New Planning Opportunties for With Non-Spouse Rollovers

The Pension Protection Act of 2006 authorized beneficiaries other than surviving spouses to roll over a qualified plan to an inherited IRA. This issue of The Wealth Counselor looks at a very recent pronouncement from the IRS that gives meaning to this provision and, therefore, is very beneficial to clients and all wealth planning professionals who understand its implications. Non-Spouse Rollovers Under The Pension Protection Act of 2006 (PPA 2006), effective January 1, 2007, a non-spouse beneficiary was permitted to roll over a qualified plan to an "Inherited IRA" after the plan participant’s death. If the participant names a trust as beneficiary of the qualified plan, PPA 2006 provides that the trustee of that trust can roll over the qualified plan into an Inherited IRA for the benefit of the trust beneficiary. Planning Tip: Before 2007, a non-spouse beneficiary was stuck taking distributions under the terms of the plan, which typically require full distribution within 5 years of the participant’s death. Planning Tip: Clients who name a trust as designated beneficiary can protect the assets from creditors (including a former spouse of the beneficiary) and spendthrift beneficiaries, who often withdraw far more than the required minimum distributions. Naming a trust also allows the participant’s financial advisor to continue to manage the assets as the participant desired. The IRS Roadblock Unfortunately, the IRS quickly issued guidance that virtually eliminated this planning opportunity. In Notice 2007-7, issued January 29, 2007, the IRS declared that a plan was not required to offer non-spouse rollovers. Therefore, absent a voluntary plan amendment, a non-spouse was stuck using the plan’s payout period. New, More Favorable Guidance from the IRS Apparently in response to rumors that Congress was going to include legislation affirmatively requiring non-spouse rollovers, in late October the IRS issued its 2007 Interim and Discretionary Amendments, available online at http://www.irs.gov/retirement/article/0,,id=173372,00.html), as follows: Section 402(c)(11) [Discretionary]: PPA ‘06 . . . added Section 402(c)(11) to allow nonspouse beneficiaries to roll over distributions from a qualified plan to an individual retirement plan. Nonspouse beneficiary rollovers are an optional plan provision for 2007. See, Notice 2007-7. Pursuant to an impending technical correction, nonspouse beneficiary rollovers will be required for plan years beginning on or after January 1, 2008 (emphasis added). Planning Tip: The IRS will soon be issuing a Technical Correction that requires all qualified plans to permit non-spouse rollovers for plan years beginning on or after January 1, 2008. What Does This Mean? Beginning January 1, 2008, non-spouse beneficiaries will be able to take advantage of the PPA 2006 provisions and roll over a qualified plan into an Inherited IRA. With an Inherited IRA, a non-spouse beneficiary can use his or her own life expectancy to determine required minimum distributions. This significantly reduces the amount that the beneficiary must withdraw each year, thereby deferring income tax and allowing the account balance to continue to grow income tax free. Planning Tip: A non-spouse beneficiary must begin taking required minimum distributions from the Inherited IRA by December 31 of the year following the year of the participant’s death. This is different from a spousal rollover, where the surviving spouse can defer required minimum distributions until attaining 70 1/2. A rollover to a non-spouse beneficiary must be directly from the trustee of the qualified plan to the trustee of the Inherited IRA (a trustee-to-trustee transfer). In addition, and unlike a spouse rollover, the IRA must remain in the name of the deceased participant. Planning Tip: Avoid re-titling the qualified plan in the name of the non-spouse beneficiary. Also avoid transferring the qualified plan to an existing IRA in the non-spouse beneficiary’s name. Both constitute a taxable distribution of the entire account. The Inherited IRA should be titled like this: Sam Participant, deceased, IRA f/b/o Emily Participant (beneficiary). Planning Tip: Any distribution to a non-spouse beneficiary is a taxable distribution, subject to income tax. Therefore the check should be made payable directly to the Inherited IRA. Planning Opportunities The IRS’s change of position means that all planning options are now available to non-spouse beneficiaries of qualified plans. These options include those listed below, which were outlined in greater detail in a prior issue of The Wealth Counselor: Name a Retirement Trust as beneficiary to ensure the longest term payout possible, while also ensuring consistent account management - in the manner desired by the client using the client’s advisors - oftentimes over generations. Give the accounts to charity at death and replace with insurance owned by a Wealth Replacement Trust. Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a Wealth Replacement Trust. Take the money out during lifetime and pay the income tax, then gift the remaining cash through an Irrevocable Life Insurance Trust. Name a Charitable Remainder Trust as beneficiary with a lifetime payout to a surviving spouse; the remaining assets pass to charity at the death of the spouse. Give Up to $100,000 from IRAs directly to charity before December 31, 2007. Conclusion The IRS now requires that all qualified plans permit non-spouse rollovers for plan years beginning on or after January 1, 2008. This "about face" means that all non-spouse beneficiaries will be able to roll over the qualified plan to an Inherited IRA rather than be stuck with shorter payout under the plan provisions, thus permitting the planning team to implement the right strategy to meet the client’s unique planning objectives.

Filed under: Taxes by Myrna Arroyo | No Comments »

Louisiana Inheritance Tax Filing Requirement is Eliminated as of January 1, 2008

Under a new law effective on January, 1, 2008, for deaths occurring after June 30, 2004, a Louisiana inheritance tax return no longer needs to be filed, regardless of when a succession proceeding is opened.

Under prior law, you were required to open a succession or file a Declaration of Trust within 9 months of death in order to avoid the filing requirement.

The new law eliminates the filing requirement altogether and is great news for succession representatives, as it means one less piece of paperwork that has to be completed when someone dies.

The new law is applicable to any deaths occurring after June 30, 2004. For deaths occurring prior to that date, an inheritance return must be filed.

Filed under: Taxes by Myrna Arroyo | No Comments »

When Should You Name a Trust as the Beneficiary of Your IRA?

Naming a trust as beneficiary of your IRA can help you achieve many important estate planning objectives.  Although a trust, in and of itself, does not create tax savings, leaving your IRA in trust can protect the wealth in your IRA from unnecessary income taxes. 

An IRA is subject to income tax when the money is paid out.  IRS rules allow your beneficiaries to delay the payment of this tax by "stretching out" the period over they receive IRA distributions over their life expectancies.  This limits the amount they can take out, and maximizes the time the money stays in the account to grow tax free.

If you leave your IRA to your beneficiaries outright, they are free to use the stretch out or take the money out all at once.  Taking the money out all at once will subject the distribution to a large income tax hit the year in which it is distributed.  To prevent your beneficiaries from doing this, you can create a trust to act as the beneficiary of your IRA.  With an IRA trust, the trustee can control how the distributions are taken, and if the trust is properly designed, can ensure that your beneficiaries enjoy the maximum stretchout period available under the current tax rules.

Some situations where an IRA trust is recommended include the following:

1. When your beneficiary is a minor child.
2. When your beneficiary is disabled or incompetent.
3. Your beneficiary cannot make good financial decisions, or needs creditor or divorce protection.
4. You need to coordinate the payment of estate taxes out of your estate.
5. You are in second marriage situation.

For more information on IRA trusts, feel free to call or email.

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Take a Tax Break for Your Child’s Summer Camp

Summer is around the corner.  Did you know that the cost of summer camp for your kids could give you a tax deduction?

Here is a link to a good article on deductions that are available for summer day camps for your kids.  I hope it’s helpful.  Most of the folks I work with are unaware of this potential tax benefit.

http://articles.moneycentral.msn.com/Taxes/CutYourTaxes/TakeATaxBreakForSummerCamp.aspx

Filed under: Taxes by Myrna Arroyo | No Comments »

College Savings Plans

If you have a child (or a grandchild) who is going to attend college in the future, you have probably heard about qualified tuition programs, also known as 529 plans (for the Internal Revenue Code section that provides for them), which allow prepayment of higher education costs on a tax-favored basis.

There are two types of programs: prepaid plans, which allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary (child) won’t be starting college for some time; and savings plans, which depend on the investment performance of the fund(s) you place your contributions in.  I recommend the latter, in which you will be able to choose the type of investment vehicle for your savings.  A good investment advisor can assist you with setting one up and choosing the best investments.

You don’t get a federal deduction for the contribution, but the earnings on the account aren’t taxed while the funds are in the program. You can change the beneficiary or roll over the funds in the program to another plan for the same or a different beneficiary without tax consequences.

Distributions from the program are tax-free if they don’t exceed the student’s qualified higher education expenses. If the program was established by a private education institution (rather than a state), the distributions are tax-free beginning in 2004.

Qualified higher education expenses include tuition, fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.

Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax will also be imposed.

Accredited colleges, junior colleges, and area vocational schools are qualified to participate in the tuition program. Accredited post-secondary schools offering credit towards a bachelor’s degree, an associate’s degree, a graduate or professional degree, or another recognized post-secondary credential, are also eligible to participate, as are certain proprietary institutions and post-secondary vocational schools.

The contributions you make to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the annual gift tax exclusion, which is $11,000 for 2004. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account ratably over a five-year period starting with the year of the contributions. Thus, assuming you make no other gifts to that beneficiary, you could contribute up to $55,000 for each beneficiary in 2004 without gift tax. (In that case, any additional contributions during the next four years would be subject to gift tax, except to the extent that the exclusion amount increases.) You and your spouse together could contribute $110,000 per beneficiary, subject to any contribution limits imposed by the plan.

A distribution from a qualified program isn’t subject to gift tax, but a change in beneficiary or rollover to the account of a new beneficiary is.

Filed under: Estate Planning Basics, Estate Tax Planning, Taxes by Myrna Arroyo | No Comments »