North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

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 Chilton 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 .
 

 

 

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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)!

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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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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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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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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.

 

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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.

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The recent Kiplinger.com 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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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.

 
 

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

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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.

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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 IRS.gov or by calling 800-TAX-FORM (800-829-3676).
.

Links:

• 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)

 

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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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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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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.

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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.

 

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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.

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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!

 

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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.

 

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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.

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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.

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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...

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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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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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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.

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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.

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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.

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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.

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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.

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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.

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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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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.

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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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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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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.

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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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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.

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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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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?

2. Are “per stirpes” beneficiary provisions accepted?

3. Is a customized beneficiary form accepted?

4. Can the beneficiary name a beneficiary?

5. Can Non-Spouse beneficiaries move investments via a trustee-to-trustee transfer?

6. Are multiple beneficiaries and IRA splitting permitted?

7. Will a trust be accepted as beneficiary?

8. Will your Power of Attorney form be accepted?

9. Is there a divorce provision?

10. Is there a “simultaneous death” provision?

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

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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.

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