Will you be rolling over your 401(k) or other retirement money to an IRA? Or transferring your money from one IRA to another? If so, be aware that the IRS has been taking a very hard line on technicalities.

The 60-day rule
If you receive a distribution from your company plan, you have 60 days to roll it over to an IRA. If you miss the deadline, the distribution becomes taxable, and if you are under age 59 1/2 , you’ll be hit with a 10% penalty, too. The same 60-day rule applies if you choose to move money from one IRA to another.

Escape from the rule
Unfortunately, people (and sometimes even financial institutions) make mistakes. In 2002 Congress directed the IRS to carve out some exceptions to the 60-day rule so as to avoid harsh and inappropriate tax consequences.
Some of the examples in the IRS guidance were very specific—errors made by a financial institution and the inability to complete the rollover as a result of death, disability, postal errors and other similar events. One ruling waived the requirement when an individual deposited a distribution check into a savings account in the mistaken belief that the distribution was an insurance death benefit, and it allowed the “late” contribution to be rolled over without tax or penalty. Similarly, IRS granted relief when a rollover attempt failed because the individual used the wrong form, and the time lapsed for the rollover.

But recently, the Service has seemed less forgiving. The IRS refused to waive the rule for an individual who received a distribution without any guidance about taxes, withholding and her rollover option from the institution issuing the check. The IRS also refused relief when an individual mistakenly believed that all taxes had been paid on two distributions that he had received and, after learning that more taxes were owed, wanted to do a rollover after the 60 day limit had expired.

“Because the IRS has not been consistent in their rulings,” says Natalie Choate, Esq., a noted retirement planning specialist with the Boston law firm, Nutter McClennen & Fish LLP, “it’s not always clear what leads the IRS to grant or deny a waiver. Lately some of the results have been harsh.”

Avoiding the rule altogether
The 60-day rule needn’t be a concern at all, if you don’t take your retirement money from your company plan or IRA yourself. You simply arrange for a direct or trustee-to-trustee transfer. In both cases, by requesting it, the funds will move from your plan account to an IRA (or from IRA to IRA) without your need to receive the distribution in hand.
When it comes to your company plan, there’s another good reason for a direct transfer to an IRA: no withholding tax. Your employer must withhold 20% of your distribution for taxes, but this withholding is not necessary when the IRA trustee receives the money directly.

_______________

Is retirement near? Have you been thinking about choosing a new trustee for your IRA funds? Come talk to us. We’ll explain how we can make your rollover effortless and tell you about the wide array of investments that we offer our IRA customers.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

The trust advisor stands in the unique position of being a central clearing house for his or her clients. The advisor knows the client’s current financial position, the client’s business, the client’s family dynamics and has helped plan the future for the client. In many cases the trust advisor stands in the place of the client, making decisions on life changes for the client, executing plans created by the client related to family and business and investing to meet the client’s financial objectives.

Thus, the trust advisor has come a long way from the time that the client saw the trust department as the final stopping point to gather assets, pay taxes and distribute assets to the client’s family. Today, the trust advisor is in the middle of planning for the client. The trust advisor works with the client, and the client’s attorney, accountant and other advisors. The trust advisor also brings unique perspectives that the client can find nowhere else.

The trust advisor does not charge for his or her time. Therefore, the trust advisor provides a sounding board for the client that can be provided without starting up a billing clock. The advisor brings to bear his or her knowledge of the client, other situations that might relate to the client’s situation and other cases in which the advisor and the client’s professional team have worked together.

While the advisor builds his or her relationship with the client, the advisor also brings valuable experiences to help the client. Building this relationship also establishes the advisor’s knowledge of the client and the client’s goals and objectives. Then the advisor can look at questions and opportunities through the eyes of the client. The advisor provides an independent but kindred viewpoint. The advisor also stands in for the client if that person is incapacitated, unavailable or deceased.

The trust advisor also serves as a gatekeeper for other banking services, including business loans, insurance loans, mortgages, home equity loans and a host of deposit and other bank products.

Focus on clients

The trust advisor achieves his or her valued position with the client through the process of building a relationship with the client. The more the advisor meets with the client, understands the client’s goals and objectives, and learns of past decisions and events in the client’s life, then the more that advisor becomes a unique and important advisor to the client.

But this doesn’t happen in a vacuum. Client confidence does not come without earning it. Clients are increasingly more sophisticated and knowledgeable. They expect a higher level of service, and they know of other sources for services. They want accuracy and timeliness. They expect understanding and familiarity with their own unique situations. They want good investment performance. They want good communication. They appreciate communication from their advisor in anticipation of their questions and needs.

To achieve this level of service for the client, the advisor must keep organized files. It is critical that the client’s case be reviewed and detailed in these files. This analysis will include a synopsis of documents, a recap of family members and a tickler of recurring events and services. Building the file helps the advisor serve the client and provides reminders of things that need to be done to help the client.

To focus on the client, the advisor needs to work hard. The advisor needs to contact the client many more times than the client contacts the advisor. The advisor needs to establish his or her position as a valuable team member. Far from being taken for granted, the client must believe that the advisor is always thinking about ways to help the client.
With this focus, the client receives personalized service, specific to the client’s situation. The client receives valuable financial investment management services and helpful financial advice. The client has a team member who considers his or her best interests. The client has an advisor who will serve the client and other members of the client’s family.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Taxpayers are free to move money from one IRA to another, so long as they complete the transaction within 60 days. If they hold on to the funds for 61 days, they have a taxable distribution on their hands, and possible penalty taxes as well.

However, the IRS is authorized to waive the requirement if there is a good reason. Here are two actual cases, taken from private letter ruling requests submitted to the IRS last year.

Situation 1. Taxpayer 1 withdrew funds from his IRA, intending to roll them over, but was hospitalized during the subsequent 60 days and couldn’t complete the transaction within the time frame. In fact, he died soon after. Taxpayer 1’s executor then asked the IRS to waive the 60-day requirement so that she could complete the rollover (avoiding significant income taxes on Taxpayer 1’s final income tax return).

Situation 2. A certificate of deposit in Taxpayer 2’s IRA matured, and she put the funds into her checking account, intending to deposit them in another IRA that she owned. However, Taxpayer 2 was the sole caregiver for her husband, who suffered from a heart attack, a hip replacement, a series of seizures and a stroke, and so she had trouble staying focused on financial issues. What’s more, during the 60-day period Taxpayer 2’s daughter fell ill, was hospitalized and subsequently died. Taxpayer 2 asked the IRS to waive the 60-day rule.
In the private letter rulings, the IRS granted both requests.

The elements that the IRS takes into consideration when waiving he 60-day rule are outlined in Revenue Procedure 2003-16. Factors other than medical developments that may come into play include postal errors, errors by a financial institution, what was done with the money, and how much time has elapsed since the IRA withdrawal. Also, the IRS notes, the waiver does not apply to required minimum distribution amounts.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Most of James Mitchell’s fortune was held in his revocable living trust. Six days before his death in 2005, he transferred a 5% interest in two real estate properties to an irrevocable trust for his sons. The reason for the transfer was to keep the properties in the family at least until the sons reached age 45.
Mitchell had inherited a fortune from his father. After Mitchell’s death his executor discovered that the father had a collection of paintings that had been crated and placed in storage. Whether Mitchell was even aware of the paintings was unknown.
Mitchell’s estate filed a timely federal estate tax return, indicating a gross estate value of $17 million and a transfer tax of nearly $7 million. On audit the IRS sought to increase the value of estate assets substantially, resulting in a $10 million deficiency.
The value of two Western paintings, one by Frederic Remington and another by Charles Marion Russell, was one point of contention for the court to examine. The other was the value of the 5% gifted interest and the 95% retained interest in the real estate.

The real estate

The IRS did not challenge the transfer to the trust. Before trial the parties had agreed to stipulate the fractional interest discounts to apply to the gift and retained interests for each property. The disagreement was over the fundamental value of the properties, which were each unique. One was a single-family oceanfront property in a gated community in Montecito, California, near Santa Barbara. The other was a 4,065 acre ranch in Santa Ynez, California, one of the largest ranches in the area. One would be hard pressed to find comparable sales for either piece of real estate.
Fortunately, Mitchell had held both properties for their income value. Both were subject to long-term leases ($160,000 per year for the beachfront property). The estate used an income capitalization method to determine the value of the leases over their projected life and added the value of the reversionary interest expected at the end of the lease. The IRS argued that income capitalization is more appropriate for commercial property, not residential property. The Service instead offered a “lease buyout” valuation method, in which the estate would incur the expenses of breaking the lease to allow for a sale of the property.
The Tax Court held that the income capitalization method was appropriate because the properties were generating income. The lease buyout analysis has not been accepted by any court, nor is it generally recognized by real property appraisers.

The paintings

The estate’s art appraisers offered a value of $1.2 million for the Remington painting and $750,000 for the Russell. The IRS believed that the value should be double those figures.
To assist in situations such as this, the IRS has an Art Advisory Panel of 25 volunteer art experts to assist with difficult valuations. The panelists are not told whether an item is being valued for purposes of a charitable deduction or for measuring an estate tax obligation, thus ensuring their objectivity. In this case, the panel believed that the Remington had a maximum value of $850,000, and the Russell could be worth from $300,000 to $1 million.
However, the Service in this case rejected the recommendation of the Panel in favor of its own appraisers’ reports, believing that the Panel may have been inexperienced in Western art. However, the IRS experts didn’t have the requisite expertise either. In fact, the Tax Court noted, only the estate’s expert had credentials in that area.
The estate’s expert relied only on public sales and looked at a large pool of sales of Western art. The IRS appraiser looked at a smaller number of transactions, including private sales. Those private sales are poorly documented and less reliable, the Tax Court held. Ultimately, the estate’s position prevailed.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.