Category Archives: Tax Planning

The 99% Rule for Spousal Beneficiaries of IRAs

financial freedomMy Comments:  Among the elements of financial freedom that I talk about is the avoidance of issues that involve the IRS. While we recognize the need for the IRS, it’s never our goal to involve them in a face to face conversation.

IRAs and Spousal Beneficiaries is an arcane topic and if you decide to skip today’s post, that’s OK. Just come back tomorrow for something more inviting. But if much of your money is tied up in accounts that have not yet been taxed, you should perhaps pay more attention.

By Jeffrey Levine, CPA / horsesmouth.com / October 14, 2014

It sounds odd to say, but death is a part of life for us all. It’s one of the few things that all clients will have in common at some point, and it’s one of the few issues that must be addressed in every client’s plan.

While each client situation is unique, however, and they all have their own goals and objectives, the overwhelming majority of married clients with IRAs and other similar accounts, such as 401(k)s and 403(b)s, will name their spouse as their primary beneficiary as part of their estate plans. As such, knowing the rules for when a spouse inherits an IRA is critical for just about every advisor.

Unfortunately, the rules are not all that simple, especially when compared with the rules for when a child or other non-spouse beneficiary inherits the same account. That’s because there are a slew of special rules that apply only when a spouse inherits an IRA, and those rules can greatly complicate matters.

A real-life example

Consider the real-life case of Charlotte Gee, a surviving spouse beneficiary who learned this rule the hard way. After inheriting more than $2.5 million in IRA funds from her deceased husband, Gee (who was younger than 59½ at the time) followed the advice of some not-so-educated advisor and executed a spousal rollover of the full amount.

Shortly afterward, she took a distribution of $977,888 from the IRA. Although Gee reported the amount as taxable income, she did not factor in any 10% penalty because she said she was a beneficiary.

The IRS challenged her on this, and ultimately the issue went to tax court, where Gee’s argument was swiftly dismissed, leading to a penalty of nearly $100,000 on top of the tax bill she already owed! The tax court’s reasoning was both accurate and succinct: “Once [Gee] chose to roll the funds over into her own IRA, she lost the ability to qualify for the exception from the 10-percent additional tax on early distributions. The funds became petitioner’s own and were no longer from her deceased husband’s IRA once petitioner rolled them over into her own IRA.”

Perhaps if Gee had been more knowledgeable about the special rules that apply to spouses, or had she worked with an advisor who understood the 99% rule, this never would have happened. The 99% rule can help bring some much needed clarity to the spousal beneficiary rules if you first understand the options available.

One option is to establish an inherited IRA, similar to the way a non-spouse beneficiary does. Here a spouse must move money directly from the decedent’s IRA to an inherited IRA, and properly title the account.

While the precise titling can vary slightly from custodian to custodian, the titling must include the name of the decedent, as well as indicate that the account is an inherited or beneficiary IRA. For example, an acceptable titling might look like this: John Doe (deceased mo/day/year) IRA FBO Sally Doe

When a spouse chooses to remain a beneficiary of an IRA, he or she is able to take penalty-free distributions from the account at any age and at any time. Thus, young spouses should pay particular attention to this option. (“Young” according to the tax code in this case is anyone under the age of 59½.)

A second option for a spouse beneficiary, and one available only to a spouse beneficiary, is to complete what is commonly referred to as a “spousal rollover.” In a spousal rollover, a surviving spouse takes a distribution from the deceased spouse’s IRA, or a beneficiary IRA inherited from the spouse, and moves the funds, either directly or indirectly, within 60 days to his or her own IRA.

This is an irrevocable decision by a surviving spouse. Once the funds are deposited into his or her own IRA, they are treated as if they had always been in the account. There is no way, at this point, for the surviving spouse to change the action taken and be treated as a beneficiary once again.

A third option allows a spouse to treat a deceased spouse’s IRA as his or her own. This option, though, is seldom used in the real world and has the same tax consequences as a spouse completing a spousal rollover.

Selecting the optimal strategy

Which option is best? The answer, of course, differs depending on the unique set of facts and circumstances surrounding the surviving spouse, but surprisingly, there is a general rule of thumb that 99% of the time will give you the right answer. All right, so maybe it’s not exactly 99% of the time, but you get the point. It’s a pretty darn reliable strategy.

Here’s the rule, in a nutshell.
The 99% rule. If a surviving spouse beneficiary is under 59½ at the time the IRA is inherited from the deceased spouse, then 99% of time the correct planning move is to establish an inherited IRA for the surviving spouse’s benefit. The funds should continue to be kept in an inherited IRA until the surviving spouse turns 59½. Once the surviving spouse turns 59&½—or if the person is already over 59½ when he or she inherits—a spousal rollover can be executed.

Why is this strategy right so much of the time? For the simple reason that there is almost never a downside to using it. It almost always allows a surviving spouse maximum flexibility without hindering them in any way.

Some might dispute that notion and point to the fact that, by remaining a beneficiary of an inherited IRA, it would lead to the surviving spouse having to take required minimum distributions (RMDs) prematurely (before turning 70½), but that logic is almost always flawed.

Unlike other beneficiaries, who must typically begin taking RMDs from an inherited IRA by Dec. 31 of the year after the IRA owner dies, a surviving spouse generally does not have to start taking RMDs from an inherited IRA until the deceased spouse would have been 70½. Since most spouses are relatively close in age, it’s a rare scenario that would force a spouse to choose between maintaining a penalty-free inherited IRA and moving the inherited IRA funds to their own IRA to avoid RMDs.

Example: Jack is married to Jill and has named her as the sole beneficiary of his IRA. Jack is 55, and Jill is 50. Unfortunately, Jack dies unexpectedly. In this scenario, Jill should, without hesitation, follow the 99% rule and establish an inherited IRA, remaining a beneficiary until she reaches 59½. This is the only approach that makes sense here.

Consider that, as a beneficiary, should Jill need to access her inherited IRA funds for any reason, she would be able to do so without incurring the 10% penalty. Furthermore, since Jack and Jill are relatively close in age, there will never be a time when Jill would be forced to take RMDs from the inherited account.

When she initially inherits the account, at 50, Jack was just 55, much younger than the key age 70½ that would require Jill to take RMDs from her inherited IRA. Similarly, when Jill turns 59½, Jack would still only be 64½, had he lived. Thus, no RMDs would be required at that time either.

In fact, by the time Jack would have been 70½, triggering RMDs for the inherited IRA, Jill would already be 65½. By that point, following the 99% rule, she should have already made a spousal rollover of the inherited funds into her own IRA (at age 59½). Following that spousal rollover, the funds would be treated as if they were always in Jill’s IRA, allowing Jill to continue to delay RMDs until she turns 70½.

Preserving the stretch

Similarly, some might point out that if a surviving spouse dies with an inherited IRA, the beneficiaries will be stuck using the surviving spouse’s life expectancy and will be unable to stretch distributions over their own lives.

While this is possible, thanks to another special rule for spousal beneficiaries, it once again is unlikely. That’s because as long as the surviving spouse dies prior to when the deceased spouse would have been 70½ (the same age RMDs need to begin), the surviving spouse’s beneficiaries can still use their own life expectancy.

Let’s bring back our friends Jack and Jill. Recall that Jack died at 55 and Jill, who was 50 at the time, followed the 99% rule and established an inherited IRA. Now imagine that Jill has named her children as the beneficiaries of her inherited IRA.

Unfortunately, tragedy strikes again, and Jill dies only a few years later, when she’s 53. If Jill were anyone other than a spousal beneficiary, her children would be stuck using her shorter life expectancy. As a spousal beneficiary, however, and because Jack would not yet have reached 70½ (Jack would only have been 58), her children will be able to stretch distributions out over their own life expectancies.

As you can see, the two biggest downsides of inherited IRAs—RMDs and the loss of the stretch IRA for future generations—are often not an issue when a spouse inherits an IRA.

The Modern Family conundrum

That said, I call it the 99% rule and not the 100% rule, because it’s not always the best option. So when does the 99% rule not work? In the rare but certainly not unheard of circumstance in which the surviving spouse is significantly younger than the deceased spouse. It’s what I like to call the Modern Family conundrum.

On the popular ABC sitcom Modern Family, the patriarch, played by Ed O’Neill is married to a vivacious younger woman, played by Sofia Vergara. While they’re not married in real life, let’s imagine for a moment that they are. O’Neill is 68 years old, while Vergara is just 42. If O’Neill were to pass away and leave Vergara his IRA, she’d have a choice to make in just a few years.

Since O’Neill is not currently 70½, the right move, initially, for Vergara, would be to set up a properly titled inherited IRA. By doing do, she’d be able to take penalty-free distributions when needed, while avoiding RMDs and giving her beneficiaries the opportunity to stretch distributions over their own life expectancies.

A conundrum, however, would present itself in just a few years. O’Neill, whose birthday is April 12, 1946, would have turned 70½ in 2016. Vergara will be 44 years old. At that time, she’ll have a critical choice to make. She could either leave the account as an inherited IRA, which would:
• Allow her to continue taking penalty-free distributions prior to 59½
• Force her to begin taking required minimum distributions from the inherited IRA
• Require her beneficiaries to continue distributions over her life expectancy, should she pass away while still remaining a beneficiary
Or she could execute a spousal rollover, which would:
• Make future distributions prior to age 59½ subject to the 10% early-distribution penalty unless another exception applied
• Allow her to delay taking RMDs until she reached 70½
• Allow her beneficiaries to use their own life expectancies whenever she passes away
Now there’s a good chance that if Sofia Vergara were really put in this situation and forced to make a choice, she’d opt for the spousal rollover. I have a sneaking suspicion that she wouldn’t have a need to dip into the inherited IRA anytime soon. She is, after all, the highest-paid actress on TV and has been for three years running now.

Your clients, however, may not be in the same boat. If there is even a slight chance that the surviving spouse might need money before 59½, it’s probably worth leaving the funds in an inherited IRA. Sure, there will be RMDs, but even a spouse beneficiary at 50 years old would still have RMDs less than 3%.

As for ability of the spouse beneficiary’s own beneficiaries to stretch distributions over their own life expectancies? While it’s certainly not impossible for the surviving spouse to die before reaching 59½, the mortality rates for people in their 50s are relatively low and chances are it won’t be an issue. Remember, once the surviving spouse turns 59½ and makes a spousal rollover, this is no longer an issue.

Virtually every advisor will deal with these spousal beneficiary rules on a regular basis, particularly as the baby-boomer generation continues to age. So get comfortable with the 99% rule, but be sure you can identify the rare exceptions when it doesn’t apply. Doing so will help you shine when your clients need you the most.

How to Protect Inherited IRAs After the Clark v. Rameker Decision

will with clockMy Comments: If you have an IRA today, there is a chance there will still be money in it when the inevitable happens and you permanently leave the building. What then with this money?

If you have a spouse, and they are the named beneficiary, that money now belongs to them and it becomes their IRA. If your spouse has predeceased you, it becomes an Inherited IRA, benefiting someone else, perhaps one or more of your children.

Recently the Supreme Court declared that while YOUR IRA is protected against the claims of creditors, an Inherited IRA is not. Because it represents money earned by someone other that YOU. Before this decision, it was assumed from IRS regs that it would be protected.

If none of this applies to you, then read no further. I’d like to attribute this to the correct author but somehow that name went missing.

In a landmark, unanimous 9-0 decision handed down on June 12, 2014, the United States Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law. This means they are therefore available to satisfy creditors’ claims. (See Clark, et ux v. Rameker, 573 U.S. ______ (2014))

The Court reached its conclusion based on three factors that differentiate an inherited IRA from a participant-owned IRA:

1. The beneficiary of an inherited IRA cannot make additional contributions to the account, while an IRA owner can.

2. The beneficiary of an inherited IRA must take required minimum distributions from the account regardless of how far away the beneficiary is from actually retiring, while an IRA owner can defer distributions at least until age 70 1/2.

3. The beneficiary of an inherited IRA can withdraw all of the funds at any time and for any purpose without a penalty, while an IRA owner must generally wait until age 59 1/2 to take penalty-free distributions.

These factors characterize an inherited IRA as money that was set aside for the original owner’s retirement and not for the designated beneficiary’s retirement. This simple analysis has sent shock waves through the estate planning and financial advisory worlds, because its logic is also applicable to all inherited defined contribution retirement plan accounts, so inherited 401(k) and 403(b) accounts are also affected. What can be done to protect inherited IRAs from creditors? Could the Clark decision put IRAs inherited by spouses at risk? Could state law still protect inherited IRAs? In this issue we will answer these questions and provide guidelines for you and your team to follow when advising clients who or what to name as the beneficiaries of their IRAs.

What Can Be Done to Protect Inherited IRAs From Creditors?
In view of the Clark decision, clients must thoughtfully reconsider any outright beneficiary designations for their retirement accounts if they want to insure that the funds will remain protected for their beneficiaries after death. By far the best option for protecting an inherited IRA is to create a Standalone Retirement Trust for the benefit of all of the intended IRA beneficiaries. If properly drafted, this type of trust offers the following advantages:

• Protects the inherited IRA from each beneficiary’s creditors as well as predators and lawsuits
• Insures that the inherited IRA remains in the family bloodlines and out of the hands of a beneficiary’s spouse, or soon-to-be ex-spouse
• Allows for experienced investment management and oversight of the IRA assets by a professional trustee
• Prevents the beneficiary from gambling away the inherited IRA or blowing it all on exotic vacations, expensive jewelry, designer shoes and fast cars
• Enables proper planning for a special needs beneficiary
• Permits minor beneficiaries, such as grandchildren, to be immediate beneficiaries of the inherited IRA without the need for a court-supervised guardianship
• Facilitates generation-skipping transfer tax planning to insure that estate taxes are minimized or even eliminated at each generation
Downsides to tying up an IRA inside of a trust include compressed tax brackets which max out at $12,150 of income (in 2014), ongoing accounting and trustee fees, and the sheer complexity of administering the trust year after year. In addition, a well-drafted trust can be completely derailed by an uncoordinated IRA beneficiary designation. Therefore, all of the pros and cons of a Standalone Retirement Trust must be carefully considered before committing to this strategy.

Planning Tip: In most cases a standard revocable living trust agreement will not be well-suited to be named as the beneficiary of an IRA. This is because in order to provide all of the benefits listed above and avoid mandatory liquidation of the inherited IRA over a period as short as five years, the trust agreement must be carefully crafted as a “See Through Trust.” A See Through Trust insures that the required minimum distributions can either remain inside the trust (an “accumulation trust”), or be paid out over the oldest trust beneficiary’s life expectancy (a “conduit trust”).

Thus, a Standalone Retirement Trust that has specific provisions for administering retirement accounts, and that is separate and distinct from a client’s revocable living trust that has been drafted to address the entire gamut of the client’s non-retirement assets, is the preferable type of IRA trust beneficiary. If your clients have not considered a Standalone Retirement Trust before the Clark decision, then the time is now to educate them about its far-reaching consequences and how a Standalone Retirement Trust can benefit their IRA beneficiaries.

Could the Clark Decision Put IRAs Inherited by Spouses at Risk?
The Clark decision dealt with an IRA inherited by the daughter of the owner. What if the IRA was instead inherited by the spouse of the owner, would the decision have been different?

When a spouse inherits an IRA, he or she has three options for what to do with it:

1. The spouse can cash out the inherited IRA and pay the associated income tax.

2. The spouse can maintain the IRA as an inherited IRA.

3. The spouse can roll over the inherited IRA into his or her own IRA, after which it will be treated as the spouse’s own IRA.

In scenario 1 the cashed-out IRA will not have any creditor protection since the proceeds will become comingled with the spouse’s own assets. Extending the Supreme Court’s rationale to scenario 2, the inherited IRA will not be protected from the spouse’s creditors since the spouse is prohibited from making additional contributions to the account, may be required to take distributions prior to reaching age 70 1/2, and can withdraw all of it at any time without a penalty. In scenario 3, a rollover is not automatic, and even after a rollover is completed, the inherited funds were certainly not set aside by the spouse for his or her own retirement before the rollover was initiated.

As a result of the Clark decision, will an IRA inherited by a spouse lose its qualification as a “retirement fund” under federal bankruptcy law once it is actually inherited by the spouse? Could the rollover of an inherited IRA into the spouse’s own IRA now be considered a fraudulent transfer under applicable state law? Unfortunately the answers to these questions are not clear at this time.

Planning Tip: Provisions can be made in a Standalone Retirement Trust for the benefit of a spouse. This may be important for many reasons aside from creditor protection, including a second marriage with a blended family or, when coupled with disclaimer planning, for a spouse who eventually needs nursing home care and seeks to qualify for Medicaid. A layered IRA beneficiary designation which includes a Standalone Retirement Trust and disclaimer planning can offer a great deal of flexibility for clients who want to insure that their hard-saved retirement funds stay in their family’s hands and out of the hands of creditors and predators.

Could State Exemptions Still Protect Inherited IRAs?
In the wake of the Clark decision, a handful of states – including Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas – have either passed laws or had favorable court decisions that specifically protect inherited IRAs under state bankruptcy exemptions for federal bankruptcy purposes. If the IRA beneficiary is lucky enough to live in one of these states, then the beneficiary may very well be able to protect their inherited retirement funds by claiming the state exemption instead of the federal exemption.

Planning Tip: Caution should be used in relying on state exemptions to protect a beneficiary’s inherited IRA. People are more mobile than ever and may need to move from state to state to find work, pursue educational goals, or be closer to elderly family members in need of assistance. Aside from this, federal bankruptcy laws now require a debtor to reside in a state for at least 730 days prior to filing a petition for bankruptcy in order to take advantage of the state’s bankruptcy exemptions. Therefore, long-term planning should not rely on a specific state’s laws but instead should take a broad approach.

The Bottom Line
Given the amount of wealth held inside retirement accounts, planners have got to become adept at helping their clients figure out who or what to name as the beneficiary of these special assets. The Clark decision has amplified the need to become knowledgeable about the pros and cons of all of the different beneficiary choices for retirement assets.

This is certainly not one-size-fits-all planning and can only be done on an individual, case by case basis. We are here to answer all of your questions about protecting beneficiaries of retirement accounts through Standalone Retirement Trusts, disclaimer planning, and layered beneficiary designations.

5 QLAC Questions and Answers

My Comments: QLAC? What the heck is a QLAC?

By Jeffrey Levine / July 18, 2014

On July 1, 2014 the Treasury Department released the long-awaited final regulations for Qualifying Longevity Annuity Contracts (QLACs). These new annuities will offer advisors a unique tool to help clients avoid outliving their money.

The QLAC rules, however, are a complicated mash-up of IRA and annuity rules, and clients may need substantial help in understanding their key provisions. To help advisors break down the most important aspects of QLACs, below are 5 critical QLAC questions and their answers.

1) Question: What are QLACs?
Answer: QLACs, or qualifying longevity annuity contracts, are a new type of fixed longevity annuity that is held in a retirement account and has special tax attributes. Although the value of a QLAC is excluded from a client’s RMD calculation, distributions from QLAC don’t have to begin until a client reaches age 85, well beyond the age at which RMDs normally begin.

2) Question: Why did the Treasury Department create QLACs?

Answer: Prior to the establishment of QLACs, there were significant challenges to purchasing longevity annuities with IRA money. The rules required that unless an annuity held within an IRA had been annuitized, its fair market value needed to be included in the prior year’s year-end balance when calculating a client’s IRA RMD. This left clients with non-annuitized IRA annuities with an inconvenient choice to make after reaching the age at which RMDs begin. At that time, they needed to either:
1) Begin taking distributions from their non-annuitized IRA annuities, reducing their potential future benefit, or
2) Annuitize their annuities, which would obviously produce a lower income stream than if they were annuitized at a more advanced age, or
3) “Make-up” the non-annuitized annuity’s RMD from other IRA assets, drawing down those assets at an accelerated rate.

None of these options was particularly attractive and now, thanks to QLACs, clients will no longer be forced to make such decisions.

3) Question: How much money can a client invest in a QLAC?

Answer: The final regulations limit the amount of money a client can invest in a QLAC in two ways: a percentage limit; and an overall limit. First, a client may not invest more than 25 percent of retirement account funds in a QLAC.

For IRAs, the 25 percent limit is based on the total fair market of all non-Roth IRAs, including SEP and SIMPLE IRAs, as of December 31st of the year prior to the year the QLAC is purchased. The fair market value of a QLAC held in an IRA will also be included in that total, even though it won’t be for RMD purposes.

The 25 percent limit is applied in a slightly different manner to 401(k)s and similar plans. For starters, the 25 percent limit is applied separately to each plan balance. In addition, instead of applying the 25 percent limit to the prior year-end balance of the plan, the 25 percent limit is applied to the balance on the last valuation date.

In addition, that balance is further adjusted by adding in contributions made between the last valuation and the time the QLAC premium is made, and by subtracting from that balance distributions made during the same time frame.

In addition to the 25 percent limits described above, there is also a $125,000 limit on total QLAC purchases by a client. When looked at in concert with the 25 percent limit, the $125,000 limit becomes a “lesser of” rule. In other words, a client can invest no more than the lesser of 25 percent of retirement funds or $125,000 in QLACs.

4) Question: What death benefit options can a QLAC offer?
Answer: A QLAC may offer a return of premium death benefit option, whether or not a client has begun to receive distributions. Any QLAC offering a return of premium death benefit must pay that amount in a single, lump-sum, to the QLAC beneficiary by December 31st of the year following the year of death.

Such a feature is available for both spouse and non-spouse beneficiaries. In addition, the final regulations allow this feature to be added regardless of whether the QLAC is payable over the life of the QLAC owner only, or whether the QLAC will be payable over the joint lives of the QLAC owner and their spouse.

QLACs may also offer life annuity death benefit options. In general, a spousal QLAC beneficiary can receive a life annuity with payments equal to or less than what a deceased spouse was receiving or would have received if the latter died prior to receiving benefits under the contract. An exception to this rule is available, however, to satisfy ERISA preretirement survivor annuity rules.

If the QLAC beneficiary is a non-spouse, the rules are more complicated. First, clients must choose between two options, one in which there is no guarantee a non-spouse beneficiary will receive anything; but if payments are received, they will generally be higher than the second option.

The second option is a choice that will guarantee payments to a non-spouse beneficiary, but those payments will be comparatively smaller than if payments were received by a non-spouse beneficiary under the first option. Put in simplest terms, a non-spouse beneficiary receiving a life annuity death benefit will generally fare better with the first option if the QLAC owner dies after beginning to receive benefits whereas, if the QLAC owner dies before beginning to receive benefits, they will generally fare better with the second method.

5) Question: Are QLACs available now
Answer: Yes…and no. Quite simply, the QLAC regulations are in effect already, but that doesn’t mean that insurance carriers already have products that conform to the new IRS specifications.

To the best of my knowledge, and as of this writing, QLACs exist in theory only.
It’s likely, however, that in the not too distant future, QLACs will go from tax code theory to client reality. Exactly which carriers will offer them and exactly which features those carriers will choose to incorporate into their products remains to be seen.

But make no mistake: QLACs are coming (or here, depending on your point of view). If such products may make sense for clients, it probably makes sense to reach out to them now and begin the discussion.

Why the IRS Wants You to Watch Your IRA Rollovers

IRS logoMy Comments: Can you say esoteric? Can you say huh? Can you say obscure?

The IRS recently issued a ruling, or perhaps more accurately a tax court decision made it for them that limits a persons ability to make an IRA rollover more than once in any calendar year. Used to be if you had 10 different IRA accounts, it didn’t matter. Now you are limited to ONE.

Mind you this doesn’t necessarily apply to transfers, which are technically different from rollovers. This article, assuming you give a damn, will tell you why.

By Mark Miller / April 24, 2014

CHICAGO (Reuters) – Memo from the Internal Revenue Service to retirement investors: Be careful with those individual retirement account rollovers.

That’s the gist of a recent IRS ruling that puts new restrictions on the number of “indirect rollovers” from one IRA to another you can do annually. The ruling comes on the heels of a federal court decision in January in which a complex strategy involving multiple rollovers executed by a New York City tax attorney, Alvan Bobrow, and his wife, Elisa, was disallowed. They were hit with a $51,298 income tax bill and a penalty of $10,260.

The new IRS rule only affects indirect rollovers, in which money isn’t sent direct from one financial trustee to another. Until now, such rollovers were permitted once every 12 months from each IRA account that a taxpayer owns. Starting January 1, 2015, the 12-month rule applies to all IRAs a taxpayer owns collectively. (Rollovers completed in 2014 won’t be affected.)

An indirect rollover allows an investor to withdraw funds from an IRA and then take up to 60 days to reinvest the proceeds in a different IRA without incurring income tax liability or the 10 percent withdrawal penalty for investors younger than 59 1/2. The court case, Bobrow v. Commissioner, involved several large indirect rollovers (just over $65,000 apiece) in 2008.
At issue is a sophisticated strategy, allowable under the old rules, aimed at drawing what amounts to an interest-free loan through a series of indirect rollovers. It’s usually executed by financial advisers or other financial experts because the penalties for mistakes are severe.

“We’ve executed it with a handful of clients over the past decade,” says Michael Kitces, partner at Maryland-based Pinnacle Advisory Group, “although I usually caution strongly against it, because if you botch it for any reason, you can’t fix it.”

In this case, Bobrow took an indirect distribution of $65,064 from his IRA in April 2008. In June he took a distribution of the same amount from a second IRA and four days later used those funds to repay the first IRA. In July he took a third distribution of that amount from an IRA owned by his wife, repaying that money into his second IRA days later. In September he made a final deposit to repay his wife’s IRA.

The IRS held that the timing of some of the transactions didn’t comply with the 60-day rule, and other aspects of the maneuver violated its rules. Bobrow sued the IRS, but the court wound up not only backing the IRS on the issue of the Bobrows’ timing but also ruling more broadly that all indirect rollovers are subject to an aggregate once-per-year rule.

That set the stage for the IRS rule that takes effect next year, which aims to clamp down on this maneuver. It applies to transfers from one IRA to another, or from a Roth IRA to another Roth account. It also covers SEP (simplified employee pension) plans and Simple (savings incentive match plan for employees) IRAs. It doesn’t apply to rollovers from a workplace account to an IRA, or to Roth conversions.

The rule has caused a stir among financial advisers because it contradicts language in IRS Publication 590, which spells out the IRA rules. (The IRS will amend the publication.) Nonetheless, the shift should not pose problems for most taxpayers, who typically execute rollovers directly between financial institutions.

“People really shouldn’t do indirect rollovers,” says Ed Slott, an IRA educator and author. “The only advantage is to get temporary use of the money, and that’s not really the spirit of the law.” Slott says some financial institutions do make it tough to execute direct rollovers, which could lead some taxpayers to the indirect route.

“I’ve heard of cases where the investor goes into a bank or brokerage and the staff person doesn’t know how to do a trustee-to-trustee transfer – or they try to talk the customer out of moving the money to another institution,” he says. “So, the investor will say, ‘Just give me a check, I haven’t decided what to do with it yet.’ “

Slott thinks the safest way to handle rollovers is direct trustee-to-trustee – with the receiving institution doing the paperwork. “If you are moving from bank A to broker B, broker B is getting the money, so let him do the paperwork. He’ll do it the right way, because he has an incentive to do so.”

But I’ll wave a caution flag: Don’t use an adviser simply because she offers to streamline your paperwork. Brokers and other financial advisers may be able to help you do the rollover paperwork, but you still need to do due diligence on the quality of investments offered and the fees charged. The U.S. Labor Department is gearing up to propose broad new rules later this year that would require brokers to act as fiduciaries, including when they advise clients on rollovers.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Top 10 Benefits and Risks of Forming a Captive

retirement_roadMy Comments: I recently published an eBook with the title CAPTIVE WEALTH!

It explains how to use an 831(b) Captive Insurance Company to create, to grow, and to preserve wealth.

While not a simple idea, it does have the blessing of the IRS if you do it the right way, under the right circumstances. That alone makes it valuable and something to know about.

From the perspective of a successful small business owner, it allows him or her to turn a current expense item into an asset at a later date. Think about it; money spent now comes back later as an asset, which can be used many different ways. This article outlines some of the caveats you should be aware of.

By Donald Riggin, from Guide to Captives and Alternative Risk Financing | November 11, 2013
Top-10-issues

9 Tax Breaks Expiring at Year’s End

IRS-formsI’m sure you agree that we live in a world of political correctness. Sometimes that’s a good thing and many times it just gets in the way of common sense. Right now, I have to tell you I am NOT licensed or qualified to dispense tax advice. But as a financial planner, for which I am licensed and qualified, I can tell you there are tax issues you should perhaps be aware of. Some of them qualify as simple common sense.

Another year has nearly passed, and it’s time to make sure your have your tax ducks in a row.
It’s important to make sure you know about the key changes made to the tax code before you make your end-of-year moves.

The slogan for this month might just be “use it or lose it.” That’s because there are several tax breaks that are set to expire as 2014 dawns. Whoever your clients are — teachers, students, small-business owners and big spenders to name a few — make sure they take advantage before it’s too late.

“The days of relying on Congress to automatically renew expiring tax provisions … might finally be coming to a close as the strain on the federal budget becomes more evident with each new round of budget negotiations,” wrote William H. Byrnes and Robert Bloink on ThinkAdvisor.

(Not all tax news is bad. The IRS recently gave high-income taxpayers a break with the release of the final regulations governing the new 3.8% tax on net investment income.)

Read about all NINE of them HERE:

A Long Walk Off a Short Cliff

Social Security 3My Comments: An area of expertise that I claim, involves a topic known as “captive insurance companies.” This concept applies to successful small business owners and the companies they own. These folks are in the news a lot lately because they get talked about in the context of the Affordable Care Act and what some pundits say will ruin them.

But since 99% of small businesses have less than 50 employees, which means the PPACA is not in play, there is a more important reason to pay attention, and that’s the government shutdown and the effect a potential default will have on them going forward.

For those of you who are small business owners and don’t know about captives, you can find out much more elsewhere on this web site. (or click on the attached image…) For now, know that it represents a way for you to improve cash flow, minimize risk exposure, and set aside funds for the future with favorable tax consequences.

Sitanta O’ Mahony October 10, 2013

By the time you read this, the fiscal crisis afflicting the US may appear to be over. Indeed despite the markets being roiled by talk of a possible US default, reaching the debt ceiling – as the government is forecast to do on October 17th – does not mean the government will default.

In fact the American constitution prevents such an eventuality; the 14th Amendment states that “the validity of the public debt of the United States, authorized by law” is sacrosanct and “shall not be questioned.” Despite this, perhaps because of remarks by the US press secretary appearing to dismiss the 14th amendment as a solution, the markets continue to be spooked.

Captive insurers are also being affected by the legislative deadlock, and unfortunately this will continue whether or not the impasse is resolved.

Lawrence Prudhomme, vice president at management and consultancy firm GPW and Associates, Inc. says the shutdown of the Internal Revenue Service (IRS), which is closed for business until the impasse is resolved, is one of the most immediate and visible ways the government shutdown is affecting captives.

It is also a short-term issue, he says. “For captive insurance companies domiciled outside the United States, obtaining an employer identification number requires direct contact with the IRS and cannot be done electronically.

So, as a result, until the IRS is reopened, nothing can be done in this area. It’s inconvenient, but not critical to the overall process of forming a new captive. We are anticipating that things will be resolved shortly and any backlogs will be overcome in a reasonable amount of time” says Prudhomme.

The biggest fiscal cliff development which Gary Osborne, President of USA Risk Group, Inc., the largest independent captive management firm in the US, has seen is an increase in firms utilising their captive, or starting a captive, to fulfil obligations under The Patient Protection and Affordable Care Act (PPACA), aka Obamacare.

“We’re seeing a big increase in smaller companies looking at utilising captives to self-insure. Self-insurance can be used to meet the requirements of PPACA and it gives companies much greater flexibility and choice in terms of the coverage they provide compared to remaining in one of the health insurance exchanges”.

Osborne cites the case of Vermont which mandates the provision of unlimited fertility treatments in its exchanges. However if a firm self-insures, a cap of one or two such treatments can be implemented.

“The coverage provided under a self insured plan can be tweaked as long as it meets the minimum federal standard which is generally much lower than many states are imposing under the health insurance exchanges.”

Although states can’t stop firms self-insuring under the federal law, in a bid to maximise higher standards of health care for all employees, they are limiting the ability to buy stop loss insurance and Osborne says this is forcing companies with fewer than 100 employees back onto the exchanges.

The other area in which the impasse is impacting captives is in relation to the renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), commonly known as TRIA, which is set to expire on December 31, 2014.

“TRIA is one of the areas the government are considering cutting, people are beginning to question why the government is getting involved and whether or not it’s really needed”, says Osborne. With trenchant cuts in public spending on the table TRIA seems an easy target.

Yet notwithstanding the tag of ‘corporate welfare’ being lobbed at it by the Cato Institute and others, in fact TRIA doesn’t cost a lot of money, says Osborne. “It’s a pooling mechanism, an advance from the government, which insurance companies (including domestic captives) contribute to by paying up to 3% of their premium. Unfortunately it’s one of those symbolic issues that has been caught up in the fight.”

Despite this, Osborne thinks TRIA’s future is assured. “There are enough vested interests fighting for it”. Let’s hope the same can be said for affordable healthcare.