notably taxing offshore deferred compensation of hedge fund managers and delaying a business tax interest deduction until 2019.

Baucus has already crafted a revised bill, the Energy Independence and Tax Relief Act of  2008, which should be submitted to the Senate next week.  Democrats oppose any tax extenders without tax offsets.

See my earlier postings under the heading Pending Legislation for a more detailed description of the tax extenders, which include the IRA charitable rollover.

House Passes Extension of Charitable IRA Rollover

On May 21,  the U.S. House passed the Renewable Energy and Jobs Creation Act of 2008 (H.R. 6049). The act includes a one year extension of the Charitable IRA rollover and similar tax provisions and updated tax incentives for renewable energy.  The state and local sales tax deduction, and tuition deduction extensions are also included.

The Senate and the White House support the continuation of the charitable rollover, but Bush will most likely veto the act in its current form since it includes $54 billion in tax increases and no extension of AMT relief.

IRA Charitable Rollover and Other Tax Extensions Passed by House Committee

The House Ways and Means Committee passed H.R. 6049, the Energy and Tax Extenders Act of 2008, on May 15, 2008. The bill includes a one-year extension of the $100,000 IRA Rollover for taxpayers age 70 and over, as well as many other tax extenders and renewable energy provisions.

Included in the bill are one-year extensions on the deduction for state and local sales tax, a deduction for educational expenses, the teacher's expense deduction, a provision allowing non-itemizers to deduct a portion of property taxes, and an expanded child tax credit for low-income taxpayers.

Charitable-related extensions include the enhanced deductions for gifts of apparently wholesome food, gifts of books to schools, gifts of computers for educational purposes and favorable Subchapter S basis rules for gifts of appreciated property.

Charles Rangel (D-NY), Chairman of the Committee, commented that "This bill would provide critical tax relief to help working families cope with the rising cost of living. Furthermore, this bill would extend vital tax incentives for American businesses to help them invest in new technologies and remain competitive internationally." He also stated that the bill's energy provisions will "reduce our dependency on foreign oil." 

Let's hope that's true!  Look for passage of the bill by the House and Senate sometime next month.

This post is excerpted from an article in the May 19, 2008 Giftlaw eNewsletter.

IRA Beneficiary Rules - What You Don't Know Can Hurt Your Kids

Click here for a good, concise article on one of the most important but frequently overlooked aspects of estate planning, particularly the interplay of IRAs and trusts.  While the articles discusses the impact of estate taxes on IRAs, it does not mention that the current federal estate tax exemption is $2 million, so most IRA owners, even of relatively large accounts, need not worry about estate taxes.

However, providing protection of an inherited IRA from creditors, divorce and mismanagement,is something most people should consider.  See my previous postings on IRA/Retirement Plan Trusts under the IRA heading.


Congress Fails to Make Post-Death Non-Spousal IRA Rollovers Mandatory

I previously blogged that employers would be required to allow post-death non-spousal rollovers of their retirement plans to IRAs starting in 2008.  However, that did not come to pass:

This information is courtesy of attorney Phil Kavesh in California:

The IRS had previously announced that it would accept as part of the Technical Correction Bill to the Pension Protection Act of 2006 a provision that would require all corporate retirement plans to offer non-spouse beneficiaries a trustee to trustee lump sum rollover to an Inherited IRA, thereby allowing non-spouse beneficiaries to take advantage of RMD stretchout and avoid the one-year and five-year rules under most corporate retirement plans.

The Technical Corrections Bill recently passed did NOT include this provision and the IRS has decided not to move from its previous position that permitted each corporate retirement plan to decide whether or not to offer this rollover.  This development means that those with corporate retirement plans who have reached normal retirement age and can take an in-service distribution or have retired and left their money in the plan should consider rolling it out to an IRA now, so that non-spouse beneficiaries may take full advantage of RMD stretchout.  You may want to check the individual plan first, to see if it has been amended to allow the non-spouse rollover, as I anticipate that many plans will start to make this change over time.  If the plan has already made the change, a current rollover would not be necessary.  

For creditor, divorce and other protections for an inherited IRA, while still allowing the stretch, a standalone IRA/Retirement Plan Trust makes sense for most persons with retirement account values in excess of $200,000.  See my posting on IRA Trusts.

IRS to Require Retirement Plans to Offer Non-Spousal Rollovers to IRAs

Beginning in 2008, retirement plans (such as 401(ks) must allow non-spouse beneficiaries to roll over to an IRA.  The following is from Ed Slott, CPA:

The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to do direct transfers from the plan to a properly titled inherited IRA and take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.

The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetime as if they inherited from an IRA. That was the plan. But in January 2007, IRS issued Notice 2007-7 which stated that the provision was not mandatory for plans. This created confusion and controversy and took the wind out of sails of this provision. This was contrary to what Congress intended. Congress realized this and has proposed a technical correction to the law stating that the plans MUST allow the non-spouse direct rollover to an inherited IRA.

In light of the pending Congressional technical correction, IRS reversed its position and now says that the non-spouse rollover provision will be mandatory beginning in 2008. 

Click here for the posting on the IRS website.

Watch Out for Vanguard and its IRA Beneficiary Designation Policy

Vanguard now requires its customers to have identical benefciary designations for all IRAs of the same type.  Click "Continue Reading" for the full article.

This policy could seriously undermine certain estate plans.  Unless you don't object to Vanguard telling you how do your benefciary designations, I suggest choosing another custodian.


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Retirement Accounts and Income Taxes vs. Estate Taxes

This posting provides a brief explanation of the advantages and disadvantages of funding a Family Trust (aka Bypass or Credit-Shelter Trust, or Trust B) with an IRA or other retirement accounts.

The Family Trust, as contained in a Will or Living trust, is designed to hold assets of the first spouse to die, up to the amount of the federal estate tax exemption (currently $2 million). It provides support to the surviving spouse, and when the surviving spouse dies, the value of the Family Trust is not included in his or her taxable estate. This plan can save $1 million or so in estate taxes for couples with estates of $4 million and up.

Because of the fact that income taxes have to be paid on distributions from a retirement plan, funding a Family trust with a retirement plan, while advantageous from an estate tax standpoint, can be disadvantageous from an income tax point of view.

If estate taxes are not an issue, the best way to handle a retirement plan is to leave it outright to a spouse, who can then roll it over into an IRA. The spouse can then name the children to received the account at his or her death, and the children can use their life expectancies to take distributions, allowing a "stretch" of the benefits. This allows more tax-deferred growth.

However, if estate taxes are an issue, it is often advisable to have the retirement account paid to the Family Trust, which will allow the account to escape estate tax at the surviving spouse's death. If the trust is designed properly, the survivor's life expectancy is used for purposes of taking distributions, and after the survivor dies, the children will receive the retirement benefits. However, since the trust owned the account rather than the surviving spouse, no further stretch is allowed, so the children must take out distributions over the deceased spouse's remaining life expectancy per IRS tables. (e.g., at age 80, 10 more years or so, as opposed to about 35 years for a 50 year old child.) This means that the income taxes must be paid over a much shorter time period and not as much tax-deferred growth can occur.

The loss of tax-deferred growth is generally worthwhile, however, since the estate tax rate is about 50%, when NC estate tax is added to the 45% federal rate.

 In addition to arranging the beneficiary designation correctly, the Family Trust must include special provisions to help ensure the best income tax treatment for retirement plans payable to the trust.

What I advise many clients to do is name the spouse as the first beneficiary, the Family Trust as the second beneficiary, and the children, or their trust shares, as the third beneficiary. At the time of the first spouse's death, the survivor can then decide which option makes the most sense at that time, based on the current value of the couple's assets and the tax laws then in effect. In the event of simultaneous death, the children will be able to avail themselves of the stretch based on their ages.


For large retirement accounts, over $200,000 or so, I generally recommend a Standalone IRA Trust, which can be used for IRAs and other retirement plans.

This is a very complicated area of the law, so you should always consult an estate planning attorney to determine the best way to structure your retirement account beneficiary designations.

Why Establish an IRA Trust?

In 2005 a Private Letter ruling was issued by the IRA approving a specially designed "IRA Trust" that offers maximum protection and flexibility while allowing the beneficiaries to "stretch" their shares of the IRA over their life expectancies.  The IRA Trust can also be used for employer provided retirement plans, such as 401(k)s, 403(b)s, 457 Plans, etc.

Having spent a great deal of time studying the IRA distribution rules and the advantages of using an IRA Trust, I am now recommending them to just about every client whose retirement account balance exceeds $200,000.


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Inherited IRA Not Creditor Protected

The IRA you inherited from your parents, or that your kids might inherit from you, may not be safe from lawsuits.  Jim Roberts, of Glast, Phillips & Murray, P.C. in Dallas, reports on a U.S. Bankruptcy case interpreting Texas law on this issue:

Federal law provides protection for most qualified plans, including 401(k), pension and profit sharing plans.But protections for Individual Retirement Accounts (“IRAs”) are a matter of state law. Most, if not all, states provide that IRAs are exempt. But there is a growing body of case law questioning the exemption of inherited IRAs.  Click "Continue Reading" for the remainder of the article.

Will North Carolina be next?  This ruling means that IRA Trusts are crucial for protecting IRAs that will pass to family members.  Even if the state in which you live protects inherited IRAs, you children could live in or move to a state such as Texas, which does not.

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Everything You Always Wanted to Know about IRAs

I know it's Memorial Day weekend, but being the compulsive tax lawyer that I am, I just finished reading two books by CPA and IRA expert Ed Slott - The Retirement Savings Time Bomb...and How to Defuse It and Parlay Your IRA Into a Family Fortune.  The books are well-written, (relatively easy to understand, and chock full of information about IRAs, including crucial Do's and Don'ts.  Particularly interesting are the tables detailing the amazing results of a "Stretch IRA," and the "Supersize" Stretch Roth IRA.

These books are a "Must-Read" for anyone with an IRA  or qualified retirement plan and every professional who deals with IRAs - estate attorneys, CPAs, financial planners, etc.  A lay person who reads these books will know more about IRAs than most professionals. 

However, be aware that some of the information in the books is out-dated due to tax law changes - for example, as of 2007, non-spouse beneficiaries of qualified plans (401(k)s, 403(b)s, etc.) can rollover the accounts to an IRA, which means the beneficiary is not limited to the sometimes restrictive rules of such plans.


IRS Rules IRA Rollover Okay Even Though Taxpayer Was Deceased

IRS regulations allow an owner of an IRA to withdraw it for purposes of transferring it to another institution provided that the funds are placed in the new institution within 60 days.  This is called a "rollover," as opposed to a trustee to trustee transfer, which is when the account funds are transferred directly from one company to another.

This is an area where many taxpayers get into trouble for not following the rules.  Generally the IRS is very strict in enforcing the rollover rules, but relief is allowed in certain situations, usually where there was no fault of the taxpayer involved.

In a recent Private Letter Ruling (PLR 200717021), the IRS ruled that a “rollover” by a surviving spouse, who was also the administratrix of the decedent’s estate, was a valid rollover within the 60-day period even thought the taxpayer was deceased at the time of the rollover.

Private Letter Rulings can only be relied upon by the requesting taxpayer, but they serve as a good indication of how the IRS would rule in similar situations.

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IRA Expert Ed Slott Recommends Standalone IRA Trusts

I recently attended a two day seminar by nationally recognized IRA expert Ed Slott, CPA.  If the protection of a trust for IRA beneficiaries is desired, Slott says that the best way is to have the IRA paid to a Standalone IRA Trust.  He cautions that IRAs should not be mixed with non-IRA assets.

Slott also recommends that for married couples, spouses with large IRA balances should use the distributions to pay for life insurance to be held in trust for the other spouse, and then make the children (or a trust for their benefit) beneficiaries of the IRA.  This leverages funds that are subject to income and possibly estate tax into completely tax-free monies, and provides optimum "stretching" of the IRA, allowing maximum growth.  I think this strategy should be used for any couple with large IRA(s) and a total estate exceeding $2 million.

New PLR on See-Through Trust and Life Expectancy for IRA Distributions

Robert Keebler, CPA, MST reports on Private Letter Ruling 200708084:

Designated Beneficiaries of See-Through-Trusts and the Life Expectancy used to
Determine the Payout Period of the IRA Distributions

In PLR 200708084, the IRS ruled that a trust is a qualified “see-through trust” and the
decedent’s son and daughter are the only individuals who have to be considered
“designated beneficiaries” because the trust pays outright to them. The lesson to take
from this PLR is that when there are beneficiaries who receive their trust benefit outright,
you do not have to look beyond those beneficiaries for potential contingent beneficiaries
in determining the oldest trust beneficiary.

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10 Questions Advisors Must Ask about IRA Custodial Documents

More helpful information on IRAs from expert Ed Slott:

Financial advisors should make sure they know the following about the IRAs they advise clients about:

  1. What is the “default option” when there is no beneficiary named?
  1. Are “per stirpes” beneficiary provisions accepted?
  1. Is a customized beneficiary form accepted?
  1. Can the beneficiary name a beneficiary?
  1. Can Non-Spouse beneficiaries move investments via a trustee-to-trustee transfer?
  1. Are multiple beneficiaries and IRA splitting permitted?
  1. Will a trust be accepted as beneficiary?
  1. Will your Power of Attorney form be accepted?
  1. Is there a divorce provision?
  1. Is there a “simultaneous death” provision?

The answers are in the IRA custodial document that set forth the rules that govern the IRA.


Top 10 Must-Dos for IRAs

It’s vitally important to make sure that the proper beneficiaries are designated for your IRAs and other retirement accounts, since the beneficiary designation controls what happens to the account, regardless of what your will, trust, divorce settlement, or any other agreement says.

The following is based on IRA expert Ed Slott’s “IRA New Year’s Resolutions:”

1.         Obtain a copy of the beneficiary form for each IRA you own.

2.         Make sure you have named a primary beneficiary and a secondary (contingent) beneficiary for each IRA you own. Secondary beneficiaries are less important for IRAs payable to trusts.

3.         If there are multiple beneficiaries on one IRA, make sure that each beneficiary’s share is clearly identified with a fraction, percentage or the word “equally,” if applicable.

4.         Make sure that the financial institution holding the IRA has your beneficiary designations on file and that their records agree with yours.

5.         Keep a copy of all your IRA beneficiary forms and give copies to your financial advisor, attorney, and CPA.

6.         Let your beneficiaries know where to locate your IRA beneficiary forms.

7.         Review your IRA beneficiary forms at least once a year to make sure they are correct and reflect any changes during the year due to new tax laws or major life events such as death, birth, adoption, marriage, divorce, etc.

8.         Check the IRA custodial document for every financial institution that holds an IRA account for me. Make sure that the document allows the provisions that are important to you and your beneficiaries. All IRAs are not created equal!

9.         Do not name your estate as beneficiary. 

10.       Consider a Standalone IRA Trust to obtain maximum stretch-out and protection of your IRAs for younger beneficiaries.