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Key Planning Dates For Your Clients

September 2011

We wanted to reach to our professional colleagues and share some important financial information that may affect your clients.


The last couple of years have been crazy with rule changes in the financial world. While you may be aware, we thought a quick reminder of some critical dates might be helpful. Some of these dates might only apply to obscure cases, but hey, you never know! These critical dates are fast approaching.

SEPTEMBER 19, 2011

Due to last year's late passage of 2010 Tax Relief Act decedents and the ability to make a retroactive election for estate tax treatment, the deadline for filing federal estate tax returns was extended to September 19, 2011 for all individuals dying before December 17, 2010.


The federal disclaimer deadline for property inherited in 2010 was also extended to September 19, 2011, so make sure to notify any clients that may benefit from this. Many estate planners may not be aware of this unusual extension, so feel free to spread the word.


Caution. In order to have a qualified disclaimer you cannot have accepted any of the benefits or exercised any ownership over the property, among other requirements.


SEPTEMBER 30, 2011

If you recently inherited, or expect to inherit, retirement plan assets, you should keep September 30 in mind. It's a very important date when it comes to retirement accounts with multiple beneficiaries. This is because IRS regulations on Required Minimum Distributions (RMD) state that for accounts with multiple beneficiaries, each beneficiary is allowed to use his or her own life expectancy for calculating post-death distributions, if the beneficiaries take certain actions by September 30 of the year following the year the retirement-account owner dies.


Generally, if there is more than one designated beneficiary for a retirement account, the life expectancy of the oldest beneficiary is used to determine post-death distributions. This can be disadvantageous for an individual who is significantly younger than the other beneficiaries, or for an individual who is one of multiple beneficiaries, with the other beneficiaries being entities, such as charities. This disadvantage can be circumvented if, before September 30 of the year following the death of the retirement-account owner, the older and/or non-person beneficiaries take one of the following actions:

  • Take a full distribution of their portion of the inherited assets.
  • Properly disclaim their portion of the inherited assets.

The beneficiaries that remain after this September 30 deadline are the only ones taken into consideration when determining which beneficiary's life expectancy can be used to calculate post-death beneficiary distributions.


Here are some examples on how this may work:


Example 1 - Two Beneficiaries, One a Charity

John died this year at age 65, and the beneficiaries of his IRA - which is valued at $1 million - are his favorite charity and his 45-year-old son, Tim. Tim and the charity were each designated to receive 50% of the IRA. Because John died before the Required Beginning Date (RBD) and one of his beneficiaries is a non-person (the charity), the $1 million must be fully distributed by December 31 of the fifth year following the year John died.


Had Tim been the only beneficiary of the IRA, he would have been allowed to do one of the following:

  • Distribute the amount within the five-year period stated above.
  • Stretch distributions over his life expectancy. Since Tim reaches age 46 next year, his life expectancy is 37.9 years.

But all is not lost for Tim. He may still be able to use his life expectancy if the charity does either of the following:

  • Takes a full distribution of its half by September 30 of next year.
  • Properly disclaims its half by September 30 of next year.
  • Tim may ask the charity to take either of these actions, so that he is allowed to benefit from using his life expectancy.


Example 2 - Account Holder Dies After RBD

The facts are the same as in Example 1 except that John dies at age 74. Because John died after the RBD and one of his primary beneficiaries is a non-person, post-death distributions must be taken over John's remaining life expectancy. These distributions must begin next year, at which time John's remaining life expectancy is 13.4 years. However, Tim is allowed to take distributions over his life expectancy of 37.9 years if the charity takes either of the following actions:

  • Takes a full distribution of its half by September 30 of next year.
  • Properly disclaims its half by September 30 of next year.   

Example 3 - Four Family Members as Beneficiaries

Jake died this year at age 75, leaving his three children and his spouse, Mary, as his IRA beneficiaries. The ages of the children next year are 30, 32 and 36. Mary's age next year is 60. Each beneficiary must receive distributions over Mary's life expectancy of 25.2 years. However, the 30-year old child may use his or her life expectancy of 53.3 years to calculate post-death distributions if Mary and the older children do either of the following:

  • Take a full distribution of their portions by September 30 of next year
  • Properly disclaim their portions by September 30 of next year.

If, however, no action is taken by September 30, each beneficiary may use his or her own life expectancy if each of their portions is allocated to separated accounts by December 31 of next year.


In summary...

If you are one of multiple beneficiaries, be sure to take the necessary steps to secure available distribution options. If your distributions depend on what the other beneficiaries do by the September 30 deadline, be aware that these other beneficiaries may not be willing to take a full distribution of their amounts, because it may mean paying taxes on the amount for the year the distribution occurs. On the other hand, if their portions are insignificant amounts or they are charities of non-profit organizations that do not pay income tax, they may be accommodating. Alternatively, where multiple individuals are beneficiaries, each beneficiary can transfer his or her amount into separate accounts by December 31 of the year following the year in which the owner dies, thereby allowing each beneficiary to use his or her own life expectancy.


OCTOBER 17, 2011

October 17, 2011, the day of reckoning for undoing 2010 Roth conversions, is fast- approaching. Once this date passes, most clients who made 2010 Roth conversions will be irrevocably locked into those Roth conversions and the tax bill that comes along with them. The recent extraordinary market volatility however, has made this deadline loom even larger for some who fear that a post-October 17, 2011 crash could sting twice as bad since they might lose both investment value and the right to reclaim the taxes they've paid on that lost value through a recharacterization.


For clients that made Roth conversions in 2010 that have already lost substantial value, the decision to recharacterize is often a no-brainer. Why pay tax on value that no longer exists? But what happens when the account value is just slightly lower, virtually the same, or even slightly higher than the value at the time of conversion? What should you do then? That question is not quite as easy to answer, and is further complicated thanks to the 2-year deal for 2010 Roth conversions that many clients took advantage of.


If you decide to keep the conversion as is, the benefits include less complication and paperwork to deal with (for you and your client); no need to file an amended return if the 2010 return has already been filed; keeping the 2-year deal in which only half of the conversion income is reported in 2011, with the remaining half included in 2012 (if the client did not opt out of this on their 2010 tax return); and keeping whatever tax-free-growth has already been achieved in the account. On the flip side of the equation, recharacterizing the conversion - with the intention of reconverting and/or converting new funds - comes with the substantial benefit of giving you and your client some additional time to monitor the Roth accounts' performances.


OCTOBER 31, 2011

Custodians of "see-through" trust must be notified of trust beneficiaries. In general, a designated beneficiary is a living, breathing person. A special exception exists however, for see-through trusts. A see-through trust is a trust that meets certain provisions (see below) that allow the beneficiaries of the trust to stretch distributions out over the age of the oldest trust beneficiary's life expectancy.


For a trust to qualify as a see-through trust...

  1. It must be valid under state law
  2. It must be irrevocable at death
  3. The beneficiaries must be identifiable
  4. A copy of the trust must be given to the custodian by October 31st of the year following the year of death.

Don't miss that deadline or the benefits of this trust are lost.


NOVEMBER 15, 2011

Executors of US residents who died in 2010 have until November 15 to decide whether to pay estate tax. Federal estate tax is optional for the year 2010, because the previous estate tax regime, enacted by George W Bush in 2001, expired in 2009 and Congress failed to renew it in time. However, Congress did legislate a new estate tax very late in December 2010 (the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act). This fixed the per-person exemption at $5 million and the top rate at 35%. This tax regime also applies retrospectively to estates created by a death in 2010, but only if the executor chooses to pay it. The advantage of doing so is that the IRS will then deem the beneficiaries to have acquired these assets at their "stepped-up" value at the testator's death, rather than at their value at the time the testator acquired them. Thus, if estate tax is paid now, the beneficiaries will reduce their future capital gains tax liabilities on the assets they inherit.


Whether this advantage is enough to make it worthwhile to pay estate tax will, of course, depend on the specific circumstances, and on guesswork about the future.


The new IRS guidance explains what executors must do to make this election. First, it is an opt-out, not an opt-in choice. Executors must inform the IRS that they elect not to pay estate tax; otherwise the IRS will charge it.


DECEMBER 31, 2011

While most changes of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 end in 2012, there is one exception, Qualified Charitable Distributions (QCD) end on December 31, 2011. The qualified charitable distribution provisions were renewed for 2011, allowing individuals age 70 or over to exclude from gross income up to $100,000 that is paid directly from their individual retirement accounts (excluding SEP or SIMPLE IRAs) to a qualified charity. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs for 2011.


To qualify as a QCD, the IRA trustee must make the distribution directly to the qualified charity. Any distributions, including any RMDs, which the IRA owner actually receives cannot qualify as QCDs. Likewise, any tax withholdings on behalf of the owner from an IRA distribution cannot qualify as QCDs.

Phew, that was a lot of technical information. We hope you found something in there that may help one of your clients. Feel free to share this with you colleagues who might also benefit from this information.


If you are not receiving our monthly enewletter and you'd like to, send us an email and we'll make sure you don't miss an issue! Otherwise, we'll send out these types of alerts from time-to-time.


We are available if you want to discuss anything further. 



Mike & Jenn married
Bill Harris, CFP

A member of Ed Slott's Elite IRA Advisor Group
WH Cornerstone Investments