Transcript IRA TRUST ISSUES - Ahrens Technologies

Generating New Business
During Tax Season
Presented by
Robert S. Keebler, CPA, MST, DEP
Virchow, Krause & Company, LLP
Phone: (920) 739-3345
Fax: (920) 733-6022
[email protected]
Key Developments
•
•
•
•
•
•
•
•
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Status of estate and gift tax legislation
New preparer penalties
Family Limited Partnership issues
Recent IRA Private Letter Rulings
Non-spousal post-mortem IRA rollovers
Charitable IRA contributions
Roth IRAs
Non-Qualified Deferred Compensation
Retirement plan planning for the small business
owner
2
Gift/Estate Tax Status
3
New Preparer Penalties
4
New Preparer Penalties
Key Highlights
• Preparer penalties are now extended to the preparation of estate, gift,
excise, exempt organizations and employment tax returns.
• Under prior law, a preparer penalty could only be imposed when the
position did not have a "realistic probability of success" (i.e. one-third
or greater chance of winning). However, under the new tax act, this
standard now requires a "more-likely-than-not" chance of success (i.e.
greater than fifty-percent chance of winning).
– Notwithstanding the above, the new tax act states that the preparer
penalty will not be imposed if the position is disclosed on the return
(using either IRS Form 8275 or IRS Form 8275-R) and there is a
"reasonable basis" for the position taken (i.e. one-third or greater
chance of winning).
• A new twenty-percent additional penalty is imposed on the excess of
the amount of a claim for refund or credit over the amount allowable,
except if the claim had a reasonable basis.
5
New Preparer Penalties
Key Highlights
• The "first-tier" penalty (relating to an understatement of
tax from taking a "unrealistic" position) is increased from
$250 to the greater of: (a) $1,000 or (b) 50-percent of the
income derived (or to be derived) by the tax return
preparer from the preparation of a return or claim with
respect to which the penalty is imposed.
• The "second-tier" penalty (relating to an understatement
of tax due to a willful attempt to understate tax or a
reckless or intentional disregard of the rules or
regulations) is increased from $1,000 to the greater of:
(a) $5,000 or (b) 50-percent of the income derived (or to
be derived) by the tax return preparer from the
preparation of a return or claim with respect to which the
penalty is imposed.
6
New Preparer Penalties
Standards Matrix
IRC §6694
(PRIOR RULE)
IRC §6694
(NEW RULE)
STANDARD
% STANDARD
More Likely
Than Not
> 50%
No
Disclosure
Required
No
Disclosure
Required
Realistic
Possibility
(Old Standard)
331/3-50%
No
Disclosure
Required
Disclosure
Required
Reasonable
Basis
(New Standard)
20-331/3%
Disclosure
Required
Disclosure
Required
Frivolous
Return
<20%
Cannot
Sign
Cannot
Sign
7
Family Limited
Partnership Issues
8
FLP Issues
Valuation - Adjustments
Particular types of unit’s value are adjusted
based on partnership agreement terms
Adjustments available Typical discount ranges
Lack of Control
15% - 20%
Lack of Marketability
15% - 20%
9
FLP Issues
Valuation – Gifts vs. Estate
• Gifts
– Values determined
based on actual asset
transferred, not other
assets owned by
donor or donee
– Tax exclusive - value
of gift is not reduced
by amount needed to
pay tax
• Estate
– Values determined as
a lump sum - not as
individual assets
passing to multiple
people
– Tax inclusive - value of
estate is reduced by
the amount needed to
pay tax
10
FLP Issues
Gift Tax Reporting
• Gift tax returns need to be filed for year of gift
• Valuation reports must be completed to
substantiate value of gifts
• Subject to three-year statute of limitation, if
properly disclosed
• Subject to adjustments indefinitely, if not
adequately disclosed
11
FLP Issues
Gift Tax Reporting – Adequate Disclosure
• Description of the
property transferred
• Identity of and
relationship between
donor and donee
• If to trust - trust’s EIN
and description of
terms of trust
• CUSIP number for
transfers of securities
• Method to determine
fair market value - or appraisal by a
qualified appraiser
12
FLP Issues
Gift Tax Reporting – Qualified Appraiser
• Holds self out to the public as an appraiser
or performs appraisals on a regular basis
• The appraiser qualifications, that are in an
attached description, the appraiser is
qualified to make appraisals of the
property transferred
• The appraiser is not the donor, donee or a
family member
13
FLP Issues
IRS Audit Issues
IRS Position
Gift-onformation
Valuation
issues
Retained life
estate
Difference between the gross and discounted values
of partnership units gifted is an additional gift from
the transferor to the transferee
• Valuation discounts greater than 30% are not valid
• Combined discount: 15 – 20% range (typical)
Includes all of the partnership in the transferor’s
taxable estate if:
• Transferor has too much control
• Disproportionate distributions are made to the
grantor
14
FLP Issues
Mitigating IRS Audit Risk
• Set up separate bank accounts and/or other
financial accounts in the partnership’s name
• Ensure that there is not a commingling of business
and personal assets in the partnership
• Establish a formal accounting system whereby all
income, expenses, receipts and disbursements are
timely recorded
• Ensure that all distributions made to partners are
pro-rata with their ownership interests
15
FLP Issues
Mitigating IRS Audit Risk
• Ensure that all loans to partners are evidenced by
a formal loan agreement that is strictly adhered to
• Establish a protocol as to how business affairs
should be handled and ensure that this protocol is
adhered to
• Ensure that all income and expenses are of a
business nature and do not have any kind of
personal nature
• Establish a formal procedure for determining when
and how income should be retained and/or
disbursed
16
Recent IRA Private
Letter Rulings
17
Recent IRA PLRs
• PLR 200742026 - Because decedent failed to designate an
IRA beneficiary who was a living person at time of his
death, his daughter/sole representative of his estate cannot
be treated as Code Sec. 401(a)(9) “designated beneficiary”
of his IRA. Therefore, the minimum required distributions
for the stated year and all subsequent calendar years
cannot be calculated based on the daughter's remaining life
expectancy and instead must be calculated on the
remaining life expectancy of the decedent.
• PLR 200707158 -Taxpayer/ IRA Beneficiary will not be
subject to gift tax under Code Section 2501, upon entering
into a settlement agreement which reformed the beneficiary
designation or the IRA account so that his sibling was the
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sole beneficiary of account at the decedent's death.
Recent IRA PLRs
• PLR 200719017 - For purposes of determining how much
of net settlement proceeds payable to married taxpayers
should be treated as representing IRA losses incurred by
taxpayers, the amount should be allocated between
taxpayers' IRAs and non-IRA account in proportion to
losses incurred in each account. If allocations which
represent recoveries of IRA losses are contributed to stated
IRAs, allocations will be considered restorative payments
not subject to limitations on contributions.
• PLR 200720023 - Trustee-to-trustee transfers between
IRAs (one of which was a SEPP IRA) constituted a
modification to a series of substantially equal periodic
payments. As a result, such modification resulted in the
imposition of the 10% additional income tax.
19
Recent IRA PLRs
• PLR 200736036 - IRS declined to waive the 60-day rollover
requirement where the taxpayer, despite a
misunderstanding of how to create an IRA online, did not
show that his failure to timely accomplish a rollover was
attributable to any factors outlined in Rev. Proc. 2003-16.
20
Non-Spousal PostMortem IRA
Rollovers
21
Non-Spousal IRA Rollovers
Pension Protection Act of 2006
• Non-spouse beneficiaries are permitted to roll over
a qualified retirement plan (e.g. 401(k) plan), via
trustee-to-trustee transfer, into an inherited IRA.
• “Designated beneficiary” trusts are also permitted
to roll over qualified retirement plans into inherited
IRAs.
• Effective for tax years beginning after December 31,
2006
CAUTION: The inherited IRA must be set up under the decedent
qualified plan owner’s name (e.g. “John Smith, Deceased, IRA
f/b/o Jane Smith, beneficiary)
22
Non-Spousal IRA Rollovers
Pension Protection Act of 2006
EXAMPLE 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 postmortem transfer to an inherited IRA for his benefit, thereby
allowing him to stretch the IRA withdrawals over his life
expectancy.
23
Non-Spousal IRA Rollovers
Pension Protection Act of 2006
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.
24
Non-Spousal IRA Rollovers
Notice 2007-7
• Non-Spouse rollovers only allowed if
plan allows for such rollovers.
• If under the five-year rule because of
optional plan provision or beneficiary
election, must perform rollover by
December 31st of year following year of
death to switch to life expectancy
method under IRA.
25
Non-Spousal IRA Rollovers
Notice 2007-7
Year
of
Death
Applicable Payout
under the Plan
Amount Allowed to be Rolled
Over
Applicable Payout under the
IRA
2002
and
earlier
5-year rule
None (Notice 2007-7, A-17(b))
NA – No Rollover Permitted
2003 2005
5-year rule
Amount not already distributed from
Plan as long as rollover completed
before year containing fifth
anniversary of death (Notice 20077, A-17(b))
5-year rule (Notice 2007-7, A-19)
All
Life Expectancy
All, minus prior and current year
RMDs (Notice 2007-7, A-17(c)(1))
Life Expectancy (Notice 2007-7,
A-19)
2006
and
later
5-year rule under Treas.
Reg. § 1.401(a)(9)-3,
Q&A 4(b) or (c) (optional
plan provision or
election by beneficiary)
All, minus prior and current year
RMDs (Notice 2007-7, A-17(c)(2))
Life Expectancy of Beneficiary if
rollover occurs prior to the end of
the year following the year of
death (Notice 2007-7, A17(c)(2)). Otherwise 5-year rule.
26
Non-Spousal IRA Rollovers
Notice 2007-7
• Example 1
– John dies in 2002. George inherits John’s
qualified plan. Under the plan, the five-year
applies. George cannot perform a rollover to
an inherited IRA. 2002 = No Rollover
• Example 2
– John dies in 2004. George inherits John’s
qualified plan. Under the plan, the five-year
rule applies. George can perform a rollover to
an inherited IRA, but must still use the 5-year
rule. 2003-2005 = Rollover + Five Year Rule
27
Non-Spousal IRA Rollovers
Notice 2007-7
• Example 3
– John dies in 2004. George inherits John’s qualified
plan. Under the plan, George can utilize his life
expectancy. George can perform a rollover to an
inherited IRA and continue to utilize his life
expectancy.
• Example 4
– John dies in 2007. George inherits John’s qualified
plan. Under the plan, the 5-year applies. If George
performs a rollover to an inherited IRA by
December 31, 2008, he can utilize his life
expectancy for RMDs from the IRA.
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Charitable IRA
Contributions
29
Charitable IRA Contributions
Pension Protection Act of 2006
• Effective for distributions made after
12/31/2005 but before 1/1/2008, taxpayers may
choose to exclude from gross income, on an
annual basis, “qualified charitable
distributions” from IRAs to the extent that the
aggregate amount of such distributions does
not exceed $100,000 in any given tax year.
CAUTION: This provision only applies to distributions
from traditional IRAs (not SEPs or SIMPLE IRAs) and
taxable distributions (i.e. non-qualified distributions)
from Roth IRAs.
30
Charitable IRA Contributions
Pension Protection Act of 2006
• A “qualified charitable distribution” is an
otherwise taxable distribution from a
traditional IRA or Roth IRA which is:
– Made directly by the IRA trustee to an IRC
§170(b)(1)(A) charitable organization (other than a
IRC §509(a)(3) private foundation or a IRC
§4966(d)(2) donor advised fund)
AND
– Made on or after the date in which the IRA owner
has attained 70½
31
Roth IRAs
32
Roth IRAs
• 100% of growth is tax-exempt
• No required minimum distributions at age
70½
– NOTE: Distributions from Roth IRAs cannot be
used to fulfill the RMD from a traditional IRA
• $100,000 Modified Adjusted Gross Income
(MAGI) limitation
• RMDs on Inherited Roth IRAs
• Roth 401(k) plans
33
Roth IRAs
• Starting in 2010, the $100,000 Adjusted
Gross Income (AGI) limitation no longer
applies
– The taxable income recognized on a Roth IRA
conversion in 2010 may be spread over the
following two tax years (i.e. 2011 and 2012)
• Married Filing Separately taxpayers can
convert to a Roth IRA
34
Roth IRAs
Mathematics of Roth IRA Conversions
• Critical decision factors
– Tax rate differential
• Year of conversion vs. withdrawal years
– Use of “outside funds” (i.e. non-qualified
retirement accounts) to pay the income
tax liability
– Time horizon
– IRC §691(c) “effect”
35
Roth IRAs
Roth IRA Conversion Timeline
1/1/2007 – First
day conversion
can take place
Conversion Period
Recharacterization Period
2007
2008
12/31/2007 – Last
day conversion
can take place
4/15/2008 –
Normal filing date
for 2007 tax
return / last day to
recharacterize
2007 Roth IRA
conversion
10/15/2008 –
12/31/2008
Latest filing date
for 2007 tax
return / last day to
recharacterize
2007 Roth IRA
conversion
36
Non-Qualified
Deferred
Compensation
37
NQDC
Advantages & Disadvantages
• Advantages – Company
–
–
–
–
Can be discriminatory
Generally non-regulated by ERISA, DOL and IRS
Customized and unlimited benefits
Can be forfeited
• Disadvantages – Company
– No current income tax deduction for accrued liability and
expense of benefits
38
NQDC
Advantages & Disadvantages
• Advantages - Employee
– Deferral of tax until benefits are received
• Disadvantages - Employee
–
–
–
–
Security of future benefits
Risk of forfeiture
Subject to Social Security and Medicare payroll taxes
No rollovers available
39
NQDC
Consequences of Improper Deferral
• All plan deferrals are included in gross income
as soon as they are no longer subject to a
substantial risk of forfeiture
• Deferrals subject to 20% additional tax, plus
interest equal to the IRS underpayment rate plus
1%
• Form defects may affect all plan participants
• Operational defects affect only those that benefit
40
NQDC
Deferral Requirements
• Restrictions on distributions
• Timing of deferral elections
– Initial
– Subsequent
• No acceleration of benefits
• Rules related to funding
41
NQDC
Permitted Distributions
•
•
•
•
Employee’s separation from service
Death
Disability
Specified time or fixed schedule established at
deferral
– Occurrence of an event is not considered specific
time (e.g., child enters college)
• Change in control
• Unforeseeable emergency
42
NQDC
Timing of Initial Election
• Election must be made in preceding tax year
– Election is prior to services being performed
– Exception: 30 days after date of initial eligibility
• Performance-based compensation
– Election must be made 6 months before service
period ends
– Service period must be at least 12 months
• Distribution timing and form specified at deferral
43
NQDC
Funding Restrictions
• Offshore trusts
– Assets in offshore rabbi trust are taxable immediately
− Exception for assets in foreign jurisdiction if substantially all
services were performed in such jurisdiction
• Financial health triggers
44
NQDC
IRC §409A Effective Dates
• Effective for amounts deferred in tax years after 2004
• An amount is considered deferred before 2005 if:
– Service provider has legal binding right to payment and
– Amount is earned and vested before that date
• Grandfather rule
• Effective if plan materially modified after 10/03/04
• Effective date for earnings the same as the deferrals
45
Retirement Plan
Planning for the
Small Business
Owner
46
Retirement Plan Planning
2007 Contribution Limits
401(k) maximum elective deferral - $15,500
Maximum catch-up 401(k) deferral (taxpayers > age 49) - $5,000
Roth 401(k) maximum elective deferral - $15,500
Maximum catch-up Roth 401(k) deferral (taxpayers > age 49) - $5,000
Compensation cap - $225,000
Defined benefit maximum - $180,000
Defined contribution maximum - $45,000
SEP compensation limit - $225,000
Maximum SIMPLE contribution - $10,500
Maximum SIMPLE catch-up contribution - $2,500
“Highly compensated employee” earnings threshold - $100,000
“Key employee” earnings threshold - $145,000
47
Retirement Plan Planning
2007 Contribution Limits
Maximum traditional IRA contribution - $4,000
Maximum traditional IRA catch-up contribution (owner > 49) - $1,000
Deductible traditional IRA AGI phase-out amounts:
Single/Head of Household: $52,000 - $62,000
Married filing jointly*: $83,000 - $103,000
Married filing jointly**: $156,000 - $166,000
Married filing separately: $0 - $10,000
Maximum Roth IRA contribution - $4,000
Maximum Roth IRA catch-up contribution (owner > 49) - $1,000
Roth IRA AGI phase-out amounts:
Single/Head of Household: $99,000 - $114,000
Married filing jointly: $156,000 - $166,000
Married filing separately: $0 - $10,000
* Applies when both taxpayers are considered “active participants” in an eligible employer retirement plan
** Applies when one spouse is not considered to be an “active participant” in an eligible employer
retirement plan
48
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
100 or fewer employees
with at least $5,000 of
compensation for the
prior calendar year.
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Eligible
Employers
No limit on
number of
employees.
Plan Year
Must be calendar Must be calendar year.
year or fiscal
year of employer.
Can be
established after
end of
employer’s fiscal
year.
Any 12 month period.
Document
Form 5305-SEP
Qualified plan document.
Form 5305-SIMPLE or
Form 5304-SIMPLE,
prototype or individually
drafted.
No limit on the number of
employees.
49
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Other Qualified
Plans?
Yes, if using
prototype SEP
document.
No-Must be the only
plan-covering
employees.
Yes
Related
Employer Rules
Apply?
Yes
Yes
Yes
Eligible
Employees
May impose age
21 requirement,
but must
contribute for any
employee who
earned at least
$500 in 3 of last 5
years. May
exclude union
employees
Any employee who
received $5,000 of
compensation in any
prior 2 years and is
expected to receive
$5,000 in current
plan year. No age
limit permitted. May
exclude union
employees.
Qualified plan rules apply.
Can require age 21 and
one year of service. May
exclude union
employees.
50
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Coverage
testing
Does not
apply.
Does not apply.
Applies.
Elective
Contributions
N/A
2007 limited to $10,500
per calendar year, then
indexed. 60-day election
period required prior to
beginning of plan year.
Limited $15,500 per calendar
year; notice must be provided
within “reasonable” period prior to
beginning of plan year.
Catch up
contributions
for individuals
age 50 and
over.
N/A
$2,500 in 2007 Indexed
for inflation.
Over and above 402(g) limit the
lesser of 1) $5,000 in 2007.
Indexed for inflation. 2)
participants compensation for the
year reduced by other elective
deferrals for the year. (Not subject
to ADP/ACP)
51
Retirement Plan Planning
Comparison of Plan Types
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
SEP
SIMPLE IRA
Matching
Contributions
N/A
Dollar for dollar match,
up to 3% of
compensation. May be
reduced down to 1%
cap in 2 of 5 years.
Dollar for dollar match, up to 3%
of compensation plus $0.50 on
the dollar from 3 – 5% of
compensation. (May not impose
a last-day rule or 1,000 hours of
service rule for active or
terminated participants.) 100%
immediate vesting.
Non-elective
contribution
Lesser of
25%
compensat
ion or
$45,000
gross.
In lieu of match, 2% of
compensation for all
participants with at least
$5,000 of
compensation.
In lieu of match, 3% of
compensation for all
participants. (May not impose a
last-day rule or 1,000 hours of
service rule for active or
terminated participants.) 100%
immediate vesting.
52
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Subject to
ADP/ACP
testing
N/A
NO
No, if matching or nonelective safe harbor
contributions are made.
Other
Employer
Contributions
Permitted?
N/A
No-only deferrals
and required
match or nonelective
contribution may
be made.
Yes, contributions such as
profit sharing may be made
and may be subject to 1,000
hour/last day requirements
and a vesting schedule.
Vesting
Allowed?
NO
NO
Yes, except for safe harbor
contributions.
53
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Top Heavy
Rules
YES
NO
Yes, but both 3% nonelective & match
contribution made to
satisfy safe harbor may be
used to satisfy the topheavy minimum
contribution.
Loans
No
No
Yes
Rollovers
May be rolled to
qualified plan,
§403(b) plan or
a governmental
§457 plan.
Accepts SIMPLE IRA
rollovers only. May be
rolled to a qualified
plan, §403(b) plan or
a governmental §457
plan.
Qualified plan rules apply.
54
Retirement Plan Planning
Comparison of Plan Types
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
SEP
SIMPLE IRA
Withdrawals
Permitted anytime,
subject to 10%
penalty if under age
59 ½.
Permitted anytime,
but 10% penalty
increased to 25% if
employee is under
age 59 ½ and
withdrawal is in first 2
years of plan.
Terms of plan control. Section
401(k) deferral restrictions
apply.
Minimum
Distributions
Must start by April 1
of the year following
calendar year in
which age 70 ½ is
attained.
Same as SEP.
Must start by April of year
following later of 1)calendar
year age 70 ½ is attained or
2) calendar year retires, if
employee is not a 5 % owner,
the rule is same as for SEP
and SIMPLE IRA
Form 5500
NO
NO
YES
55
Retirement Plan Planning
Comparison of Plan Types
SEP
SIMPLE IRA
DESIGN-BASED SAFE
HARBOR 401 (k) PLAN
Trust
Accounting
NO
NO
YES
Transmittal of
Elective
Contributions
N/A
Earlier of: 1) 30
days after close of
month or 2) earliest
date employer is
able to segregate
from its assets.
Earlier of: 1) 15th business
day of the following month or
2) earliest able to segregate.
56
Conclusion
57