by Linda Suzzanne Griffin
The Act provides new opportunities for beneficiaries of qualified plan assets such as a 401(k) plan. Generally upon an individual’s death if he or she has designated a beneficiary the beneficiary becomes the new owner of the assets. Beneficiaries are financially better off if they can defer the distributions as long as possible because of the immediate taxation upon receipt and because of the compounding of tax free earnings within the plan. Generally distributions must be made within five years of death or over the life expectancy of the beneficiary if the decedent was under age seventy and a half (70 ˝). If the decedent was already seventy and a half (70 ˝) then the distributions must be taken over the decedent’s life expectancy. Spouses who are beneficiaries have additional opportunities as they can rollover the the deceased spouse’s plan into their own IRA and the surviving spouse can distribute the IRA assets in accordance with the rules applying to their own IRA.
If a beneficiary is not a spouse then the deferral opportunities only apply if the actual plan documents allow the deferral opportunities. Generally companies require a lump sum payment. Thus the beneficiary would have immediate tax consequences. The Act allows for plan assets payable to beneficiaries to be rolled into an inherited IRA and then once in the inherited IRA the beneficiary can take advantage of the deferrals as noted above.
Advice:
If the decedent’s company plan requires a lump sum distribution it is imperative you advise your client about this deferral opportunity. The provision applies to distributions after December 31, 2006 and the transfer must be a trustee to trustee transfer.
Tax Free IRA Distributions for Charitable Purposes
The Act also provides that for tax years beginning in 2006 and 2007 a taxpayer can exclude, not to exceed $100,000, from gross income otherwise taxable IRA distributions which qualify as charitable distributions. The distribution must be made after the participant attains age 70 ˝ , the distribution must be to a qualified charity and the distribution must be made directly by the IRA trustee to the charity .
Advice:
This provision in the Act provides for income tax savings for an otherwise charitably inclined client. A distribution that meets the minium required distribution meets that requirement even if the minimum required distribution is distributed to the charity.
Appraisal Penalties
The Act also provides new Internal Revenue Code 6695A which applies penalties for appraisers. The penalty applies to (1) anyone who prepares appraisals that knows or should have known that the appraisal is to be prepared in connection with a federal tax return or claim for refund and (2) the appraisal must result in a substantial valuation mis statement (more than 200% of the correct value) or gross valuation misstatement (double the substantial valuation misstatement). The penalty to be assessed is the lesser of (1)10% of the tax underpayment, (2)$1,000 or (3)125% of the fee that the person charges for the appraisal.
Advice:
If you represent appraisers this new code section must be reviewed. Further, that statute may make for interesting negotiations for the fee between appraisers and the attorneys who hire them because of the increased risk to appraisers.
Ten Percent (10%) Penalty Imposed
Husband dies in 1998 with the sole beneficiary of his IRA, his wife. Wife asked the IRA institution to make a direct rollover of Husband’s IRA into wife’s own IRA. She remarries in 2002. When she was under the age of 59 ˝ she distributed to herself a $978,000 distribution from her IRA. She argued that the 10% penalty did not apply because the distribution was a “distribution of IRA for her deceased husband”. The IRS said the distribution was subject to a 10% penalty because the distribution was made from wife’s own IRA and not her deceased spouse’s IRA. The tax court held that wife received the distribution from her own IRA.
Advice:
When you get into the specifics of rolling over IRA’s or withdrawing monies be sure you have competent legal advice to determine the tax consequences.
Charity Will and Trust
In private letter ruling 200617026 a charitable remainder annuity trust was created by Marvin’s dad, with the annuity payable to Marvin’s dad for his life and then to Marvin for his life. Marvin proposes that the trust terms be reformed to permit annual distributions of principal to the charitable remainder beneficiaries. Treasury Regulation Section 1.664-2(a)(4) provides that no other amount other than specified annuity payment of a charitable annuity trust will be paid to or for use of any person other than a charity. The governing instrument can provide a portion of the annuity or annuity trust be paid to a charity. Thus, the proposed reformation did not disqualify the charitable trust.
Advice:
In many cases the charitable life annuitant may want to benefit the charity earlier than at his death. This is a private letter ruling that can provide guidelines.
All Contents © Copyright Linda Suzzanne Griffin, P.A.
