Monday, October 14, 2013

birdOnce again, the Internal Revenue Service reminds us in PLR 201330011 that a distribution from an IRA to a residuary beneficiary will not result in recognition of IRD (also known as income in respect of a decedent) to the estate or trust, as only the residuary beneficiary will recognize the IRD.

Here the Decedent’s Estate was the beneficiary of the Decedent’s IRA. Under the provisions of the Decedent’s Will, his Estate poured over to his Revocable Trust on his death. His Revocable Trust provided that each of two Charities were to receive a percentage of the residue of his Trust, and further provided that the Trustee could satisfy this percentage gift in cash or in kind and also could allocate different assets to different residuary beneficiaries in satisfaction of their percentage interest in the trust residue.

Of course, the IRA constitutes income in respect of a decedent (IRD), and pursuant to IRC § 691 (a)(2) and Reg. § 1.691(a)-4(b)(2), the transfer of an item of IRD by an estate, such as by satisfying an obligation of the estate, will cause the estate to recognize the IRD, but if the estate transmits the item of IRD to a specific legatee of the item of IRD or to a residuary beneficiary (emphasis added), only the legatee or the residuary beneficiary will recognize the IRD. (more…)

Tuesday, August 13, 2013

At first blush, Chief Counsel Advice Memorandum CCA 201313025, may seem overly harsh. After all, the taxpayer was relying on information provided to her from her employer when she took her lump sum distribution and rolled it over into an IRA. However, the government was simply following the statute and regulations in refusing to refund the excess contribution penalty.

Here, the taxpayer’s former employer was overly generous to the taxpayer and, in making the lump sum distribution to her, distributed more to her than was in her qualified plan, and reported to her on a 1099R that the entire amount of the distribution was an eligible rollover distribution. Believing that she was entitled to the entire distribution and that it was entirely an eligible rollover distribution, the taxpayer rolled over this entire distribution including the over-payment to her rollover IRA and reported the lump sum distribution and rollover as a tax-free rollover on her income tax return that year. (more…)

Friday, July 12, 2013

With guest co-blogger, Washington University School of Law student and Bryan Cave summer intern, Mike Gallagher.

As is the case for everyone (and as we previously discussed in our prior post, Rock, Paper, Scissors: Life Insurance Beneficiary Designation Beats Will), based on the United States Supreme Court decision in Hillman v. Maretta, if you are a federal employee, you should carefully consider who is listed as beneficiary of your life insurance policy. In Hillman, the Court favored Warren Hillman’s ex-wife, Judy Maretta, over his widow, Jacqueline Hillman, and not because the former was more deserving or the marriage to the latter was overly capricious. $124,558 of life insurance benefits accrued to the ex-wife because the husband neglected to send the federal government’s Office of Personnel Management the necessary documentation to change his beneficiary designation before his death. (more…)

Monday, July 1, 2013

When the Fifth Circuit, in a case of first impression for that circuit and all of its sister circuit, last year ruled in In re Chilton, 11-40377, 2012 WL 762924 (5th Cir. Mar. 12, 2012) that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions), many thought the issue was settled. This was especially so because the Fifth Circuit ruling was the last (or so we all thought) in a long line of cases that ruled the same way after the enactment of the 2005 Bankruptcy Act. The Seventh Circuit in Rameker v. Clark, Nos. 12-1241 & 12-1255, United States Court of Appeals (7th Cir. 2013), on April 23, 2013, however, disagreed with the Fifth Circuit and agreed with the argument made by bankruptcy trustees in this case, and in numerous other cases, that on the death of the IRA owner, even though the inherited IRA was still exempt from immediate taxation, the inherited IRA ceases to be “retirement funds” and does not represent retirement funds in the hands of the beneficiary. Consequently, the inherited IRA ceased to have the protection afforded to IRAs under § 522(b)(3)(C) and (d)(12) of the Bankruptcy Code.  For a summary of prior cases, see our post from last year: “Are Inherited IRAs Protected in Bankruptcy?”

In Clark, the debtor, Heidi Heffron-Clark, had inherited the IRA worth approximately $300,000 from her mother, Ruth Heffron, in 2000 and Heidi had been taking required minimum distributions from the inherited IRA since that time. Heidi and her husband filed bankruptcy in Wisconsin in 2010. Wisconsin is not an opt out state, permitting debtors to elect to use either the Wisconsin exemptions or the Federal exemptions. Heidi elected to use Wisconsin exemptions and claimed that the inherited IRA was an exempt asset under the Wisconsin exemptions and under 11 U.S.C. § 522(b)(3)(C), the Federal exemption applicable when state exemptions are applicable. (more…)

Thursday, May 23, 2013

In the past, the Service has indicated informally that an affirmative direction in a trust that is named as the beneficiary of an IRA would not be respected to limit the consideration of other beneficiaries named in other sections of the trust, but that a negative direction would work. Thus, if the trust created Trust A, Trust B and Trust C after the settlor’s death, and specified that the IRA was to be an asset of Trust A, the Service still required a review of all the beneficiaries of Trust B and Trust C, but if the trust specified that the IRA could not be used to fund Trust B or Trust C, the beneficiaries of those trusts would not be considered in determining whether the trust was a “see through” trust and the measuring life for purposes of the required minimum distributions. However, in PLR 201241017, the Service appears to respect just such an affirmative direction.

In this private letter ruling, the decedent named his revocable trust, Trust T, as beneficiary of his IRA. After the decedent’s death, the trustee set up an inherited IRA in the decedent’s name for the benefit of Trust T. Under the provisions of Trust T, the trust was divided into “IRA Trust Property” and “Remaining Trust Property”, with the IRA Trust Property directed to be distributed to nine individuals. (more…)

Thursday, May 9, 2013

The U.S. District Court in Minnesota, in Hall v. Metropolitan Life Insurance Company, D. Minn., No 0:11-cv-01269-DWF-LIB, 1/15/13, declined to give any effect to the fill in the blank form Will completed at the direction of Dennis Hall (the “Decedent”) by the Decedent’s daughter that attempted to dispose of the proceeds of the group term life insurance policy provided through the Decedent’s employment.

The Decedent had designated one of his four children as the beneficiary of his employer-provided life insurance policy in 1991. He then married Jane in 2001, but did not change the beneficiary of this life insurance policy. In early 2010, Decedent was diagnosed with cancer. Sometime after being diagnosed with cancer, Decedent notified his employer that he wanted to change his beneficiary, and his employer-provided him with a change of beneficiary form, but Decedent never returned the form to his employer. (more…)

Thursday, May 2, 2013

The general rule is that an IRA is exempt from the claims of creditors. Indeed, the Federal Bankruptcy Code provides in Sections 522(b)(3)(C) and 522(d)(12) that a retirement plan, including an IRA and a Roth IRA, is an exempt asset in bankruptcy. However in Green v. Pershing L.L.C., N.D. Okla., No. 4:12-cv-00296-CVE-FHM, 10/22/12, the U.S. District Court for the Northern District of Oklahoma ruled that the plan sponsor was not liable for turning over Mr. Green’s entire IRA to the IRS in response to the Notice of Levy and demand the IRS served on Pershing L.L.C. (“Pershing”).

In this case, the IRS sent a Notice of Levy to Pershing attaching the IRA as property of Mark Green (“Green”) to satisfy the taxes owed by Green. When Pershing received the Notice of Levy, it sent a letter to Green asking that he notify the broker as to how he was planning to satisfy his tax obligation and letting Green know that they were restricting his ability to withdraw funds from the account until the tax obligation was paid. Green apparently took no action and did not pay the tax obligation. Consequently, 4 months later, the IRS sent a Final Demand for Payment to Pershing, demanding that Pershing turn over the funds in the account and notifying Pershing that if they failed to do so, Pershing would be liable for penalties under IRC § 6332. Pershing again notified Green, and Green’s response was to demand that Pershing not forward any funds from his IRA to the IRS. Two weeks later, Pershing sent the IRS all of the funds in Green’s IRA, and notified Green that it had done so. (more…)

Monday, December 17, 2012

Section 408(d)(3) of the Code specifically deals with when a distribution from an individual retirement plan to an individual does not need to be included in the gross income of the individual recipient but rather may be paid into another IRA for the benefit of such individual. This recontribution of an IRA distribution is referred to in this provision as a “Rollover Contribution” and must be completed within 60 days of the receipt of the distribution from the distributing IRA. Section 408(d)(3)(C), however, denies rollover treatment for inherited IRAs, and specifically states that any amount received by an individual from an IRA account inherited on the death of another individual cannot be contributed to another IRA for his or her benefit unless the individual was the surviving spouse of the decedent.

The taxpayer in Beech v. Commissioner, T.C. Summary Opinion 2012-74 (Docket No. 1948-11S, 7/26/2012, however, attempted to complete a Rollover Contribution from the IRA she received from her mother to an inherited IRA in her mother’s name for her benefit. In this case, Citi issued the check directly to the petitioner from her mother’s IRA, which she then deposited into an American Funds IRA. The taxpayer argued that it was her intent to effect a trustee-to-trustee transfer, but what was actually done was a distribution from her mother’s IRA to her and an attempted Rollover Contribution to a new IRA. (more…)

Monday, June 18, 2012

Sometimes failing to read the fine print in the IRA Account Agreement can have disastrous results, since the terms contained in the fine print of such Agreements on some pretty important points can vary greatly. In Smith v. Marez, Case No. COA11-475, NC Ct. App. , December 6, 2011, the IRA owner, Leonard Smith, opened two IRAs with Pershing LLC, signing a Traditional IRA Adoption Agreement for one and a Rollover IRA Adoption Agreement for the other, in each case adopting the terms of the applicable Account Agreement governing the terms of the IRA and designating his children as the beneficiaries. A year and a half later, after having been diagnosed with cancer, he signed a new Will designating his children in different proportions and new beneficiary forms on which he stated that the IRAs are “to be distributed pursuant to my Last Will and Testament.” Two weeks later, Leonard married Suzanne, and died two months after the marriage.

Suzanne Smith, individually and as executrix of Leonard’s estate, filed a complaint against Leonard’s children, alleging that the IRAs were properly payable to her and not the children or the estate. (Interestingly, there is no discussion of her conflict of interest between her position in this case and her duties to the estate and the children as the beneficiaries of the estate, in her capacity as the executrix.) The children defended on the basis that they were the beneficiaries and should receive distribution based on the percentages set out in Leonard’s Will, or in the alternative, the IRAs should be distributed according to the provisions of the Beneficiary Designation signed by Leonard when he set up the IRAs. The trial court granted summary judgment to Suzanne, ruling that the IRAs belonged to her as Leonard’s surviving spouse. (more…)

Tuesday, May 1, 2012

Whether post-death creditor protection is available to inherited IRAs under the 2005 Bankruptcy Act has been the subject of a number of cases decided in the last several years. The argument made by bankruptcy trustees is that, on the death of the IRA owner, the IRA ceases to be “retirement funds” as it is not the retirement funds of the beneficiary. Consequently, the bankruptcy trustees argue that the inherited IRA ceases to have the protection afforded to IRAs under the Bankruptcy Code.

In Re Stephenson, U.S. District Court, E.D. Mich., No. 4:11-cv-10848-MAG-MAR, December 12, 2011 is the latest in a long line of cases that have been decided in the last several years under the 2005 Bankruptcy Code. While the Bankruptcy Court in this case agreed with the Trustee that the inherited IRA was not exempt from the bankrupts’ estate, the District Court did not agree.

In this case, Janet Stephenson had inherited an IRA from her mother two years before filing bankruptcy. The Stephensons claimed an exemption for the IRA under the Federal Exemptions in § 552(d)(12), and the Trustee objected. In reviewing this bankruptcy case, the District Court first reiterated the two-prong test used in each of the cases previously decided under the 2005 Bankruptcy Code, whether the funds were “retirement funds” and whether the funds are exempt from taxation.

The Court reviewed all of the cases decided under the 2005 Bankruptcy Code: (more…)