A New York trial court recently approved a trustee's petition to reform his deceased father's trust in order to protect his disabled sister's Medicaid benefits. In Matter of Newman (2008 NY Slip Op 50127, Jan. 22, 2008).
When he died in 1988, William Newman established a trust in his will for his disabled daughter. The will required the trustee to use the trust income for the daughter's benefit and gave the trustee discretion to spend the trust principal for her support and maintenance. Mr. Newman's daughter lived on her own until 2006, when she moved into an adult care facility and qualified for Medicaid. In order to maintain her eligibility, her brother, the trustee, then petitioned the court to reform the trust to make it a Supplemental Needs Trust. The guardian ad litem opposed the petition, arguing that the trustee, who was also a remainderman, had a conflict of interest.
The court approved the petition, finding that the trust meets all of the statutory conditions for reformation. Specifically, the court determined: 1. that the beneficiary is disabled; 2. that the intent of the donor was to supplement her benefits; 3. that the trust prohibits the trustee from using the assets to jeopardize her benefits; and 4. that the beneficiary cannot compel distributions from the trust. Finally, the court dismissed the guardian ad litem's argument regarding the conflict of interest, calling the analysis "restrictive" and contrary to the intent of the donor.
Friday, April 25, 2008
Friday, April 18, 2008
New guidance on fixing a botched IRA stretch after it's "too late"
To preserve the ability to stretch IRA distributions for a beneficiary, that individual must start taking withdrawals based on his/her life expectancy in the year after death. If those required withdrawals don't start on time, can you still rectify the situation to preserve the tax deferral? A recent private letter ruling procured our by our law firm indicates the answer is "yes."
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
Saturday, April 5, 2008
Living Trusts Are Revocable And Not An Asset Protection Tool
This great post comes from Jennifer N. Sawday of The California Estate Planning Blog.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Subscribe to:
Posts (Atom)