Articles tagged with: mikem@cfgiowa

Less Protection for Inherited IRAs

They are no longer exempt from creditors & bankruptcy proceedings

A SCOTUS ruling raises eyebrows. On June 12, 2014, the Supreme Court ruled 9-0 that assets held within inherited IRAs by non-spousal beneficiaries do not legally constitute “retirement funds.” Therefore, those assets are not protected from creditors under federal bankruptcy statutes.1,2

This opinion may have you scratching your head. “IRA” stands for Individual Retirement Arrangement, right? So how could IRA assets fail to qualify as retirement assets?

Here is the background behind the decision. In 2010, a Wisconsin resident named Heidi Heffron-Clark filed for Chapter 7 bankruptcy. In doing so, she listed an inherited IRA with a balance of around $300,000 as an exempt asset. No doubt this seemed reasonable: the Bankruptcy Abuse Prevention and Consumer Protection Act provided a cumulative $1 million inflation-adjusted bankruptcy exemption for both traditional IRAs and Roth IRAs in 2005.3

So under BAPCPA, wasn’t that $300K in inherited IRA funds held by Ms. Heffron-Clark creditor-protected? Her creditors, the bankruptcy trustee and the Wisconsin bankruptcy court all thought not. That wasn’t surprising, as bankruptcy trustees have issued numerous challenges to the exemption status of inherited IRAs since BAPCPA’s passing.3

Clark v. Rameker made it all the way to the country’s highest court, and boiled down to one question: is an inherited IRA a retirement account, or not?

The Supreme Court rejected the idea that a retirement account for one individual automatically becomes a retirement account for the individual who inherits it. It made that stand based on three features of inherited IRAs:

** The beneficiary of an inherited IRA can draw down all of the IRA balance at any time and use the money for anything without any penalty. Compare that to the original IRA owner, who will face penalties for (most) IRA distributions taken before age 59½.
** Typically, beneficiaries of inherited IRAs must start to take required minimum distributions (RMDs) in the year after they inherit the IRA; it doesn’t matter how old they are when that happens. They could be 68 years old, they could be 8 years old – age doesn’t factor into the RMD rules.
** Unlike the original IRA owner, the beneficiary of an inherited IRA can’t contribute to that account – another strike against the contextualization of an inherited IRA as a retirement fund.3

All this gave the high court a basis for its decision.

Do IRA funds that pass to surviving spouses remain creditor-protected? It would seem so. Frustratingly, the Supreme Court didn’t tackle that question in its ruling. IRAs inherited from spouses are still presumably exempt from federal bankruptcy laws, and if a surviving spouse rolls over inherited IRA assets into an IRA of his or her own, the resulting enlarged IRA is presumably still defined as a retirement account. Oral arguments heard in Clark v. Rameker may help to reinforce this view; the bankruptcy trustee’s lawyer emphasized the differences between Ms. Heffron-Clark’s inherited IRA and one inherited from a decedent.3

State laws may save some inherited IRA assets. If a non-spousal beneficiary inherits an IRA and lives in Alaska, Arizona, Florida, Missouri, North Carolina, Ohio or Texas, state law is on his or her side. In those states, bankruptcy exemption statutes shelter inherited IRAs.2

What if the heir lives elsewhere? That could pose a problem. If an IRA owner fails to play defense, the IRA assets could one day be at risk if a non-spousal beneficiary inherits them.

Designating a trust as the IRA beneficiary isn’t the only option here, but it certainly has merit. The hitch is that putting an IRA into a trust is rather involved. Trusts also come with fees, paperwork and complexity, and the non-spousal beneficiary of the IRA assets should have some financial literacy.1

In the case of a traditional IRA, a Roth conversion might be an option worth examining. (The conversion would have to happen during the original owner’s lifetime.) Another option: some of the IRA balance could be spent on life insurance which could be left to a trust; life some of the IRA balance could be spent on life insurance which could be left to a trust; life insurance proceeds are tax-free, and a life insurance policy is much more suited to inclusion in a trust than a traditional or Roth IRA.2

The bottom line? If you fear that the heir(s) to your IRA might face bankruptcy proceedings someday, talk with a financial or legal professional about your options. If state law won’t protect those assets, a trust might be wise.

Mike Moffitt may be reached at phone# 641-782-5577 or email: mikem@cfgiowa.com
website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs and complete details.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – blogs.marketwatch.com/encore/2014/06/12/scotus-inherited-iras-not-retirement-accounts/ [6/12/14]
2 – tinyurl.com/n9g4acw [7/13/14]
3 – theslottreport.com/2014/06/supreme-court-inherited-iras-are-not.html [6/18/14]

Section 105 Plans

Medical reimbursement plans to benefit the smallest businesses.

Some businesses start small and stay small, by design. You may own such a business. Perhaps things begin and end with you, or maybe you employ one other person – your spouse. If this is the case, you should know about Section 105 plans.

Being self-employed, you already know that you can deduct 100% of your healthcare premiums from your federal and state taxes. The tax savings needn’t stop there. A properly structured Section 105 plan may let you deduct 100% of your family’s out-of-pocket medical expenses from federal, state and FICA/Medicare taxes.1,2

That’s right – all of them. TASC, a major provider of microbusiness employee benefits administration services, estimates that a Section 105 plan saves a family an average of $5,000 in taxes a year.2

How does this work? Section 105 of the Internal Revenue Code permits a self-employed person to set up a health reimbursement arrangement (HRA) for tax-free repayment of major qualified medical expenses not covered under a health plan. Alternately, that self-employed individual may hire a salaried employee (read: his/her spouse) and offer that employee an HRA.1,3

If the latter choice is made, the benefits offered will not only cover the employee, but also his/her spouse and dependents. So if the new hire is the business owner’s spouse, what results is effectively a family healthcare expense account.1

Most solopreneurs need to hire someone to get this perk. Can you set up a Section 105 plan without hiring an employee? Yes, if your business is a C-corp, an S-corp, or an LLC that files its federal tax return as a corporation. In a corporate structure, the corporation is defined as the employer and the business owner is defined as a salaried employee.1,3

Otherwise, hiring an employee is a precondition to implementing a Section 105 plan. You don’t necessarily have to hire your spouse – the new hire could be your son or daughter, a more distant relative, or even someone to whom you aren’t related.1

Did the Affordable Care Act restrict the implementation of these plans? Not for microbusinesses. When the IRS issued Notice 2013-54 as a follow-up to the Affordable Care Act, most businesses lost the chance to offer a discrete medical reimbursement plan. One-employee HRAs are still allowed under Section 105 using group or individual insurance coverage.2

Look at all you can potentially deduct. A properly designed Section 105 plan allows eligible employee(s) and their family/families to deduct all health and dental insurance premiums, all life and disability insurance premiums, all premiums for qualified long term care coverage, all Medicare Part A and Medigap premiums, all out-of-pocket medical, dental, and vision care expenses, psychiatric care, orthodontics … anything stipulated as a qualified medical expense in Section 213 of the Internal Revenue Code. Section 105 plans can even be structured so that if an employee doesn’t max out his/her yearly deduction, the unused portion can be carried over to subsequent years.1 

To keep up the plan, keep the paper trail going. A business owner and a financial or tax professional should collaborate to put a Section 105 plan into play. The IRS does look closely at these plans to check that the other spouse is legitimately employed – salaried, working a set schedule of hours, and hired per a written agreement. In addition, appropriate tax forms must be filed with the IRS, including Form 940 if the employee is unrelated to the business owner.1

If you want to lessen your tax liability and create an expense account to meet unanticipated medical costs, consider doing what other microbusiness owners have done: set up a Section 105 plan.

Mike Moffitt may be reached at 1-800-827-5577or email mikem@cfgiowa.com

website  cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – tasconline.com/products/agriplan/section-105-plan-2/ [4/15/14]

2 – theihcc.com/en/communities/hsa_hra_fsa_admin_finance/hras-are-still-a-viable-tax-savings-device-for-sma_hsnc3u8t.html [3/10/14]

3 – smallbusiness.chron.com/can-business-owners-reimburse-themselves-taxfree-health-insurance-38718.html [4/15/14]