For Clients, Advisors and Community.  In March and May, 2011, I wrote blog articles about the asset protection aspects of inherited IRAs. This article describes current developments involving tax aspects of inherited IRAs. What is so important about inherited IRAs?

With careful planning, the beneficiary of an inherited IRA (typically a child) has the opportunity to defer income taxes (with tax-deferred growth) over his or her lifetime. Many refer to this as the “stretch IRA”. It is a significant income tax savings tool, particularly for individuals who have large IRAs, or for whom tax deferred monies constitute a large portion of their estate.

In some cases, without proper planning, the child or grandchild (and sometimes the spouse if the planning is done incorrectly) only has five years to withdraw all the money from the IRA. This is called the “five year rule”. This accelerates all the tax payment. The government gets its money at once. There is very little opportunity for tax-deferred growth.

The highway bill, which is currently moving through Congress, contained a provision removing the “stretch IRA” and implementing the five year rule for everyone. That would raise $4.6 billion over the next decade.

In recent weeks, there was an extensive campaign by members of the Financial Services Institute (your financial planners) which put extreme pressure on Congress, especially the Majority Leader of the Senate, Senator Harry Reid. Last week, Senator Reid removed the offending provision from the highway bill thereby leaving the current “stretch IRA” provisions in force.

The national experts in the field think that the Congress may revisit the matter. Who knows what is going to happen when the government is looking under every rock for revenue!

Strategy: If you or a family member is the beneficiary of an account or benefit in a profit sharing, 401(k), or pension plan where the employee has passed away, it will be important to do an inherited IRA rollover as soon as possible. You need to consult a financial planner or investment advisor who is familiar with the rules, as well as a tax attorney to ensure that the IRA is coordinated with your estate plan. The rules are complicated. You need to find individuals who are fully trained in the required minimum distribution (RMD) and trust rules.

Taxation of Inherited IRAs is one place the Congress may go looking for revenue. There is a possibility that the stretch IRA may become a thing of the past; I doubt it because there will be another uprising. Nonetheless, it makes sense to plan now.

For Clients, Advisors and Community.

Do you have a vacation home? Perhaps you celebrate every Christmas at a mountain lodge built by Grandpa, take the kids on a spring break to a beachside condo, or spend summer weekends at the old farmhouse so the little ones can catch fireflies.

How do you pass on your vacation home to the next generation so that everyone still enjoys spending time together there? An article published by the Wall Street Journal deals with this question. (Click here to see the article.)  The article examines some of the complex issues involved, including paying expenses and determining access and use. It’s a great article for you if you’re considering leaving such assets, as well as for those who inherit them.

Families Are Not Simple
Once you pass away, how will the costs to maintain the vacation home be paid? This includes taxes, insurance, utilities and repairs (i.e., a new roof).

There are other complex, family-oriented questions that take more than a spreadsheet to figure out:
• Should every child get an equal share?
• When children get married, can we protect the property from a divorce?
• How will it be decided who gets to use the property and how often?
• If one child “wants out” of the arrangement down the line, will this force a sale?

While one generation of siblings might successfully share a mountain cabin, the next generation might not. Later generations won’t have the same attachment to a property, so an exit strategy should be considered as part of the plan.

Strategies to Consider
The WSJ article suggests putting the home in a trust and funding it with life insurance. A professional trustee manages the property and insurance proceeds cover expenses. If one of your kids wants to sell, the money in the Trust can be used to buy him out. The trustee might decide on a schedule of use and whether the property should be rented out occasionally to cover expenses.

Working with an estate planning attorney will help you and your family (or your clients) decide which strategy will best fit their needs, and ensure that the next generation enjoys the property for many years to come.