Category Archives: Tax Planning

5 Key QLAC Rules to Help You Defer Taxable Income

financial freedomMy Comments: Yesterday, President’s Day, was all about memories and things past. Today, we’re back with a somewhat esoteric idea to help you grow and keep your money.

Much of the talk in Washington these days is about income inequality and how much the 1% make each year. For some of us in the 99%, there is little dispute that legitimate ways can be found that defer taxes. This is one of them.

The IRS recently approved a way for us to defer ordinary income taxes on some of the money we may now have in what are known as “qualified plans”. That’s IRS speak for money that has NOT BEEN TAXED YET. Think IRA, or 401k, or 403b, and so on.

They, the IRS, introduced QLACs, which is an acronym for Qualifed Longevity Annuity Contracts. Here is a definitive explanation. (BTW, I have no idea what the initials after the authors name implies!)

Denise Appleby, APA, CISP, CRC, CRPS, CRSP

A longer life expectancy is one of the many benefits of modern medicine and healthy living. But with that longer life comes the risk that retirees may outlive their savings – a primary concern for many Americans.

To address those fears, many financial advisors are recommending annuity products, and the IRS has joined in by issuing final regulations on qualified longevity annuities that individuals can purchase in eligible retirement accounts. These regulations, issued on July 21, 2014, apply to contracts purchased on or after July 2, 2014.

Background
With the exception of Roth IRAs, retirement account owners must begin to take required minimum distributions (RMDs) for the year in which they reach age 70½. Qualified plans, 403(b)s and governmental 457(b) accounts can allow eligible participants to defer starting RMDs past age 70½ until retirement.

An RMD amount for a year is calculated by dividing the previous year-end fair market value (FMV) of the retirement account(s) by the account owner’s applicable life expectancy for the RMD year.

If an individual owns multiple traditional, SEP, and SIMPLE IRAs, the RMDs for each of those IRAs must be calculated separately, but can be totaled and taken from one or more of the IRAs. This aggregation treatment can also be applied if an individual owns multiple 403(b) accounts.

RMDs cannot be aggregated for qualified plans, such as 401(k) and pension plans.
Some individuals who already have sufficient income from other sources may prefer to avoid or defer the usually taxable income from RMDs for as long as possible. The qualifying longevity annuity contract (QLAC) rules provide what some consider a partial solution for these individuals.

The following is an explanation of some of the key QLAC provisions.

1. Eligible accounts
These QLAC rules apply to traditional IRAs, defined contribution plans, 403(b) plans, and eligible governmental 457(b) plans. For this purpose, “traditional IRA” includes SEP IRAs and SIMPLE IRAs. These QLAC rules do not apply to Roth IRAs because the RMD rules do not apply to Roth IRA owners. They also do not apply to defined benefit plans, as defined benefit plans already provide for distributions in the form of annuities.

2. Delayed required beginning date provides opportunity for deferred RMD income
Generally, RMDs must begin by the required beginning date (RMD), which is April 1 of the year that follows the year in which the account owner reaches age 70½.

For employer-sponsored retirement plans, the required beginning date (RBD) can be deferred until April 1 of the year that follows the year in which the participant retires from working for the plan sponsor. For retirement account owners who would prefer to defer starting RMDs past the RBD, QLACs provide an opportunity to defer RMDs on a portion of their account balances.

Under the QLAC rules, the annuity starting date for a QLAC is the first day of the month following the month in which the retirement account owner reaches age 85. A QLAC could include provisions that allow an earlier start date, but it is not required to do so.

3. QLAC excluded from FMV in RMD calculation
The value of a QLAC is excluded from the FMV used to calculate RMDs for the years before the annuity start date. This allows for a smaller RMD amount for those years.

4. QLAC Limits
The amount of the premiums paid for a QLAC cannot exceed the lesser of $125,000 or 25% of the owner’s account balance on the date of payment.

The $125,000 limit rules
• All of the owner’s retirement accounts are aggregated for the purpose of the $125,000 limit.
• The $125,000 is reduced by any QLAC premiums paid on or before the date of the QLAC premium payment for any other IRA or employer-sponsored retirement plan.
• The $125,000 limit is indexed for inflation in $10,000 increments.

The 25% limit rules
• The limit is determined separately for each defined contribution plan.
• The limit is determined separately for each eligible governmental 457(b) plan.
• The limit is determined separately for each 403(b) plan. This is a deviation from the RMD rules, which provide that 403(b) accounts can be aggregated for RMD purposes (see background section above).
• IRA balances are aggregated and treated as one when determining if this limit applies. Consistent with the RMD aggregation rule for IRAs, a QLAC can be purchased in one IRA even if another IRA balance is used to satisfy the 25% limit.
• The 25% is reduced by any QLAC premium payment for the same QLAC or another QLAC that is held or purchased for the owner’s IRAs.
• Aggregation by account type is not allowed. For instance, IRAs cannot be aggregated with qualified plans or 401(k) plans.
• IRA balances are determined as of Dec. 31 of the year that precedes the year in which the premium is paid.
• For employer-sponsored retirement plans, the balance is the account balance as of the last valuation date preceding the date of the premium payment. This is adjusted by adding contributions allocated to the account during the period that begins after the valuation date and ends before the date the premium is paid and reduced by any distributions made from the account during that period.

An important distinction for the FMV is that while the QLAC is excluded for the purposes of calculating RMDs, it is included for purposes of applying the 25% limit.

Let’s look at some examples:
Example 1
Sally has a 401(k) account with a balance of $500,000, an IRA with a balance of $40,000, and a 403(b) with a balance of $25,000. If she pays a QLAC premium of $125,000 from the 401(k) account, no additional QLAC premiums can be paid from any of the other accounts. This is because her QLAC premiums cannot exceed $125,000.

Example 2
Assume that the facts are the same as in Example 1, except that Sally pays a QLAC premium of $25,000 from the 401(k) account. She can pay additional QLAC premiums from the other accounts as long as the aggregate payment does not exceed $125,000 and the premium from one account does not exceed 25% of the account balance.

Example 3
Jim has a traditional IRA with a balance of $50,000, a 403(b) account with a balance of $100,000, and a 401(k) with a balance of $200,000. Jim’s QLAC premium cannot exceed the lesser of $125,000 or 25% of his account balance.

Jim’s total account balance is $350,000 and 25% of that is $87,500. Because of the restriction on aggregation of the 25% rule, Jim’s QLAC premium cannot exceed:
• $12,500 for the IRA
• $25,000 for the 403(b) and
• $50,000 for the 401(k) account.
If all three of the accounts were IRAs, then the QLAC could have been purchased in any of the IRAs.

5. Roth LACs are not QLACs
Annuities, including qualifying longevity annuity contracts, are not QLACs if they are purchased in a Roth IRA, even if they otherwise meet all of the requirements for a QLAC. If a QLAC is converted to a Roth IRA, it loses its QLAC status as of the date on which the conversion occurs.

Amounts held in Roth IRAs, including any QLAC that is converted to a Roth IRA and, as a result, loses its QLAC status, are not taken into consideration when determining the $125,000 and 25% QLAC limits.

Responsibility for monitoring limits
In general, the account owner is responsible for ensuring that the QLAC limits are not exceeded. Unless the IRA custodian or plan administrator has knowledge to the contrary, they are allowed to rely on the account owner’s representation that the limits are not being exceeded. For qualified plans, the reliance on the account owner’s representation does not extend to amounts held under a plan that is not maintained by the employer.

If the premium amounts are exceeded, the annuity contract could fail to be a QLAC unless the excess premium is returned to the non-QLAC portion of the account on a timely basis.

Other factors to consider
The guaranteed lifetime income-deferred RMD on QLACs and reduced RMDs as a result of excluding QLAC premiums are only some of the factors that should be considered when determining suitability. Another issue to take into account is the benefits payable to beneficiaries, including any optional features available when choosing a QLAC product. The availability of optional features could vary among different providers and products.

13 Reasons Why a QLAC Belongs in Your IRA

My Comments: Some people made good decisions along the way and now have significantly large IRA accounts. Some people I know have little need for the money to maintain their existing standard of living.

If this is you and would like to find a way to NOT take money every year and pay the IRS a sizeable chunk of your retirement nest egg, there is now a way to defer some of the taxes. You can’t avoid the truism about the inevitability of death and taxes, but you can delay it.

This article explains your new option. If you’d like to know more, send me an email or give me a call. I can help make it happen for you.

By Stan Haithcock / Nov 18, 2014

Qualified longevity annuity contracts (QLACs) were approved on July 1 of this year for use in Traditional IRAs, 401(k)s, and other approved retirement plans.

They’re also referred to as qualifying longevity annuity contracts. Regardless of what name you choose, let’s look at some reasons why you should consider including a QLAC in your IRA:

1. Potentially reduce taxes
The ruling allows you to use 25% of your individual retirement account, IRA, or $125,000, whichever is less, to fund a QLAC. That dollar amount is excluded from your required minimum distribution, RMD, calculations, which could potentially lower your taxes.

2. Lessen your RMDs
As an example, if you have a $500,000 Traditional IRA, you could fund a $125,000 QLAC under the current rules. Your RMDs (Required Minimum Distributions) would then be calculated on $375,000.

3. Plan for future income
QLACs allow you to defer as long as 15 years or to age 85, and guarantees a lifetime income stream regardless of how long you live.

4. Spousal and non-spousal benefits
Legacy benefits for both spouse and non-spouse beneficiaries guarantee that all the money will go to your family, not the annuity carrier.

5. Protect your principal
QLACs are longevity annuity structures, which are fixed annuities. Also referred to as deferred-income annuities (DIAs), the QLAC structure has no market attachments, and fully protects the principal.

6. Add a COLA
Depending on the carrier, you can attach a contractual COLA (cost-of-living adjustment) increase to the annual income or a CPI-U, Consumer Price Index for All Urban Consumers, type increase as well.

7. No annual fees
QLACs are fixed annuities, and have no annual fees. Commission to the agent are built into the product, and very low when compared with fully-loaded variable or indexed annuities.

8. Contractual guarantees only
QLACs are pure transfer of risk contractual guarantees, and agents cannot “juice” proposal numbers.

9. Laddering income
Because of the QLAC premium limitations, this strategy should be used as part of your overall income laddering strategies, and in combination with longevity annuities in non-IRA accounts.

10. No indexed or variables allowed
Variable and indexed annuities cannot be used as a QLAC, which is a positive for the consumer in my opinion. Only the longevity annuity structure is approved under the QLAC ruling.

11. Complements Social Security
QLACs work similarly to your Social Security payments by guaranteeing a lifetime income stream starting at a future date.

12. Indexed to inflation
The QLAC ruling allows the premium amount to be indexed to inflation. That specific amount is $10,000, and should increase by the amount every three to four years.

13. Only the big carriers play
Because of the reserve requirements to back up the contractual guarantees, only the large carrier names most people are familiar with will offer the QLAC version of the longevity annuity structure.

I have recently written an easy to read QLAC Owner’s Manual that clearly explains the law and what you need to know to make an informed decision. In my opinion, it’s worth your time to take a closer look.

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
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