When the taxpayer in PLR 201547010 decided to invest his IRA assets in a partnership, he forgot to check whether his IRA provider was able to hold an interest in a partnership as an investment in the IRAs for which it served as custodian. While all IRA accounts are able to hold investments in publicly traded securities, i.e. stocks, bonds and mutual funds, not all IRA custodians are set up to handle alternative investments, such as direct ownership of a business, real estate, partnership interests and LLC member interests, in their IRA accounts managed pursuant to their IRA account agreements. In fact, some IRA account agreements specifically preclude ownership of such alternative assets in the IRA accounts covered by the IRA custodian’s account agreement.
In this PLR, Taxpayer A instructed the IRA Custodian to invest his IRA assets in a percentage partnership interest of Partnership C. The IRA Custodian issued a check in November of 2012 payable to Partnership C for the amount required for purchase of that percentage partnership interest in Partnership C, and Partnership C indicated that the percentage interest was owned by “Taxpayer A IRA”. However, since the IRA Custodian’s account agreement did not authorize the Custodian to hold the partnership interest in Taxpayer A’s IRA, the IRA Custodian issued a 1099-R reporting the payment to Partnership C as a distribution from Taxpayer A’s IRA. When finalizing the preparation of his 2012 income tax return in October 2013, Taxpayer A finally came to a full appreciation of the significance of the IRA Custodian’s 1099-R, that a mistake had been made in the purchase of the percentage partnership interest. Had he opened another IRA with another IRA Custodian whose account agreement would permit the ownership of a percentage interest in Partnership C in a new IRA account for Taxpayer A and had he directed the old IRA Custodian to transfer the amount for purchase of the Partnership C percentage partnership interest in a custodian to custodian transfer from Taxpayer A’s IRA B for a new IRA to use to purchase the Partnership C percentage partnership interest directly in a Taxpayer A IRA, there would have been no 2012 IRA distribution to report on his 2012 income tax return.
Since more than 60 days had elapsed following the purchase of the Partnership C percentage partnership interest with assets from Taxpayer A’s IRA B, the amount of the purchase price for this interest could no longer be rolled over to a new IRA without a waiver by the Service of the 60 day rollover requirement under § 408(d)(3). The Service has the authority to waive the requirement that the rollover of funds to an IRA be completed within 60 days from the date on which the distributee received the property distributed “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 individual subject to such requirement.” § 402(c)(3)(B).
As set forth in Rev. Proc. 2003-16, 2003-4 I.R.B. 359 (January 8, 2003), in determining whether to waive the 60 day requirement, the Service will “consider all relevant fact and circumstances,” including:
Taxpayer A attempted to convince the Service that his failure to purchase the Partnership C partnership interest in his IRA was due to financial institution error, to fall within one of the factors enumerated in Rev. Proc. 2003-16. Instead, the Service stated that “Taxpayer A chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.” Apparently, the Service was focusing on the failure of Taxpayer A to open a new IRA with an IRA Custodian who was able to hold a partnership interest in Taxpayer A’s IRA, as a failure or error within the control of Taxpayer A. All Taxpayer A had to do was read the IRA account agreement, or contact Custodian C directly about whether Custodian C was able to hold Partnership B partnership interests in Taxpayer A’s IRA. Had he done that, he would have known that he needed a different IRA in order to do what he wanted to do, that is, own Partnership C partnership interests in his IRA. This failure was, in the Service’s view, within the “reasonable control” of Taxpayer A, and was beyond the scope of the Service’s ability to waive the 60 day rollover requirement.
Update: According to media sources, a lawyer for Bremer Bank and Trust, the corporate fiduciary appointed to administerPrince’s estate, said the bank is continuing to search for a will and the judge in the Court, Judge Kevin W. Eidge, stated “We are not finding that there’s no will, but that no will has yet been found.”
The following was originally published on April 28, 2016.
As we’ve all seen in the news, musician Prince passed away on April 21, 2016 at the age of 57. According to news sources, on April 26, just five days later, one of Prince’s six siblings, his sister Tyka Nelson, filed documents with the Carver County probate court stating “I do not know of the existence of a Will and have no reason to believe that the Decedent executed testamentary documents in any form.” News sources have gone crazy, announcing that Prince died without a Will directing who should inherit his estate and therefore his six siblings will inherit everything. But is this actually true? Maybe, maybe not.
We don’t know about you, but, except for the fact that this is what we do for a living, our brothers (we each only have one sibling) would probably have no idea if we have a Will (or other estate planning) in place. Maybe he would get around to going through all of our files to see if we have one stored somewhere or find the name of our lawyer in six days, but that’s pretty unlikely, given all of the things that typically take place immediately after someone dies (think, funeral, grieving, etc.). Tyka may be absolutely correct – We’re not saying she’s not, but we don’t think that her statement that she doesn’t know of a Will conclusively means there isn’t one. As of yesterday, TIME Magazine online reported that Bremer Trust Company was appointed by a judge to temporarily oversee Prince’s estate for six, which indicates that the court is not closing on the door on a possible Will being produced. (more…)
You may not have produced over 30 albums, accrued over $300 million and an equivalent amount of fans as Prince, but, like the recent pop star, you too have a legacy that could impact many individuals around you. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 240 of the Green Book and is re-printed here for your convenience:
REFORM EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE FOUNDATIONS
Private foundations that are exempt from Federal income tax generally are subject to a two percent excise tax on their net investment income. The excise tax rate is reduced to one percent in any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the five preceding taxable years (with certain adjustments). Private foundations that are not exempt from Federal income tax, including certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. Under current law, private nonoperating foundations generally are required to make annual distributions for charitable purposes equal to five percent of the fair market value of the foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation is required to distribute annually for charitable purposes is reduced by the amount of the excise tax paid by the foundation. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 164 of the Green Book and is re-printed here for your convenience:
REQUIRE NON-SPOUSE BENEFICIARIES OF DECEASED IRA OWNERS AND RETIREMENT PLAN PARTICIPANTS TO TAKE INHERITED DISTRIBUTIONS OVER NO MORE THAN FIVE YEARS
Minimum distribution rules apply to employer sponsored tax-favored retirement plans and to IRAs. In general, under these rules, distributions must begin no later than the required beginning date and a minimum amount must be distributed each year. For traditional IRAs, the required beginning date is April 1 following the calendar year in which the IRA owner attains age 70½. For employer-sponsored tax-favored retirement plans, the required beginning date for a participant who is not a five-percent owner is April 1 after the later of the calendar year in which the participant attains age 70½ or retires. Under a defined contribution plan or IRA, the minimum amount required to be distributed is based on the joint life expectancy of the participant or employee and a designated beneficiary (who is generally assumed to be 10 years younger), calculated at the end of each year.
Minimum distribution rules also apply to balances remaining after a plan participant or IRA owner has died. The after-death rules vary depending on (1) whether a participant or IRA owner dies on or after the required beginning date or before the required beginning date, and (2) whether there is an individual designated as a beneficiary under the plan. The rules also vary depending on whether the participant’s or IRA owner’s spouse is the sole designated beneficiary.
If a plan participant or IRA owner dies on or after the required beginning date and there is a nonspouse individual designated as beneficiary, the distribution period is the beneficiary’s life expectancy, calculated in the year after the year of death. The distribution period for later years is determined by subtracting one year from the initial distribution period for each year that elapses. If there is no individual designated as beneficiary, the distribution period is equal to the expected remaining years of the participant’s or IRA owner’s life, calculated as of the year of death.
If a participant or IRA owner dies before the required beginning date and any portion of the benefit is payable to a non-spouse designated beneficiary, distributions must either begin within one year of the participant’s or IRA owner’s death and be paid over the life or life expectancy of the designated beneficiary or be paid entirely by the end of the fifth year after the year of death.
If the designated beneficiary dies during the distribution period, distributions continue to any subsequent beneficiaries over the remaining years in the distribution period.
If a participant or IRA owner dies before the required beginning date and there is no individual designated as beneficiary, then the entire remaining interest of the participant or IRA owner must generally be distributed by the end of the fifth year following the individual’s death.
The minimum distribution rules do not apply to Roth IRAs during the life of the account owner, but do apply to balances remaining after the death of the owner.
Reasons for Change
The Code gives tax preferences for retirement savings accounts primarily to provide retirement security for individuals and their spouses. The preferences were not created with the intent of providing tax preferences to the non-spouse heirs of individuals. Because the beneficiary of an inherited account can be much younger than a plan participant or IRA owner, the current rules allowing such a beneficiary to stretch the receipt of distributions over many years permit the beneficiary to enjoy tax-favored accumulation of earnings over long periods of time.
Under the proposal, non-spouse beneficiaries of retirement plans and IRAs would generally be required to take distributions over no more than five years. Exceptions would be provided for eligible beneficiaries.
Eligible beneficiaries include any beneficiary who, as of the date of death, is disabled, a chronically ill individual, an individual who is not more than 10 years younger than the participant or IRA owner, or a child who has not reached the age of majority. For these beneficiaries, distributions would be allowed over the life or life expectancy of the beneficiary beginning in the year following the year of the death of the participant or owner. However, in the case of a child, the account would need to be fully distributed no later than five years after the child reaches the age of majority.
Any balance remaining after the death of a beneficiary (including an eligible beneficiary excepted from the five-year rule or a spouse beneficiary) would be required to be distributed by the end of the calendar year that includes the fifth anniversary of the beneficiary’s death.
The proposal would be effective for distributions with respect to plan participants or IRA owners who die after December 31, 2016. The requirement that any balance remaining after the death of a beneficiary be distributed by the end of the calendar year that includes the fifth anniversary of the beneficiary’s death would apply to participants or IRA owners who die before January 1, 2016, but only if the beneficiary dies after December 31, 2016. The proposal would not apply in the case of a participant whose benefits are determined under a binding annuity contract in effect on the date of enactment.
Last year’s Green Book Proposal on the same topic can be read here.
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 189 of the Green Book and is re-printed here for your convenience:
EXPAND APPLICABILITY OF DEFINITION OF EXECUTOR
The Code defines “executor” for purposes of the estate tax to be the person who is appointed, qualified, and acting within the United States as executor or administrator of the decedent’s estate or, if none, then “any person in actual or constructive possession of any property of the decedent.” This could include, for example, the trustee of the decedent’s revocable trust, an IRA or life insurance beneficiary, or a surviving joint tenant of jointly owned property. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 187 of the Green Book and is re-printed here for your convenience:
SIMPLIFY GIFT TAX EXCLUSION FOR ANNUAL GIFTS
The first $14,000 of gifts made to each donee in 2016 is excluded from the donor’s taxable gifts (and therefore does not use up any of the donor’s applicable exclusion amount for gift and estate tax purposes). This annual gift tax exclusion is indexed for inflation and there is no limit on the number of donees to whom such excluded gifts may be made by a donor in any one year. To qualify for this exclusion, each gift must be of a present interest rather than a future interest in the donated property. For these purposes, a present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (including life estates and term interests). Generally, a contribution to a trust for the donee is a future interest.
Reasons for Change
To take advantage of this annual gift tax exclusion without having to transfer the property outright to the donee, a donor often contributes property to a trust and gives each trust beneficiary (donee) a Crummey power. Crummey powers are used particularly in irrevocable trusts to hold property for the benefit of minor children. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 186 of the Green Book and is re-printed here for your convenience:
MODIFY GENERATION-SKIPPING TRANSFER (GST) TAX TREATMENT OF HEALTH AND EDUCATION EXCLUSION TRUSTS (HEETS)
Payments made by a donor directly to the provider of medical care for another person or directly to a school for another person’s tuition are exempt from gift tax under section 2503(e). For purposes of the GST tax, section 2611(b)(1) excludes “any transfer which, if made during the donor’s life, would not be treated as a taxable gift by reason of section 2503(e).” Thus, direct payments made during life by an older generation donor for the payment of these qualifying expenses for a younger generation beneficiary are exempt from both gift and GST taxes. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 185 of the Green Book and is re-printed here for your convenience:
EXTEND THE LIEN ON ESTATE TAX DEFERRALS WHERE ESTATE CONSISTS LARGELY OF INTEREST IN CLOSELY HELD BUSINESS
Section 6166 allows the deferral of estate tax on certain closely held business interests for up to fourteen years from the (unextended) due date of the estate tax payment (up to fourteen years and nine months from date of death). This provision was enacted to reduce the possibility that the payment of the estate tax liability could force the sale or failure of the business. Section 6324(a)(1) imposes a lien on estate assets generally for the ten-year period immediately following the decedent’s death to secure the full payment of the estate tax. Thus, the estate tax lien under section 6324(a)(1) expires almost five years before the due date of the final payment of the deferred estate tax under section 6166. (more…)
The Department of the Treasury has released the Treasury Green Book for Fiscal Year 2017, which provides explanations of the President’s budget proposals. One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 183 of the Green Book and is re-printed here for your convenience:
LIMIT DURATION OF GENERATION-SKIPPING TRANSFER (GST) TAX EXEMPTION
GST tax is imposed on gifts and bequests to transferees who are two or more generations younger than the transferor. The GST tax was enacted to prevent the avoidance of estate and gift taxes through the use of a trust that gives successive life interests to multiple generations of beneficiaries. In such a trust, no estate tax would be incurred as beneficiaries died, because their respective life interests would die with them and thus would cause no inclusion of the trust assets in the deceased beneficiary’s gross estate. The GST tax is a flat tax on the value of a transfer at the highest estate tax bracket applicable in that year. Each person has a lifetime GST tax exemption ($5.45 million in 2016) that can be allocated to transfers made, whether directly or in trust, by that person to a grandchild or other “skip person.” The allocation of GST exemption to a transfer or to a trust excludes from the GST tax not only the amount of the transfer or trust assets equal to the amount of GST exemption allocated, but also all appreciation and income on that amount during the existence of the trust.
Reasons for Change
At the time of the enactment of the GST provisions, the law of most (all but about three) States included the common law Rule Against Perpetuities (RAP) or some statutory version of it. The RAP generally requires that every trust terminate no later than 21 years after the death of a person who was alive (a life in being) at the time of the creation of the trust. (more…)