Oh, Thank You Mr. Bobrow: IRA Rollover Rules Have Changed

In 2008, Mr. and Mrs. Bobrow made a series of single-day transfers from several Individual Retirement Accounts (“IRA”) to others. Unfortunately for all of us, one of the transfers occurred more than 60 days after the corresponding withdrawal, which the IRS deemed late and assessed a 10% penalty. Instead of simply “taking the bullet” on a late rollover-transfer, the Bobrows appealed to the United States Tax Court.

By statute, there could only be one rollover per year without penalty. The IRS historically applied this limit on an IRA-by-IRA basis, meaning that if you had 5 IRA accounts, you could conceivably have 5 rollovers in any one 12-month period. Obviously, this method could be used to borrow from one retirement account to get some “quick cash,” as long as the funds are reimbursed to a different IRA within the 60 day grace period. The more IRAs you had, the more “rollover-borrowing” opportunities you had.

Apparently, neither the Bobrows nor even the IRS saw this overall rule as an issue. But the Tax Court did. In deciding this case, the Tax Court incidentally decided that Mr. and Mrs. Bobrow could not avoid penalties by making a rollover from one IRA to another if there was a rollover from any other IRA in the preceding 1-year period. This rule does not apply to trustee to trustee transfers, where the taxpayer does not touch the funds. As of this year the IRS changed its rules to conform to this court ruling (Source: Bobrow v. Commissioner, T.C. Memo 2014-21 (2014); IRS Publication 590-A (2014)).

One moral of the Story – If you ever go to court, expect the unexpected. In this case (as sometimes happens) the Tax Court took a little “jab” at Mr. Bobrow, mentioning that he “is an attorney specializing in tax law.” He has now made some new tax law for all of us.

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Protecting Your Estate from “Social Engineering” Fraud

One aspect of estate planning is keeping your assets, and not having them stolen.  This came to my attention this weekend, when I received an automated “social engineering” call on my cellphone, something like: “This is ATT.  It has come to our attention that the security on your cellphone account may have been compromised. To avoid service interruption, at the tone please provide the last 4 digits of your social security number…”

I hung up.  My later research into that “800” telephone number disclosed a number of internet posts from individuals who had received the same message.  One post claimed that ATT denied leaving such a message.

Common sense is your best protection.  Here are a few guidelines:

1.  Never provide any personal information to an unsolicited caller or e-mail.  Never.  If you believe that it might be legitimate, call the provider.  They will invariably deny making an unsolicited call asking for information.  The more urgent the demand for information, the more likely it is fraudulent.

2.  Elderly people are particularly vulnerable to this type of manipulation, because they tend to be more trusting and are often starved for companionship.  Con-men and women target this risk group.  If you have a loved one living alone, measures should be taken.

3.  Always beware when accessing public wi-fi “hot spot” points.  Some predators set up hot spots and pass them off as public — for example, in a hotel lobby.  Never pass off private information through a public wi-fi access point.  Double check the name of the access portal, which might offer a clue as to whether you should use it.

4.   Disable the auto-connect feature of your phone, so that it does not automatically connect to the strongest wi-fi signal.  You should choose the access manually.

These are only a few thoughts.  Be safe during the summer.

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Don’t Forget to Review Beneficiary Designations

Even a well tuned estate plan can be defeated by failing to update beneficiary designations for bank accounts, brokerage accounts, and qualified plans (such as IRAs). Here are some points to consider:

  1. If a designation is made, it will ordinarily pass outside of your trust or will. Therefore, even it your will says something like “I hereby give my ABC brokerage account to my beloved daughter, Sheri Doe,” if your account designation gives the account to your ex-spouse, your ex-spouse probably receives the gift.
  2. The preceding point also shows that account designations should be regularly reviewed.
  3. If an account designation gives money to a minor, it may be necessary to open up a court supervised guardianship (which is the case in California). In such a case it may be less costly to set up a trust to manage the funds on behalf of the minor, and make the trust the beneficiary.
  4. If the beneficiary has a disability and meets needs requirements for governmental assistance, a gift under a beneficiary designation may cause disqualification for the benefit. However, creating a third party special needs trust, making the trust the beneficiary, may circumvent this problem.

In short, you should review your designations regularly, and make sure that they blend in with the rest of you estate and financial planning. Otherwise, your intended and unintended beneficiaries may end up being surprised – sometimes pleasantly surprised, but often times unpleasantly.


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“How to Spot a Liar”

This subject may not seem to be explicitly about the subject of estate planning, but it is intertwined with everything an estate and financial planner does.  Your attorney can prepare the most wonderful documents, which are easily undone by an untrustworthy, lying trustee.  There is  an important root word in “Trustee” which many forget when selecting the person who will manage their affairs when they are disabled or gone.  Truth in these personal relationships is far, far more important than the words written on paper.

Pamela Meyer’s overarching theme in the following video that lying is a “cooperative effort” applies to a wide range of estate planning subjects, such as —

  • Selecting a truthful trustee, executor, or agent;
  • Selecting and monitoring your financial planner, and investment adviser;
  • Making sure that your home care worker is acting in your interest, and not for her own interests.

These are only examples.

(Source: TED Talks)

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Lessons from “Little Sweetie’s” Estate

Most of us live pretty mundane lives.  But not Hong Kong billionaire Nina Wang, who died in 2007 at age 69.  Wang, nicknamed “little sweetie” because she liked dressing in traditional Chinese clothing and wore pigtails, was the heiress to Hong Kong’s Wang Chinachem Group and was at the time of her death arguably the world’s richest woman, with a net worth of over $4 billion (US).

Her husband Teddy Wang was kidnaped twice – the second time occurred in 1992, and when he was never released, in 1999 he was declared legally dead.

Wang sought out feng shui master Tony Chan in 1992 to help find her husband, and then the two reputedly entered into a romantic relationship.  According to a New York Times article, Chan was a pretty “sketchy” fellow.  According to the article, at the time “Chan was already married and had a patchy resume as a waiter, bartender, machinery salesman and market researcher, making him an unlikely match for Wang.”

When Wang died in 2007, there were two competing wills.  One gave $387 million to Chan, but the bulk of her fortune went to Chinachem Charitable Foundation.  The other “will” gave the entire estate to Chan.

One will was obviously a fake.  After years of legal battles, Chan has now been convicted of forgery and use of a false instrument, and was sentenced to 12 years in prison.  Calling him a “beguiling charlatan,” High Court Justice Andrew Macrae said that “Instead of benefitting mankind as Nina Wang wanted, the only one to benefit would have been you.”

Who says that estate planning is boring?  The lesson to learn from this is: Protect that will or estate planning document.  Also, if you have an old or superceded document, make it clear that it is superceded and revoked in the new planning documents.

Of course, it is much harder to protect against forgery, as happened in this case.

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The Lesson of Ghandi’s Missing Will

GhandiThe failure to properly maintain estate planning records is a universal problem.  For instance, as described in this article, Mahatma Ghandi’s 1921 will was recently auctioned off in England for £22,000.

However, Ghandi was known to have written four wills during his lifetime, with his last known will being handwritten and signed on February 20, 1940.  While that later will is missing, the provisions were set forth, verbatim, in a separate trust document.  The article says: “Now 73 years later, the original will, which was entrusted to Navajivan Trust, cannot to be located. A true copy of the typed text is easily accessible in the Trust’s records though.”

This points to the necessity of taking care of estate planning records, to ensure that heirs and executors (and trustees) are using the correct legal documents.  Protecting these documents  also helps to protect against the fraudulent use of superseded or expired estate documents by unhappy heirs and family members.

(Thanks to Dr. Beyer of the Wills, Trusts & Estates Prof Blog for alerting me to this article)

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Thoughts on Giving to Charities

moneyI have had a number of clients who have no children or natural heirs, and have struggled with what to do with their estates after death.  Others want to “mix it up,” giving some to their heirs, but not everything.  An easy answer is a charity – a cause or organization which reflects or advances their values during their lifetime.  Here are some ideas for those thinking along these lines to consider:

●    Think About Whether the Organization Will Still Be Around.  Like people, organizations “die” or cease to exist.  They also merge or change in form.  Consider this when giving to an organization, and the possibility that you may outlast it.  One solution is to provide an alternative organization, or destination for the money.  At the very least, consider having your estate planning attorney make it clear that the gift may be given to “any successor organization.”

●    Give an Address.  I sometimes place current addresses in some estate planning documents, especially when dealing with organizations.  Consider doing this to help out your executor or trustee.

●    Consider Giving “Shares” or Percentages.  Percentages are self adjusting, in case you have less than expected in your estate upon death.  Giving a percentage instead of a fixed sum could prevent “crowding out” those who receive a residuary gift in your estate (or trust).  Another idea: Give a fixed sum, but not to exceed a specific percentage.

●    Don’t Forget Lifetime Giving.  If you can afford it and feel comfortable doing so, consider giving some or all of your overall gift during your lifetime.  Expenses of charities are ongoing – if you make lifetime gifts, you might be able to see the fruit of your giving during life.

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Problems with a Joint Tenancy

piggybankWhile the method is often used, holding property in joint tenancy is not always the best estate planning tool.  It  often has unexpected results.

What is joint tenancy?  Under California law, a joint tenancy is property held in undivided equal shares by two or more persons.  The primary feature of a joint tenancy is a right of survivorship – the surviving joint tenant(s) obtain title to the property as a matter of law.

This is why a transfer of a joint tenant account avoids probate, and why it is often used as an estate planning tool.  For example, if a parent wants to transfer a bank account to a child, he or she could make the account a joint tenancy account.  The parent has use of the account during his or her life, but at death the child has ownership.  In general, joint tenancy transfer prevails over the will, and it is generally used as a “non-probate transfer.”  Even if a will lists a joint tenancy account as an asset, disposition of the account is generally not governed by the will.

Yet, pitfalls abound.  I have had clients with property in a joint tenancy, where an unexpected death results in a completely unexpected transfer.  Moreover — especially with real property — there may be gift tax consequences of placing property in joint tenancy with another.  If the son or daughter joint tenant (in my example, above) is in an automobile accident and insurance does not cover the loss, the parent’s account may be subject to debt collection – as another example.

And, of course, the joint tenant can always withdraw the funds!

Holding property in a trust is much more flexible, with a reduced possibility of unexpected consequences, and the parent (or other giver) may maintain control over the funds.  Also, it is difficult to have a coordinated estate plan with joint tenancy accounts.

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The Importance of Selecting the Proper Trustee and Agent

I often tell clients that one of the most important aspects of an estate plan is their selection of a trustee, agent, or other fiduciary.  The best plan in the world can fall apart with a poor selection of fiduciary.  Conversely, a plan fraught with problems can be saved or partially salvaged with the proper selection of (for instance) trustee.  The human element is all important.

As a case in point, Zsa Zsa Gabor’s husband was, allegedly a very poor choice for her agent, for her durable powers of attorney.  While a good agent/trustee ordinarily might keep matters out of court by acting in the best interests of the creator of the agency (the “principal”) or trust (as the “settlor”), the actions of Prince Frederic von Anhalt has evidently kept the power of attorney documents in active litigation, according to this article in the Examiner.com.  That article goes on to state:

If Zsa Zsa Gabor had it to do over again, she might have chosen a better fiduciary under her power of attorney. Gabor is 95 years old today and her current and ninth husband, Prince Frederic von Anhalt, is 25 years her junior. Von Anhalt is her power of attorney.

Gabor’s daughter Francesca Hilton has been concerned for years that von Anhalt has abused his position as her mother’s power of attorney, alleging he has used the money for birthday parties, billboards, and his own mayoral campaign in L.A. Francesca has also accused von Anhalt of unnecessarily heavily sedating Gabor and restricting Francesca’s access to her mother.

This is a good lesson for all.

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“Death Tax” Hikes Hitting Farmers

On January 1, 2013 the individual estate tax exemption is set to fall from $5 million to $1 million, following the expiration of the Bush tax cuts. The maximum tax rate will rise from 35% to 55% of assets. If Congress and the President fail to reach an agreement extending the exemption and rate, the expiration will occur by operation of law at the beginning of the year.

The family farmer will feel the hit, with unique consequences. The farmer’s only asset is in “dirt,” according to a Fox News article covering the expiration of the exemption.  The farmer and rancher have no way to liquidate his only asset without selling it off entirely or in pieces. But selling it off in pieces makes the farm less productive as a whole. The alternative for his heirs is to sell off the entire farm to pay the tax:

“The idea behind the estate tax is to prevent the very wealthy among us from accumulating vast fortunes that they can pass along to the next generation,” said Patrick Lester, director of Federal Fiscal Policy with the progressive think tank — OMB Watch. “The poster child for the estate tax is Paris Hilton — the celebrity and hotel heiress. That’s who this is targeted at, not ordinary Americans.”

According to the American Farm Bureau, up to 97 percent of American farms and ranches will be subject to an estate tax if the exemption falls to $1 million.

“We’re not millionaires in the terms of making a million dollars a year,” said Kester who lives in a modest home and whose family — not outsiders or a corporation — runs his ranch. “I have a half-a-million dollars in soil.”

Kester can’t spend it, without selling land. But by selling the land, each year the ranch would become less viable.

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