2010 IRA & Pension Update PRESENTED BY: Robert S. Keebler, CPA, MST, AEP © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved.

Bankruptcy & IRAs Recent Developments Prohibited Transactions PLR (Reformation of IRA Trust) New 3.8% Medicare Surtax APPENDIX: Analyzing Roth IRA Conversions © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Outline 2

Bankruptcy & IRAs © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 3

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 Signed by President on April 20, 2005 Main Purpose – to stop perceived abuses in the bankruptcy system Bankruptcy & IRAs 2005 Bankruptcy Act © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 3

11 U.S.C. §522 –Retirement Asset Protections o IRA and Roth IRA Limitations o $1 Million –Rollover IRA Protections o Separate Accounts –Protection for Business Owners 11 U.S.C. §541 –Coverdell Accounts and 529 Plans Bankruptcy & IRAs © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved Bankruptcy Act 5

Several states have “opt out” provisions that replace the U.S.C. with state law protection − It is important to assess the level of protection each state law provides IRA owners to determine which set of laws (federal vs. state) to apply in a particular case Bankruptcy & IRAs © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved Bankruptcy Act 6

(2010, Bktcy Ct MN) 105 AFTR 2d , 01/11/2010 The United States Bankruptcy Court for the District of Minnesota held that funds in an inherited IRA account are exempt from the debtor’s bankruptcy estate. Although the IRA funds were subject of a post-death trustee-to-trustee transfer, such transfer did not affect their character as retirement funds or qualification as such for exemption. Court found that under the plain language of 11 U.S.C. § 522(d)(12), the funds qualify for exemption under that provision and have been properly claimed exempt. Bankruptcy & IRAs In re Nessa © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 7

(Bktcy Ct TX) 105 AFTR 2d 2010-XXXX, 03/5/2010 United States Bankruptcy Court for the Eastern District of Texas held that a debtor’s inherited IRA is not exempt from her bankruptcy estate. Court looked at the meaning of “retirement funds” under § 522(d)(12), a term which is not defined in the Bankruptcy Code. Viewing the words “retirement funds” in their entire context, the Court felt that it could not reasonably be understood to authorize an exemption of an inherited IRA. The Court concluded that “the funds contained in an inherited IRA are not funds intended for retirement purposes but, instead, are distributed to the beneficiary of the account without regard to age or retirement status.” Court concluded that an inherited IRA is not equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the estate under § 522(d)(12). Bankruptcy & IRAs In re Chilton © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 8

Recent Developments © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 9

No. CV PHX-FJM, 105 AFTR 2d ERISA’s applicability (including surviving spouse statutory claim provisions) terminate once plan is rolled over to IRA See also Charles Schwab v. Debickero, 105 AFTR 2d 2010-XXXX, 01/22/2010 Recent Developments Charles Schwab & Company v. Chandler © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 10

IRS ruled that the 10 percent additional income tax contained in IRC Sec. 72(t)(1) (the early distribution penalty) did not apply to our client’s withdrawals from his IRA because of his disability. Taxpayer diagnosed with multiple sclerosis which forced him to leave his job and apply for Social Security disability benefits. He was granted disability benefits from the Social Security Administration. Recent Developments PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 11

An individual convicted of and imprisoned for the murder of the decedent will still be treated as the designated beneficiary of the decedent's IRAs despite the state law slayer statute treating him as predeceased for purposes of inheriting property from the decedent. The individual convicted of murdering the decedent, is the designated beneficiary of the IRAs held by the IRA owner on the date of her death, as well as on September 30 of the calendar year immediately following the calendar year of her death. Recent Developments PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 12

133 T.C. No. 9 (2009) In a case of first impression, the Tax Court sustained the Internal Revenue Service’s determination that a Roth IRA is not an eligible S corporation shareholder. Accordingly, the taxpayer was taxable as a C corporation for the year involved. An IRA or Roth IRA can be an S-corporation shareholder in the case of a corporation which is a bank (as defined in IRC Sec. 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), but only to the extent of the stock held by such IRA or Roth IRA in such bank or company as of Oct. 22, IRC Sec. 1361(c)(2)(A)(vi). In such a case, the individual for whose benefit the IRA or Roth IRA was created is treated as a shareholder. IRC Sec. 1361(c)(2)(B)(vi). Recent Developments Taproot Administrative Services, Inc. v. Commissioner © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 13

Notice confirms the accepted notion that, if the employee says "no" to a direct rollover, and instead takes an outright distribution from the plan, and then rolls over only part of the distribution within 60 days, the part rolled over comes out of the pretax money first. However, the IRS says a partial direct rollover is treated differently: If the participant chooses a direct rollover to an IRA for part of his distribution, and takes outright distribution of the rest, both the portion directly rolled over and the portion paid to the employee will consist of proportionate amounts of the pre- and after-tax money in the employee's account. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Notice Recent Developments 14

The Tax Court found that the proper value of a life insurance contract was the "entire cash value" of the contract not taking into account a reduction for the surrender charges. Accordingly, the Tax Court held Mr. Matthies was required to recognize additional income of $1,053,304 on the bargain purchase of the policy. The IRS assessment of a $58,985 accuracy-related penalty was denied. The pension rescue strategy utilized in Matthies has been a common strategy for many years and is still marketed today in a manner designed to comply with the amended regulations. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Matthies v. Commissioner Recent Developments 15

134 TC No. 14 A section 6321 lien attached to all of Wadleigh’s property, including an ERISA pension he had from Honeywell. Although the pension was fully vested, it would not be in payout status until November In 2005, Wadleigh and his wife filed a voluntary Chapter 7 bankruptcy petition, listing the pension as an excluded asset. They received a discharge in bankruptcy that included the 2001 federal income tax liability. Notwithstanding the discharge, in 2006 the IRS issued a notice of intent to levy on the pension income. Wadleigh made three core arguments: (1) that his liability for the unpaid tax was discharged in bankruptcy, (2) that the levy was invalid because it was made before he was in payout status and (3) that the proposed levy was invalid because a previous levy on his pension was released. The Tax Court rejected all three arguments-IRS lien was not discharged in bankruptcy because the pension plan was an excluded asset under 26 U.S.C. 541(c)(2) and the trustee in bankruptcy had no power over it © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Wadleigh v. Commissioner Recent Developments 16

TC Memo Taxpayer was found to be liable for 10% early distribution from IRA she inherited from her husband because she performed a spousal rollover of such inherited IRA before taking the distribution. When a spouse inherits an IRA, it is generally desirable to perform a spousal rollover. This allows the spouse to defer required minimum distributions until he/she reaches his/her required beginning date and also allows for further deferral to after the surviving spouse’s death if the spouse does proper beneficiary planning. However, as this case highlights, if a spouse is younger than age 59 ½, a spousal rollover should not be automatic. If there is a possibility that the spouse will need to access the IRA funds before age 59 ½, a rollover should not be performed. Instead, the IRA should remain titled in the name of the deceased spouse for the benefit of the surviving spouse. Distributions can then be taken from this inherited IRA without imposition of the 10% early distribution penalty because of the IRC Sec. 72(t)(2)(A)(ii) exception. Once the surviving spouse reaches age 59 ½, a rollover can be performed as there is no time limit imposed on a spousal rollover. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Sears v. Commissioner Recent Developments 17

No th Circuit Court of Appeals. The 11th Circuit Court of Appeals upheld the U.S. Tax Court ruling that Eugene and Glenda Dollander were responsible for the 10% excise tax on their withdrawal from a qualified retirement plan. The petitioners had claimed that IRC section 72 (t) provided a hardship exception. The court, in reviewing the flush language of section 72(t), confirmed a financial hardship was not one of the enumerated exceptions. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Dollander v. IRS Recent Developments 18

TC memo , N.o L. Judith and Robert Swanston operated a corporation that eventually filed for Chapter 7. The IRS issued a Letter 1153 notice of proposed trust fund recovery penalty assessment. The IRS eventually proposed penalties totaling over $289,000. In 2004, the IRS seized $289,017 from Mr. Swanston's IRA. In 2005, the Swanston's filed their income tax return for the 2004 tax year. In preparing this return they included the seized funds in gross income as a taxable distribution from the IRA. Although they paid $1,461 via withholding, they failed to pay the remaining balance of approximately $75,000 to the IRS. This case was truly more of a trust fund case than a case regarding IRAs, however the court was very clear that the payment of federal taxes by way of a levy constitutes an involuntary assignment of income and may be included in gross income in the year of levy pursuant to the doctrine of constructive receipt. © 2010 Robert S. Keebler, CPA All rights reserved. Swanston v. Commissioner Recent Developments 19

Prohibited Transactions © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 20

Any direct or indirect sale or exchange, or leasing, of any property between a plan and a “disqualified person” Residence or cottage Business interest Investment real estate © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Prohibited Transaction - Defined Prohibited Transactions 21

IRC §4975(a) 15 percent tax on prohibited transactions IRC §4975(b) Tax equal to 100 percent of the amount involved on a prohibited transaction IRAs - If individual or his beneficiary engages in any prohibited transaction, then: Disqualification of IRA Immediate income taxation © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Prohibited Transaction – Applicable Law Prohibited Transactions 22

IRA owner's pledge of his personal account as security for the IRA's debts to the broker would be a prohibited transaction. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Advisory Opinion A Prohibited Transactions 23

No fee Website: © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Department of Labor Requests Prohibited Transactions 24

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. PLR (Reformation of IRA Trust) 25

Service ruled that the retroactive reformation of a trust would not be respected for purposes of section 401(a)(9) and the related regulations The trustee reformed the trust pursuant to a state court order to remove charities under a limited power of appointment granted to first tier beneficiaries The adverse ruling means the trust was not treated as a “designated beneficiary trust” (“DBT”): the trust beneficiary’s life expectancy could not be used for required minimum distributions. PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 26

Husband and wife create a straightforward revocable trust with a Survivors trust, Marital trust and a Bypass trust Upon the death of the surviving spouse the trust further divides among various family members The trust creates “protective” trusts for the benefit of “C” and “D” (children) Prior to death, the taxpayer’s counsel revised the trust adding the following language to allow for post-mortem trust reformations (emphasis added): With respect to any IRA, 401 K or other retirement plan payable to the trust on the death of either Trust Creator, it is the Trust Creators’ desire that the Trustee utilize the minimum distribution rules described in the Internal Revenue Code (“IRC”) and applicable regulations when making withdrawals from said retirement account … In particular, the trustee should be guided by the following; PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 27

(a) The Trustee should first determine whether the custodian allows for long-term deferral of income taxes by the Trustee; … (c) the Trustee should determine what requirements exist, if any, in order to elect the longest tax-deferral period; (d) Having made the appropriate election in order to elect the longest tax-deferral period of time, the Trustee should withdraw funds from the retirement plan in the minimum amounts required under IRC and applicable regulations without penalty; additional amounts should be withdrawn only if the Trustee determines that a need exists; … (f) … The provisions of this instrument are intended to inform the Trustee of the Trust Creator’s desire that the rules commonly known as the “stretch IRA” rules should be applied to all retirement plans. … It is the Trust Creator’s hope that the Trustee will use his or her best efforts to minimize income taxes on these assets for the maximum duration permitted by law … For purposes of qualifying as a Designated Beneficiary under IRC and applicable regulations, each Beneficiary may amend the terms of the trust which govern the distribution of his or her trust at death in the absence of a complete and effective exercise of any applicable power of appointment;…” PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 28

In earlier PLRs the Service allowed a trust that was reformed after the IRA owner’s death to qualify as a DBT See PLRs and (the authors represented the taxpayers in these rulings). Now the message seems to have changed and if the Service’s position is eventfully sustained by the Tax Court the burden on drafting lawyers is high PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 29

The moral of this ruling is that counsel and other advisors must exercise great care when drafting IRA trusts. Given the difficulty of drafting an accumulation trust that qualifies as a designated beneficiary, it may be advisable to first draft the trust as a conduit trust (i.e. any and all IRA distributions must be paid outright to the trust beneficiary) and give the Trust Protector a one-time option to switch the trust to an accumulation trust after the death of the IRA owner but before September 30 of the year following the year of death. This technique was approved in PLR Visit for the podcastwww.ultimateestateplanner.com/robertkeebler.html PLR © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 30

New 3.8% Medicare Surtax © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 31

Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” will apply to taxpayers who have “net investment income” and whose gross income exceeds a certain “threshold amount” This “surtax” will be in addition to the ordinary income tax © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 32

Taxable Income Top Rate with Surtax 2013 [1] [1] $ 0 – 16,75010%15% $ 16,750 – 68,00015% $ 68,000 – 137,30025%28% $ 137,300 – 209,25028%31%34.8% $ 209,250 – 373,65033%36%39.8% Over $373,65035%39.6%43.4% [1] [1] The top rate with surtax in 2013 is simply the rate shown for 2011 in addition to the surtax rate of 3.8%. Married Filing Jointly Table © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 33

APPLICATION TO INDIVIDUALS – the new “surtax” is equal to 3.8% times the lesser of: 1. “Net investment income” for such taxable year, OR 2. The excess (if any) of – A. the “modified adjusted gross income” (“MAGI”) for such taxable year, over B. the “threshold amount” © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 34

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax APPLICATION TO ESTATES AND TRUSTS – the new “surtax” is equal to 3.8% times the lesser of: 1. The undistributed “net investment income” for such taxable year, OR 2. The excess if any of – A. the adjusted gross income (as defined in section 67(e) for such taxable year, over B. the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year ($11,200 in 2010). 35

“NET INVESTMENT INCOME” means: Interest, dividends, rents and royalties (other than income derived in the ordinary course of a trade or business) Capital gains attributable to the disposition of property (other than property held in a trade or business) © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 36

EXCEPTION FOR DISTRIBUTIONS FROM QUALIFIED PLANS - The term “net investment income” does not include any distribution from a plan or arrangement described in section 401(a), 403(a), 403(b), 408, 408A, or 457(b). Specific examples of excluded items: − Roth IRAs − Traditional IRAs − 401(k) − ESOP − Profit sharing plans © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 37

“THRESHOLD AMOUNT” means: Single taxpayers - $200,000 Married taxpayers - $250,000 Trusts - $11,200 (i.e. the “floor” of the top tax bracket in 2010) © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 38

Example 1 - John, a single taxpayer, has $100,000 of salary and $50,000 of net investment income for MAGI of $150,000. The 3.8% surtax would not apply because his MAGI is less than $200,000. Example 2 - Mary, another single taxpayer, has $225,000 of net investment income and no other source of income. The 3.8% surtax would apply to $25,000 of income (the lesser of investment income of $225,000 or the excess of $225,000 MAGI over $200,000 “threshold amount”). Example 3 - Terry & Tina, married filing jointly, have $300,000 of salaries and no net investment income. The tax 3.8% surtax will not apply because they have no investment income. © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax Examples 39

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax Examples Example 4 - Peter & Paula, married filing jointly, have $400,000 of salaries and $50,000 of net investment income. They will pay the 3.8% surtax on $50,000. Example 5 - Sarah & Scott, married filing jointly, have $200,000 of salaries and $150,000 of net investment income for total MAGI of $350,000. The 3.8% surtax would apply to $100,000 of income (excess of $350,000 MAGI over $250,000 “threshold amount”). Example 6 - Randy, a single taxpayer, age 69, has investment income of $200,000 and is not subject to the surtax. In the following year, Randy has an RMD from his IRA of $125,000. In this case $325,000 of MAGI exceeds the $200,000 threshold and $125,000 is subject to the 3.8% surtax. This is called the surtax “bubble”. 40

REDUCING “NET INVESTMENT INCOME” Municipal bonds IRA and qualified plans Tax deferred annuities – (during deferral) Life insurance Depreciation on real estate 15% depletion allowance on oil and gas IDC deductions on passive oil and gas © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax 41

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax REDUCING “MAGI” Reduce investment income (above) Roth conversions in 2010, 2011 and 2012 Non-grantor charitable lead trusts Charitable remainder trusts Installment sales 42

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax OTHER PLANNING CONSIDERATIONS The 3.8% surtax does not apply to distributions from IRAs and other qualified retirement plans. Thus, taxpayers may wish to increase contributions to IRAs and 401(k), 403(b) and 457 plans The 3.8% surtax does not apply to distributions from Roth IRAs 43

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax Roth IRA Conversion Illustration #1 44

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax Roth IRA Conversion Illustration #2 45

Randy, a single taxpayer, age 69, has investment income of $200,000 and is not subject to the surtax. In the following year, Randy has an RMD from his IRA of $125,000 of investment income. In this case $325,000 of MAGI exceeds the $200,000 threshold and $125,000 is subject to the 3.8% surtax. This is called the surtax “bubble”. However, if the distributions were from a Roth IRA rather than from a Traditional IRA, MAGI would be unchanged and the surtax would not apply. Note the chart below: Regular IRARoth IRA Investment Income$200,000 IRA Income$125,000$0 MAGI$325,000$200,000 Less Threshold Amount($200,000) Amount Subject to Surtax$125,000$0 3.8%$ 4,750$0 Surtax over 10 years$ 47,500$0 © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. New 3.8% Medicare Surtax Roth IRA Conversion Example 46

APPENDIX Analyzing Roth IRA Conversions © 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. 47

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Analyzing Roth IRA Conversions 48

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Analyzing Roth IRA Conversions 49

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Analyzing Roth IRA Conversions 50

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Analyzing Roth IRA Conversions 51

© 2010 Robert S. Keebler, CPA, MST, AEP All rights reserved. Analyzing Roth IRA Conversions 52

Acknowledgements: The author gratefully acknowledges the assistance of Larry Kaminsky and Eliot Becker with regard to the afore appendix. 53

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. Although effort was taken to ensure the accuracy of these materials, Robert S. Keebler and Baker Tilly Virchow Krause, LLP assume no responsibility or liability for an individual’s reliance on these materials. These materials are being provided for educational and informational purposes only and are in no way to be construed as accounting, financial, tax, legal or other advice. Individual readers must consult their own professional tax and legal advisors. Circular 230 Notice 54

To be added to our IRA update newsletter, please 55