2006 Pension Bill & IRA Update Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP 1400 Lombardi Avenue, Suite 200 Green Bay, WI 54304 [email protected]

2006 Pension Bill 2006 Pension Bill

& IRA Update& IRA UpdateRobert S. Keebler, CPA, MSTVirchow, Krause & Company, LLP1400 Lombardi Avenue, Suite 200Green Bay, WI [email protected]

PRESENTED BY

22

Key DevelopmentsKey Developments • Pension Protection Act of 2006Pension Protection Act of 2006

• Tax Increase Prevention & Reconciliation Tax Increase Prevention & Reconciliation Act (TIPRA)Act (TIPRA)

• Revenue Ruling 2006-26Revenue Ruling 2006-26

• Revenue Ruling 2005-36Revenue Ruling 2005-36

• Recent Private Letter RulingsRecent Private Letter Rulings

• 9100 Relief 9100 Relief

33

Pension Protection Pension Protection Act of 2006Act of 2006

44

• Post-mortem non-spousal rollovers to Post-mortem non-spousal rollovers to inherited IRAs inherited IRAs

• Tax-free charitable IRA distributionsTax-free charitable IRA distributions• Direct rollovers of qualified retirement plan Direct rollovers of qualified retirement plan

assets (e.g. 401(k) plan) to Roth IRAsassets (e.g. 401(k) plan) to Roth IRAs• Change in qualified retirement plan hardship Change in qualified retirement plan hardship

provisionsprovisions• Economic Growth & Tax Relief Reconciliation Economic Growth & Tax Relief Reconciliation

Act of 2001 (EGTRRA) provisions made Act of 2001 (EGTRRA) provisions made permanentpermanent

Pension Protection Act of 2006Pension Protection Act of 2006Key IRA & Qualified Retirement Key IRA & Qualified Retirement

Plan ProvisionsPlan Provisions

55

• Non-spousal beneficiaries (e.g. children, nieces, Non-spousal beneficiaries (e.g. children, nieces, friends, etc.) are permitted to roll over a qualified friends, etc.) are permitted to roll over a qualified retirement plan (e.g. 401(k) plan), via trustee-to-retirement plan (e.g. 401(k) plan), via trustee-to-trustee transfer, into an inherited IRA.trustee transfer, into an inherited IRA.

• ““Designated beneficiary” trusts are also permitted to Designated beneficiary” trusts are also permitted to roll over qualified retirement plans into inherited roll over qualified retirement plans into inherited IRAs.IRAs.

• Effective for tax years beginning after December 31, Effective for tax years beginning after December 31, 20062006

CAUTION: The inherited IRA must be set up under the CAUTION: The inherited IRA must be set up under the decedent qualified plan owner’s name (e.g. “John decedent qualified plan owner’s name (e.g. “John Smith, Deceased, IRA f/b/o Jane Smith (beneficiary))Smith, Deceased, IRA f/b/o Jane Smith (beneficiary))

Pension Protection Act of 2006Pension Protection Act of 2006Post-Mortem Non-Spousal RolloversPost-Mortem Non-Spousal Rollovers

66

Pension Protection Act of 2006Pension Protection Act of 2006Post-Mortem Non-Spousal RolloversPost-Mortem Non-Spousal RolloversEXAMPLE 1 – Inherited IRA Held by Beneficiary

On March 15, 2007, Betty Smith passes away, naming her son Dave as sole beneficiary of her 401(k). On August 3, 2007, Dave transfers his mother's 401(k) to an inherited IRA for his benefit via a trustee-to-trustee transfer. Under the new tax law, Dave is permitted to make this post-mortem transfer to an inherited IRA for his benefit, thereby allowing him to stretch the IRA withdrawals over his life expectancy.

77

Pension Protection Act of 2006Pension Protection Act of 2006Post-Mortem Non-Spousal RolloversPost-Mortem Non-Spousal Rollovers

EXAMPLE 2 – Inherited IRA Held by Qualified Trust

Assume the same facts as Example 1, except that Betty named a trust, for the benefit of Dave, as beneficiary of her 401(k). In this case, the trustee would be permitted to make a post-mortem trustee-to-trustee transfer of the 401(k) into an inherited IRA for Dave's trust’s benefit.

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• Effective for distributions made after Effective for distributions made after 12/31/2005 but before 1/1/2008, taxpayers may 12/31/2005 but before 1/1/2008, taxpayers may choose to exclude from gross income, on an choose to exclude from gross income, on an annual basis, “qualified charitable annual basis, “qualified charitable distributions” from IRAs to the extent that the distributions” from IRAs to the extent that the aggregate amount of such distributions does aggregate amount of such distributions does notnot exceedexceed $100,000 in any given tax year.$100,000 in any given tax year.

CAUTION: This provision only applies to CAUTION: This provision only applies to distributions from traditional IRAs (not SEPs distributions from traditional IRAs (not SEPs or SIMPLE IRAs) and taxable distributions (i.e. or SIMPLE IRAs) and taxable distributions (i.e. non-qualified distributions) from Roth IRAs.non-qualified distributions) from Roth IRAs.

Pension Protection Act of 2006Pension Protection Act of 2006Tax-Free Charitable IRA DistributionsTax-Free Charitable IRA Distributions

99

• A “qualified charitable distribution” is an A “qualified charitable distribution” is an otherwise taxable distribution from a otherwise taxable distribution from a traditional IRA or Roth IRA which is:traditional IRA or Roth IRA which is:– Made Made directlydirectly by the IRA trustee to an IRC §170(b) by the IRA trustee to an IRC §170(b)

(1)(A) charitable organization (other than a IRC (1)(A) charitable organization (other than a IRC §509(a)(3) private foundation or a IRC §4966(d)(2) §509(a)(3) private foundation or a IRC §4966(d)(2) donor advised fund) donor advised fund)

ANDAND– Made Made on or afteron or after the date in which the IRA owner the date in which the IRA owner

has attained 70½has attained 70½


1010

• Under the annuity rules of IRC §72, a Under the annuity rules of IRC §72, a “qualified charitable distribution” will be “qualified charitable distribution” will be treated as income first, up to the aggregate treated as income first, up to the aggregate amount that would otherwise be includible in amount that would otherwise be includible in gross income if the aggregate balance of all gross income if the aggregate balance of all IRAs held by the owner were to be distributed IRAs held by the owner were to be distributed during the same tax year.during the same tax year.


1111

KEY POINTSKEY POINTS• The “qualified charitable distribution” must be made The “qualified charitable distribution” must be made

directly from the IRA to an IRC §170(b)(1)(A) directly from the IRA to an IRC §170(b)(1)(A) organizationorganization

• The percentage limitations under IRC §170 (i.e. 50%, The percentage limitations under IRC §170 (i.e. 50%, 30%, 20% AGI limitations) are disregarded for 30%, 20% AGI limitations) are disregarded for purposes of determining the “qualified charitable purposes of determining the “qualified charitable distribution”distribution”

• The distribution is allowed only to the extent that the The distribution is allowed only to the extent that the distribution would otherwise be includible in gross distribution would otherwise be includible in gross incomeincome– Thus, “qualified distributions” from Roth IRAs would not Thus, “qualified distributions” from Roth IRAs would not

countcount


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KEY POINTSKEY POINTS• The “qualified charitable distribution” which is The “qualified charitable distribution” which is

excluded from income cannot be claimed as a excluded from income cannot be claimed as a charitable deduction on the taxpayer’s tax returncharitable deduction on the taxpayer’s tax return

• To the extent a distribution does not fully qualify for To the extent a distribution does not fully qualify for the exclusion, the excess will follow the general the exclusion, the excess will follow the general charitable deduction rules of IRC §170charitable deduction rules of IRC §170

• The “qualified charitable distribution” reduces the The “qualified charitable distribution” reduces the taxable portion of a taxpayer’s IRA dollar-for-dollar taxable portion of a taxpayer’s IRA dollar-for-dollar (i.e. basis stays with the IRA)(i.e. basis stays with the IRA)

• The “qualified charitable distribution” The “qualified charitable distribution” will countwill count towards the IRA owner’s “required minimum towards the IRA owner’s “required minimum distribution” from his traditional IRAdistribution” from his traditional IRA


1313


EXAMPLE 3 – Qualified Charitable Distribution (IRA With No Non-Deductible Contributions)

Agnes, age 75, has a $300,000 traditional IRA consisting only of deductible contributions and earnings. In 2006, Agnes directed the trustee of her IRA to make a direct payment of $30,000 from her IRA to the United Way (an IRC §170(b)(1)(A) charitable organization). Further, had Agnes taken the $30,000 distribution for herself, it would have been included in income. As a result, the entire $30,000 distribution is a “qualified charitable distribution” and is excluded from Agnes’ taxable income for the year.

1414


EXAMPLE 4 – Qualified Charitable Distribution (IRA With Non-Deductible Contributions)

Same facts as Example 3, except that Agnes had $20,000 in non-deductible contributions to her traditional IRA. As in Example 3, Agnes’ $30,000 contribution would be a “qualified charitable distribution” and would be excluded from her taxable income. Further, the entire $30,000 would fully reduce the taxable portion of Agnes’ traditional IRA (i.e. $ 280,000). Thus, after the contribution, Agnes would still have a “basis” of $20,000 in her traditional IRA.

1515


EXAMPLE 5 – Required Minimum Distribution Used for Qualified Charitable Contribution

Same facts as Example 3, except that Agnes designates that a portion of her $30,000 “qualified charitable distribution” is her required minimum distribution (RMD) for the year. In this case, $13,100 ($300,000 IRA balance ÷ 22.9 RMD factor) of Agnes’ $30,000 distribution is attributable to her RMD for the year. Thus, Agnes would not need to take the $13,100 RMD from her IRA since the “qualified charitable distribution” covered this amount.

1616

Pension Protection Act of 2006Pension Protection Act of 2006Direct Rollover of Qualified Retirement Direct Rollover of Qualified Retirement

Plan Assets to a Roth IRAPlan Assets to a Roth IRA• Effective for tax years after 12/31/2007, Effective for tax years after 12/31/2007,

taxpayers may convert all or a portion of their taxpayers may convert all or a portion of their “eligible retirement plan” to a Roth IRA“eligible retirement plan” to a Roth IRA

• ““Eligible retirement plans” include:Eligible retirement plans” include:– Traditional IRAs or individual retirement annuitiesTraditional IRAs or individual retirement annuities– IRC IRC §401(a) plan§401(a) plan– IRC §403(a) qualified annuityIRC §403(a) qualified annuity– IRC IRC §403(b) annuity contract§403(b) annuity contract– IRC §457 governmental planIRC §457 governmental plan

1717


Plan Assets to a Roth IRAPlan Assets to a Roth IRA

• The rules that apply to Roth IRA conversions The rules that apply to Roth IRA conversions from traditional IRAs will apply to conversions from traditional IRAs will apply to conversions from “eligible retirement plans”from “eligible retirement plans”– AGI must not exceed $100,000AGI must not exceed $100,000– Married taxpayers filing separate will not qualifyMarried taxpayers filing separate will not qualify

• The one excludible traditional IRA-to-The one excludible traditional IRA-to-traditional IRA rollover per year will not apply traditional IRA rollover per year will not apply to qualified rollover contributions from to qualified rollover contributions from “eligible retirement plans” to Roth IRAs“eligible retirement plans” to Roth IRAs

1818


Plan Assets to a Roth IRAPlan Assets to a Roth IRAEXAMPLE 6

In 2008, John, age 52 and married, directs the trustee of his profit sharing plan to make a $50,000 trustee-to-trustee transfer to his newly-created Roth IRA. Assuming an AGI of $75,000 and that John and his wife do not file separately, John’s $50,000 transfer will be a “qualified rollover contribution” to his Roth IRA.

1919

Pension Protection Act of 2006Pension Protection Act of 2006Change in Qualified Retirement Plan Change in Qualified Retirement Plan

Hardship ProvisionsHardship Provisions

• Effective after Regulations have been issued Effective after Regulations have been issued by the Treasury, the hardship distribution by the Treasury, the hardship distribution provisions that apply to qualified retirement provisions that apply to qualified retirement plans will extend to any beneficiary (not just plans will extend to any beneficiary (not just spouses and dependents) spouses and dependents)

2020

Tax Increase Tax Increase Prevention & Prevention &

Reconciliation Act Reconciliation Act

2121

• Starting in 2010, the $100,000 Adjusted Gross Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer appliesIncome (AGI) limitation no longer applies– The tax incurred on a Roth IRA conversion in 2010 The tax incurred on a Roth IRA conversion in 2010

may be spread over the following two tax years may be spread over the following two tax years (i.e. 2011 and 2012)(i.e. 2011 and 2012)

• Married Filing Separately taxpayers can Married Filing Separately taxpayers can convert to a Roth IRAconvert to a Roth IRA

Tax Increase Prevention & Tax Increase Prevention & Reconciliation Act (TIPRA)Reconciliation Act (TIPRA)

Key Roth IRA ProvisionsKey Roth IRA Provisions

2222


ABCs of Roth IRAsABCs of Roth IRAs

• Contributions not deductibleContributions not deductible• Qualified withdrawals not taxableQualified withdrawals not taxable• No lifetime required minimum distributionsNo lifetime required minimum distributions• Earnings come out last, and are the only Earnings come out last, and are the only

component that could be subject to income taxcomponent that could be subject to income tax• Contributions permitted after age 70½Contributions permitted after age 70½• All regular IRA rules apply unless Roth rules All regular IRA rules apply unless Roth rules

specifically state otherwisespecifically state otherwise

2323


ABCs of Roth IRAsABCs of Roth IRAs• A “qualified withdrawal” from a Roth IRA will be A “qualified withdrawal” from a Roth IRA will be

tax free, if the account has been open for more tax free, if the account has been open for more than five tax years, ANDthan five tax years, AND− The account holder is eitherThe account holder is either

Over age 59½, OROver age 59½, OR Deceased, ORDeceased, OR Disabled, ORDisabled, OR

− The withdrawal is for a qualified first time home The withdrawal is for a qualified first time home purchasepurchase Per person $10,000 lifetime limitPer person $10,000 lifetime limit

2424



• Conversions are subject to income tax, but not Conversions are subject to income tax, but not subject to the 10% additional taxsubject to the 10% additional tax− Converted amounts withdrawn within the five-year Converted amounts withdrawn within the five-year

period starting with year of conversion will be subject period starting with year of conversion will be subject to the 10% penalty rulesto the 10% penalty rules All exceptions to penalty applyAll exceptions to penalty apply

• Can do a partial conversionCan do a partial conversion

2525

Computation of MAGI - New Rule (Conversions After 12/31/2004)Adjusted Gross Income $XX,XXXLess:

Income from Roth Conversion ($XX,XXX)Required Minimum Distribution (IRAs Only) (XX,XXX) (XX,XXX)

Add-in:Traditional IRA Deduction $X,XXXStudent Loan Interest X,XXXTuition & Fee Deduction X,XXXForeign Income/Housing Exclusion X,XXXForeign Housing Deduction X,XXXExclusion of Interest on U.S. Series EE Savings Bonds X,XXX XX,XXX

Modified Adjusted Gross Income (Must be greater than $100,000) $XX,XXX



2626

(1)Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, etc. (2) Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. (3) Taxpayers benefit from paying income tax before estate tax (when a

Roth IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

(4) Taxpayers who can pay the income tax on the IRA from non IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields.

(5) Taxpayers who need to use IRA assets to fund their unified credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds.

(6) Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates.

(7) Because federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free.


Seven Reasons to Convert to a Roth IRASeven Reasons to Convert to a Roth IRA

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Estate Tax First Income Tax FirstTraditional IRA Roth IRA

IRA Balance 2,500,000$ 2,500,000$ Less: Federal & State Income Taxes @ 40% -$ (1,000,000)$ Subtotal 2,500,000$ 1,500,000$ Less: Federal Estate Tax @ 46% (1,150,000)$ (690,000)$ Less: State Estate Tax (180,000)$ (80,000)$ Subtotal 1,170,000$ 730,000$

IRA Balance 2,500,000$ Less: IRC §691(c) Deduction* (1,150,000)$ Subtotal 1,350,000$ Less: Federal & State Income Taxes @ 40% (540,000)$

Net Wealth to Family 630,000$ 730,000$

* NOTE: Under IRC §691(c), a deduction is allowed ONLY for federal estate taxes paid.* NOTE: Under IRC §691(c), a deduction is allowed ONLY for federal estate taxes paid.


Advantage of Paying Income Tax Advantage of Paying Income Tax Before Estate TaxBefore Estate Tax

2828

• Utilize unused charitable contribution carryoversUtilize unused charitable contribution carryovers• Offset current year ordinary lossesOffset current year ordinary losses• Utilize current year Net Operating Losses (NOL) Utilize current year Net Operating Losses (NOL)

or carryovers from prior yearsor carryovers from prior years• Utilize Alternative Minimum Tax (AMT) Utilize Alternative Minimum Tax (AMT)

carryoverscarryovers


Roth IRA Conversions – Tactical Roth IRA Conversions – Tactical ConsiderationsConsiderations

2929

• Taxpayers may recharacterize (i.e. “undo”) the Roth IRA Taxpayers may recharacterize (i.e. “undo”) the Roth IRA conversion in current year or by the filing date of the current conversion in current year or by the filing date of the current year’s tax returnyear’s tax return

- - Recharacterization can take place as late as 10/15 in the year Recharacterization can take place as late as 10/15 in the year following the year of conversion following the year of conversion

• Taxpayers may choose to “reconvert” their Taxpayers may choose to “reconvert” their recharacterizationrecharacterization

- - Reconversion may only take place at the later of the Reconversion may only take place at the later of the following two dates: following two dates:

(1) The tax year following the original conversion (1) The tax year following the original conversion OROR(2) 31(2) 31stst day after the recharacterization day after the recharacterization


Roth IRA Conversions – Tactical Roth IRA Conversions – Tactical ConsiderationsConsiderations

3030

Roth Conversion Period Recharacterization / Reconversion Period

1/1/2006 – First day conversion can

take place

2006

12/31/2006 – Last day conversion can

take place

4/15/2007 – Normal filing date for 2006 tax return

/ last day to recharacterize 2006 Roth IRA

conversion

10/15/2007 – Latest filing date

for 2006 tax return / last day to

recharacterize 2006 Roth IRA

conversion

12/31/2007

2007


Roth IRA Conversion TimelineRoth IRA Conversion Timeline

3131

Revenue Ruling Revenue Ruling 2006-262006-26

3232

• Traditional fiduciary accounting income Traditional fiduciary accounting income

• Unitrust paymentsUnitrust payments

• Uniform Principal & Income Act (UPIA)Uniform Principal & Income Act (UPIA)– Equitable adjustments (UPIA Equitable adjustments (UPIA §104(a))§104(a))– ““10% rule” (UPIA 10% rule” (UPIA §409(c))§409(c))– ““Savings clause” (UPIA §409(d))Savings clause” (UPIA §409(d))

Revenue Ruling 2006-26Revenue Ruling 2006-26

3333

• InterestInterest– TaxableTaxable– Tax-exemptTax-exempt

• DividendsDividends

• Rents (net of expenses)Rents (net of expenses)

• RoyaltiesRoyalties

Revenue Ruling 2006-26Revenue Ruling 2006-26 Typical Types of “Income” Under Typical Types of “Income” Under Traditional Fiduciary AccountingTraditional Fiduciary Accounting

3434

• IRA value as of date of deathIRA value as of date of death

• Increases in asset valueIncreases in asset value

• Realized long-term capital gainRealized long-term capital gain

• Realized short-term capital gainRealized short-term capital gain

• Proceeds from covered call writingProceeds from covered call writing

Revenue Ruling 2006-26Revenue Ruling 2006-26 Typical Types of “Principal” Under Typical Types of “Principal” Under Traditional Fiduciary AccountingTraditional Fiduciary Accounting

3535

• Revenue Ruling 2006-26 approves unitrust Revenue Ruling 2006-26 approves unitrust trust payments paid pursuant to UPIA trust payments paid pursuant to UPIA §409(c) under applicable state law§409(c) under applicable state law

ExampleExample: : IRA is valued at $1,000,000. Pursuant IRA is valued at $1,000,000. Pursuant to state law, the trust is makes a unitrust to state law, the trust is makes a unitrust distribution of 4% ($40,000). In this case, the distribution of 4% ($40,000). In this case, the $40,000 is a qualified “income” interest.$40,000 is a qualified “income” interest.

Unitrust PaymentUnitrust Payment


3636

• UPIA §104(a) provides trustees the power UPIA §104(a) provides trustees the power to adjust between income and principal if a to adjust between income and principal if a trust cannot be administered fairly trust cannot be administered fairly between the income and remainder between the income and remainder beneficiariesbeneficiaries

NOTENOTE: Revenue Ruling 2006-26 holds that, : Revenue Ruling 2006-26 holds that, notwithstanding a trustee’s application of notwithstanding a trustee’s application of UPIA §104(a), a trust will qualify the marital UPIA §104(a), a trust will qualify the marital deductiondeduction

Equitable Adjustment (UPIA §104(a))Equitable Adjustment (UPIA §104(a))


3737

• UPIA §409(c) provides that 10% of IRA UPIA §409(c) provides that 10% of IRA (and other qualified plan) distributions are (and other qualified plan) distributions are considered to be “income”considered to be “income”

ExampleExample: : RMD from IRA is $40,000. Pursuant to RMD from IRA is $40,000. Pursuant to UPIA §409(c), $4,000 ($40,000 x 10%) is UPIA §409(c), $4,000 ($40,000 x 10%) is considered to be “income”.considered to be “income”.

CAUTIONCAUTION: This type of clause may not : This type of clause may not qualify as “income” under Rev. Rul. 2006-26qualify as “income” under Rev. Rul. 2006-26. .

““10% Rule” (UPIA §409(c))10% Rule” (UPIA §409(c))


3838

IRA has a current value of $1,000,000 and interest/dividend income of IRA has a current value of $1,000,000 and interest/dividend income of $60,000. RMD is $50,000.$60,000. RMD is $50,000.

Fiduciary Fiduciary Accounting Accounting

IncomeIncome 4% Unitrust4% Unitrust

10% Rule 10% Rule Under UPIA Under UPIA

§409(c)§409(c)

Distributable Distributable IncomeIncome $60,000$60,000 $40,000$40,000 $5,000$5,000

DistributableDistributable QTIP-IRAQTIP-IRA “Income” “Income” ExampleExample

$50,000 RMD x 10%


3939

• UPIA §409(d) provides trustees the UPIA §409(d) provides trustees the discretion to make additional payments in discretion to make additional payments in order to qualify the payments as “income” order to qualify the payments as “income” for purposes of the marital deductionfor purposes of the marital deduction. .

CAUTIONCAUTION: This type of clause may not save : This type of clause may not save the QTIP election under Rev. Rul. 2006-26.the QTIP election under Rev. Rul. 2006-26.

Savings Clause (UPIA §409(d))Savings Clause (UPIA §409(d))


4040

• The surviving spouse should have a power to compel the The surviving spouse should have a power to compel the trustee to withdraw the income earned in the IRA and to trustee to withdraw the income earned in the IRA and to distribute that income, along with any other income earned distribute that income, along with any other income earned by the trust, to him/her. by the trust, to him/her.

• A trust will qualify for the martial deduction if the terms of A trust will qualify for the martial deduction if the terms of the trust require the trustee to withdraw an amount equal the trust require the trustee to withdraw an amount equal to the income earned in the IRA and to distribute that to the income earned in the IRA and to distribute that income, along with any other income earned by the trust, income, along with any other income earned by the trust, to the surviving spouse no less frequently than annually.to the surviving spouse no less frequently than annually.

• The QTIP election must be made for both the IRA and The QTIP election must be made for both the IRA and trust.trust.

• It is permissible for a trustee to allocate between income It is permissible for a trustee to allocate between income and principal in a manner that fulfills the trustee's duty of and principal in a manner that fulfills the trustee's duty of impartiality between beneficiaries.impartiality between beneficiaries.

• A marital deduction saving clause within a state statute A marital deduction saving clause within a state statute may not qualify the arrangement under IRC §2056.may not qualify the arrangement under IRC §2056.

Key PointsKey PointsRevenue Ruling 2006-26Revenue Ruling 2006-26

4141

• The “10% rule” under Sections 409(c) and (d) of UPIA (or The “10% rule” under Sections 409(c) and (d) of UPIA (or other related statute under relevant state law) is other related statute under relevant state law) is problematic in that it, standing alone, does not satisfy the problematic in that it, standing alone, does not satisfy the requirements of IRC §2056(b)(7). requirements of IRC §2056(b)(7).

• If the terms of the trust do not require the distribution to If the terms of the trust do not require the distribution to the surviving spouse of at least the income of the IRA in the surviving spouse of at least the income of the IRA in the event that the surviving spouse exercises the right to the event that the surviving spouse exercises the right to direct the withdrawal form the IRA, then the requirements direct the withdrawal form the IRA, then the requirements of IRC §2056(b)(7) may not be satisfied unless the trust's of IRC §2056(b)(7) may not be satisfied unless the trust's terms provide that the state’s version of Section 409(c) of terms provide that the state’s version of Section 409(c) of the UPIA is not to apply.the UPIA is not to apply.

• In states that have adopted the “10% rule”, the QTIP trust In states that have adopted the “10% rule”, the QTIP trust document will require very specific language allowing the document will require very specific language allowing the surviving spouse to compel income distributions from the surviving spouse to compel income distributions from the IRA in order to qualify for the marital deduction.IRA in order to qualify for the marital deduction.


4242

• Unitrust distributions made pursuant to state law appear Unitrust distributions made pursuant to state law appear to meet the definition of income. However, Rev. Rul. to meet the definition of income. However, Rev. Rul. 2006-26 specifically mentions that the surviving spouse 2006-26 specifically mentions that the surviving spouse has the power to compel.has the power to compel.

• A trust also qualifies for the martial deduction election A trust also qualifies for the martial deduction election when fiduciary accounting income is determined under a when fiduciary accounting income is determined under a more traditional definition. Again, Rev. Rul. 2006-26 more traditional definition. Again, Rev. Rul. 2006-26 specifically mentions that the surviving spouse has the specifically mentions that the surviving spouse has the power to compel the trustee to annually withdraw income power to compel the trustee to annually withdraw income from the IRA.from the IRA.

• A safe haven is created if the terms of the trust direct the A safe haven is created if the terms of the trust direct the trustee annually to withdraw all of the income form the trustee annually to withdraw all of the income form the IRA and to distribute to the surviving spouse at least the IRA and to distribute to the surviving spouse at least the income of the IRA.income of the IRA.

• Rev. Rul. 2006-26 takes effect only for tax years Rev. Rul. 2006-26 takes effect only for tax years beginning after May 30, 2006.beginning after May 30, 2006.


4343

Revenue Ruling Revenue Ruling 2005-362005-36

4444

A beneficiary's disclaimer of a beneficial A beneficiary's disclaimer of a beneficial interest in a decedent's IRA is a qualified interest in a decedent's IRA is a qualified disclaimer even though, prior to making the disclaimer even though, prior to making the disclaimer, the beneficiary receives the disclaimer, the beneficiary receives the required minimum distribution for the year of required minimum distribution for the year of the decedent's death from the IRA. the decedent's death from the IRA.


4545

AA qualified disclaimer is an irrevocable and unqualified refusal by a qualified disclaimer is an irrevocable and unqualified refusal by a person to accept an interest in property, but only if: person to accept an interest in property, but only if:

1) The disclaimer 1) The disclaimer is in writingis in writing2) The 2) The writing is receivedwriting is received by the transferor of the interest, his/her legal by the transferor of the interest, his/her legal

representative or the legal holder of the title of the property to which representative or the legal holder of the title of the property to which the interest relates the interest relates not later than nine monthsnot later than nine months from the later of the from the later of the following:following:a) a) the date of the transferthe date of the transferb) b) the day such person turn age 21the day such person turn age 21

3) The person 3) The person has not accepted the interest or any of its benefitshas not accepted the interest or any of its benefits ANDAND4) As a result of such refusal, the interest passes 4) As a result of such refusal, the interest passes without any directionwithout any direction

on the part of the person making the disclaimer and passes to eitheron the part of the person making the disclaimer and passes to either::a) a) the spouse of the decedentthe spouse of the decedentb) b) a person other than the person making the disclaimera person other than the person making the disclaimer

Qualified Disclaimer (IRC Qualified Disclaimer (IRC §2518(b))§2518(b))Revenue Ruling 2005-36Revenue Ruling 2005-36

4646

SCENARIO 1 – Pecuniary Disclaimer by SpouseSCENARIO 1 – Pecuniary Disclaimer by Spouse

IRA

Spouse

Child A

Primary Beneficiary

First Contingent Beneficiary – If spouse disclaimed IRA as Primary Beneficiary

Pecuniary disclaimer of IRA balance ($600,000) plus income earned since date of death ($12,000)

Required Minimum Distribution ($100,000) Result: Spouse’s

pecuniary disclaimer, after taking RMD, still results in a “qualified disclaimer”

Key assumptions:IRA Balance (date of death) - $2,000,000

IRA Balance (date of disclaimer) - $2,040,000

Required Minimum Distribution - $100,000


4747

SCENARIO 2 – Fractional Disclaimer by SpouseSCENARIO 2 – Fractional Disclaimer by Spouse

IRA

Spouse

Child A

Primary Beneficiary

First Contingent Beneficiary – If spouse disclaimed IRA as Primary Beneficiary

Fractional disclaimer (30%) of net remaining IRA balance after RMD (including income attributable to RMD) plus income earned since date of death

Required Minimum Distribution ($100,000) plus income earned since date of death ($2,000) Result: Spouse’s

fractional disclaimer, after taking RMD (plus attributable income), still results in a “qualified disclaimer”





4848

SCENARIO 3 – Full Disclaimer by Child ASCENARIO 3 – Full Disclaimer by Child A

IRA

Child A

Spouse

Primary Beneficiary

First Contingent Beneficiary – If Child A disclaimed IRA as Primary Beneficiary

Full disclaimer of net remaining IRA balance after RMD (including income attributable to RMD) plus income earned since date of death

Required Minimum Distribution ($100,000) plus income earned since date of death ($2,000) Result: Child A’s full

disclaimer, after taking RMD (plus attributable income), still results in a “qualified disclaimer “





4949

• The taking of a RMD does not preclude a disclaimer from being The taking of a RMD does not preclude a disclaimer from being a “qualified disclaimer” a “qualified disclaimer” – Note, however, that the person receiving the RMD must receive the Note, however, that the person receiving the RMD must receive the

post date of death income attributable to the RMDpost date of death income attributable to the RMD

• In the context of a full or fractional disclaimer, the beneficiary In the context of a full or fractional disclaimer, the beneficiary receiving the disclaimed interest from the disclaimant must be receiving the disclaimed interest from the disclaimant must be entitled to receive the post date of death income earned on the entitled to receive the post date of death income earned on the interest disclaimedinterest disclaimed

Key PointsKey Points

Revenue Ruling 2005-36

5050

• Provided that the disclaimant disclaims his/her entire interest Provided that the disclaimant disclaims his/her entire interest in the IRA prior to September 30 of the year following the in the IRA prior to September 30 of the year following the year of death, the disclaimant will not be considered a year of death, the disclaimant will not be considered a designated beneficiary for purposes of IRC designated beneficiary for purposes of IRC §§401(a)(9) 401(a)(9) – However, the disclaimant must also withdraw the post date of death However, the disclaimant must also withdraw the post date of death

income attributable to the RMD prior to September 30 of the year income attributable to the RMD prior to September 30 of the year following the year of death in order avoid being counted as a following the year of death in order avoid being counted as a designated beneficiarydesignated beneficiary

Key PointsKey Points

Revenue Ruling 2005-36

5151

Recent Private Recent Private Letter RulingsLetter Rulings

5252

• Permitted separate share treatment for trust Permitted separate share treatment for trust beneficiaries, thus allowing the “sub-IRAs” to be beneficiaries, thus allowing the “sub-IRAs” to be paid out over each beneficiary’s life expectancypaid out over each beneficiary’s life expectancy

− Separate trust shares named as individual Separate trust shares named as individual beneficiaries in beneficiary designation formbeneficiaries in beneficiary designation form

− Post Death Trust Protector RenunciationPost Death Trust Protector Renunciation

− ““Toggle Switch” – Conduit vs. AccumulationToggle Switch” – Conduit vs. Accumulation

PLR 200537044Recent PLRsRecent PLRs

5353

Payable to single trustPayable to single trust

No separate shares identified in the No separate shares identified in the beneficiary designation formbeneficiary designation form

IRA paid over oldest life expectancyIRA paid over oldest life expectancy

Recent PLRsRecent PLRs

Separate Share RulePLR 200537044

5454

IRA payable to multiple trustsIRA payable to multiple trusts

Single shares named in beneficiary Single shares named in beneficiary designation formdesignation form

IRA paid over oldest life expectancyIRA paid over oldest life expectancy

Separate Share Rule

Recent PLRsRecent PLRsPLR 200537044

5555

IRA payable to multiple trustsIRA payable to multiple trusts

Each trust named in Each trust named in

beneficiary designation formbeneficiary designation form

IRA paid over each trust beneficiary’s life IRA paid over each trust beneficiary’s life expectancyexpectancy

Separate Share Rule

Recent PLRsRecent PLRsPLR 200537044

5656

FACTSFACTS• Taxpayer (“T”) owned an IRA naming his four sons as Taxpayer (“T”) owned an IRA naming his four sons as

beneficiariesbeneficiaries• T died before his “required beginning date” (i.e. age 70½)T died before his “required beginning date” (i.e. age 70½)

• IRA custodian set aside separate shares for each IRA IRA custodian set aside separate shares for each IRA beneficiary within the time prescribed by lawbeneficiary within the time prescribed by law

• One of T’s sons (“S”) is disabled and is receiving Medicaid One of T’s sons (“S”) is disabled and is receiving Medicaid benefitsbenefits– Mother (“M”) was named as S’s guardianMother (“M”) was named as S’s guardian

– S would lose Medicaid benefits if IRA were payable directly to S S would lose Medicaid benefits if IRA were payable directly to S


IRA Payable to Grantor Trust

5757

FACTSFACTS

• A state court allowed M to create a “special needs trust” A state court allowed M to create a “special needs trust” (“SNT”) for the benefit of S so as to preserve S’s Medicaid (“SNT”) for the benefit of S so as to preserve S’s Medicaid benefitsbenefits

– M is the trusteeM is the trustee

– S is the only trust beneficiary during S’s lifetimeS is the only trust beneficiary during S’s lifetime

– M has discretion over the distribution and accumulation of income M has discretion over the distribution and accumulation of income and principaland principal

• M proposed to transfer S’s interest in T’s IRA to an M proposed to transfer S’s interest in T’s IRA to an inherited IRA to be held by SNT inherited IRA to be held by SNT



5858

HOLDINGSHOLDINGS

• SNT is a grantor trust under IRC SNT is a grantor trust under IRC §677(a)§677(a)

• The transfer of S’s share of T’s IRA to SNT will be The transfer of S’s share of T’s IRA to SNT will be disregarded for income tax purposes and will not be disregarded for income tax purposes and will not be considered a transfer under IRC considered a transfer under IRC §691(a)(2)§691(a)(2)

• The annual IRA distributions to SNT may use S’s life The annual IRA distributions to SNT may use S’s life expectancyexpectancy



5959

PLANNING POINTPLANNING POINT

•It appears, based on the conclusions reached in this ruling, that an IRA may be It appears, based on the conclusions reached in this ruling, that an IRA may be transferred to a grantor trust during lifetime with triggering any adverse tax transferred to a grantor trust during lifetime with triggering any adverse tax consequences. Accordingly, it may be possible to do the following:consequences. Accordingly, it may be possible to do the following:

– Post-mortem beneficiary transfer of an IRA to a grantor trustPost-mortem beneficiary transfer of an IRA to a grantor trust

– Lifetime IRA assignment to an Asset Protection Trusts (APT)Lifetime IRA assignment to an Asset Protection Trusts (APT)

– Lifetime IRA assignment to an Alaska Community Property TrustLifetime IRA assignment to an Alaska Community Property Trust

– Lifetime transfer to a Grantor Retained Annuity Trust (GRAT) or Intentionally Lifetime transfer to a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT)Defective Grantor Trust (IDGT)

CAUTION: These planning opportunities are new and untested. CAUTION: These planning opportunities are new and untested. Therefore, they should not be implemented without first Therefore, they should not be implemented without first obtaining a private letter ruling.obtaining a private letter ruling.



6060

• Spousal Rollover Through Trust or EstateSpousal Rollover Through Trust or Estate

– Spouse must have unrestricted right to fundsSpouse must have unrestricted right to funds

– PLR 200611037PLR 200611037

• The Service allowed a surviving spouse, who was the executrix of her The Service allowed a surviving spouse, who was the executrix of her husband’s estate and the sole residuary beneficiary of the estate, to rollover husband’s estate and the sole residuary beneficiary of the estate, to rollover her husband’s IRA, which the estate was the beneficiary, into an IRA set up her husband’s IRA, which the estate was the beneficiary, into an IRA set up and maintained in her name.and maintained in her name.

– PLR 200603036PLR 200603036

• Trust named beneficiary of IRA. Spouse was trustee and sole beneficiary of Trust named beneficiary of IRA. Spouse was trustee and sole beneficiary of trust.trust.

– PLR 200618030PLR 200618030

• Spouse not allowed to perform rollover as she was not sole beneficiary of Spouse not allowed to perform rollover as she was not sole beneficiary of trust.trust.

Other Important RulingsRecent PLRsRecent PLRs

6161

• Waiver of Rollover PeriodWaiver of Rollover Period

– Revenue Procedure 2003-16Revenue Procedure 2003-16

• Against equity or good conscienceAgainst equity or good conscience

– PLR 200618033PLR 200618033

• IRS waived the 60 day rollover requirement where failure was due to IRS waived the 60 day rollover requirement where failure was due to taxpayer's ongoing medical condition and a miscommunication with a taxpayer's ongoing medical condition and a miscommunication with a representative of the financial institutionrepresentative of the financial institution..

– PLR 200618028PLR 200618028

• IRS declined to waive the 60 day rollover requirement. Taxpayer presented IRS declined to waive the 60 day rollover requirement. Taxpayer presented no information which indicates that he attempted to rollover, or had any no information which indicates that he attempted to rollover, or had any intention to accomplish a rollover during the 60-day period. The ability to intention to accomplish a rollover during the 60-day period. The ability to rollover was, at all times, within taxpayer's control. rollover was, at all times, within taxpayer's control.

– Money must not be used for personal expenses (See PLR 200546047)Money must not be used for personal expenses (See PLR 200546047)

– Growth cannot be rolled overGrowth cannot be rolled over

Recent PLRsRecent PLRsOther Important Rulings

6262

• Series of Substantially Equal Periodic Payments (SEPPs)Series of Substantially Equal Periodic Payments (SEPPs)

– Annual Recalculation - PLRs 200532062, 200544023, 200551032 & Annual Recalculation - PLRs 200532062, 200544023, 200551032 & 200551033200551033

• IRS allows the payments to be recalculated annually based upon the annual IRS allows the payments to be recalculated annually based upon the annual December 31 account balance.December 31 account balance.

– Missed Distribution – PLRs 200503036 & 200601044Missed Distribution – PLRs 200503036 & 200601044

• The failure to distribute the entire required distribution amount for the calendar The failure to distribute the entire required distribution amount for the calendar year and the subsequent make up distribution in the calendar year was not year and the subsequent make up distribution in the calendar year was not considered a modification to a series of substantially equal periodic payments.considered a modification to a series of substantially equal periodic payments.

– Inadvertent Rollover – PLR 200616046Inadvertent Rollover – PLR 200616046

• The inadvertent rollover by taxpayer’s financial broker of IRA into IRA, from which The inadvertent rollover by taxpayer’s financial broker of IRA into IRA, from which the SEPPs were being taken will not be considered a modification of substantially the SEPPs were being taken will not be considered a modification of substantially equal periodic payments within the meaning of IRC § 72(t)(4). equal periodic payments within the meaning of IRC § 72(t)(4).

Other Important RulingsRecent PLRsRecent PLRs

6363

• Revenue Procedure 2006-8Revenue Procedure 2006-8

– Increase in overall feesIncrease in overall fees

– Elimination of reduced user fees for IRA PLRsElimination of reduced user fees for IRA PLRs

– Increase in fees for PLRs dealing with waiver of Increase in fees for PLRs dealing with waiver of 60-day rollover rule60-day rollover rule

– Effective February 1, 2006Effective February 1, 2006

PLR FeesPLR Fees

6464

PLR Requests Postmarked Before 2/1/06

PLR Requests Postmarked On or After 2/1/06

Reduced User Fee for Taxpayers with Income Below $250,000

$625 Not Available

Substantially Identical Letter Rulings $210 Not Available

Standard Letter Ruling Request $2,570 $9,000

Waivers of 60 Day Rollover Period - Rollover less than $50,000

$95 $500

Waivers of 60 Day Rollover Period - Rollover equal to or greater than $50,000, but less than $100,000

$95 $1,500

Waivers of 60 Day Rollover Period - Rollover equal to or greater than $100,000

$95 $3,000

PLR FeesPLR Fees

6565

9100 Relief9100 Relief

6666

9100 Relief9100 Relief60-Day Rollovers

▪ Taxpayers have a 60-day time period to redeposit Taxpayers have a 60-day time period to redeposit an IRA (other other qualified plan) withdrawal in an IRA (other other qualified plan) withdrawal in order to avoid taxationorder to avoid taxation− Required minimum distributions Required minimum distributions cannotcannot be rolled over be rolled over

− Only one rollover is allowed during a 12 month period Only one rollover is allowed during a 12 month period starting on the date of the first withdrawalstarting on the date of the first withdrawal

▪ Metcalf v. Commissioner Metcalf v. Commissioner (T.C. Memo 2002-123)(T.C. Memo 2002-123)− Taxpayer claimed he had 3 years, to effect a rollover, Taxpayer claimed he had 3 years, to effect a rollover,

the time in which he could file an amended returnthe time in which he could file an amended return

− Court said “nice try, you lose”Court said “nice try, you lose”

6767

• IRC § 408(d)(3)(I) provides that the Secretary may IRC § 408(d)(3)(I) provides that the Secretary may waive the 60-day requirement where:waive the 60-day requirement where:– the failure to waive such requirement would be against equity the failure to waive such requirement would be against equity

or good conscience, including casualty, disaster, or other or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individualevents beyond the reasonable control of the individual

•Relief available under Rev. Proc. 2003-16Relief available under Rev. Proc. 2003-16– IRS will consider all relevant facts and circumstances, IRS will consider all relevant facts and circumstances,

including:including: errors committed by a financial institution;errors committed by a financial institution; inability to complete a rollover due to death, disability, hospitalization, inability to complete a rollover due to death, disability, hospitalization,

incarceration, restrictions imposed by a foreign country or postal error; incarceration, restrictions imposed by a foreign country or postal error; the use of the amount distributed (for example, in the case of payment the use of the amount distributed (for example, in the case of payment

by check, whether the check was cashed); and by check, whether the check was cashed); and the time elapsed since the distribution occurredthe time elapsed since the distribution occurred..

9100 Relief9100 Relief60-Day Rollovers

6868

• October 15 date is the statutory date for October 15 date is the statutory date for recharacterizationsrecharacterizations

– Taxpayers have been allowed an extension to recharacterize Taxpayers have been allowed an extension to recharacterize Roth IRA when they were mistaken as to the applicable Roth IRA when they were mistaken as to the applicable adjusted gross income limitation.adjusted gross income limitation.

– Taxpayers have been allowed an extension to recharacterize Taxpayers have been allowed an extension to recharacterize Roth IRA when they filed separately from spouse because of Roth IRA when they filed separately from spouse because of divorce action.divorce action.

Late Recharacterizations9100 Relief9100 Relief

6969

ConclusionConclusion

Documents

2006 Pension Bill & IRA Update Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP 1400 Lombardi Avenue, Suite 200 Green Bay, WI 54304 [email protected]