Robert Keebler

Wednesday, May 16, 2012

TAXES—The Tax Magazine®: The Mathematics of Harvesting Losses and Gains

The Ultimate Estate Planner, Inc. is pleased to share with you a copy the article, "The Mathematics of Harvesting Losses and Gains" by Robert S. Keebler, CPA, MST, AEP (Distinguished) found in the Family Tax Planning Forum that appeared in TAXES - The Tax Magazine®'s April 2012 edition.  This article presents a model for deciding when it makes sense to harvest losses and explore its planning implications and quantify the power of gain harvesting in 2012. Click here to read the full article.

This article is reprinted and redistributed with the publisher's permission from TAXES - The Tax Magazine®, a journal published by CCH, a Wolters Kluwer business. Copying or distribution of this article without the publisher's permission is prohibited. To subscribe to TAXES - The Tax Magazine® or other CCH Journals please call 800-449-8114 or visit cchgroup.com.

Download Free Charts & Resources from Robert S. Keebler, CPA, MST, AEP (Distinguished)

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Tuesday, May 15, 2012

Out of the Ashes: CPA Robert Keebler is Leading Keebler & Associates LLP to the Cutting Edge of Tax and Estate Planning

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.”

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: fa-mag.com

Friday, April 20, 2012

Steve Oshins’ 3rd Annual DAPT Ranking Chart & Other Free Updated Charts Available to Download

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).

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Wednesday, April 18, 2012

Keebler & Ward on Taproot v. Commissioner: Roth IRA Not Eligible Shareholder of S Corporation

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

Monday, April 09, 2012

Robert Keebler: Planning for Concentrated Stock Positions, Plus Half Off Bob's Teleconference

Reposted with Permission from Robert S. Keebler, CPA, MST, AEP

Planning for Concentrated Stock Positions: Variable Forward Sales, Charitable Remainder Trusts and Exchange Funds

The detrimental effects of concentrated stock portfolios are well documented. Not only do they subject the investor to a high level of risk, but their volatility tends to drag down returns.

Fortunately, a number of strategies have been developed to address the problem. This is the last in a three-part series of columns explaining those strategies. In the first column I explained how asset volatility drags down returns, quantified the benefits of diversification and provided a model for analyzing when simply selling off a concentrated position and reinvesting in a diversified portfolio produces a better economic result than holding the stock. In the second column, I pointed out that there are hedging strategies like protective put options and cashless collars that seek to give taxpayers the best of all possible worlds. In this month’s column, we will explore variable forward sales, charitable remainder trusts and exchange funds as alternative hedging strategies.

Variable Forward Sale
In a variable forward sale (VFS), an investor agrees to tender stock to a counter party at a specified future date in exchange for receiving a specified amount of cash up front (usually as a percentage of the underlying stock's current value). A typical VFS term is generally two to five years and the stated percentage 75 percent to 90 percent. The taxpayer could immediately use the sale proceeds to invest in a diversified portfolio even though no tax will be payable until the sale closes, either by physical delivery of some or all of the stock or by cash settlement.

Economics
A VFS is not simply a tax-deferred stock sale because it also provides downside protection and caps upside potential. Thus, it could be thought of as a cashless collar plus a loan against the stock to be sold. In other words, the investor is purchasing a put option to protect the downside, selling a call option limiting potential gain and receiving a current cash advance on the stock subject to the collar. The embedded collar would be subject to the constructive sale rules of Code Sec. 1259 just like any other collar, so the spread between the put strike price and the call strike price should be at least 15 percent.

Advantages
A properly executed VFS accomplishes four important objectives:

1. Provides immediate liquidity for reinvestment
2. Provides downside protection below the put option strike price
3. Enables the investor to retain growth potential up to the amount of the call option strike price
4. Defers gain recognition until the VFS is closed

Variable Forward Sale vs. Outright Sale
Research suggests that an outright sale generally outperforms a VFS. This is not to say, however, that there are not situations in which a VFS can perform better than simply selling the stock. Perhaps the most common situation is one in which the taxpayer is concerned about the risk of a concentrated stock position but is nevertheless bullish about the stock’s prospects in the short term. A VFS would… READ MORE

GET 50% OFF OUR TELECONFERENCE WITH BOB KEEBLER ON THIS RELATED SUBJECT:
Back in December of last year, Bob did a teleconference entitled, "Tax Planning for Concentrated, Low-Basis Stock Positions".  We are offering our blog readers a special 50% discount on the extensive handout materials and the audio recording of this program.  To apply your 50% discount, simply enter in the coupon code "CONCENTRATED" when purchasing.  This offer is only good through next Monday, April 16th.  For more information and to purchase...

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.

Friday, March 16, 2012

Leimberg Information Services: 60-Second Planner on Fifth Circuit Affirms Chilton on Inherited IRAs

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

Friday, March 02, 2012

Senate Highway Bill S.2132 Brings Back Mandated 5-Year Rule for Payout of Inherited IRAs

A special thanks to Robert Keebler of Keebler & Associates, LLP for bringing to our attention the Senate Highway Bill S.2132, which brings back the mandated 5-year rule for Inherited IRAs (with some exceptions).  This obviously has a lot of estate planning professionals on edge to see what's going to happen with respect to retirement benefit planning for clients this year and beyond.  The entire Bill can be found on the Library of Congress' website.  To view S.2132, click here.

Robert Keebler has a phone call into Senator Baucus' office to confirm and will be posting more updates in the future as we eagerly await news on this Bill.

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: rubins401k.com

Friday, February 24, 2012

Leimberg Information Services: 60-Second Planner on President Obama's Estate & Income Tax Proposal

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

As mentioned previously by Robert S. Keebler in a previous blog entry, President Obama's Fiscal Year 2013 budget was released on February 13th. Follow this link to get a full copy of the 2013 Budget. The Treasury's Green Book containing general explanations of the Administration's revenue proposals can be found here.

We now wanted to share with you two Leimberg Information Services, Inc. 60-Second Planner podcasts in response to this budget. One podcast deals with the estate and gift tax proposals of the budget and the other addresses the income tax proposals. These recordings are reproduced courtesy of LISI (Leimberg Information Services, Inc.) and can be found on their website, along with plenty of other resources for you and your practice.

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

Sources: Leimberg Information Services, Inc. & Robert S. Keebler, CPA, MST, AEP
Photo Source: politico.com

Wednesday, February 22, 2012

Senate Bill Threatens Life of Stretch IRAs

Highway bill provision would end tax-deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled

Reposted from AdvisorOne | By Melanie Waddell

Industry trade groups are up in arms over a provision in a Senate highway bill that would reduce the value of inherited IRAs, commonly referred to as stretch IRAs, and are determined to have it removed.

The bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would no longer permit tax deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled. Others, such as adult children, would only be permitted a five-year window to defer.

The provision would require beneficiaries to pay taxes on inherited IRAs over five years instead of spreading them over their lifetime. If passed, the provision would apply to deaths after Dec. 31, 2012.

The proposal is designed to reduce the value of a tax-planning technique that allows inside buildup of tax-deferred funds inside inherited retirement accounts.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, added the provision on Feb. 7 during markup of the bill by his committee, but after pushback he promised to have the provision removed.

During the markup of the bill, Baucus said that “IRAs are intended for retirement,” adding that IRAs are being “used by some taxpayers to give tax-free benefits” to future generations. The taxes from the stretch IRAs provision was to be used to help pay for the highway bill, and would raise $4.6 billion over 10 years.

As it stands now, the provision was adopted by Baucus’ committee and remains intact in the highway bill, which awaits action by the full Senate. Once taken up by the Senate, industry officials believe that the IRA provision will be replaced with one that raises the funds by changing the way assets are valued in defined benefit plans.

Judy Miller, chief of actuarial issues at the American Society of Pension Professionals and Actuaries, says that the new provision would likely "reduce the current required contribution to defined benefit plans; when you do that there are fewer deductions taken so it raises money."

But given that the IRA provision has yet to be taken out, the Financial Services Institute is mobilizing its members to have it removed.

Chris Paulitz, spokesperson for FSI, says that FSI “won’t rest" until it's removed. "We’re keeping the pressure on from our members to try and ensure it eventually is indeed stripped out.”

FSI said in a Feb. 15 letter to its members that “while we expect the provision to be removed from the highway bill, it is important that we send the Senate the message that taxes on inherited IRAs should not be used to pay for other governmental spending.”

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: advisorone.com

Wednesday, February 22, 2012

IRS Extends Deadline to Make Portability Election

By Robert S. Keebler, CPA, MST, AEP

On February 17th, the IRS released an important Notice allowing an extension to make a portability election for certain qualifying estates. An executor of a qualifying estate that wants to obtain the extension granted by this notice must file the application for a six month extension no later than 15 months after the decedent's date of death. With the extension granted by this notice, the Form 706 of a qualifying estate will be due 15 months after the decedent's date of death. The first of these extensions (and underlying Form 706) will be due April 2nd. Estates qualifying for this election must meet the following requirements:

• The decedent must have a date of death after 12/31/10 and before 7/1/11
• The decedent must be survived by a spouse
• The gross estate does not exceed $5 million
• The estate is not a qualifying estate if the estate effectively requested an automatic six-month extension of time to file Form 706 by timely filing Form 4768 on or before the due date for filing Form 706.

The executor of a qualifying estate may file Form 4768 at the same time as the executor files Form 706, as long as both are filed on or before the date that is 15 months after decedent's date of death. To obtain the extension, the executor must meet the following requirements:

• The executor files Form 4768 with the Service office designated in the form's instructions;
• The executor files Form 4768 no later than 15 months from the decedent's date of death; and
• The executor enters at the top of Form 4768 the notation "Notice 2012-21, Extension for Good Cause Shown" or otherwise sufficiently notifies the Service on or with Form 4768 that Form 4768 is being filed pursuant to this notice.

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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Monday, February 13, 2012

Bloomberg: Senate Proposes Tougher Requirements for Inherited IRAs

The changes that Baucus proposed earlier today would raise $4.6 billion for the Treasury over the next decade by requiring younger beneficiaries to pay taxes over five years instead of spreading them over their lifetimes, according to the Finance Committee. Baucus, a Montana Democrat, had wanted to use the money to help pay for a highway bill the panel is debating.

Under pressure from Republicans, Baucus said he would work with them to find replacement revenue. During the committee meeting, he didn’t provide details about alternatives.

Baucus’s proposal would curtail a tax-planning technique that allows the buildup of tax-deferred gains inside inherited retirement accounts. Currently, holders of inherited IRAs can take required taxable distributions over their anticipated lifespan.

“IRAs are intended for retirement,” said Baucus, who said the current law is being abused. “They’re being used by some taxpayers to give tax-free benefits” to future generations.

Financial advisers and tax lawyers said Baucus’s proposal would significantly alter retirement and estate planning.

Change ‘Playing Field’

“It would really change the whole playing field for retirement planning,” said Ed Slott, an IRA adviser in Rockville Centre, New York. “That would make things simpler, but it would really put a crimp in the whole legacy planning people do for IRAs.”

The proposal includes exceptions for an account owner’s spouse, beneficiaries within 10 years of age of the account owner, and disabled and chronically ill people, according to a summary by the nonpartisan Joint Committee on Taxation. Children would be exempt from the new five-year rule until they reach adulthood.

Owners of regular IRAs must begin taking taxable distributions at age 70 1/2, and they must be taken according to a life-expectancy calculation.

Baucus’ proposal would take effect for people who die starting in 2013.

Late Starter

Senator Jon Kyl, an Arizona Republican, said members of his party found out that the IRA provision would be included early this morning and said it showed that senators’ attempts to limit highway funding sources to items related to transportation and energy had fallen apart.

“I think we’ve lost the opportunity to have a truly bipartisan package,” he said during the committee meeting. He later praised Baucus for his willingness to find a replacement for the provision.

“Perhaps this provision and the subject can be taken up in tax reform,” Baucus said.

Depending on how the language is written, beneficiaries in some cases might be able to use rollovers into their IRAs to avoid the required distributions, said Mary Ann Mancini, who leads the private client group at Bryan Cave LLP in Washington.

Mancini said many of her clients don’t use IRAs as an estate-planning tool because beneficiaries often want to spend their inheritances.

“If you can keep it in the IRA with tax-free growth, the longer you can keep it in the IRA, people can come out with millions,” she said. “The problem is people don’t keep it in the IRA. Young people want the money.”

‘Too Much Invested’

Baucus’s proposal would return IRAs to their intended purpose as a retirement savings tool and not an estate-planning tool known as a stretch IRA, Slott said. The change, if enacted, would cause people to spend the money in their IRAs rather than leave it as an inheritance for their children, he said.

“It sounds good, but I think it’s a nonstarter,” Slott said. “There’s too much invested in the whole stretch IRA concept.”

John Olivieri, a partner in the private clients group at White & Case LLP in New York, said the change could increase the taxable income of heirs each year for five years and may push them into a higher income tax bracket, he said.

Another potential benefit to the federal government is that, because distributions would be taken out faster, there would be less time for the money to accumulate in the IRA tax- free, Olivieri said.

“Once the money is out of the account, it can no longer grow tax-free,” he said. “That’s where the government may be planning to get the most benefit from this.”

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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Monday, February 13, 2012

U.S. Treasury Announces President Obama's 2013 Budget and Proposed Estate Tax Law Changes

A special thank you to Robert Keebler of Keebler & Associates, LLP for the heads up that the U.S Treasury just released its FY2013 Greenbook, which provides an explanation of the Administration's revenue proposals for Fiscal Year 2013. The Administration's FY2013 budget proposes tax policy to boost growth, create jobs and improve opportunity for the middle class.

In particular, as estate planning professionals, we are all extremely interested to see what is going to happen with the current Federal Estate Tax Exemption Amount, which is set to revert back to $1 million in 2013.  According to this bill, the estate tax exemption amount would revert back to the 2009 $3.5 million level.  According to Robert Keebler, that despite this change, the income tax changes would keep us all busy for a decade.

Some estate planning professionals feel that this bill looks very similar to the 2012 Budget Proposal, which was released exactly a year ago on February 14, 2011 and was rejected by the Senate in a unanimous vote of 97 to 0.

To view the explanations of the proposed changes to the Estate & Gift Tax Exemption, click here.

To view the complete FY2013 Greenbook, click here.

Photo Source: AP

Tuesday, February 07, 2012

Betting On A Roth Conversion

By Allan Roth
Reposted from Financial-Planning.com

Long ago, there wasn't much that planners had to worry about as far as taxes except for lawmakers changing tax law. Now we have to worry that, if Congress does nothing, taxes will jump in 2013. In these financially tumultuous times, Roth conversion strategies can reduce risk substantially for clients in 2012.

UNKNOWNS FOR 2013

Regardless of whether Republicans or Democrats prevail in controlling the White House and/or Congress in November, there is likely to be an impact on tax law. If nothing is done, the Bush-era tax cuts will expire and the highest federal individual income tax rate will increase to 42%, taking into account deduction phaseout. On top of that, if the federal health care overhaul survives legal challenges, an additional 3.8% Medicare surcharge on investment income for those earning more than $200,000 ($250,000 for joint returns) will take effect.

As if the political uncertainty weren't enough, the wild swings in the stock market and other investments create further uncertainty. Will the euro survive? Might there be a major natural disaster? One way of planning for these uncertainties is to predict the outcome and prepare for it. Unfortunately, predictions of market strategists have proved to be very inaccurate. A much better way is to admit we don't know the future and plan as such, giving as much flexibility as possible to our clients. Enter the Roth conversion.

TRADITIONAL VS. ROTH

Gregg Polsky, a tax professor at the University of North Carolina School of Law, suggests we view a traditional IRA as a partnership between the taxpayer and the government. If the client has a $100,000 traditional IRA (with a zero basis if it was funded with pretax dollars) and is in the 35% marginal tax bracket, the taxpayer owns $65,000 while the government (federal and state) owns $35,000. The IRA is a partnership between the taxpayer and the government. Admittedly, the ultimate tax bracket upon withdrawing the funds from the traditional IRA is unknown.

Polsky notes that, if the taxpayer decides to convert this IRA to a Roth IRA, he or she is buying out the governments' ownership in the partnership and can then keep all of the returns tax-free going forward. At least this is true without a major change in the tax law. If the client does a Roth conversion in early 2012 with some or all of their traditional IRA funds, he or she has as late as Oct. 15, 2013 (if they file an extension on their 2012 return) to recharacterize some or all of the conversion.

Polsky refers to this recharacterization as a free put option. By exercising the put option, the taxpayer requires the government to buy back its original share of the IRA for the purchase price the taxpayer paid. I liken it to the undo key on a computer. It is this put option that can be so valuable in hedging political and market uncertainty.

John Bledsoe, author of The Gospel of Roth: The Good News About Roth IRA Conversions and How They Can Make You Money, recommends that everyone should convert 100% of his or her IRAs to Roth IRAs as early in the year as possible. Robert Keebler, a partner at Keebler & Associates, a tax and estate planning firm in Green Bay, Wis., agrees. Both specialize in assisting clients to carry out Roth conversion strategies.

They each note that a lot can happen between Jan. 1, 2012, and Oct. 15, 2013. If clients go into the conversion with the premise that they may recharacterize, they in essence get a free look and can keep any conversions that make sense. "Why wouldn't anyone want this free look?" Bledsoe asks.

HEDGING STRATEGIES

Here are three strategies for hedging future uncertainties:

1. Simple hedging against 2013 tax increases and market declines. This is the simplest and most straightforward of the strategies. To protect against potential tax increases and even a market decline, the client can convert that $100,000 and pay $35,000 to the IRS. If it turns out that tax rates did increase, the client could save up to 10% by converting in 2012 instead of waiting.
   
   If rates didn't increase, then a recharacterization may be in order. But Keebler believes a 2013 income tax increase is likely, although he sees the Medicare surcharge in the hands of the Supreme Court.
   
   The second reason a client may want to recharacterize is if the market has a significant decline. Say the $100,000 portfolio declined to $80,000 sometime before 2012 taxes are filed in 2013. Rather than take the whole $20,000 loss, hit the undo button and recharacterize, and the government will take 35% of the loss. In this case, even if tax rates did decrease, the gain from the government taking on a share of the loss is larger than the hit from the tax increase. Both must be taken into account in the decision to recharacterize.
    
2. Multiple Roth conversions. Polsky, Bledsoe and Keebler recommend against doing a single Roth conversion. The strategy they recommend is to open separate accounts, such as accounts by asset classes. For example, you could have five Roth accounts in U.S. stocks, international stocks, REITs, precious metals and mining stocks, and bonds. If, for example, bonds and precious metals and mining decline significantly, exercise that put option and recharacterize. Keep the others that appreciated, knowing you bought out the government's share of the partnership at a lower price than the current market value.
   
   There are no limits on the number of accounts one could convert. A client could have a thousand different securities and convert each one to a separate Roth IRA. That way, any security that declined could be recharacterized. Neither Bledsoe nor Keebler does this for his clients, noting the concept of diminishing returns, as well as planner expense from the additional work. Bledsoe and Keebler have each done 10 or more accounts for IRAs exceeding $10 million in value. They typically recommend about four to six separate conversions.
    
3. High volatility, negative correlation. Polsky wrote last year in the newsletter Tax Notes that the optimal strategy would be to convert two IRAs of equal value, investing in two highly volatile but negatively correlated securities, one in each account. If, for example, there was $50,000 in each at the start and one was wiped out while the other doubled to $100,000, the client has converted $100,000 into a Roth while paying taxes on only $50,000. This is because the client will recharacterize the IRA that went to zero, while maintaining the one that doubled.
   
   The trick is to find securities that fit this bill, Polsky says, because IRAs cannot sell securities short or buy options. To overcome this barrier, perhaps an approach could be two inverse securities, such as the ProShares UltraPro S&P 500 ETF (UPRO) and the UltraPro Short S&P 500 ETF (SPXU) would work, since each levers three times.
   
   Unfortunately, in a year like 2011 when the S&P 500 was relatively flat, and due to the specifics of these funds, which essentially invest in a one-day duration and have substantial fees and costs, both would have been in the red. The UPRO fund lost 11.8%, while the SPXU plunged 32.3%.
   
   Polsky, Bledsoe and Keebler note that they have not performed this strategy. Polsky worries that the IRS could challenge it, although he says it would be difficult for the agency to act if a taxpayer could show he or she had used readily available investment options (as opposed to a customized derivative). Nonetheless, the cost of defending an IRS challenge could be substantial.

BARRIERS TO CONVERSIONS

If a free look into the future is so compelling, why aren't more people converting their IRAs? One answer may be behavioral economics. When clients convert, they must pay taxes, reducing the size of their portfolio. Economically, of course, the Roth money is far more valuable than the traditional IRA funds, and there has not been a decline in economic net worth.

Polsky asserts in the Tax Notes story that financial advisors may be another hurdle. Advisors who are paid by commissions or wrap fees no longer earn fees on the assets used to pay the taxes for the conversions.

One more reason clients hesitate to convert is that the move is not risk-free. Polsky notes it's possible Congress could change laws - even take the unlikely step of taxing some Roth distributions. Polsky likens it to the tax on Social Security benefits. A similar worry would be a revamping of the tax code, such as an enacting of a consumption tax to replace the current income tax. That would effectively result in paying the tax at conversion and again when goods and services are purchased.

(click to enlarge)

BOTTOM LINE

There is nothing simple about taxes, but a Roth conversion with the recharacterization option offers a way to both reduce risk and lower taxes. Before moving forward, advisors need to be sure a client has paid enough estimated taxes to meet the safe harbor rule so that penalties and interest won't kick in if a client decides not to recharacterize.

It's best to maximize the value of the put option by doing the conversion early in the year and following the timeline in the "Roth Conversion Timeline" chart, above. Also make sure a tax expert is guiding your client.

While there is a lot of uncertainty between now and Oct. 15, 2013, there is far more uncertainty decades later when clients may be spending down their IRA money. No one knows what tax rates will be 20 years from now or a client's net income.

There's also the possibility of a radical tax change like a consumption tax. That's why many experts do not recommend keeping 100% of IRA funds in a Roth. Instead, a better strategy would be diversifying against those unknowns by having some taxable traditional IRA funds and some Roth IRA funds. Nonetheless, there is a way to help your clients increase their Roth IRA funds while minimizing taxes.

Allan Roth, founder of the planning firm Wealth Logic in Colorado Springs, Colo., writes the Irrational Investor column for CBS MoneyWatch.com and is an adjunct faculty member at Colorado College and the University of Denver.

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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Monday, February 06, 2012

Michelle Ward & PLR 201203033: Trust Qualified as Designated Beneficiary After Beneficiary Released Certain Powers

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

EXECUTIVE SUMMARY
In PLR 201203033, a trust qualified as a designated beneficiary after a trust beneficiary released certain portions of a power of appointment. The trustee of the trust was also allowed to transfer the inherited qualified plan to an inherited IRA for the benefit of the trust.

FACTS
“Alex” died at age 62 after establishing a trust that became irrevocable at his death. Alex was survived by his wife, “Lydia”, and his two children, “Nicholas” and “Melissa.”

The trust provided for the creation of a marital trust for the benefit of Lydia. The marital trust was named as primary beneficiary of Alex’s qualified defined contribution plan. The marital trust was to be funded by (in addition to other amounts) the value of any employee benefit plans made payable to the marital trust.

The trust also provided for the creation of "Primary Trusts" and "Exemption Trusts" for each of the two children. The Exemption Trusts receive equal shares of Alex's remaining GST exemption. The Primary Trusts receive the balance of the assets of the trust after all other distributions or allocations under the trust.

Lydia receives all income from the marital trust and discretionary distributions of principal. Upon Lydia’s death, any remaining property in the marital trust passes in this manner: (1) from the marital trust property includable in Lydia’s gross estate, a share equal to Lydia’s remaining GST exemption, to be divided equally between each Exemption Trust, and (2) the
remaining balance, divided equally between each Primary Trust.

During the term of each Exemption Trust, the trustee may distribute to each child the income and principal the trustee considers necessary for the child's health, education, maintenance and support. Upon the death of each child, the child may appoint the remaining principal and accumulated income among Alex’s lineal descendants. To the extent the child does not exercise this power, the remaining principal and income are to be distributed to the child's lineal descendants, per stirpes, and if there are none, to Alex’s lineal descendants, per stirpes.

During the term of each Primary Trust, all net income is paid to the child, plus discretionary distributions of principal. The child may withdraw up to one half of the principal upon reaching age 30, and the entire principal upon reaching age 35. Melissa had already reached age 35 at the time of Alex’s death.

A child who dies before receiving the entire principal of their Primary Trust may appoint any or all of the principal and income by will among one or more persons or organizations; however, the child may not exercise this power of appointment over any portion of the trust in favor of the child, the child's estate, or the creditors of either unless a federal GST tax would be payable.

To the extent that the child does not exercise this appointment power over their Primary Trust, the remaining principal and income are to be distributed to the child's lineal descendants, per stirpes, and if there are none, to Alex’s lineal descendants, per stirpes.
The trust provides that any property not effectively disposed of under the provisions of the trust is to be distributed to a charity.
After Alex’s death but before September 30 of the year following the year of Alex’s death, Nicholas executed a "Partial Release of Power of Appointment". The Release irrevocably released Nicholas’ right to appoint at his death any portion of the Primary Trust in his name to any beneficiary who is not a natural person or who was born before Lydia. Nicholas had no children as of September 30 of the year following Alex’s death.

COMMENT
An individual’s designated beneficiary is determined by September 30 of the year following the year of the plan participant’s or IRA owner’s death. In order for a trust to be considered a designated beneficiary under the IRC Sec. 401(a)(9) regulations governing RMDs from plans and IRAs, the following requirements must be met:

1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
2. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable within the meaning of Treas. Reg. Sec. 1.401(a)(9)-4, A-1 from the trust instrument.
4. The documentation described in Treas. Reg. Sec. 1.401(a) (9)-4, Q&A 6 has been provided to the plan administrator (this requirement can be satisfied by providing a copy of the trust to the plan administrator by Oct. 31 of the year following the year of the owner’s death).

If these requirements are satisfied, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries for purposes of determining the distribution period. Accordingly, the life expectancy of the oldest trust beneficiary can be used to determine RMDs. If the trust does not meet the above requirements, the owner is considered to have no designated beneficiary and the retirement plan must be distributed in five years if the plan owner died, as did Alex, before his required beginning date.

Requirements 1, 2 and 4 are easily met. Most trusts fail to qualify as designated beneficiaries because of the third requirement. While at first blush it may appear simple to identify the beneficiaries of a trust, the analysis is not that straightforward.

One must look at all potential beneficiaries of a trust to determine (1) if such beneficiaries can be identified by September 30 of the year following the year of the plan owner’s death and (2) if such beneficiaries are all individuals with an ascertainable life expectancy.

Accordingly, in PLR 201203033, the potential beneficiaries of the trust upon the death of Lydia needed to be considered in determining if the trust qualified as a designated beneficiary.

A person will not be considered a beneficiary for purposes of determining who the beneficiary with the shortest life expectancy is, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee’s beneficiaries after that beneficiary’s death. Such beneficiary is referred to as a “mere potential successor.

The above rule does not apply to a person who has any right (including a contingent right) to an employee’s benefit beyond being a mere potential successor to the interest of one of the employee’s beneficiaries upon that beneficiary’s death. Therefore, if benefits will not accumulate in trust for a particular beneficiary under the facts existing at the plan owner’s death, any contingent beneficiary taking as a result of such beneficiary’s death is disregarded. In essence, one would keep going down the beneficiary line to determine the oldest potential beneficiary until there comes a point when the trust would be distributed outright given the facts that exist at the owner’s death.

Because of this “mere potential successor” rule, the potential remainder beneficiaries of Melissa’s Primary Trust did not need to be considered because Melissa was already age 35 at Alex’s death and therefore her Primary Trust would be distributed outright to her if she were living at Lydia’s death.

Nicholas, however, was not age 35 at his father’s death and therefore contingent beneficiaries of his Primary Trust had to be taken into account. If Nicholas were to die before the entire principal of his Primary Trust was distributed, he had the power to appoint the trust among one or more persons or organizations. In addition, to the extent the GST tax would otherwise apply, his power of appointment expanded to include himself, his estate, and the creditors of both. In other words, Nicholas had the power to appoint his Primary Trust to a non-individual or to an individual who is older than Lydia (whose identity could not have been known as of September 30 of the year following the year of Alex’s death).

Nicholas’ power of appointment would disqualify the trust as a designated beneficiary because, as of September 30 of the year following the year of Alex’s death, not all beneficiaries were identifiable and those that were included non-individuals. This situation
was rectified by Nicholas releasing, before September 30 of the year following the year of Alex’s death, his right to exercise his power of appointment in favor of any non-individual or anyone older than Lydia.

Under Treas. Reg. 1.401(a)(9)-4, Q&A 4 (except as provided in Treas. Reg. Sec. 1.401(a)(9)-6) any person who was a beneficiary as of the date of the employee's death but is not a beneficiary as of that September 30 of the year following the year of the employee’s death is not taken into account in determining the employee's designated beneficiary for RMD purposes. As a result of Nicholas’ release, the class of potential beneficiaries as of September 30 of the year following the year of Alex’s death contained only individuals and the beneficiary with the shortest life expectancy was identifiable (Lydia). Accordingly, the trust qualified as a designated beneficiary under the IRC Sec. 401(a)(9) regulations.

The potential charitable beneficiary that would take if there was a total failure of beneficiaries did not need to be considered because the trust would pay outright to a beneficiary at the death of Nicholas. The charity, therefore, was a “mere potential successor”.
Regarding the trustee’s desire to have the qualified plan transferred to an inherited IRA, IRC Sec. 402(c)(11) allows the post-mortem transfer of qualified retirement plans to inherited IRAs by non-spousal beneficiaries when such transfer is done via direct trustee to trustee transfer. As long as the trust qualified as a designated beneficiary, the trustee was entitled to have a direct trustee-to-trustee transfer made of the inherited qualified plan to an inherited IRA. Because the IRS ruled that the trust did qualify as a designated beneficiary, the IRS further ruled that such a transfer would be allowed.

CONCLUSION
Along with being a good example of how a trust is analyzed to determine if it qualifies as a designated beneficiary, this ruling also shows a post-mortem technique (i.e. a release or disclaimer) that can be utilized to save the designated beneficiary status of a trust. It highlights the fact that even if the plan owner has died and the trust does not qualify as a designated beneficiary as drafted, the advisor can explore options such as disclaimers or cashing out a beneficiary to allow the trustee to stretch out required minimum distributions for as long as possible.

CONTRIBUTOR: Michelle Ward, J.D.

TECHNICAL EDITOR: Barry Picker

CITE: PLR 201203033 (January 20, 2012).

CITE AS: LISI Employee Benefits and Retirement Planning Newsletter #594 (February 1, 2012) at http://www.leimbergservices.com Copyright 2012 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission is Prohibited.  The Ultimate Estate Planner, Inc. has received permission from Leimberg Information Services, Inc. to repost this newsletter.

Thursday, February 02, 2012

Forbes.com: The Roth IRA Back Door

The following article from Forbes.com entitled, “The Serial Backdoor Roth, A Tax-Free Retirement Kitty”, features one of our teleconference speakers, nationally renowned CPA, Robert S. Keebler, CPA, MST, AEP.

The Serial Backdoor Roth, A Tax-Free Retirement Kitty
by Ashlea Ebeling

If your income is too high, you can’t contribute directly to a Roth individual retirement account, but you can get one in a backdoor way.

Step 1: Open a traditional IRA (in your case, it’s nondeductible).

Step 2: Convert it to a Roth IRA. Is it worth it? “It’s a no-brainer if you have the cash to do it,” says Kevin Huston, an enrolled agent in Asheville, N.C. who has clients both young and old doing it to shore up their retirement savings. “It especially makes sense for people who are younger because they have all these years of tax-free growth,” he says.

Basically, you get an extra $5,000 (or $6,000 if you’re 50 or older) each year that grows in the Roth IRA income-tax free. That’s $10,000 (or $12,000) a year for a married couple. Repeat each year, and you can amass a nice retirement kitty. The audience for backdoor Roths is a niche, appealing to those earning too much to contribute to Roths directly but not so much that the extra tax savings doesn’t seem worth the effort. Vanguard says that “backdoor Roth” contributions represented about 2 percent of traditional IRA contributions in 2011. (Income restrictions on conversions were lifted starting Jan. 1, 2010, so anyone—regardless of income—can convert a traditional IRA to a Roth.)

Why go through the hoops of getting money into a Roth IRA? They are an amazing deal, especially for folks looking long-term and expecting higher tax rates in the future. With a Roth IRA you don’t ever have to take money out, and when you do start taking money out, it’s all income-tax-free, including the earnings. By contrast, with a traditional IRA, earnings grow tax-deferred, you have to start taking required mandatory distributions the year after you turn 70.5, and distributions count as income. A Roth can help keep your tax bite down in retirement. (Ideally you want a mix of taxable, tax-deferred and tax-free accounts to draw from in retirement.)

A Roth IRA also has other benefits. Medicare premiums are based on income, so by keeping your income down, you’ll pay a lower premium. And if you leave a Roth account to a child, he or she will have to take money out each year, but there will be no income tax hit. (Inheriting a $100,000 Roth IRA is a whole lot better than inheriting a $100,000 traditional IRA; the higher your beneficiary’s tax bracket, the bigger the savings).

Here’s how the strategy is helping a couple in their 40s build their nest egg. The wife’s in marketing with a pharmaceutical company, and the husband is a stay-at-home dad. First, she’s maxing out on her company pre-tax 401(k) plan contributions—putting away the full $17,000 for 2012—her employer doesn’t offer a Roth 401(k) option. The couple told their tax advisor Huston they want to save more, but they can’t contribute to Roth IRAs directly because her income is nearly $200,000 a year. (Once your modified adjusted gross income is $183,000 for a couple filing jointly or $125,000 for singles, no Roth IRA contributions are allowed).

But they can each contribute to a traditional IRA. They don’t get a deduction because of the wife’s high income, so it’s called a nondeductible IRA. She puts away $5,000, and he puts away $5,000 (his IRA is based on her earning and called a nondeductible spousal IRA; otherwise you have to have earned income to contribute to an IRA). Then they convert the IRAs into Roth IRAs. That sounds complicated but you can do it online, and it’s almost as easy as transferring money from checking to savings. You pay income tax the next April only on any earnings accrued between the time you contributed to the nondeductible IRA and converted to a Roth.

There’s one big caveat to the backdoor Roth: the pro rata rule. When you calculate the taxes due on a conversion, you have to take into account all your IRA assets, not just the new $5,000 nondeductible IRA. For example, if you have a traditional IRA with $95,000 of money from a 401(k) rollover (the $95,000 contributions were made on a pre-tax basis), and you make a $5,000 nondeductible contribution to a new IRA, the conversion would be 95% taxable.

So when might it make sense to skip this whole exercise? Ronald Finkelstein, a CPA and lawyer with Marcum in Melville, N.Y., said he personally makes nondeductible IRA contributions each year and has considered doing a Roth conversion but passed because he has accumulated a large sum in a traditional IRA he opened 30 years ago when he had a newspaper route. Plus, he may retire to Florida, so paying the New York state tax bite wouldn’t make sense. “You have to do the calculations,” he warns.

But sometimes it can still make sense for folks, even older folks, with big traditional IRAs, to do the backdoor Roth. Another Huston client, a 68-year-old builder, does them as part of a holistic plan to get more of his net worth into tax-free accounts so he and his wife (and grandchildren) will have the accounts to tap as part of a tax diversification strategy. He just did a $6,000 backdoor Roth for the third year in a row. At the end of each calendar year, Huston and he look at his income and decide how much to convert from his traditional IRA too (one year it was $50,000; one year $25,000), keeping in mind what would push him into a higher tax bracket.

There’s still time to make an IRA contribution for calendar year 2011 through April 17, 2012. You can double up and make your 2012 contribution too. How long should you wait to convert? “It’s a grey area,” says Robert Keebler, a CPA in Green Bay, Wisc. He suggests a waiting period of six months, although other advisors say to convert the next day to limit the tax bite on the conversion.

For a run-around the dreaded pro rata rule, see The Backdoor Roth IRA, Advanced Version.

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: forbes.com

Friday, January 20, 2012

Bob Keebler on Roth Conversions in 2012: Now's the Time to Convert

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

“For more than 14 years, we have been advising clients about converting to a Roth IRA. For the first ten years, most of our collective efforts focused on the long-term strategic benefits of converting to a Roth IRA with us preparing complex spreadsheet analyses on the front-end to determine an ‘ideal amount’ to convert.

Like other tax professionals, with the extreme volatility of the stock market in recent years, our Roth IRA conversion paradigm has shifted.

Instead of spending hours on the front-end analyzing Roth IRA conversions to find a so-called ‘ideal amount’ to convert, we only spend an hour or so to determine if a Roth IRA conversion is feasible in the first place. After determining feasibility, we then advise our clients to convert to a Roth IRA as early in the year as possible and take a 'wait-and-see' approach over the next year.

Only after the client’s tax situation becomes clearer in the following tax year and we have the benefit of hindsight (to analyze post-conversion returns within the Roth IRA) will we take the next step and carefully analyze where a potential ‘sweet spot’ exists. Given the above considerations, with proper planning a client who converts to a Roth IRA in early 2012 can create a ‘heads I win, tails I tie’ scenario.”

Now, Robert S. Keebler, CPA, MST, AEP provides members with important commentary on Roth IRA conversions in 2012.

EXECUTIVE SUMMARY:

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, a “heads I win, tails I tie” situation can easily be achieved by taxpayers, especially for 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. Moreover, with the proper timing, a taxpayer can hedge against the pending 2013 income tax rate increases and effectively use certain tax attributes (such as NOLs).

FACTS:

For more than 14 years, we have been advising clients about converting to a Roth IRA. For the first ten years, most of our collective efforts focused on the long-term strategic benefits of converting to a Roth IRA with us preparing complex spreadsheet analyses on the front-end to determine an “ideal amount” to convert. While these analyses were generally prudent, there were several times where our analyses were all for naught, especially when the value of the Roth IRA went down from the time of conversion.

Like other tax professionals, with the extreme volatility of the stock market in recent years, our Roth IRA conversion paradigm has shifted.

Instead of spending hours on the front-end analyzing Roth IRA conversions to find a so-called “ideal amount” to convert, we only spend an hour or so to determine if a Roth IRA conversion is feasible in the first place. After determining feasibility, we then advise our clients to convert to a Roth IRA as early in the year as possible and take a “wait-and-see” approach over the next year. Only after the client’s tax situation becomes clearer in the following tax year and we have the benefit of hindsight (to analyze post-conversion returns within the Roth IRA) will we take the next step and carefully analyze where a potential “sweet spot” exists.

Given the above considerations, with proper planning a client who converts to a Roth IRA in early 2012 can create a “heads I win, tails I tie”scenario. The six things to keep in mind when converting to a Roth IRA in 2012 are the following:

1. Recharacterizations
2. Roth IRA Segregation Conversion strategy
3. Reconversions
4. Impact of recharacterizations on RMDs
5. Annual Roth IRA conversion/distribution strategy
6. Special tax attributes (such as NOL carryovers, excess itemized deductions, AMT credits, etc.)

Recharacterizations

Under the tax law, a taxpayer is allowed to “recharacterize” (i.e. undo) a Roth IRA conversion anytime from the day after the conversion all the way up to the filing date of the taxpayer’s individual income tax return, including extensions (i.e. October 15th of the year following the year of the conversion). This allows the taxpayer the benefit of hindsight to determine if the Roth IRA conversion was prudent. Consequently, if designed and executed properly, the taxpayer can create a “heads I win, tails I tie” scenario.

As mentioned above, the primary benefit of recharacterizations is that the taxpayer has the benefit to 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 January 2012. Now let’s assume that the value of the Roth IRA is $80,000 on March 1, 2013. In this case, the taxpayer would simply “recharacterize” (i.e. undo) 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 (i.e. April 15, 2013 or October 15, 2013 if an extension is filed). The effect of the recharacterization is that the taxpayer will not be taxed on any of the $100,000 original conversion because he recharacterized the entire amount back to a traditional IRA.

Roth IRA Segregation Conversion Strategy

While recharacterizations provide a significant benefit for taxpayers, the IRS realized that taxpayers could abuse this privilege, so the IRS enacted the “anti-cherry-picking rules” under Notice 2000-39 (which were later codified under Treas. Reg. §1.408A-5). Under the “anti-cherry-picking rules” one cannot recharacterize an asset which has gone down in value within the Roth IRA (i.e. “loser asset”) while keeping an asset which has gone up in value (i.e. “gainer asset”) within the same Roth IRA. The purpose of this rule is to pro-rate gains and losses across all assets within the same Roth IRA in determining the amount of gain (or loss) to apportion to the recharacterized conversion amount.

Example:

Connie converts $100 of Stock A and $100 of Stock B to a Roth IRA on January 3, 2012. On September 30, 2013, the value of Stock A is $120 and the value of Stock B is $90.

Because Stock B has gone down in value since the time of conversion, Connie would recharacterize Stock B back to a traditional IRA before she files her extended 2012 individual income tax return. Stock A, on the other hand, would be kept in the Roth IRA.

Absent of the “anti-cherry-picking rules”, if Connie were to recharacterize Stock A back to a traditional IRA, she would be allowed to reduce the taxable portion of her conversion (i.e. $200) by the value of Stock A at the time of conversion (i.e. $100). Thus, Connie would only have to pay income tax on a $100 conversion amount (i.e. $200 total conversion - $100 recharacterized amount).

However, because of the “anti-cherry-picking rules”, Connie cannot simply recharacterize Stock A back to a traditional IRA and get a $100 reduction (i.e. the original conversion value of Stock A) in her taxable income.

Instead, Connie can only reduce her taxable income by the recharacterized amount (i.e. $90). As a result, Connie will pay income tax on $10 of income (i.e. $100 original conversion value - $90 recharacterized amount) on something that no longer exists. Further, to add insult to injury, Connie must allocate a portion of the net income from the Roth IRA (i.e. $210 current value - $200 conversion value = $10 net income) to the recharacterized amount. In this case, Connie will have to add $4.50 ([$10 net income/$200 conversion amount] x $90 recharacterized amount) to the recharacterized amount going back to the traditional IRA.

As a solution to the “anti-cherry-picking rules”, instead of converting all assets to a single Roth IRA, the taxpayer would group like-assets together (e.g. small cap stock, large cap stock, international equities) and then convert those groups of like-assets to separate Roth IRAs. This is commonly known as the “Roth IRA Segregation Conversion” strategy.

The benefit of the “Roth IRA Segregation Conversion” strategy is that, unlike the example above, a taxpayer does not have to pro-rate gains and losses against each other (for purposes of recharacterization) because each asset (or grouping of like-assets) is in a separate Roth IRA. Therefore, when the taxpayer chooses to recharacterize a “loser asset”, he simply recharacterizes the entire Roth IRA with the “loser asset” back to a traditional IRA and receives a full reduction in his taxable income for the original conversion amount of that “loser asset”. (NOTE: Under Treas. Reg.

§1.408A-5, there is no aggregation rule for the separate Roth IRAs, so the gain in one Roth IRA does not have to be offset against the loss in another Roth IRA for purposes or recharacterization.)

Example:

Assume the same facts as the example above, except that Connie converts Stock A to Roth IRA #1 and Stock B to Roth IRA #2.

When Connie recharacterizes Stock B, she will be recharacterizing the entire amount in Roth IRA #2. As a result, Connie will be able to reduce her taxable income by $100 (i.e. the original conversion value of Stock B) and not have to pro-rate any of the gain from Stock A to the recharacterization because Stock A is held in a separate Roth IRA.

Reconversions

Even though a taxpayer may choose to recharacterize a prior year Roth IRA conversion (because the value of the Roth IRA has gone down since the time of the original conversion), he/she may want to take advantage of current market conditions to convert back to a Roth IRA. This is known as a “reconversion”.

In general, reconversions are permitted. However, a reconversion cannot take place until the later of: (1) the year following the year of the original conversion or (2) more than 30 days after the recharacterization. The purpose of this rule is to keep taxpayers from flipping in and out of Roth IRAs during the tax year.

Example

Gary converts $100,000 to a Roth IRA on January 3, 2012. On November 15, 2012, the Roth IRA declines to $75,000, so Gary recharacterizes the entire account back to a traditional IRA on November 16, 2012. In this case, Gary must wait until January 1, 2013 to reconvert back to a Roth IRA.

Example

Emma converts $200,000 to a Roth on July 3, 2012. On March 1, 2013, the Roth IRA declines to $180,000, so Emma recharacterizes the entire account back to a traditional IRA on March 4, 2013. Emma must wait until April 4, 2013 to reconvert.

Despite the disadvantage created by the reconversion rule, there is an exception. If a taxpayer has a separate traditional IRA, he is free to convert that separate traditional IRA to a Roth IRA without having to wait the statutory holding period.

Example

Randy converts $100,000 to a Roth IRA on January 3, 2012. On April 1, 2013, the value of the Roth IRA is $80,000, so Randy recharacterizes the entire amount back to a traditional IRA (i.e. Traditional IRA #1) on April 2, 2013.

While Randy must wait until May 3, 2013 to reconvert Traditional IRA #1, he is free to convert any other traditional IRAs he has to a Roth IRA at any time.

Impact of Recharacterizations on RMDs

There is an interesting anomaly in the Treasury Regulations regarding Roth IRAs which might be helpful for clients who need to take required minimum distributions (RMDs) from their traditional IRAs. Usually, under Treas. Reg. §1.401(a)(9)-5, RMDs are calculated under the following formula:

12/31 prior year account balance / RMD life expectancy factor

However, in cases where the entire traditional IRA is converted to a Roth IRA before December 31st and the Roth IRA is recharacterized in a subsequent tax year, the recharacterization date becomes the day from which to measure the subsequent year’s RMD.

Example

On January 3, 2012, Herman, age 74 in 2012, converts $600,000 to a Roth IRA.

On December 31, 2012, the value of the Roth IRA is worth $500,000. On March 1, 2013, when the Roth IRA is worth $400,000, Herman recharacterizes the entire Roth IRA back to a traditional IRA.

Given these facts, the account balance for purposes of calculating Herman’s RMD for the 2013 tax year would be $400,000, making his RMD for the 2013 tax year $17,467.25 ($400,000/22.9 RMD factor). Had Herman not converted to a Roth IRA at all in 2012, he would have used a $500,000 IRA balance (as of December 31, 2012), making his RMD for the 2013 tax year $21,834.06 ($500,000/22.9 RMD factor).

As illustrated in the example above, Herman was able reduce his RMD by $4,366.81 (a 20% difference) assuming he did not convert to a Roth IRA in 2012. On the other hand, it is important to point out that, from an RMD standpoint, while this strategy works for the taxpayer when the Roth IRA goes down in value (from the end of the year until the time of recharacterization), it also could work against the taxpayer if the Roth IRA were to go up in value (from the end of the year until the time of recharacterization).

Annual Roth IRA Conversion/Distribution Strategy

If a taxpayer knows that he/she is going to withdraw funds from his/her traditional IRA during the year, it may be prudent for him/her to convert (what would otherwise be distributed from the traditional IRA) to a Roth IRA early in the tax year and then take withdrawals from the Roth IRA during the course of the year.

Example

Mary, age 65, usually withdraws $10,000 per month ($120,000 annually) from her traditional IRA to cover her living expenses. Instead of taking monthly distributions from her traditional IRA in 2012, Mary converts $120,000 of her traditional IRA to a Roth IRA on January 3, 2012. During the course of the 2012 tax year, Mary withdraws $10,000 per month from her new Roth IRA.

Any residual balance left in the Roth IRA at the end of 2012 will be kept in the Roth IRA for future distributions.

Assuming that Mary did not have any other existing Roth IRAs in the example above, none of the Roth IRA distributions during the 2012 tax year would be “qualified distributions”, thus making the distributions subject to income tax. However, under the tax law, Roth IRA distributions are deemed to be on a “basis out first” basis. Therefore, none of the Roth IRA distributions would be taxable (assuming she does not withdraw more than $120,000) because Mary had already paid income tax on the $120,000 deemed distributed at the time of conversion. (NOTE: If Mary were under the age of 59½ at the time of distribution from the Roth IRA, some or all of the distribution would be subject to the 10% early withdrawal penalty under IRC §72(t).)

Although not readily apparent, the key to this strategy is to siphon off a portion of income and growth (which would otherwise be generated in the traditional IRA) and transfer it to a Roth IRA. While not a great advantage on an annual basis, over time the amount of income and growth transferred to a tax-free environment can be substantial. (NOTE: Because required distributions cannot be converted into a Roth IRA, this strategy cannot be used when the traditional IRA is in pay status, unless the entire RMD is withdrawn first.)

This is illustrated in the following charts:

Special Tax Attributes

Over the last few years taxpayers have suffered significant losses. Some of these losses, in particular trade/business losses, have created Net Operating Losses (NOLs) which have carried forward to the current tax year.

These NOLs, in turn, can be used to offset the taxable income generated by a Roth IRA conversion. If planned for carefully and analyzed correctly, a taxpayer can, in essence, do a Roth IRA conversion for free.

Example

In 2011, Jack suffered a $500,000 NOL. Of the $500,000 NOL generated in 2011, $100,000 was carried back and utilized in 2009 and $100,000 was carried back and utilized in 2010. As a result, Jack has a $300,000 NOL carryover to the 2012 tax year.

Assuming Jack had other income and deductions which offset each other in 2012, if Jack were to convert $300,000 to a Roth IRA in 2012, he could shelter the entire Roth IRA conversion with the $300,000 NOL carryover, thereby causing $0 of income tax on the conversion.

In addition to NOLs, there are situations where taxpayers may have negative taxable income (i.e. itemized deductions and personal/dependency exemptions greater than gross income). In most cases, if these “excess deductions” are not used in the current tax year, they are irrevocable lost. Thus, it is important for taxpayers in this situation to seriously consider a Roth IRA conversion in that, like a NOL carryover situation, a Roth IRA conversion can be done with little to no income tax being incurred.

Finally, there are situations where taxpayers may have tax credits which could absorb the income tax liability created by a Roth IRA conversion. One such example is the Alternative Minimum Tax (AMT) credit. In this case, if a taxpayer has an AMT credit carryover and regular taxable income is greater than AMT income in the current tax year (as a result of the Roth IRA conversion), some or all of the AMT credit carryover could be used to reduce the taxpayer’s current year income tax liability.

Conclusion

By knowing a few simple tax opportunities and doing a little planning on the front-end, one can make a Roth IRA conversion very successful. With the almost certainty of income tax rates rising within the near future, now is the time to convert. Even if one really isn’t much in favor of Roth IRA conversions, don’t be afraid. One can simply undo (i.e. recharacterize) the transaction if it doesn’t work out as well as one expects.

CONTRIBUTOR: Robert S. Keebler, CPA, MST, AEP

TECHNICAL EDITOR: Barry Picker

CITE AS:  LISI Employee Benefits and Retirement Planning Newsletter #591 (January 19, 2012) at http://www.leimbergservices.com Copyright 2012 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission is Prohibited.  The Ultimate Estate Planner, Inc. has received permission from Leimberg Information Services, Inc. to repost this newsletter.

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