IRA Planning

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the Jeffrey M. Verdon Law Group, LLP at jeff@jmvlaw.com or 949-263-1133.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how we can assist you at our upcoming program, "The Ultimate Level".  Connect with us on Facebook, Twitter or LinkedIn.

Thanks to the assistance of Michelle Ward of Keebler & Associates, LLP for bringing to our attention a recent case regarding bankruptcy exemption for inherited IRAs.

The 7th Circuit Court of Appeals has reversed a district court's ruling extending bankruptcy exemption to an inherited IRA (Download Case). In Clark, the Wisconsin district court had previously reversed the bankruptcy court's decision and allowed an inherited IRA to be exempt from the bankruptcy estate. The debtors, Mr. and Mrs. Clark, filed for chapter 7 bankruptcy in 2010. Mrs. Clark had inherited an IRA from her mother in 2001. Neither Mr. nor Mrs. Clark was retired. The debtors claimed the inherited IRA was exempt under Wisconsin law and 11 U.S.C. Sec. 522(b)(3)(C). The Court of Appeals (cases Nos. 12-1241 & 12-1255) stated that by the time the Clarks filed for bankruptcy, the money in the inherited IRA did not represent anyone's retirement funds and that to treat this account as exempt would be to shelter from creditors assets that can be freely used for current consumption. The Court further stated that an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner's retirement.

Given this recent decision and the diversity of decisions on this topic, caution suggests having an IRA payable to a trust rather than to a beneficiary outright to strengthen creditor protection.

Keebler & Associates, LLP assisted the Law Firm of Kavesh, Minor & Otis in obtaining PLR 200537044, approving the IRA Inheritance Trust®, the use of a standalone trust as beneficiary of IRA assets for the purpose of ensuring the stretchout of RMDs and providing added protection of IRA assets.  For more information about the IRA Inheritance Trust®, click here.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

At The Ultimate Estate Planner, Inc. it's important to us to keep our customers and the rest of the estate planning community informed about very important and exciting updates as it happens.  A special thank you to Michelle Ward and Robert Keebler for this wonderful article featured on WealthManagement.com.

Roth IRA Conversion Recharacterization Permitted by Michelle L. Ward
Taxpayer relied on financial advisor’s advice

In Private Letter Ruling 201235030 (June 6, 2012), received by Keebler & Associates, the Internal Revenue Service granted the taxpayer an extension to recharacterize his 2009 Roth individual retirement account conversions.

Facts
In 2009, the taxpayer read articles and heard discussions describing the end of the $100,000 income limitation (which actually occurred in 2010) for converting to a Roth IRA and highlighting the benefits of performing such a conversion.  He came under the mistaken impression that the income limitation was eliminated in 2009, rather than in 2010.  Because the articles, generally, indicated that it was a good time to perform a conversion, due to the decline in the stock market, he decided to go forward with performing the Roth IRA conversions.

Also in 2009, before he performed the Roth conversions, the taxpayer consulted with his financial advisor, who was also his uncle, and discussed that he was considering performing a Roth IRA conversion.  The financial advisor submitted an affidavit along with the PLR request, in which he represented that he has been advising the taxpayer and the taxpayer’s wife since 1998, that in 2009 the taxpayer discussed with him the idea of a Roth conversion, that he never informed the taxpayer the $100,000 limitation still applied in 2009, that his failure to inform the taxpayer was an oversight on his part and that the taxpayer relied on the financial advisor to inform them if a Roth conversion was either inadvisable or not allowable.

The taxpayer prepares his and his wife’s tax return annually without the assistance of a paid preparer.  In 2009, he used software to prepare their income tax return, but due to a keystroke or entry error when completing the 2009 Form 1040, the Roth IRA conversion amounts he placed on line 15a didn’t carry over to line 15b.  He didn’t realize this error had occurred when he filed their tax return.  Because of this error, the taxpayer and his wife received an IRS Notice of Deficiency, increasing their income by the amount of the conversion.  Upon receipt of this Notice, the taxpayer contacted an attorney for assistance, and it was during these conversations with that the taxpayer first discovered that he had been ineligible to make the 2009 Roth conversions, because his 2009 income exceeded $100,000.

IRS Ruling
For tax years beginning before 2010, a taxpayer is eligible to rollover funds from a traditional IRA to a Roth IRA provided that his: (1) adjusted gross income (AGI) was no more than $100,000, and (2) filing status wasn’t “married filing separately”.

To the extent that a taxpayer converted his traditional IRA to a Roth IRA and later found out that his AGI exceeded $100,000, the taxpayer could elect to recharacterize (that is, undo) the conversion.  However, the recharacterization must have been completed on or before the due date of the federal income tax return (including extensions) for the year of conversion (that is, no later than October 15th would be constrained to the original conversion amount.

Notwithstanding the Oct. 15th deadline, under Treasury Regulations Section 301.9100-1(c), the IRS may grant a reasonable extension of time fixed by regulation, a revenue ruling, a revenue procedure, a notice or an announcement for making an election, which includes a Roth IRA recharacterization.

Treas. Regs. Section 301.9100-3 provides that applications for relief will be granted when the taxpayer provides sufficient evidence to establish that: (1) the taxpayer acted reasonably and in good faith; and (2) granting relief wouldn’t prejudice the interests of the government.  The regulations provide that a taxpayer will be deemed to have acted reasonably and in good faith if, among other factors, the taxpayer reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election.

In this case, the IRS found that the information presented and documentation submitted by the taxpayer was consistent with his assertion that his failure to elect to recharacterize the Roth IRA on or before the due date was caused by his lack of awareness of the necessity of making an election, as a result of his reliance on his financial advisor.

Lessons Learned
Although one should never depend upon Treas. Regs. Section 301.9100-3 relief, this PLR provides some insight as to when such relief can be granted.  It’s also a good reminder of the power of the recharacterization provisions.  Although, in this instance, the recharacterization provisions applied when the taxpayer's modified AGI exceeded $100,000, there’s nothing to prevent a recharacterization if the Roth IRA falls in value after the conversion or if the taxpayer's financial circumstances change significantly. 

The primary benefit of recharacterizations is that the taxpayer can assess the post-conversion returns and determine if the conversion was worthwhile in the first place.  For example, let’s assume a taxpayer converts $100,000 to a Roth IRA in 2012.  Now let’s assume that the value of the Roth IRA is $80,000 in March 2013.  In this case, the taxpayer would simply recharacterize the conversion by moving the entire $80,000 Roth IRA back to a traditional IRA on or before the time he files his 2012 individual income tax return.  The effect of the recharacterization is that the taxpayer won’t be taxed on any of the $100,000 original conversion, because he recharacterized the entire amount back to a traditional IRA.

The 2012 tax year is the perfect time to take advantage of converting to a Roth IRA before income tax rates go up in 2013.  In many cases, taxpayers can easily achieve a “heads I win, tails I tie” situation, especially those who have sufficient wherewithal outside of their IRAs to pay the income tax liability on a Roth IRA conversion.  In most cases, all post-conversion income and growth can be sheltered from future income tax, while any post-conversion losses can be made less painful by recharacterizing the prior conversion.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: under30ceo.com
Source: WealthManagement.com

Reposted from Financial Advisor Magazine | By Eric L. Reiner | May 2012

The financial crisis has been blamed for a lot of things. Setting in motion the events that launched a topflight planning boutique isn’t usually one of them.

The Ponzi schemes exposed by the crisis affected clients at the firm CPA Robert S. Keebler was with at the time. As he delved into the tax issues surrounding clients’ losses, Keebler, a nationally known speaker and writer based in Green Bay, Wis., came to a realization. Few, if any, noted experts existed in the obscure world of theft-loss deductions. So he set out to become one.

“I just knew someone had to step up and figure it out,” Keebler says. He invested time in learning the ins and outs of this little-used itemized deduction, then produced seminars and articles on the subject for practitioners.

Keebler is perhaps best known for his work in retirement plans and advanced estate planning, as well as for making private letter ruling requests from the Internal Revenue Service. Certainly he handles plenty of other matters as well, but foraying into the deep recesses of theft losses turned out to be a confidence builder and springboard. “Once we did that, we weren’t afraid to do other things,” he says.

Given such conviction, plus a little career coaching and encouragement from industry icons Sid Kess and Steve Leimberg, he made the inevitable move. In late 2010, Keebler left Top 20 accounting firm Baker Tilly Virchow Krause, where he had been a partner for years, to found Keebler & Associates with key members of his long-standing team. Guess what?

“The phone continues to ring,” says Keebler, 51. Frankly, the 18-month-old firm is doing fine, thank you very much.

In addition to serving the firm’s clients’ needs, “we do a lot of work for financial advisors, CPAs and law firms,” says Keebler, who remains down-to-earth and approachable despite his professional stature. “Most of our referral work comes from people who have heard me speak.” But then that’s always been Keebler’s rainmaking methodology.

How To Find Work In Green Bay And Beyond
“When I came up to Green Bay from Milwaukee in 1990, the only way to bring in work was to go out and teach local professionals like the Green Bay Estate Planning Council. You hoped if you spoke to enough people and showed them you had expertise that they would send you work,” he says. And they did.

As a speaker, “Bob is exceptionally good at breaking down high-level planning so that everybody in the room can understand and apply the ideas in their practice,” says Las Vegas attorney Steve Oshins, a prominent asset protection and estate planning expert with whom Keebler recently conducted a full-day seminar for a national accounting firm.

Keebler claims he was “driven to teach” once he discovered he was good at it, and that propelled him to the next level. Workshops for large insurance and financial-services companies, along with seminars for financial advisors, accountants and attorneys, take Keebler coast to coast these days. He also expands his reach with technology—through podcasts, webinars and teleconferences accessible through www.keeblerandassociates.com. The result is a clientele more national than local.

Skill Set
Like his teaching, Keebler’s writing for CCH, Leimberg Information Services and the American Institute of Certified Public Accountants emphasizes clarity and usefulness.

“Bob is able to get ahead of the curve in how to use estate planning tools and techniques and explain what they look like when they are modeled. He is a visionary,” says one of his editors and mentors, estate planning legend Steve Leimberg, namesake and CEO of the tax news and analysis service.

Keebler also holds awards such as the “Distinguished Accredited Estate Planner” designation (there are only 66 such individuals), which bears further testament to his technical prowess. But that alone does not a firm build. The truth is, Keebler is a pretty sharp cookie when it comes to marketing, too.

Staying on the cutting edge is vital to his teaching and writing brand. “So we move very quickly,” Keebler says. For instance, when the IRS recently announced an extension of the deadline for certain estates to elect the spousal portability of the estate-tax exemption, within hours Keebler & Associates blasted an e-mail to practitioners spotlighting the affected clients and steps advisors should take.

“We try to be the first people on the block with the news and how it’s going to apply,” says one of Keebler’s three partners, Stephen J. Bigge.

Inside The Engine Room
Each morning at the firm, another partner, estate-planning attorney Michelle Ward, begins her day with a visit to the Web sites of the IRS and a variety of subscription services. Her purpose is singular: to sift through the myriad news alerts and find the nuggets. “I’ll check to see whether anything relevant to our clients has come out and, if so, I’ll post it to our Twitter account and Facebook, and then pass it on to Bob,” says Ward, who has worked with Keebler since he hired her into the tax profession in 2000.

When Keebler deems a topic worthy of dissemination, he then turns to one of his partners. “We’ll figure out how the pronouncement applies to our client base and do a brief write-up on the rule,” explains Bigge, who Keebler hired right out of school from their shared alma mater, Lakeland College in Sheboygan, Wis., in 2001.

Backed By A Power Trio Of Experts
Keebler is the front man, enabled by his three partners’ strong, complementary backgrounds. Ward, an attorney with a master’s in law (LLM), tends to handle the research for private letter ruling requests while Bigge, a CPA, crunches the numbers for Roth conversions, sales to intentionally defective grantor trusts and other strategies clients are mulling.

The other principal, Peter J. Melcher, holds an LLM in tax plus an MBA from the University of Chicago. “Pete does the heavy tax research for white papers and opinion letters,” Bigge says. An executive assistant, Emily Rosenberg, rounds out the five-person operation.

Many accounting firms thrive on audits and tax-return preparation—dubbed “annuity work” by the CPA profession because of these services’ recurring nature—but that’s not the case at Keebler & Associates. There is no audit practice, and preparing returns accounts for only about 10% of total revenues. “Most of our revenues come from either Bob’s speeches or new tax-planning work from existing clients or referrals,” reports Bigge, who doubles as the firm’s chief financial officer.

An Eye On The Future
Despite the shop’s solid performance since inception, Bigge contemplates the future like a good CFO should. “The challenge is continuing to bring in work,” he says. “A lot of times we get called in as a specialist, and once we have resolved the client’s issue or helped him put a plan in place, he moves on and we have to look for our next planning client.”

A potential damper on the firm’s unique private letter ruling business is a recent hike in the fee the IRS charges for some ruling requests. That will make the requests feasible for fewer taxpayers, according to Ward.

In the firm’s estate planning business, a big question mark is what will happen to the federal estate tax exemption. Under current law, it will revert to $1 million per person at the end of the year. That would expand opportunities for estate planners. But if the exemption were maintained at its current $5 million, it would continue to constrain the market. In that case, says Bigge, “we’ll focus more on tax-sensitive retirement planning. That’s really at the intersection of finance and tax, where no one else wants to play.”

Developing drawdown strategies for retirees is one area Keebler has been putting time into lately. “If the client has Roth money, pretax money in an individual retirement account and after-tax money in a personal account, what does he spend first and how does he take it out in the most tax-efficient way? That’s where the action is,” Keebler says, adding, “Everyone is going to need a financial planner because this is so complex.”

Planners, for their part, will need to know more about taxes. “With the compression in tax season—because 1099s are going out later and later—having a 1040 prepared at a CPA firm is becoming more expensive” as accountants attempt to make a full year’s living in a shorter period, Keebler says. “The result is non-CPAs are preparing more income tax returns, and because of the seasonal nature of their businesses, often they are not equipped to do tax planning. So financial planners will have an opportunity to take a larger role in income-tax planning with more middle- and upper-middle-class families,” Keebler predicts.

Plans to grow Keebler & Associates stop at the point where the partners are managing the firm instead of bringing in lucrative speaking fees or national billing rates. From that perspective, an experienced practitioner, rather than a neophyte needing training, could be a more viable addition to the firm.

But no matter where the boutique winds up, it will have taken Keebler a long way from those local speaking gigs 20-plus years ago, even if ascending to the national stage and circulating with some of the biggest names in planning-dom were not his original goals.

“I was never shooting for the stars,” Keebler says. “It just kind of happened.”

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Sources: fa-mag.com

By L. Paul Hood, Jr., Esq. & Emily Bouchard

A prospective new client contacts you about working with him and his partner.  Within minutes you learn that they are unmarried with each having children from prior relationships as well as one of their own together.  Do you experience a thrill of excitement at having such a complex and fascinating potential couple to work with, or does this scenario strike fear in your heart?  If you’re like most of the estate planners we work with, fear would be your first response.  Are you aware that your prospective client is most likely afraid as well, but for different reasons?

In Estate Planning for the Blended Family (Self-Counsel Press 2012), we identify and discuss 11 fears that clients can have when it comes to the estate planning process.  These fears include everything from confronting fear of death, to fear of the estate planning process itself.  On the other side of the equation, the biggest concern for the estate planner (or should be if it’s not already) is the likelihood of conflict of interests within the blended family system.

The reality is that estate planners need to be able to manage their own emotions, as well as those of their clients, around these fears and potential conflicts.  It’s not enough to understand the intricacies of estate planning vehicles to avoid taxes and transfer assets efficiently – it’s also necessary to make sure you are addressing the core concerns (and yes, fears) that are part of the process.  These fears prevent people from doing estate planning, or cause them to procrastinate.  Fears lead to avoidance strategies that cause costly and unnecessary delays in estate planning.  More often than not, people tend to avoid the conversations that could move the process along smoothly due to a lack of awareness about how to have the conversations effectively. 

Estate planning for the blended family client can present some of the most challenging work that an estate planner ever does.  One of the reasons why this is so is that most professionals in the field of estate planning aren’t sufficiently trained or experienced in the “human side” of the process, which is the “heart” of estate planning.  Most attorneys, accountants, and financial advisors are trained in the “head” side of estate planning.  The key to successfully navigating the often treacherous waters of estate planning for the blended family is properly balancing the head and heart. 

On Tuesday, May 8th, the first in a series of three teleconferences on Blended Family Estate Planning will commence.  This 90-minute presentation will dive into the key issues of the initial consultation and successful engagement of couples with a blended family. Participants learn how to address emotionally charged issues and fears that keep the planning process from moving forward, as well has how to move when a client shuts you down or shuts you out.  Specifics related to property ownership and distribution will be addressed along with who should be considered for key fiduciary roles.   The training provides a comprehensive introduction to estate planning for the blended family, and in so doing, marries the “head” and the “heart” of estate planning. 

In the second session to be held on Tuesday, May 15th, attention is focused on the lifetime planning options that are available or advisable to blended family couples. 

And last, but certainly not least, in the final session to be held on Tuesday, May 22nd, the various issues that are attendant to testamentary estate planning for blended family clients are addressed, as well as some post-death administration issues.

To sign up for this timely and important series and to receive a complimentary copy of our book, which includes a CD with forms, visit www.ultimateestateplanner.com.

If you have any questions, please feel free to contact Emily or Paul at estateplanning@blended-families.com.  You can also contact The Ultimate Estate Planner, Inc. at 1-866-754-6477.

Emily Bouchard and L. Paul Hood, Jr. © 2012

Steve Oshins’ 3^rd Annual Domestic Asset Protection Trust Ranking Chart
Thanks to the generosity of nationally renowned estate planning and asset protection attorney, Steven J. Oshins, Esq., AEP (Distinguished) for providing his 3rd Annual Domestic Asset Protection Trust Ranking Chart.  For the first time since the chart was originally created, this chart now assigns numerical rankings to each DAPT state. The approximate weights assigned to each variable are listed.  However, please note that in the interests of impartiality, since Nevada is the only state (of the top eight states per the rankings) that doesn’t allow divorcing spouses to access its DAPTs, Steve added a lot of subjective bonus points to the non-Nevada jurisdictions in order for the “Total Score” to not be too skewed. 

Traditional IRA Distribution Flowchart
Thanks to the generosity of nationally renowned CPA and IRA Expert, Robert S. Keebler, we are providing to you his updated Traditional IRA Distribution Flowchart.

Updated Understanding the 3.8% Health Care Surtax Chart
In late March, the Supreme Court began hearing arguments on the constitutionality of the Affordable Care Act, the health care reform law that was signed on March 23, 2010.  Accordingly, Robert S. Keebler updated his Understanding the 3.8% Health Care Surtax chart to reflect the new Medicare surtax. This law imposes a 3.8% tax on unearned income, such as interest, dividends, rents, royalties and certain capital gains, for higher income taxpayers (and trusts and estates).

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

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Reproduced with Permission by and Courtesy of Leimberg Information Services, Inc. (LISI).  For information about how to subscribe to LISI, click here.

Traditional IRAs are not eligible S corporation shareholders under Rev. Rul 92-73 on the theory that the beneficiary of a traditional IRA is not taxed currently on the IRA's share of the S corporation's income. But what about Roth IRAs?

In Employee Benefits and Retirement Planning Newsletter #506 Bob Keebler provided LISI members with his analysis of the initial Tax Court decision in Taproot, that at the time supplied the answer to the fascinating question set out above.  Now, Bob returns with Michelle Ward, and together they comment on the 9th Circuit’s affirmation of the Tax Court’s decision.

EXECUTIVE SUMMARY
In Taproot, the Ninth Circuit Court of Appeals upheld the U.S. Tax Court’s finding that a Roth IRA is not an eligible S-corporation shareholder.

FACTS
Paul Di Mundo incorporated Taproot Administrative Services, Inc. in the state of Nevada in 2002. Taproot elected S corporation status effective as of the date of incorporation and filed its 2003 tax return on a U.S. Income Tax Return for an S Corporation.

In early 2003, Taproot issued all outstanding shares of its stock to a custodial Roth IRA account held at the First Trust Co. for the benefit of Di Mundo. The custodial Roth IRA account remained Taproot’s sole shareholder during the 2003 tax year.

In 2007, the Commissioner of the Internal Revenue Service issued a notice of deficiency to Taproot for the 2003 tax year. Among other findings, the Commissioner determined that a Roth IRA did not qualify as an eligible shareholder of an S corporation. Consequently, Taproot was deemed taxable as a C corporation for the 2003 tax year.

DISCUSSION
Taproot argued that the individual beneficiary of a custodial account also qualifying as a Roth IRA should be considered the shareholder for purposes of the S corporation statute.

Treas. Reg. Sec. 1.1361-1(e)(1) provides that “[t]he person for whom stock of a corporation is held by a nominee, guardian, custodian, or an agent is considered to be the shareholder of the corporation for purposes of [the S corporation statute].” Taproot contended that as the sole beneficiary of the DiMundo Roth IRA, DiMundo should be considered the shareholder and, thus a qualifying individual for the purposes of the statute.

IRC Sec. 1361(c)(2)(A)(i) also extends shareholder eligibility to any grantor trust “all of which is treated...as owned by an individual who is a citizen or resident of the United States.” Taproot therefore also argued that a Roth IRA should be classified as a grantor trust.

In Rev. Rul. 92-73, the IRS ruled that an IRA is not a permitted shareholder of an S corporation under section 1361. The IRS reached similar conclusions regarding an IRA’s eligibility as an S corporation shareholder in a least 42 PLRs (see, e.g., PLRs 200915020, 200931039 and 200940013). While the Court acknowledged that such rulings were not binding precedent, it also noted that they can be used as evidence of an administrative practice of the IRS.

The Tax Court, along with noting the functional differences between IRAs and grantor trusts, found Rev. Rul. 92-73 to “sensibly distinguish[ ] IRAs from grantor trusts.” In making that determination, the Tax Court relied in part on the rationale of Revenue Ruling 92-73, stating that:

[T]raditional IRAs are not eligible S corporation shareholders because the beneficiary of a traditional IRA is not taxed currently on the IRA’s share of the S corporation’s income whereas the beneficiaries of the permissible S corporation shareholder trusts listed in section 1361(c)(2)(A) are taxed currently on the trust’s share of such income.

On appeal, Taproot maintained that the Di Mundo Roth IRA functioned merely as the form of Di Mundo’s individual investment account and that the plain language of Treas. Reg. Sec. 1.1361-1(e)(1) explicitly authorizes those IRAs and Roth IRAs created as custodial accounts to be shareholders of S corporations.

Taproot first claimed that both forms of IRAs and Roth IRAs—trusts and custodial accounts—lack the essential characteristics of a separate taxpayer and should therefore be treated as indistinguishable from the individual owners. The Court, however, found that Taproot did not provide persuasive reasoning or convincing authority for this conclusion and found the reasoning in Rev. Rul. 92-73 to support the opposite result. The Court found that the distinguishing feature is the deferred income tax treatment, which differentiates IRAs from beneficiaries listed in IRC Sec. 1361(c)(2)(A) who are taxed currently on the trust’s share of income.

The Tax Court also discussed the legislative intent behind the S corporation statute, finding the only available evidence suggested that Congress did not intend to allow IRAs to own S corporation stock. Although at the time Congress initially drafted the S corporations statute, both traditional and Roth IRAs had yet to be created, the Tax Court reasoned that “had Congress intended to render IRAs eligible S corporation shareholders, it could have done so explicitly,” as it did with the 2004 amendment allowing banks with IRA shareholders to elect S status in specific circumstances.

This was especially true in light of Congress’s 1999 directive to “the Comptroller General of the United States to conduct a study of possible revisions to the rules governing S corporations including “permitting shares of such corporations to be held in individual retirement accounts.” For these reasons, the Tax Court concluded that traditional and Roth IRAs were not eligible shareholders. On appeal, the Court found the legislative history of the S corporation statute favored limited eligibility and that if at any point Congress had intended IRA eligibility, it could have amended the statute. The Court pointed out that if IRAs and Roth IRAs qualified as eligible shareholders in 2003, then the subsequent 2004 amendment would have been completely unnecessary.

CONCLUSION
It is interesting to note that the Tax Court was also mindful that under Taproot’s theory of statutory construction, DiMundo would avoid virtually all taxation on his S corporation profits. This would enable S corporations to achieve an overwhelming benefit over C corporation competitors which are subject to two levels of taxation —one at the corporate level and another at the shareholder level.

In a lengthy dissent, however, Judge Halpern notes that “this underestimates the strengths of the Code's other defenses against such shenanigans.” He noted that there are numerous limitations on what can go in and out of an IRA—income-contribution limits, deadlines for contributions, penalties on prohibited transactions, and penalties on excess contributions. Judge Halpern further noted that while custodial retirement accounts are generally exempt from tax on undistributed IRA income, they are still subject to the taxes imposed on Unrelated Business Income Tax. In general, the Unrelated Business Income Tax subjects the business earnings of tax-exempt organizations to taxation.

The majority of the Tax Court, however, expressed its skepticism that the Unrelated Business Income Tax could adequately mitigate this tax advantage. Although Taproot contended that the Unrelated Business Income Tax negates the Tax Court’s policy concerns, the Appeals Court agreed with the IRS that I.R.C. Sec. 512 generally excludes passive investment income, such as interest income, from application of the UBIT and thus, in this case, the interest income at issue would not be subject to the UBIT.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

TECHNICAL EDITOR: Barry Picker

CITE AS: LISI Employee Benefits and Retirement Planning Newsletter #603 (April 17, 2012) at http://www.leimbergservices.com/ Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES: Taproot Administrative Services v. Commissioner, Case No. 10-70892; Revenue Ruling 66-266, 1966-2 C.B. 356; Revenue Ruling 92-73, 1992-2 C.B. 224

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP

Reposted from WSJ.com | By Kelly Greene

Inherited individual retirement accounts made news earlier this year when the Senate Finance Committee proposed to make heirs empty them within five years of the benefactor's death.

The measure, which was abandoned shortly thereafter, would have upended a system that is highly advantageous to families. Under current rules, heirs get to stretch withdrawals from an inherited IRA across their own life expectancies, meaning the assets could potentially increase in value, tax-deferred, for decades.

Yet many unwitting families cash out the account, losing the possibility of a life-expectancy payout, says Natalie Choate, an estate-planning lawyer at Nutter McClennan & Fish LLP in Boston.

That is a problem, she says, because there is no way to get the money back into the IRA after it has been cashed out.

Sometimes, even when the heir is aware of the opportunity to keep the inherited IRA in tax-deferred investments, financial and legal advisers botch the paperwork so badly that the IRA is disqualified.

Here are some of the snags that can result:

Trust tangles: M.D. Anderson, a tax preparer in Chandler, Ariz., has worked on so many inherited IRA snafus that he set up a website to chronicle the morass, titled InheritedIRAHell.com.

One of the most common problems involves how they intersect with trusts. Many people who set up plain-vanilla living trusts, often marketed as a way to avoid probate, name the trust as the IRA beneficiary.

But a trust isn't a person, and has no life expectancy, so it can't take advantage of the opportunity to stretch withdrawals across decades.

There is a potential fix: Demonstrating that a trust qualifies as a "conduit," or "see-through" trust, meaning its purpose is to get the IRA distributions to a trust's beneficiaries. Doing so, however, could require winning a so-called private-letter ruling from the Internal Revenue Service, which can cost $4,000 for filing and double that for the accountant or lawyer preparing it, Mr. Anderson says.

His advice: Keep the IRA out of the trust unless your kids' situation is so egregious that there isn't any alternative, like having kids who are in jail.

Titling problems: When you inherit an IRA, you should retitle the account so it reads like this: "William Smith, Deceased (date of death) IRA F/B/O (for benefit of) James Smith, Beneficiary." But Mr. Anderson is working with a client who received forms from the custodian of the account that didn't spell out that he had inherited the account. The second set of forms the client received still needed some edits to avoid possibly disqualifying the account, Mr. Anderson says.

So, when you retitle the account, make sure the paperwork is in the proper format.

Paying the tax twice: If the benefactor's estate were large enough to be subject to federal estate tax, and a federal estate tax were paid, then the IRA beneficiary can get a tax deduction for the estate tax paid on the IRA's value. That is the case even if someone else paid the tax, Nutter McClennan's Ms. Choate says.

Estates worth up to $5.12 million are exempt from estate tax this year, but the exemption reverts to $1 million in 2013 unless Congress acts.

For example: a mother leaves a $1 million IRA to her son and the rest of the estate to her daughter. The daughter ends up paying the federal estate tax on the entire estate, including the IRA, the taxes on which were $350,000. The son cashes out the $1 million IRA. He now has $1 million in gross income and a $350,000 deduction for the estate tax.

"This is the most overlooked deduction in America," Ms. Choate says. The reason: Heirs often don't realize they are entitled to the "income in respect of a decedent" deduction, as it is known. Estate administrators typically don't feel it is their job to tell beneficiaries about their future tax situations. Meanwhile, the beneficiary's tax preparer might have no idea that estate tax has been paid on the IRA.

Failing to pass it on: Many wealthier adult children forget they can disclaim an inherited IRA and pass it along to their children—possibly creating tax-deferred growth for decades, says Bobbi Bierhals, an estate-planning lawyer with McDermott Will & Emery in Chicago.

There are two things to keep in mind, Ms. Bierhals says. First, the IRA owner has to fill out the beneficiary designation form in a way that will allow it. The best way is to leave the account "to my then-living descendants, per stirpes," which means the account goes equally to your children, or, if they have died, to their children.

Also, you must act quickly. Disclaimers must be completed within nine months of the benefactor's death, she says.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Photo Credit: James Steinberg via WSJ.com
Source: WSJ.com

The tumult of the current tax season is winding down, but advisors can provide a valuable additional service to their wealthy clients by encouraging them to closely review their estate plans to ensure these are up to date.

Estate plans are valid at the time they are signed, but sometimes years or decades pass before they come into play and circumstances change: assets grow or retract, designated trustees die, family members have falling-outs.

Keeping estate plans current is essential to protecting clients’ families and their assets, Blooma Stark, an attorney with Aronberg Goldgehn Davis & Garmisa, said in a telephone interview with AdvisorOne.

Stark noted that accountants are often the advisor clients see most often—at least once a year—and so are well positioned to recommend an estate plan review. In contrast, clients may see their attorneys only at wide intervals. She said she had just spoken with a client who had prepared an estate plan 20 years ago, and only recently realized she needed to update the plan.

Stark listed five estate plan areas to which advisors can direct clients’ attention for review. Doing this now “can save a lot of time and aggravation down the road,” she said.

1. Review Documents. It’s essential that a client’s estate plan documents align with his or her current situation. Often a review will show one or more of these need to be updated, Stark said. Especially important are the will, power of attorney, living will and trust.
2. Determine Familial Situation. Clients should assess whether their relationships with people they’ve named as guardians, executors, trustees or agents under a power of attorney are in good standing. If not, they will need to appoint others to fill those roles.
3. Assess Sub-Trusts.  Children grow up, and often their adult circumstances are different from those envisaged at the time the client formulated the estate plan. They may now have children of their own, requiring the arrangements of trusts to be changed. For example, Stark said, clients may decide that their children are sufficiently wealthy not to need to be direct beneficiaries and so execute a generation-skipping trust to ensure their grandchildren will be well provided for.
4. Update Schedule of Assets.  A critical issue clients often overlook or are unaware of is that an asset such as a second home does not automatically become part of their trust; the asset must be transferred to the trust during their lifetime. Failure to do this will likely result in probate costs that can escalate.
5. Evaluate Changes in Estate Tax Law. Depending on the net worth of the client’s estate, changes in the law may make it advisable to change estate plan documents. This year is a prime example, when so much is up in the air about the so-called Bush tax cuts. In 2013, for example, the estate tax exemption of $5 million could drop to $1 million, or some figure in between; nobody knows. Stark, like so many others who advise wealthy clients, said she has given up trying to crystal-ball what will happen next year. She is advising her high-net-worth clients to make gifts this year to take advantage of the current exemption.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Source: AdvisorOne.com
 

For decades many of us, as wealth strategies planners, have wondered not only how but if we should attract, engage and work with affluent families and those with complex taxable estates.  Their advisors are more protective.  The solutions are more complicated and create larger liability.  Though the fees may be greater, are they enough to cover the time and effort – especially if we only do it occasionally?

The Laureate Center for Wealth Advisors has the training and education needed to attract, engage, and implement work in the taxable estate arena.  You owe it to yourself and your clients to learn more about The Laureate Program, especially if you desire to:

• Quarterback a team of advisors or be called in as a team member;
• Find your quiet confidence as a leader and resource to clients and their advisors;
• Identify, explain, and implement complex tax, wealth, legal, and other technical strategies in an understandable client language;
• Price for your intellectual property and the value you create;
• Improve closing techniques while practice with energy, freedom, and passion;
• Have an effective, process-oriented, and profitable business, not a job

This program should seriously be considered by wealth strategies practitioners and advisors interested in the Families with Taxable Estates market and having the quiet confidence to quote six digit fees.

Below is a summary of The Three Pillars of the Laureate Curriculum: Counseling, Practice Management, and Case Studies. These pillars seem to separate the successful cases from the wildly successful and have helped to truly address the clients’ concerns, increase advisor compensation, and provide an established process through review, design, and implementation.

Counseling – Interpersonal Labs

The training and counseling labs provided through the Laureate Program helps each member decide and recognize which type of client you would like to work with.  We believe that expanding from a “client engagement” to “client partnering” deepens the relationship and leads to more productive plans and results.

Client Partnering achieves the client’s specific goals through the process of Review, Design, and Implementation through authority on and clarity of:

• Problem and what’s behind it;
• Possible Solutions often resulting in former goals as less or not important; and
• Implementation and commitment to solution, timeline, and responsibilities for new goals.

In Client Partnering we facilitate a safe environment to explore the client’s and advisor’s true drivers.  The common characteristics of facilitating a safe environment are:

• Rapport – a continued feeling of connection
• Relevance – current personal perspective related to the subject
• Expanding engagement
• Encouraging “new and clearer thought about the situation and what’s behind it”
• Understanding and committing to “We Can Help”
• Proactive commitment to process
• Expectations – setting, continuously reaffirming, achieving, and “whole plus one”

Practice Management - Processes & Protocols

Processes that worked before may not support a practice serving wealthy clients.  Practitioners need to review and fine tune their processes and systems to support themselves and their team’s implementation, considering changes in technology.  It is even more critical to continue to include the other collaborative advisors in communications, being sensitive and respectful to each professional and his or her role.

In short, continue to enhance your protocols on how you and your team interact with clients and advisors.  Remember to work on, not in, your practice.

Case Studies – Review, Design, and Implementation

It is important to stay abreast of changes caused by new laws, economic conditions, financial products, and the impact of the media.  Even though counseling and practice management are stronger players in attracting and engaging families with taxable estates, financial, tax and legal competency is required to design and implement successful client strategies.  Through the technical and strategic training provided by The Laureate Program, we not only teach the “ins” and “outs” of stand-alone strategies but the more integrated strategies that should, or should not, be used together in the more hands on world of wealth strategies planning.

The art of working with affluent families is in the combining and layering of strategies that we have learned in order to accomplish our client’s deeper goals – identified through counseling. Laureate Program Members, through the Three Pillars of study and its members’ various professional experiences, continue to learn and practice to not only the variations of combining and layering complex strategies through case studies, but also ways to present these strategies to clients in an understandable fashion.

Enjoy Practicing Law – Join The Laureate Program today!

The Laureate Program facilitates discussions and provides process on how to counsel at a deeper level, manage our practices with more process, and to practice case studies that challenge ourselves, make more money, and appreciate what we do.  Collaboration is king! Join The Laureate Program to learn more about how working with affluent families can be profitable and pleasurable with the right team of advisors at the table.

The Laureate Center for Wealth Advisors provides cutting edge training from industry leaders in advanced wealth, business, estate, and income tax planning. This year’s three 3-day session starts May 10-12, 2012. Visit www.laureatecenter.com or call (858) 200-1919 for more information.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Reproduced with Permission by and Courtesy of Leimberg Information Services, Inc. (LISI).  For information about how to subscribe to LISI, click here.

Nationally renowned CPA, Robert S. Keebler, recently produced an audio recording for Leimberg Information Services on the court ruling in the Chilton case pertaining to Inherited IRAs.  CLICK HERE TO LISTEN TO THE LEIMBERG 60-SECOND PLANNER RECORDING

Special thanks to Robert S. Keebler and Stephan Leimberg for sharing this valuable information!

Additionally, Robert Keebler is gearing up for his upcoming Learn it Live 2-day IRA seminar in Green Bay, Wisconsin on May 14-15, 2012 and just announced a June seminar to take place in Minneapolis. The Minneapolis seminar will be held June 20-21, 2012. This 2-day seminar for lawyers, CPAs and financial advisors is titled: "What the Lawyer, CPA and Financial Advisor Need to Know about Sophisticated Planning and Drafting for IRA & Qualified Plan Distributions Including How to Plan with a $5,120,000 Exemption." The seminar provides extensive coverage regarding planning with retirement accounts including: Estate planning for IRAs with a $5,120,000 exemption, the Pension Protection Act, the IRA Regulations, pre-retirement issues, required beginning date issues, the inherited IRA, the minimum distribution rules, spousal rollovers, QTIPing an IRA, charitable bequest planning, beneficiary designation planning, retirement plans payable to trusts, Roth IRA issues, distribution of employer securities, insurance strategies and new, innovative planning strategies.   For more information and to register...

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP