The Treasury Green Book 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 is found on page 165 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
Current Law 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. (more…)
Just as Mr. Dabney learned in our prior post, Dennis Bohner learned about the Plan Document Rule in Bohner v. Commissioner. Here Bohner participated in the Civil Service Retirement System as a government employee. When he retired, he received correspondence that he could increase the amount of his retirement annuity if he sent the plan administrator $17,832, which he did.
However, since Bohner did not have that cash available in any other account, he withdrew $5,000 from his IRA and borrowed the balance of the funds to make that payment. He then withdrew an additional amount from his IRA to pay back the borrowed funds. Like Dabney, Bohner ignored the Form 1099-R and did not report these withdrawals on his income tax return and treated them as rollovers from his IRA to his qualified plan. The IRS did not agree that these were rollover contributions and assessed a deficiency. (more…)
The provisions of IRC § 408 do permit investment of IRA assets in any kind of asset other than those specifically prohibited, such as life insurance and collectibles. Therefore, it was somewhat reasonable for Guy Dabney to conclude that he could invest his IRA account assets in real estate. However, the Tax Court in Dabney v. Commissioner took Mr. Dabney to task for failing to follow the terms of the IRA Account Agreement that governed his IRA.
In this case, Dabney wanted to use his IRA assets to purchase a piece of undeveloped land in Utah that he considered to be priced below its fair market value. So he did what a lot of us do when we want to learn something new—he went to the Internet. Based on his Internet research, Dabney concluded that IRAs were permitted to invest in real property.
Dabney was smart enough to know that he should delve further in his research than just the Internet. Next, he contacted his CPA, who told him that he didn’t have any training in retirement account rules, but based on Dabney’s research confirmed that he could invest IRA assets in real property.
Here’s where Dabney went wrong, however. (more…)
On June 12, the United States Supreme Court in Clark v Rameker resolved the question that has recently split the 5th and 7th Circuits— Are inherited IRAs protected from the beneficiary’s creditors in a bankruptcy proceeding? The Court unanimously held that they are not.
An inherited IRA is a traditional or Roth IRA that has been inherited by a beneficiary after the death of the owner. This term does not include an IRA that has been “rolled over” by a spouse beneficiary into her own IRA.
In order to make their decision, the Court had to determine whether an inherited IRA constitutes “retirement funds”, which are exempt assets in a bankruptcy estate.
The Court focused on three legal characteristics of inherited IRAs that led to their conclusion that the assets in an inherited IRA are not objectively set aside for the purpose of retirement: (more…)
In 2012, the Fifth Circuit ruled in In re Chilton 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). See our prior discussion of this case here. (more…)
A Buy-Sell agreement can be a useful planning tool for emerging companies as well as more stable, privately owned companies. In the context of an emerging company, the use of a Buy-Sell agreement provides a pathway for an orderly exit from the business by an owner if the owners do not see eye-to-eye with each other with respect to creative direction, allocation of responsibilities or other issues. (more…)
Once 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…)
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…)
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…)
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…)