There’s a growing estate-planning need for a highly complex, tax-sensitive asset most clients have: retirement savings. As we begin 2014, advisors can help clients understand death benefits offered under governing plan documents and help prepare beneficiary forms. They also need to assist with implementing the resulting transfers at death to preserve ongoing tax benefits. 


A Pervasive Issue

Dependence on tax-favored retirement accounts has become widespread. As of 2007, employer-sponsored plans covered about 86.3 million workers.1 The recent recession likely lowered the number of participant-workers and saw significant drawdowns to cover expenses while many were jobless. In 2009 alone, the Internal Revenue Service collected $5.22 billion from the 10 percent tax on retirement account distributions drawn before age 59½.2 Total 2009 early distributions subject to the tax were $52.2 billion. 

Also, as of 2007, 15.15 million Americans participated in individual retirement plans, including IRAs, individual retirement annuities, Roth IRAs and simplified employee pensions. Of that number, approximately 6.9 million participated in Roth IRAs, and approximately 5.3 million participated in traditional IRAs. Those numbers will swell as retirees roll over their employer-sponsored accounts to IRAs. 

Church and government plans aren’t required to file financial information, but those participants are certainly significant in number.  

Thus, there’s a clear need for advisors who help implement estate plans involving retirement benefits to prepare themselves to handle the complexities of naming beneficiaries, opening IRAs and moving funds into those accounts. Roth IRA conversions are another area of concern. 

The need for financial planning, in particular, has increased because we’re living longer. Financial planning services also help beneficiaries to integrate inherited retirement funds into their financial lives, including asset allocation, retirement planning and their own estate planning. 

A lot can go wrong for both retirement plan participants and death beneficiaries. Examples emerge easily if you do a search for the term “rollover” in private letter rulings in a tax service’s database. My own search turned up over 3,200 PLRs. For surviving spouses alone, the IRS has been asked over 100 times to allow a spousal IRA rollover when an estate or trust was the beneficiary of a retirement plan account. The IRS has almost always granted the spousal IRA rollover, but there’s a high cost for asking. The IRS user fee to process such a request is now $10,000. The cost to prepare such a request, submit it and represent a client before the IRS is often far greater. 

The lesson from all those PLR “saves” is this: Retirement plan money in motion is tax-sensitive money at risk. Clients need their advisors to help successfully navigate rollovers. And, there’s a real need to follow up on drafting, signing and ultimately filing beneficiary forms with the IRA provider. 


Making Beneficiary Forms Stick

It’s also important to document that the beneficiary form has been filed with the IRA provider or retirement plan sponsor. In one recent matter, I learned that an IRA provider denied having received a beneficiary form. The “old” form was meant to be superseded by the “new” form, which had different beneficiaries. Without any acknowledgment of receipt, there was no way the “new” form could be recognized, short of reformation under a court order.


Estate Planning

When advisors discuss the need to fill out the beneficiary form of the destination account for a rollover, they can take this opportunity to bring up overall estate planning with their clients. 

Two fundamental estate-planning goals for retirement funds are: (1) putting benefits in the right hands at the right time in the right amounts, and (2) maximizing value by maximizing the number of years over which benefits are paid. Asset allocation planning follows from those goals when it comes to identifying an investment time horizon and appropriately managing investment risk. 

Often, the beneficiary will be a surviving spouse or a trust that will support the surviving spouse. Evaluate the option of a spousal rollover (meaning the spouse has complete control over lifetime distributions) versus leaving an IRA in trust. A spousal rollover means lowest required minimum distributions (RMDs). But, holding the IRA in trust provides control over lifetime access to benefits, as well as beneficial enjoyment after the spouse’s death. 

Estate tax planning for most married plan participants also means planning for portability of the deceased spouse’s unused estate tax applicable exclusion (DSUE) amount. Portability is beneficial because the income taxes on retirement account distributions payable after death erode the value of any applicable exclusion amount used to shelter the account from estate tax on the death of the retirement plan participant. But, that’s not so for Roth IRAs, as distributions generally aren’t subject to income taxes. 

If the surviving spouse can make an IRA rollover, beware: Withdrawals before age 59½ will generally incur a 10 percent excise tax.3 But, that tax doesn’t apply to an inherited account.4 Financial planning can help identify what portion of inherited retirement funds won’t be needed until after 59½. Roll over the portion not needed to an IRA of the surviving spouse. The part that may be needed before reaching age 59½ can be transferred to an inherited IRA of the surviving spouse.


Trust Economics

If naming a trust seems desirable, first consider the added cost and complexity. It’s possible that the size of the account won’t justify the cost and extra trouble. There’s a long-standing principle that uneconomical trusts may be terminated. The presence of a retirement account adds to the complexity of trust administration and tends to raise the amount needed to avoid becoming an uneconomical trust.

Here’s a list of items that tend to increase trust administration costs or reduce the value of a retirement account:


Risk of application of the 5-year rule (if no individual beneficiary is recognized as designated beneficiary for purposes of RMDs, and the decedent died before reaching the decedent’s required beginning date). 

Determination of the designated beneficiary for purposes of RMDs. It may be deemed necessary by the trustee to obtain an opinion letter and/or a PLR.

Exploration and determination regarding whether a spousal IRA rollover may be made by the decedent’s surviving spouse. The trustee may deem it necessary to obtain an opinion letter and/or a PLR. Some IRA custodians won’t facilitate a spousal rollover without a PLR.

Accomplishing an allowable spousal IRA rollover. Here, the risk is that there are more transactions to navigate than when the spouse is named directly as the beneficiary. 

Accomplishing eventual transfer of a trust’s inherited IRA to a beneficiary’s inherited IRA. The trustee may deem it necessary to obtain an opinion letter and/or a PLR. Some IRA custodians won’t facilitate such a transfer without a PLR.

Time communicating with a plan administrator or IRA custodian.

Risk of triggering income taxation prematurely.

Subtrust allocation decisions and execution.

Imposition of the highest tax rates on amounts accumulated in trust.

Qualification for estate tax marital deduction.

Qualification for estate tax charitable deduction.

Avoiding income taxation on charitable bequests that will be (or could be) funded with retirement plan benefits.

Accounting for income and principal under state law (see, for example, Uniform Principal and Income Act Section 409).

Meeting requirements for qualified disclaimers under Internal Revenue Code Section 2518.

Inability to make the DSUE election with respect to retirement benefits if the trust doesn’t qualify for the estate tax marital deduction.


An alternative to forming a trust to be the beneficiary of a retirement account is to roll over the account during lifetime to a trusteed IRA established at a bank or trust company. Trust provisions and options for distributions to beneficiaries vary. (For more information on trusteed IRAs, see “Before Setting Up a Trusteed IRA,” by Bruce D. Steiner, Trust & Estates (September 2009) at p. 48, and “Trusteed IRAs: An Elegant Estate-planning Option,” by Edwin P. Morrow III, Trusts & Estates (September 2009) at p. 53.) 


ERISA’s Spousal Mandate

For a married participant of a retirement plan covered by the Employee Retirement Income Security Act (ERISA), there’s a statutory requirement that benefits must be provided to the participant’s surviving spouse, unless the spouse signs a waiver and consent. That may mean there won’t be an opportunity to name a trust as beneficiary instead of the spouse.

The ERISA requirement mandating spousal benefits applies to same-sex marriages under the U.S. Supreme Court decision in United States v. Windsor, holding that same-sex marriages must be recognized for purposes of federal law.5 In Cozen O’Connor PC v. Tobits et al., the District Court for the Eastern District of Pennsylvania held in an interpleader action that the same-sex widow of a plan participant was entitled to ERISA-mandated surviving spouse benefits because she hadn’t executed a waiver and consent to a beneficiary form naming the decedent’s parents as beneficiaries.6 The case was filed and argued before Windsor was decided, but the district court hearing Cozen O’Connor deferred action pending the Supreme Court’s decision.

In the wake of Windsor, the bonds of same sex marriage will also bind the IRS and the Department of Labor in the administration of federal tax laws relating to retirement benefits. The IRS has begun to address tax administration consequences of recognizing that reality in Revenue Ruling 2013-17.7 The ruling goes beyond Windsor, in that same-sex couples lawfully married under state law (including foreign countries) will be recognized for tax purposes regardless of state of domicile. In that regard, the ruling cites difficult, if not impossible, administrative hurdles presented if state of domicile were taken into account—not only for taxpayers, but also for retirement plan administrators.

The ruling states that its holdings, generally, will be applied prospectively as of Sept. 16, 2013. The holdings may also be relied on:


. . . for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, provided the applicable limitations period for filing such claim under section 6511 has not expired. 


However, the ruling imposes a requirement that all items within such filings must be reported or adjusted to be consistent. 

Thus, those who filed protective claims for refund may now, like Thea Spyer’s estate in Windsor, be able to perfect those claims. 

A resulting emerging issue for surviving spouses of same-sex marriages will be whether they can recover benefits actually paid to another before Windsor was decided. Income tax consequences need to be clarified if a surviving spouse succeeds in recovering benefits from a named beneficiary who was never entitled to be recognized as such because the surviving spouse didn’t sign a waiver and consent. The question then arises: How will all parties treat the recovery for income tax purposes? 

It may well be that the recipient who turned out not to be entitled has reported taxable income. If so, it should be possible to recover income taxes paid, because the taxpayer has restored to the surviving spouse an amount held under claim of right.8 The surviving spouse, as rightful owner, should be subject to income taxes upon receipt of the amount so restored. 

A spousal IRA rollover may be available. Clarification from the IRS would be helpful. Two possible avenues to a rollover exist. The first avenue is statutory language saying the rollover must occur “not later than the 60th day after the day on which he receives the payment or distribution”9 (emphasis added). Since the date of receipt controls the start of the 60-day rollover period, the date of recovery by the surviving spouse arguably starts the clock. The second avenue is waiver of the 60-day rollover period by the IRS, but that option requires a determination on a case-by-case basis pursuant to a request for a PLR.


Alternative Investment Dangers

Another developing trend is marriages of IRAs and alternative investments. With some alternative investments come a risk that an IRA-killing prohibited transaction might occur. Two 2013 court cases underscore the issues.

In Peek, et al. v. Commissioner,10 an IRA of Lawrence Peek and an IRA of Darrell Fleck, two unrelated individuals, together formed FP Co., a corporation. Each IRA contributed capital to newly created FP Co. in exchange for its common stock, after which each IRA held 50 percent of that stock. Soon after formation, FP Co. acquired an existing, active business in the line of fire safety. 

In 2003, Lawrence and Darrell made Roth IRA conversions, each rolling over half his IRA’s FP Co. stock. In 2004, each of them made another Roth IRA conversion of the remaining FP Co. stock.

In 2006, the FP Co. stock was sold at a gain. Because all of the stock was held in Roth IRAs, neither Lawrence nor Darrell reported capital gains on the sale.

The Tax Court held that prohibited transactions occurred. The court found that the individuals’ personal guarantees of company loans beginning in the year 2001 were an indirect extension of credit between the IRA owner and the IRA. The loan guarantees were ongoing. The court said each IRA was disqualified and treated as distributed on Jan. 1 of each year at issue, beginning in 2001. This meant all Roth IRA gains on corporate stock sales in 2006 were reportable on the individuals’ income tax returns.

But, in Daley v. Mostoller, the U.S. Court of Appeals for the Sixth Circuit found that no prohibited transaction arose merely because a cross-collateralization agreement found in an IRA’s adoption agreement existed.11 Not only was the cross-collateralization agreement never invoked, but also the IRA provider never extended credit to the IRA owner.

Another prohibited transaction occurred in Terry L. Ellis et ux. v. Comm’r.12 Terry Ellis retired and rolled over his 401(k) profit sharing account to an IRA. He formed CST, a Missouri limited liability company (LLC), to operate a used car business. CST elected to be taxed as a corporation. 

Terry had the ability to direct how his rollover IRA invested its funds. He directed the IRA to invest in CST. He also contributed some of his non-IRA funds to CST. As a result of those investments, Terry’s IRA owned 98 percent of CST. Terry concurrently invested in CST, taking the other 2 percent ownership.

Terry, his wife and their three children formed CDJ, LLC. That LLC purchased real estate and leased it to CST.

The simultaneous initial co-investment in CST by Terry and his IRA was found not to be a prohibited transaction. The court noted that the LLC had no members at the time initial contributions were subscribed and funded, so it fell outside the definition of a disqualified person with respect to the IRA.

But, Terry was a disqualified person with respect to his IRA. Because he had the ability to direct how his rollover IRA invested its funds and did so, Terry was a “fiduciary” within the meaning of the prohibited transaction rules. He, thus, was in a position to potentially engage in self-dealing under IRC Section 4975.

Terry was employed by and provided services to the corporation, for which he received compensation. The court found that assets of the corporation were, in effect, assets of the IRA for purposes of prohibited transactions. The IRA had invested nearly all of its funds in CST. Based on this, the court said that payments to Terry from CST were the same thing as payment of IRA funds to Terry.

Although payment of reasonable compensation to a “fiduciary” is exempted from the definition of self dealing, the court found that exemption applied only to a fiduciary’s investment activities. The court pointed out that Terry was being paid for operating a trade or business, which isn’t the same thing as conducting investment activities.

Thus, the court found compensation paid by CST to Terry constituted a prohibited transaction. As a result, Terry’s IRA was deemed distributed in a taxable distribution on Jan. 1, 2005, the first year when Terry was paid compensation by CST.

As Terry hadn’t yet attained age 59½ on Jan. 1, 2005, the date of the deemed distribution, he owed IRC Section 72(t)’s 10 percent tax on early distributions in addition to income taxes on that distribution. 


Cracks in Bankruptcy Protection

IRA inheritors found themselves in the crosshairs of bankruptcy case law in 2013. Creating a split with the Fifth and Eight Circuits,13 the Seventh Circuit, in Rameker v. Clark, held that inherited IRAs aren’t protected from creditor claims in bankruptcy.14 The better planning option may be to name a creditor protection trust as beneficiary of an IRA.

The question raised was whether an inherited IRA qualifies for exemption of retirement funds from creditors’ claims in bankruptcy under 11 U.S.C. Sec-
tion 522(b)(3)(C) and (d)(12). The exemption applies to:


. . . retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.


While an inherited IRA is “exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986,” the court said a question arises as to what’s meant by the term, “retirement funds.” 

According to the court, whether “retirement funds” are present isn’t ascertained merely by examining the title of the account, but rather whether the funds must be used for retirement. Finding no present impediment to distribution before reaching retirement age, such as the 10 percent tax on early withdrawals under Section 72(t), and also finding that distributions to the beneficiary are required even before retirement, the court concluded that an inherited IRA is a tax-deferred continuation of a retirement fund, but has ceased to be a retirement fund in the hands of the beneficiary.                    



1. Treasury Inspector General For Tax Administration, “Statistical Trends in Retirement Plans” (Aug. 9, 2010). 

2. Ibid., p. 14.

3. Internal Revenue Code Section 72(t). Exceptions apply.

4. IRC Section 72(2)(2)(A)(ii).

5. United States v Windsor, 133 S.Ct. 2675 (2013). 

6. Cozen O’Connor PC v. Tobits et al., No. 2:11-cv-00045 (Dist. Ct. E. Pa. July 29, 2013).

7. Revenue Ruling 2013-17, 2013-38 IRB 1 (Aug. 29, 2013). Updated frequently asked questions for same-sex couples, registered domestic partners and individuals in civil unions have been posted on Publication 555, Community Property, has also been updated (available on

8. IRC Section 1341.

9. IRC Section 408(d)(3)(A)(i).

10. Peek, et al. v. Commissioner, Nos. 5951-11, 6481-11; 140 T.C. No. 12 (May 9, 2013).

11. Daley v. Mostoller, No. 12-6130 (6th Cir., June 17, 2013). See also IRS Announcement 2011-81, 2011-52 IRB 1 (Dec. 27, 2011), establishing a temporary blanket exemption for individual retirement accounts entering into such agreements, provided there’s been no execution or other enforcement pursuant to the agreement against the assets of an IRA of the individual granting the security interest or entering into the agreement.

12. Terry L. Ellis, et ux. v. Comm’r, No. 12960-11, T.C. Memo. 2013-245 (Oct. 29, 2013).

13. In re Nessa, 426 B.R. 312 (BAP 8th Cir. 2010); In re Chilton, 674 F.3d 486 (5th Cir. 2012).

14. Rameker v. Clark, No. 12-12414 and 12-1255 (7th Cir. April 23, 2013). The U.S. Supreme Court granted certiorari on Nov. 26, 2013.