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…)

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…)

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…)

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…)

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…)

When a trust is named as the beneficiary of retirement benefits, there will be a designated beneficiary for purposes of the required minimum distribution (“RMD”) so long as the trust is a “look-through” trust, a trust that complies with the requirements set out in Reg. § 1.401(a)(9-4, A-5(b).  If a trust is a “look-through” trust, the oldest countable beneficiary will provide the measuring life for purposes of the RMD.  Determining the countable beneficiaries of a trust, and drafting to make sure the desired person is the oldest countable beneficiary, is complex and necessitates precise drafting.  Most recently in PLR 201203033 the IRS has provided a detailed roadmap to be followed in making this determination.

In PLR 201203033, the decedent, whom we’ll call Bob, had created a revocable trust that created a Marital Trust, an Exempt Trust and a Primary Trust.  Then in his beneficiary designation form, Bob named the Marital Trust as the beneficiary of his qualified plan benefits.  After Bob’s death, the trustee of the Marital Trust sought this ruling in order to confirm (1) that the trustee could arrange for a trustee to trustee distribution from the plan to an inherited IRA in a “non-spousal rollover”, as only a “look-through” trust is entitled to complete a non-spousal rollover, and (2) that Bob’s surviving spouse Carol would be the measuring life for determining the RMDs.

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In an unusual ruling, the IRS shows it has a heart when it comes to helping a minor recover inherited funds misappropriated by the minor’s mother.  In PLR 201139011, the Service permitted the minor to contribute funds to an inherited IRA that were inappropriately distributed in a lump sum from a qualified plan she inherited from deceased father.

The minor, whom we’ll call Alice, was 13 when her father, whom we’ll call Eric, died.  Eric, who was unmarried at the time of his death, had designated Alice as the beneficiary of his qualified plan.  While Alice could have arranged for a trustee to trustee transfer of the qualified plan benefits to an inherited IRA, Alice’s mother and guardian, whom we’ll call Francis, instead arranged for the plan administrator to make a lump sum distribution of the benefits.  Francis then reported the distribution on a Form 1040 filed for Alice for 2008 and paid the income tax on the distribution.  In 2009, a petition was filed (by an undisclosed person) seeking the appointment of a financial institution as conservator for Alice.  Once Bank was appointed as Alice’s conservator, Bank filed suit against Francis for recovery of the qualified plan distribution.

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In PLR 201125047, the IRS allowed a surviving spouse to roll over a decedent’s entire IRA to the surviving spouse’s IRA when the surviving spouse exchanged her community property interest in other property for the decedent’s community property interest in his IRA, as authorized under applicable state law.

The decedent, who we will call David, resided in a community property state with his wife, whom we will call Susan, to whom he had been married for 21 years.  David had failed to name a beneficiary of his IRA, so that when he died, the beneficiary was David’s estate.  David and Susan had created a community property trust, and David’s Will caused the IRA to become an asset of this trust. (more…)

Last week, the IRS issued a press release announcing its 2012 cost-of-living adjustments for retirement plans. The chart below reflects the qualified plan limits for calendar years 2009-2012.

Reflects the issuance of IRS News Release IR-2011-103, October 20, 2011

(1) This number is only the catch-up available under Code Section 414(v).  Code Sections 457(b)(3) and 402(g) provide separate catch-up rules, which must also be considered in appropriate cases.

During a participant’s lifetime, his or her IRA is considered “retirement funds” that are protected from the participant’s creditors, even if the participant files bankruptcy.   But, what happens to the creditor protection after the participant’s death?  Is the IRA now protected from the beneficiary’s creditors?  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 year.

The argument made by bankruptcy trustees is that, on the death of the initial IRA owner, the IRA ceases to be “retirement funds”, as it is not the retirement funds of the beneficiary, and therefore loses the protection afforded to the IRAs under the Bankruptcy Code. (more…)

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