Bruce Steiner

If the IRA owner had left the IRA to the beneficiary in trust rather than outright, it would have avoided these complexities. The only complexity would have been that the stretchout would have been limited to the life expectancy of the oldest beneficiary of the trust.

If the IRA owner is still living, he/she should consult with tax/estates counsel. Based on what you describe, since the spouse is the oldest beneficiary, assuming the trust complies with the recent rulings (such as PLR 200228025 and 200235038), the spouse will be the measuring life. This plan will most likely destroy the rollover, destroy the possible Roth conversion after the IRA owner's death, leak the income to the spouse even if it's not necessary to elect QTIP for the entire IRA, and force the principal to the children, destroying the ability to keep it out of their estates and to protect it from their creditors. Here is a link to an article I wrote on trusts as beneficiaries of IRA benefits: http://www.bnatax.com/tm/tmm0903_steiner.rtf It appeared in the BNA Tax Management Estates, Gifts and Trusts Journal.

It's hard to tell without seeing your calculations. But it seems surprising that a 7 point difference in the tax rates would outweigh the benefits of the Roth conversion. What assumptions are you making as to the rate of return in your IRA, the rate of return after income taxes on your taxable account, your estate tax rate, how long you will live, the age of your beneficiary at your death, etc.?

Your ideas are quite good for someone who's not a lawyer. We've seen lawyers who haven't done as well. But instead of your trying to come up with the solutions, you should focus on your objectives and concerns, and let your lawyer advise you as to how best to accomplish your objectives. You must have some concern about your siblings if you are considering providing for them in the form of a 20-year annuity. and you want to make sure they don't cash in the IRA at once. But if you leave your IRA to them, you can't stop them from cashing it in (at least after your husband's death once they get the annuity). A better way to provide for them is in trust rather than outright, so the trustees will have some control. A 20-year annuity is extremely inflexible, and not very tax efficient. Again, it would be better to select the appropriate trustees, and give the trustees some discretion. If you leave the IRA to or in trust for your siblings, the stretchout is limited by their life expectancy. Is there some other way to get a longer stretchout? A life estate is also not very flexible. Suppose at some point your husband wants to move? Suppose he wants to refinance the mortgage (if there is one), or take out a home equity loan. Again, a trust is much more flexible. Finally, we rarely do codicils. To do a codicil, you have to make sure it meshes with the Will. After your death, everyone will both the Will and the codicil, whoever's interest was reduced by the codicil may be unhappy. If you do a whole new Will, no one would know what the changes were unless for some reason the prior Will came to light. Finally, a codicil is often done as a temporary stopgap, but once the codicil is done, redoing the Will may seem less urgent. So don't do a codicil; do a new Will. With the aid of word processing, it probably won't cost much more.

Decedent, unaware of the Section 691© deduction available to her beneficiaries, withdrew her entire IRA just before she died, to remove the income tax from her estate. The issue is whether her executors or the beneficiaries of her IRA can put the money back into the IRA, since the benefit of the stretchout would probably far outweigh the fact that the Section 691© deduction applies only to the Federal, but not the state, estate tax. Gunther, 573 F. Supp. 126 (W.D. Mich. 1982) says yes. Rev. Proc. 2003-16 (which lists death as an example) and the temporary regulations under former Section 4981A suggest yes. But the IRS said no in PLR 200415011. If the financial institution will let the executor put the money back (within the 60 days), and if the beneficiaries of the IRA are the same as the beneficiaries of the estate, the executor could put the money back, and then either seek a ruling (and take the money back out if the ruling is unfavorable), or run the risk of the excess contribution penalty. But if the financial institution won't let the executor put the money back, she'll need to get a ruling both on the rollover after death and the waiver of the 60 days. Even if the executor puts the money back without calling attention to the IRA owner's death, the financial institution may spot the issue when the beneficiaries set up their beneficiary IRAs. Does anyone have any thoughts, other than having the executor move to the Western District of Michigan? Was anyone in this group involved in PLR 200415011?

Why do you think that the dividends are exempt from Canadian tax?

Depending on the terms of the trust, the trustees may be able to distribute the trust assets to another trust for the benefit of the same beneficiaries.

Without knowing all the facts, it's hard to evaluate the transaction described in the New York Times article. It's hard to know what to make of the Swanson case. In one sense, it's strong, since it involved not the underlying issue, but rather the issue of attorneys' fees based on the IRS' taking an unreasonable position. But since the IRS conceded the underlying issue, we don't have the benefit of the court's analysis of the underlying issue based on the arguments of the opposing parties. There may also be special considerations for DISCs or FSCs. DOL advisory opinion 2000-10A is also a difficult one. Some people have expressed concern as to whether the DOL got the math right regarding the issue of 50% ownership, with attribution. In summary, the Section 4975 prohibited transaction rules are extremely complicated, and to try to understand their application to a particular case based only on a summary in a newspaper is not possible, at least for me.

There are lots of possible problems. But rather than trying to describe them all, it would be more efficient if the person would say what he/she is trying to accomplish, and then to determine how best to accomplish his/her objectives.

Assuming no change in the tax rates, John would be correct that it would come out a wash if you had to use the IRA money to pay the tax on the conversion. But that would not be the case if you had non-IRA funds with which to pay the tax on the conversion. Example, assuming a constant 25% tax rate: you have $100 in your IRA and $25 of other money. You convert and use your $25 of other money to pay the tax. Over some period of time, your $100 Roth IRA grows to $200. If you didn't convert, then over the same period of time your $100 traditional IRA would grow to $200 before income tax, or $150 after income tax. If you were always in a zero bracket, your $25 of other money would grow to $50, so you would be just as well off. But if your tax rate on your investment income is greater than zero, your $25 of other money will grow to something less than $50.

It's not enough that I kept you out of the soup. You want the analysis, too. Some people (i.e., some experts) think that if you use an IRA to satisfy a preresiduary formula marital or credit shelter bequest, then the IRA is immediately taxable, notwithstanding the stretchout that would otherwise have been available. Others (i.e., other experts) think that this should not be a problem. Why take a chance? If you leave the IRA to this trust, how is the spouse supposed to do a rollover? Obviously you can't for the portion that goes to the credit shelter. If the marital share passes in the form of a QTIP trust rather than outright, then obviously you can't for the marital share either. If the marital share passes outright, then you may be able to do the rollover for some or all of the portion of the IRA that will go to the spouse via the trust. This issue is far too complicated for a short answer. For a long answer, see my article on that subject in the October 1997 issue of Estate Planning. The lawyer who handles your estate planning should subscribe to this publication. But again, why look for a complicated solution that may work when there are simpler solutions that do not have these uncertainties?

While this matter may be urgent, it is not particularly difficult; and the estate is not particularly large. To consult with three lawyers would likely double the cost of the project. I suggest consulting with one good lawyer, but doing so right away. Why would he not convert to a Roth? Why has he not considered leaving the children's share in trust rather than outright? Suppose a child (i) has a taxable estate, (ii) has a creditor problem, (iii) goes into a nursing home and wants Medicaid, (iv) gets divorced, or (iv) outlives his/her spouse and remarries. With 3 children, there's a good chance at least one of these things will happen to at least one child.

I'm not sure what you mean by "his trust." If you mean a separate trust containing a marital/credit shelter formula, he could leave the IRA to that trust. But as Katherine hints at, there is a difference of opinion as to whether that might accelerate the income taxation of the IRA benefits. And it will sacrifice, or at least complicate, the rollover of the portion going to the marital share. If his objective is to use his IRA to the extent necessary to fully fund the credit shelter trust, after using whatever other assets are available, he can accomplish this in the beneficiary designation. The tradeoff is the loss of the spousal rollover. A simpler approach is to name the spouse as beneficiary, with a disclaimer/credit shelter trust as contingent beneficiary. The tradeoffs are (i) the decision becomes the spouse's rather than the IRA owner's, and (ii) a disclaimer trust is less flexible that a regular credit shelter trust. I will be presenting a paper on this at the BNA Tax Management advisory board meeting in New York on September 18th. If your lawyer can make it, he/she may find it useful. If not, he/she should watch for a copy of the paper in his/her BNA Tax Management Memoranda.

My article covers various situations in which the spouse was permitted to do a rollover even though he/she was not named as beneficiary. In doing the research for the article, I found two PLRs involving community property. I was not suggesting that they are determinative. (PLRs are not binding on the IRS in any event except with respect to the taxpayers to whom they are issued.) But I think these PLRs and my article may assist Mr. Foley in his research, and in deciding whether he thinks it is worth his effort to apply for a ruling in his case. I don't think the Service's view on this issue (spousal rollovers where the spouse is not named as beneficiary) will change by reason of the final regulations. If you don't subscribe to Estate Planning, you should be able to get a copy of the article from the lawyer who handles your estate planning, or from any law firm with a tax/estates practice with which you have a relationship.

See PLRs 9427035 and 8927042. Also see my article on this in the October 1997 issue of Estate Planning at page 369.