What is a “Stretch IRA?”
The “Stretch IRA” refers to sustaining the tax-deferred status of an inherited IRA for as long as possible when the beneficiary is someone other than a spouse. Under current law, a stretch IRA is a way to limit required distributions on an inherited IRA. Instead of naming the spouse as beneficiary, an account holder names children, grandchildren, great-grandchildren, or even siblings, etc., who can stretch out the withdrawals over their expected lifespan. That ability translates into the possibility that the continued tax deferred status could mean a difference of hundreds of thousands, perhaps, millions of dollars over a beneficiary’s lifetime.
The New Bill for 2017
In 2016, the Senate Finance Committee voted 26-0 to end the stretch IRA for non-spousal beneficiaries. The Committee saw such curtailment as a way to bolster revenues by $5.5 billion over 10 years. The bill has a retroactive provision to apply to IRAs The proposed bill, the Retirement Enhancement and Savings Act (“RESA”), requires beneficiaries of an inherited IRA to pay all taxes due on the account within five years of the owner’s death. To lessen the bite a little, the bill contains a $450,000 exclusion for non-spousal beneficiaries, which means a $1 million IRA would be taxed only on $550,000.
Say, you die and leave a $1.45 million IRA to an only child, the child can claim the exclusion and defer taxes on $450,000 over his lifetime. however, the child must withdraw the remaining $1 million within 5 years subjecting the larger portion of his inheritance to accelerated income taxes. If there are multiple accounts, the exclusion must be prorated over each account.
Decedent had $2 million in retirement assets: $1.2 million in a traditional IRA, a $500,000 401(k), and a $300,000 Roth IRA. So, the proration looks like this:
- Traditional IRA–$1.2/2 = 60%
- 401k–$500k/2mm = 25%
- Roth IRA–$300k/2mm = 15%.
So, the beneficiary gets to stretch $270,000 of the traditional IRA (60% x $450,000); $112,500 of the 401k ($450,000 x 25%); and $67,500 ($450,000 x 15%) of the Roth IRA.
The accelerated tax rules would apply to the remaining $930,000 of the traditional IRA; $387,500 of the 401k; and $232,500 of the Roth IRA. These amounts must all be distributed within 5 years. But, the amounts out of the Roth wouldn’t be subject to tax.
Likelihood of Implementation
Leading experts like Ed Slott are on record that this is going to happen in 2017. While most agree that the bill won’t move along as a stand-alone provision according to Brigen L. Winters, a principal at Groom Law Group in Washington, DC, the RESA “can easily be inserted into any tax bill, especially since Congress is being told that this provision will produce billions in revenue,” says Slott. While Slott maintains that the RESA won’t generate any revenue, to the contrary is more likely to lose revenue, since Trump has promised comprehensive tax reform, odds are good that some type of tax legislation is coming. Slott’s rationale for the lack of revenue generation is that the majority of beneficiaries won’t stretch the IRA anyway, they’ll “go through them like water…it’s human nature.”
Inherited IRAs Aren’t Exempt Assets Under ERISA
A United States Supreme Court decision in 2014 unanimously ruled that inherited IRAs cannot be considered a retirement fund and thus are not subject to exemptions under bankruptcy laws. So, that means inherited IRAs are open to creditor claims in the event of fortuitous financial problems occurring.
Need for Detailed Planning Analysis
It’s important to note that any unused exclusion cannot be transferred to a surviving spouse. Thus, you can’t just leave everything to your spouse if you have a lot of money in retirement accounts without losing the chance to exclude a portion of the account from accelerated tax. This knowledge should serve as a wake-up call to married people who have a lot of money in retirement accounts. It only makes sense to take advantage of both exclusions, else they will lose the opportunity to take advantage of enormous tax savings.
So long as the family’s combined IRA balance is less than $450,000 and isn’t likely to grow beyond $450,000, no special planning will be needed unless Congress decides to use a different exclusion amount. if the combined balance of the IRAs is greater than the exclusion amount, then strategic planning will be needed to protect families from a harsh new tax structure. One option is to establish enormous flexibility in the estate-planning documents with extremely liberal disclaimers. Perhaps allowing the surviving spouse to disclaim to children and provisions allowing children to disclaim to trusts created for the benefit of their children are low-hanging tactics obviously to be employed. Roth conversions are another powerful strategy to be employed. Discussions on the Roth conversion will be the subject of a different article–stay tuned!
HB 221 overwhelmingly passed both houses under the Golden Dome this 2017-2018 session. The bill was heavily promoted by the State Bar of Georgia via its Fiduciary Section, which also worked as a wordsmith of sorts on the bill. This legislation seeks to modernize Georgia’s power of attorney statute by outlining the duty, liability and authority for agents, co-agents and successor agents. The bill also provides for the applicability, meaning, effect and termination of a power of attorney. To be titled as OCGA §10-6B-1:81 upon signing by the Governor, the new legislation also contains a statutory form. The new law will also amend OCGA §10-6-7 and OCGA §16-8-10 concerning affirmative defenses to criminal charges related to misuse of power over another’s property. If the Governor signs it, the law will become effective by its terms on July 1, 2017. You can review the legislation for yourself here.
5. Lack of Planning: What To Do?
The most important first step is planning, but not necessarily estate planning. By the time one of these situations has begun, it’s too late for thorough estate planning. Indeed, many of these situations occur despite good estate planning. Instead, your client needs to prepare for battle. That does not mean racing to the courthouse to sue everyone in sight. It does mean thinking through your options and taking initial steps to prepare for a potential fight.
The second step is to remember that the loved one’s will is not the only issue. In fact, for most people, the will is much less important than other documents. A last will and testament controls only assets belonging to the deceased’s estate. Most people, however, do not have significant assets in their estate. Instead, most people’s sizable assets pass outside the estate, probate and are not controlled by the will.
For example, most retirement accounts, investment accounts, and life insurance policies use payable-on-death beneficiary forms which designate who gets the particular asset at issue. The will does not override these forms.
So, as an estate dispute is simmering, it is vitally important to make sure that these non-probate assets are considered. Otherwise, there is a great risk of winning the battle over the will, but losing the war over the real assets.
3. Blended Families
Despite good intentions, this can lead to problems. For example, the husband may predecease the wife who eventually loses touch or becomes estranged from her stepchildren. If the husband’s will left assets to her with the expectation that her will would pass the assets along according to their long-term wishes, all certainty is lost. She can then make a new estate plan based on her own wishes. Depending on her relationship with her stepchildren, she might decide to leave everything to her own kids.
2. Late-in-Life Spouse
For lack of a better term, “gold diggers” exist—there are individuals who seek close personal relationships with elderly persons for their own financial gain. This was the case with J. Howard Marshall and Anna Nicole Smith and John Seward Johnson (of Johnson & Johnson) and his third wife (though, despite what these high-profile cases may indicate, gold diggers aren’t limited to one sex).
Sometimes, a late-in-life spouse has no ill intentions and simply can’t get along with the preexisting children, be it over matters of inheritance or just not being welcomed (or making an effort to fit) into the existing family paradigm.
Such scenarios often result in estate disputes between the late-in-life spouse and adult children or other persons who once stood to inherit. The spouse claims true love, the children claim undue influence, and the disputes almost always are fueled by personal animus and resentment between the parties.
4. The Trusted Caregiver or Confidant
When there are no family members to take care of an elderly client, he is often forced to rely on caregivers and other professionals for care. Unfortunately, these paid professionals can, likewise, be opportunists, preying on the weakened faculties and necessary dependency of their charges. In such a case, a client’s children and grandchildren may be disinherited (or have their inheritances significantly reduced) in favor of the nurse, attorney or other caregiver.
By way of example, a number of parties are currently litigating the estate of Ernie Banks, the famous Chicago Cub and baseball hall of famer, who made substantial estate planning changes late in his life in favor of a personal nurse and to the detriment of adult family members.
1. Local/Distant Siblings
Disputes often arise when a “local” sibling provides care and support for a parent at the end of life, while the other sibling is “distant,” either physically, psychologically or otherwise. In this scenario, the local sibling typically “helps” with (i.e., controls) most aspects of the elderly parent’s life—including bank accounts, doctor appointments and care providers. Thus, the local sibling often feels entitled to more from the parent, regardless of the parent’s wishes.
Over time, the local sibling may use proximity to the parent to begin a “money grab.” For example, the local sibling is added as a signatory to the parent’s checking account, ostensibly for convenience. Sometimes the local sibling exercises such control over the parent that he or she orchestrates an entire new estate plan or arranges to be added as a joint tenant on the parent’s house. Very often it is not until the parent’s death that a distant sibling learns about what has happened. The distant sibling suspects undue influence on the part of the local sibling, and a dispute arises, often creating contentious litigation.
In the weeks following the death of Chicago Cubs shortstop Ernie Banks, it was apparent that the Banks family faced unwanted surprises and challenges. Bleacher Report columnist Tim Daniels writes that Banks’ estate was revealed to hold only $16,000 in assets, much less than expected. Additionally, Banks, in his declining health, signed a new will three months before his death, directing his estate to his caretaker instead of his family. The mourning family and other individuals involved are trying to understand how the situation came to be and where the money went.
Recently, news broke that the costs of Ernie Banks’ funeral have gone unpaid, and the provider of the service has filed a claim, effectively adding to the legal strife. Upon hearing this news, the Chicago Cubs committed to cover the $35,000 claim, as an effort to alleviate some of the burden on the Banks family.
Forbes has just published a new article written by our colleague and nationally reknowned asset protection guru, Jay Adkisson wherein Jay analyzes the Georgia Court of Appeals new decision Mahalo Investments III, LLC v. First Citizens Bank and Trust Co. (Feb 19, 2015). Mahalo had two members: Epstein and Kelly. The two members lost a $3 million judgment to the creditor, First Citizens Bank (“FCB”). FCB then followed the well-known Georgia statute to obtain a charging order, OCGA 14-11-504(c). That’s where Mahalo takes off into a new, but not unforeseen (at least as to Jay) direction .
Mahalo reaffirms the robustness of the Georgia LLC Act in that it point-blank states that creditors do not get to take over management of a LLC merely by virtue of obtaining a charging order. Creditors are limited to the status of an assignee insofar as the members’ interests in distributions to be paid by the LLC. As for the LLC, it’s “business as usual.” For the debtor member(s), the creditor stands in their shoes for any distributions made by the LLC, and the latter is to make such distributions to the creditor, not the debtor-member. Otherwise, the LLC is faced with making two distributions, one mistakenly to the debtor-member and the other will be compelled to the creditor holding the charging order. Then, the LLC is left to recoup the wrongfully paid distribution from the debtor-member. Of course, the aggrieved creditor could go after either. But, the easiest target is the LLC who basically would be in contempt of court for failing to obey the court-issued charging order.
Mahalo breakes the silence that previously existed in the area of whether a creditor must file separate lawsuits to obtain charging orders on other LLCs of which the debtor is a member. You see, Epstein and Kelly held member interests in other LLCs who weren’t named parties defendant in the Cobb County State Court suit instituted by FCB; FCB sued only Epstein, Kelly, and Mahalo Investments III, LLC. The Court of Appeals upheld the State Court’s issuance of charging orders against the other LLCs despite FCB having not named them in the original suit, nor having brought “collateral” actions against the other entities. The Court of Appeals interpreted OCGA 14-11-504(c) to mean only that the creditor must bring a “proceeding” in the sense of an Application for Charging Order in the State Court. Here, FCB had brought a “proceeding” in the form of its Application for Charging Order in State Court. Ergo, the Court of Appeals held that FCB had complied with 504(c)’s requirement merely by filing its Application for a charging order. The charging order applies to the debtor-member, not the LLC. So, the creditor obtains an assignee interest in any interest held by the debtor-member in any LLC of which the debtor may hold a member interest, regardless of whether the creditor has named that LLC in the action. Once again: the creditor need NOT institute separate proceedings for the charging order to reach each company/entity interest held by the debtor-member.
Debtor-appellants also argued that the Georgia State Court was not “a court of competent jurisdiction” because the Georgia State Court did not have personal jurisdiction over the LLCs whose interests were charged. Citing Bank of America BAC -1.71%, N.A. v. Freed, 983 N.E.2d 509, 520–521 (Ill.App.Ct.2012), the Georgia Court of Appeals reasoned that the only jurisdiction required was that over the debtor-member. Extending its logic from the preceding argument, Mahalo holds that so long as the State Court held proper jurisdiction over the debtor-member, the charging order reaches any other LLC member-interest the debtor holds, regardless of whether that entity is a Georgia LLC or even transacts business in Georgia. Reiterating the good news that the charging order gives a creditor NO management rights in the LLC, the Court of Appeals held “that under Georgia’s limited liability company act, it is only necessary for a court to have jurisdiction over the judgment debtor to have the authority to enter charging orders against the judgment debtor’s interest.”
If you think I’m being repetitive now, it’s for good reason. As Jay has been preaching for years now, the asset protection industry has marketed the concept of LLCs formed in other jurisdictions with more favorable debtor statutes concerning creditor remedies as having an advantage over other states. Mahalo now clearly establishes precedent that creditors will be deterred only by the extent of the court’s personal jurisdiction over defendant debtor-members and the domiciliary jurisdiction’s charging order statutes, and NOT those of the entity’s domicile jurisdiction. Stated another way, those Wyoming, Nevada, Alaska, Arizona, Delaware and other jurisdictions lawyers have marketed as having better charging orders than Georgia are of no value so long as the creditor may sue the debtor-member here in Georgia. Undoubtedly, creditors will use this precedent across the nation to circumvent those other states’ statutes previously thought to be more advantageous to debtors.
Jay Adkisson has written a well-thought out analysis in these areas. It’s worth a read and you can find it here. The full case may be read at: Mahalo Investments III, LLC v. First Citizens Bank andTrust Co., Inc., 2015 WL 687922, ___ S.E.2d _____ (Ga.App., Feb. 19, 2015). Full opinion at http://goo.gl/sFbjRf
Just to leave you with a positive feeling: Georgia’s freedom of contract principle remains alive and well in its LLC Act. The well-drafted LLC Operating Agreement will save more skin and provide better bang for the buck in the long run than an attempt at and “end-around” play using another jurisdiction’s LLC statutes to try to avoid creditors. Probably at least as many problems arise between members than between creditors and LLC members. The well-crafted LLC Operating Agreement may provide a better playbook to avoid bad business decisions being made in the first place and thus avoid the creditor problem before it leads to the company and its members being sued in state court. If drafted and executed properly, it may well prevent the members from remaining in the lawsuit and losing a judgment to the creditor in the first place.
Need to have your Operating Agreement reviewed or updated? Thinking of forming a new LLC? The formation documents with the Secretary of State’s Office is only the beginning. Remember: the pain of low quality is remembered long after the pleasure of low price has been forgotten. Give us a call at 404-602-0040, you’ll love doing business with WR Nichols Law!