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Tax
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Proposal Before Senate Finance Committee Would Limit Stretch IRAs |
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Wednesday, February 08, 2012 20:24
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Senate Finance Committee Chairman Max Baucus Tuesday said he will release a modified mark-up of The Highway Investment, Job Creation and Economic Growth Act of 2012 ahead of the Committee's consideration of the bill.
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Under the proposal, the five-year rule is the general rule for all distributions after death for plans and IRAs (regardless of whether the owner dies before or after the required beginning date), unless the beneficiary is an eligible beneficiary as defined in the proposal. This would apply to deaths occurring after 2012.
Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee or IRA owner, is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee or IRA owner, or is a child who has not reached the age of majority.
For these beneficiaries, the exception to the five-year rule (for death before the required beginning date) applies whether or not the IRA owner or employee dies before or after the required beginning date. In addition, the five-year rule would apply after the death of the beneficiary.
The full markup can be found here .
The key issues here will be loss of deferral and bracket creep. The two most likely strategies to deal with this would be Roth conversions to pay tax at the owner's level prior to death or to leave an IRA payable to a charitable remainder trust.
We will be keeping a close eye on this proposal and will keep you updated.
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Mark Zuckerberg's Advisor Becomes A Star, Even Though Facebook Founder Faces $2 Billion Tax Liability |
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Monday, February 06, 2012 13:45
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Tags: investment advisors The looming Facebook IPO has people taking about Mark Zuckerberg's financial advisor, Divesh Makan, who stands to generate a lot of AUM once his client's company goes public.
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Profiles of Makan focus on his Silicon Valley connections. He came out of Goldman Sachs and went to Morgan Stanley in 2008, only to start his own firm -- Iconiq Capital -- a few months ago.
Makan has attributed the decision to go independent to his reluctance to push proprietary investment products.
However, he doesn't seem to be hurting for cash. While he probably had to repay about half of his $20 million signing bonus when he left Morgan, with clients like Zuckerberg and other Facebook executives on his roster, he is probably not hurting for production.
The IPO will translate into $28 billion in liquid wealth for Zuckerberg and, reportedly, a $2 billion tax bill. Effectively all of his personal income from the offering will go to pay that bill.
It remains to be seen how Makan will invest the rest of Zuckerberg's billions once the shares are tradeable on the open market.
In the near term, Zuckerberg will want to hold onto his control of the company, which means holding onto most of the shares -- he still owns 28% of the $120 billion company outright.
This means Makan's real job is building a diversified portfolio around that massive concentrated investment.
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Muni Bond Interest Deduction Is Safe, White House Insiders Say |
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Tuesday, January 31, 2012 13:44
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Tags: municipal bonds A proposed cap on the tax advantages of municipal bond interest looks dead now that "people who understand" the credit markets are weighing in on the issue.
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The September stimulus package sent to Congress would have cut off the exemption on muni interest to 28% of all income for upper-middle-class families earning a joint $250,000 or more.
The bill failed. However, pushback from the local financing community got the White House to realize that making the tax treatment less attractive would hurt already-fragile demand for muni debt.
The proposal is now reportedly off the table.
Some influential think tanks and former congressional types have begged for ending the exemption on muni interest, arguing that the federal government simply can't pass up the revenue right now.
Muni advisors argued back that nobody in the government understands the way the asset class works.
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IRS Private Letter Ruling Waives 60-Day IRA Rollover Rule For Surviving Spouse Claiming Duress |
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Thursday, January 26, 2012 01:54
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Tags: Internal Revenue Service | IRA In a recent private letter ruling, the IRS waived the 60-day IRA rollover rule for a surviving spouse who claimed financial illiteracy and duress. However, the wording of Section 408 of the Internal Revenue Code is permissive rather than mandatory — even if the conditions outlined to receive an IRS waiver are met, the request can be denied.
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In Private Letter Ruling (PLR) 201149048 a taxpayer received an IRA distribution, which his spouse and financial advisor claim he intended to rollover to another IRA. Medical issues arose shortly after the IRA distribution, however, which impeded his ability to handle financial affairs and contributed to his death. His spouse also failed to complete the IRA rollover. She represented to the IRS that she was under duress due to the situation with her spouse and inexperienced with financial matters.
Internal Revenue Code Details Circumstances for IRS Waiver of 60-Day Rollover Rule
The IRS internal revenue code provides that a rollover must be accomplished within 60 days. However, the IRS may waive the 60-day rollover rule “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.”
In determining whether to waive the 60-day rollover requirement, Revenue Procedure 2003-15 states that “the service will consider all relevant facts and circumstances, including:” (1) financial institution error; (2) “death, disability, hospitalization, incarceration, restrictions imposed by a foreign county, or postal error; (3) the use of the distribution; and, (4) the time since the distribution. (Source: Revenue Procedure 2003-15, 2003-4 I.R.B. 359; January 27, 2003).
In this private letter ruling, the IRS waived the 60-day rollover rule because the facts supported the position that the IRA rollover was not accomplished in a timely fashion due to “mental and medical conditions during the 60-day rollover period.”
This ruling seems relatively uneventful. However, consider the wording of IRS Internal Revenue Code Section 408(d)(3)(I): “The Secretary may waive 60-day requirement…” [Emphasis added]. The wording is permissive rather than mandatory — even if the conditions outlined to receive a waiver are met, the request can be denied. Everyone who owns and manages IRAs should know this IRS internal revenue tax code section. Rollovers should always be accomplished by moving the funds directly, or at minimum as quickly as possible, into the new IRA.
When and How to Request a Private Letter Ruling (PLR)
Generally, relief is requested through the private letter ruling (PLR) process. The requirements for filing PLR can be found under Revenue Procedures 2012-1 and 2012-8. However, no application to the IRS is required if a financial institution receives funds on behalf of a taxpayer prior to the expiration of the 60-day rollover period, the taxpayer follows all procedures required by the financial institution for depositing the funds into an eligible retirement plan within the 60-day period (including giving instructions to deposit the funds into an eligible retirement plan) and, solely due to an error on the part of the financial institution, the funds are not deposited into an eligible retirement plan within the 60-day rollover period. Automatic approval is granted only: (1) if the funds are deposited into an eligible retirement plan within one year from the beginning of the 60-day rollover period; and (2) if the financial institution had deposited the funds as instructed, it would have been a valid rollover.
The IRS has informally indicated that they will only grant relief if the taxpayer's fact pattern falls squarely under one of the examples listed in Revenue Procedure 2003-16 (i.e. errors committed by a financial institution, death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error). Advisors need to be aware of this when counseling clients regarding whether they should invest the money to submit a private letter ruling request. Obtaining such relief will help your client save on the payment of income tax and possibly the early distribution penalty that would otherwise be due on the failed rollover. Given such tax consequences, the costs involved in requesting a PLR is generally a good trade-off.
If you have a client who has already missed the 60-day rollover deadline, you should carefully review the facts surrounding the missed deadline to determine whether relief may be available.
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Estate and Charitable Giving Planning For You And Your Clients |
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Sunday, December 18, 2011 09:30
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Tags: estate planning | financial planning | legacy | philanthropy | tax planning | year end tax planning Rabbi Hillel said, “If I am not for myself, who will be for me? But if I am only for myself, who am I? If not now, when?” Unless your clients are planning to spend all their money before they go, or they want to donate their estates to Uncle Sam, estate and charitable planning are critical. In spite of the uncertain and ever-changing tax laws, there are some significant benefits to be obtained by planning now! Below is a handy checklist to use for your reference.
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Donating Appreciated or Depreciated Property
- Consider giving appreciated property to a charity instead of cash. Your client will get a deduction for fair market value, and avoid paying tax on the capital gain.
- Depreciated investment assets should be sold first, and the cash donated to charity. That way your client will get the benefit of the capital loss.
Charitable Donation of IRA-Required Minimum Distribution
- IRA owners can donate their 2011 required minimum distribution, up to $100,000, tax-free. To be eligible, they must be at least 70-1/2 years old, required to take annual distributions, and make the donation directly from the IRA. The distribution income won’t be taxable, nor is the contribution a deductible donation. This strategy can be beneficial if your client would otherwise be making a comparable gift with after-tax dollars. This provision is scheduled to expire after 2011.
Timing of Larger Charitable Gifts
- Consider whether larger charitable contributions should be made in early 2012 instead of 2011 to maximize the tax benefit.
- Year-end charitable contributions can be made using a credit card, but the gift must be processed and charged to the card by December 31 to be deductible on the 2011 tax return. Similarly, checks to charities must be written and postmarked by December 31 for a 2011 deduction.
Charitable Giving As Part of an Overall Estate Plan
- Incorporate charitable contributions within a comprehensive long-term estate plan strategy, taking into account the various tax- and cash flow-efficient ways to structure charitable gifts. With the large disparity between required payouts and current applicable Federal rates, certain charitable giving structures have become more difficult – for example, charitable remainder trusts. Be sure to bring up these vehicles and possible solutions and alternative to your clients.
Develop or Update a Long-Term Estate Plan
- Understand your clients’ goals and the effect of Federal and state (if applicable) estate taxes. Consider working with your clients’ other professionals to build plans that address cash flow, business, and family needs as well as charitable wishes.
- After the client has developed an estate plan, confirm that the assets are properly titled and the beneficiary designations are correct.
I acknowledge Moss Adams LLP for providing much of the content in this article from its Year-End Tax Planning Guide: 2011 (http://www.mossadams.com/mossadams/media/Documents/Publications/Wealth%20Services/WSG111005-Year-End-Tax-Planning-Guide-2011.pdf).
Any tax advice contained in this article, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax-related penalties that may be imposed on the taxpayer under the Internal Revenue Code or applicable state or local tax law of (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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