Pennsylvania Estate Planning Lawyer & Attorney : Jakubik Law Firm : Serving Philadelphia, Chestnut Hill, Mt. Airy

The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to transfer assets directly from the plan to a properly titled inherited individual retirement account. Also permitted was the ability of non-spouse beneficiaries to take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.

The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetimes as if they inherited from IRAs. That was the plan, but the provision lost its steam when the Internal Revenue Service released Notice 2007-7 in January stating that the provision was not mandatory for plans.

This created confusion and controversy, and was contrary to what Congress intended. Congress realized this and proposed a technical correction to the law stating that employer plans must allow the non-spouse direct rollover to an inherited IRA.

Source: Investment News

In light of the pending Congressional technical correction, the IRS reversed its position and said that the non-spouse rollover provision will be mandatory beginning in 2008. There has been no official announcement on this yet, other than a posting on the IRS website (see irs.gov/retirement/article/0,,id=173372,00.html).

This change in the IRS position is especially helpful to employees who are still working and who have had no chance to do an IRA rollover. It will avoid a quick payout to their non-spouse beneficiaries such as their children or grandchildren.

It is also a big benefit to unmarried partners who inherit qualified plans and cannot be treated as spouse beneficiaries under the tax law. Without this change, an unmarried partner who inherited from their partner would not be able to do a spousal rollover, even though they might be legally married under state law. For tax purposes, they are non-spouses.

In dealing with non-spouse rollovers, the current timing and transfer rules still apply. The transfer must be a direct transfer (a trustee-to-trustee transfer), and it must be done by the end of the year following the year of death. In addition, the beneficiary must take their first required minimum distribution from the inherited IRA by that same deadline (by the end of the year following the year of death). If the transfer is not done within the time guidelines, the beneficiary will still be able to do the transfer but will be stuck with the usually less favorable payout option of the plan (probably the five-year rule) instead of getting to stretch the payments over their lifetime.

If funds are turned over to a beneficiary (that is, not handled as a direct transfer), the beneficiary cannot correct the error and transfer those funds to a properly titled inherited IRA. Instead, the entire amount of the distribution will be taxable — bringing an end to the tax shelter.

The direct transfer must be to a properly titled inherited IRA. The name of the deceased plan participant must be in the title of the inherited IRA. One example of proper account titling for an inherited IRA is "Bob Jones, deceased (Nov. 28, 2007), IRA f/b/o Jane Jones," where the dad was the 401(k) participant, and his daughter is the beneficiary of his plan.

A trust can be a non-spouse beneficiary, too. In order to take advantage of this non-spouse transfer provision, the trust must qualify as a "see through" or "look through" trust under the IRS requirements. The trust also must be valid under state law, it must be irrevocable after death, the trust beneficiaries must be identifiable, and the trust documentation or the trust itself must be delivered to the plan administrator by Oct. 31 of the year following the year of death — plus all trust beneficiaries must be individuals. A trust that does not qualify cannot do a direct transfer to an inherited IRA.

This change in IRS position is not a reason to leave money in an employer plan. If an IRA rollover was the right move before this policy change, it is still the right move now. The last thing you want is for your new clients, the beneficiaries, to be at the mercy of some plan. As you can see, plan provisions can change.

Most times, the best move is still to do the IRA rollover when possible, unless one of the lump-sum- distribution tax breaks such as net unrealized appreciation or 10-year averaging might work out better for your client.

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I have posted here before about the hazards of trying to do "do it yourself estate planning." The reasons why its a bad idea, and the possible adverse consequences of planning your estate or engaging in significant financial transactions without professional advise are too numerous and varied to list in a blog post. This is not to say, however, that we can't all learn from the unfortunate examples that osmetimes come across my radar screen. The Wills, Trusts & Estates Prof Blog discussed a couple of such cases recently, about which you can read here and here. Please do yourself - and your loved ones - a favor, and seek professional advice when planning for the disposition of your assets.

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I have taken the comments below from the new edition of Estate Planning Journal, prepared by a connected, Washington D.C. attorney. I think these are reasonable, and represent the current consensus of planners who pay attention:

“Whatever the candidates say as to their campaign positions, economic and political realities will come into play when the new President takes office and must work together with Congress. Members of both political parties have an interest in avoiding the 2010-2011 train wreck. The Democrats do not want to allow even one year of repeal; it is very hard to put the genie back into the bottle. The Republicans want to avoid having the exemption return to a $1 million exemption level in 2011. Therefore, the prediction of a resolution before the end of 2009 seems sound, and it suits the needs of all parties.

Even if one of the Republican candidates becomes our 44^th president, it is very unlikely that the estate tax will be repealed. President Bush campaigned twice with repeal in his platform; however, once in office, the economic realities took precedence and Congress could not enact the repeal bill that President Bush sought. Although estate tax repeal has been included in the President’s budget proposals for years, including six years with a Republican controlled Congress, estate tax repeal will not be enacted due to its budgetary cost and competing demands on the federal purse. A new Republican President would not enjoy greater success on this issue. Compromise is really the only option now.

Congressional action in spring 2007 indicates that there may be significant support for a temporary extension of 2009 law. If there is a compromise that keeps the estate tax in place, there is a onetime ability to offset some of the cost of the increased unified credit with the revenue gain in 2010, the year for which current law provides for no estate tax. In a three-year extension of 2009 law, the first year is a revenue raiser, followed by two years in which there is revenue loss due to the change from a $1 million exemption to a higher exemption. A three-year extension would certainly be helpful, as it would eliminate the nonsensical one-year repeal, and would establish a fixed exemption level and rate. Nevertheless, a three-year fix is likely to add the estate tax to the package of tax provisions that is required to be the subject of periodic extender bills, and would do nothing to eliminate the current uncertainty that plagues clients and their tax advisors.

The rate considerations are more complex than the exemption level. Under pre-EGTRRA law, the top estate tax rate was 55%, but state death taxes were creditable. For an estate over $10 million, the state tax rate was 16%, leaving a real federal rate of 39%. Under present law, the applicable rate is a flat 45%. The net result—whether an estate is paying more tax or less—depends on state law…….

Dusting off my crystal ball, here is the prediction: If the Democrats win both the Presidency and control of both houses of Congress, the compromise will be to extend the 2009 rates and exemption level: a $3.5 million exemption and a flat 45% rate. If the Republicans win both the Presidency and control of the Congress, the compromise will be a $5 million exemption and a 35% rate. While the Republicans would prefer repeal or, at a minimum, lower rates (a la McCain), that would be too expensive in terms of revenue loss. If the Democrats and Republicans split control of the White House and Congress, the compromise will still fall within this range.”

Source: Will Doctor's Latest Updates

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A high-profile trust fund fight spilled over into state district court Thursday when Albert Hill III, the first great-grandson of H.L. Hunt, sued the trustee for two family trust funds, alleging mismanagement of about $3 billion in assets.

Mr. Hill III also sued his father, Al Hill Jr., and two aunts, saying in the complaint that they, along with trustee Tom Hunt, conspired to force him and his family out of the trust after he didn't go along with a plan to split the trust money among themselves and sell off interest in Hunt Petroleum Corp.

"Al Hill III didn't sue his father until after his father sued him and said he was not the beneficiary of these trusts, fired him from the family business and filed documents in probate court that made certain claims that would oust Al and his grandchildren from any interests in these trusts," said William Brewer, attorney for Albert Hill III, in an interview.

Attempts to reach Tom Hunt, trust adviser William Schilling, and family attorney Ivan Irwin Jr., who are all named in the suit, weren't successful Thursday.

H.L. Hunt created separate trusts for the six children he had with his first wife, Lyda, to pass along the fortune. In the suit, Mr. Hill III states that he became a direct beneficiary of the trust when his father, Mr. Hill Jr., "disclaimed" most of his interests in the Margaret Hunt trust March 22, 2005.

That "irrevocable disclaimer" made Mr. Hill III a direct beneficiary of the Margaret Hunt trust when she died June 14, according to the suit. Margaret Hunt Hill was Al Hill Jr.'s mother.

Tom Hunt, H.L. Hunt's 84-year-old nephew, and the other Hill family members "conspired" to break up the Margaret Hunt Trust Estate and the Harold Lafayette Hunt Jr. Trust and "partition" it among themselves by selling the assets they contained, primarily control of shares of Hunt Petroleum Corp.

When Mr. Hill III, 37, confronted the parties, he was told he wasn't a direct beneficiary but rather a "contingent beneficiary" of the trust. In a phone conversation, Mr. Hill III told Tom Hunt that the document his father had signed was witnessed by Tom Hunt himself; Tom Hunt then hung up on Mr. Hill III, the complaint said.

When Mr. Hill III's father and other family members sensed he wouldn't go along with the plan to change the trust, they began a campaign of "emotional and financial" threats designed to force Mr. Hill III to go along, the suit said.

Mr. Hill III was disinherited from his father's will and was forced from the family business by terminating his personal services contract. The suit also names Alinda Wikert and Lyda Hill, the two aunts.

The suit alleges broad financial mismanagement of the two trusts in how assets were handled, saying their management violated federal racketeering laws.

It asks for a full accounting of the finances of the trusts, the removal of Tom Hunt as trustee, appointment of receivers for the two trusts, and unnamed damages along with punitive damages against the defendants.

Source: Dallas News

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It is always a good idea to review the various aspects of your family's financial plan, including your estate plan, on a regular basis. I know that this is often easier said than done. In addition, it is usually a good idea to consult your accountant, financial advisor and attorney before making major life decisons, such as getting married, adopting a child (or on the birth of a child) or getting divorced. Here is a fairly comprehensive list of life events that warrant such a review, courtesy of tax lawyer Charles Rubin:

• Birth of a child or grandchild;
• Marriage of self or heir;
• Divorce;
• Death of a spouse or child;
• Major change in the tax laws;
• Major change in financial circumstances, such as a substantial inheritance;
• Change of domicile to a new state or country;
• Acquisition of out-of-state or out-of-country property;
• Major illness;
• Acquisition or sale of a business or real estate, including major liquidity events;
• Major charitable gifting;
• Acquisition of life insurance or significant annuity policies;
• Significant gifting to friends or family members;
• Or in the absence of any of the above, the passage of 4-5 years since the last review.

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OK, I couldn't resist. Reprinted below the fold is a post from a blog called Economic Trends by a fellow named Ed Morse, making the case, convincingly I'd say, that Warren Buffet's views on the estate tax are all wet. You can also read another critique of Buffet's views here.

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From Tax News comes the following hopeful repor that Congress may in fact do something sometime soon about the uncertain status of the federal estate tax. I will refrain from commenting on Warren Buffet's remarks here (but may well do so in a future post) - let us at least hope that Congress does SOMETHING soon to bring at least a little certainty and predictability to the tax considerations that go into estate planning. Here's the gbit from Tax News:

At a November 14 Senate Finance Committee hearing, Republicans and Democrats, in rare agreement, said that the current estate tax situation is a quagmire and needs to be fixed. The only question is how. With total repeal out of the question, Committee Chairman Max Baucus, D-Mont., put the question to his committee and a panel of tax experts, including two family business owners whose heirs could be forced to choose between selling the family business or going deep into debt in order to settle with the IRS.
Lawmakers and panelists also agreed that, in addition to the costs, the uncertainty associated with the future of the tax creates havoc with estate planning, as small business owners find themselves constantly adjusting their wills to accommodate new family members and shifting tax rates included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16). "Complicated trusts often have to be created to deal with the moving target estate tax exemption," testified attorney and law professor Conrad Teitell. "And we have to draft for the contingency that there won't be an estate tax in 2010," he said. "Families must have multiple estate plans," agreed Baucus. "And that costs money."
Teitell, who has published a number of articles on the topic of taxes, wills and estate planning, noted that life insurance planning to pay for estate taxes and provide liquidity is also difficult. Indeed, constant estate planning has become a necessity in these uncertain times, according to Teitell. "Putting off decisions until Congress acts can be hazardous to your wealth," he quipped.
With panelists and lawmakers basically on the same page, the focus of the hearing quickly moved to where to draw the line - how big of an estate should trigger the tax. While many felt full repeal was justified, a straw poll appeared to settle on a figure of around $4 million, indexed for inflation. For his part, Baucus said that current congressional dynamics are such that he must wait until 2008 to begin looking at adjustments to the estate tax, but he told reporters following the hearing that major changes would come either in 2009 or 2010.
While the hearing was ostensibly dedicated to exploring the problems associated with the current estate tax laws, the star power of one panelist, business magnate and philanthropist Warren Buffet, proved too tempting for some lawmakers to ignore. Ranking member Charles E. Grassley, R-Iowa, asked Buffet to digress from the estate tax topic and give his opinion on taxing carried interest, an issue that Grassley admitted he remained undecided on. Buffet acquiesced, telling Grassley that he once served as a hedge fund manager and that he regarded it an occupation like any other and should, therefore, be taxed as such.
Grassley then turned to the question of tax-exempt charities and college endowments, asking Buffet whether he thought the current laws on charitable spending requirements should be changed. Buffet again acquiesced, telling the senior lawmaker that charities and endowments were no different than private businesses when it came to federal requirements and that they would use their funds as they saw fit. "It's institutional economics", said Buffet. "Require them to spend 3 percent of their donations on charitable purposes and that's what they will spend. Require 5 percent and they'll spend that." Flat-tax advocate Ron Wyden, D-Ore., inquired of Buffet his views on the subject. "I'm with you in principle," responded Buffet."But, it should be progressive."
By Jeff Carlson, CCH News Staff.

Source: Tax News

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Leanna Hammill recently posted some interesting thoughts on her Massachusetts Estate Planning and Elder Law Blog regarding what, if anything clients should tell their children about their estate plans. As I have discussed here before, I am a definite proponent of sharing information with children regarding family finances and estate issues. Posted below are Leanna's thoughts on this isue.

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This article is really a cut above most "you need to have an estate plan" articles -- good use of detail and examples.

One part I wanted to focus on:

In event of your disability, give someone you trust the power to manage your property. It's called a power of attorney (although the person doesn't have to be an attorney).

But there's a problem: Some financial institutions won't accept powers of attorney created more than six months before. You're unlikely to renew a power of attorney this frequently. For a better solution, ask an estate planning attorney to draft a living trust for you. (The cost is probably $1,500 to $3,000.) The ownership of all your property is changed from your name to the trust's name. As the sole trustee, you can do anything you like with the property.

But if you become disabled, a person named in your trust steps in as successor trustee to manage the property on your behalf and for your benefit. All financial institutions accept this, no matter when the trust was written.

I haven't had a problem getting "old" powers of attorney (done in the last 5 years) accepted by financial institutions, but a living trust really works better than a property power of attorney in the case of disability. Or, rather, I should say that a fully funded living trust works better. If you transfer ownership and change beneficiary designations to your living trust and then become disabled, your successor trustee really can step right in and handle your property for your benefit. If you set up a living trust but don't fund it, and then become disabled, your property power of attorney can (hopefully) be used to fund your living trust at that time. I always include specific language allowing an agent under a property power of attorney to take care of this funding.

And, of course, a health care power of attorney is very important as well.

Let me put it simply: If you become disabled, having a fully funded living trust and powers of attorney will save you and your family a lot of time and money.

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Michael Bonasera asks a couple of interestin questions at his Ohio Trust & Estate Blog:

After you have done a revocable living trust for client, is there a requirement (implicit or otherwise) on the lawyer to insure that the trust is funded or mechanisms are in place to allow for it to be funded?

Further, if the trust is not funded when the client dies (leading to a larger probate estate than would have otherwise been necessary if the trust had been funded), is the attorney who drafted the trust liable for malpractice?

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Congress has given you a terrific way to save for college.  Don't let it slip by.

So-called "529" plans are investment vehicles which permit money you set aside for a child or grandchild's education to grow tax free.  If the funds are in fact used for college, they are never taxed.

Many states have offered further benefits to these plans, including creditor protection in the event of bankruptcy and state income deductions for contributions up to certain limits.  More than half of states offer some sort of creditor protection and more than 30 states offer at least some income tax deduction.  Though they may provide for recapture of the deducted income if the account is moved to another state.

An odd aspect of 529 plans is that although they are authorized under federal tax law, they depend on state legislation.  So each state has its own plan or plan operated by an investment company.  While investors may take advantage of any plan offered by any state or investment company, some of the state benefits only apply to their own state plans.

Another advantage to 529 plans is that permit automatic investment.  A donor can provide that a certain amount is deposited into the plan each month, allowing the account to grow over time almost painlessly.

A final change that makes 529 plans more attractive than formally is that the internal costs of many plans have come down in recent years and some plans now provide for investment in low-cost index funds.

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Jennifer Sawday's recent post on her California Estate Planning blog in which she addresses why you do NOT want to put your retirement plan into your revocable trust provides an opportunity to consider two of the most significant mistakes that folks make when completing their estate plans. First, many fail to fund their revocable trusts. It is not enought to simply sign your trust documents. You've got to actually transfer assets into the trust. This is called funding the trust, and if this critical step is not completed, the trust will serve no purpose whatsoever, in terms of avoiding probate, allowing for flexible disability planning or anything else. Second, the trust needs to be not only funded, but properly funded. This step involves assuring that you transfer to the trust those assets that are best situated there, and leaving outside of the trust those assets that can provide you with more flexibility and tax or financial benefit by staying out of the trust. In many circumstances, as Jennifer notes, retirement accounts are best left out of the trust. Your attorney can, and should, assist you with these processes, as can your accountant. Don't get caught short - be sure that your advisers help you complete the process and have your trust properly funded.

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So reports the Wills, Trusts & Estates Prof Blog:

Earlier on this blog, I discussed the uncertainty associated with the amount of exemption and the tax rate that will be applicable to non-exempt estates in the upcoming years.

According to Rebecca Knight, Facing up to the two certainties in life, FT.com, Oct. 23, 2007, this uncertainty has caused many Americans to experience an increased level of anxiety. Knight reports:

The survey, carried out by The Hartford Financial Services Group, found that most affluent Americans - particularly those with more than $2m in net worth - say they are more concerned than they were a year ago about their families having to surrender significant chunks of an estate to federal taxes.* * *

The top federal estate-tax rate on the biggest estates is 45 per cent until 2009, and will increase to 55 per cent in 2011.* * *

Compared with the sample average of 49 per cent that expressed greater concern about the estate tax, 73 per cent of Americans with $5m or more in assets, and 56 per cent of Americans with more than $2m in assets, said that their fears were increasing, the survey found.

The greatest concerns over the estate tax were: the respondents' increase in their net worth; the growing federal budget deficit that might imperil any estate tax cuts; and their sense that the new Congress is less likely to repeal or reform the tax.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

Source: Wills, Trusts & Estates Prof Blog

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