HOW TO TRANSFER TITLE FROM A DECEASED SPOUSE

by | Feb 3, 2015 | Uncategorized

When property is owned by spouses as joint tenants with rights of survivorship or as community property with rights of survivorship, the interest of the first spouse to die passes to the surviving spouse. If property was held between spouses with “rights of survivorship” then it can pass without having to go to probate. While you do not have to go to probate court to transfer title out of the deceased spouse’s name, you typically need to record something with the county where the property is located to transfer the deceased person off of title. The procedure differs a bit amongst the states but essentially it will require the filing of an original death certificate and affidavit or statement from the surviving spouse. For example, in California the surviving spouse can file an Affidavit of Death of Joint Tenant along with a certified copy of the death certificate. In Utah, the surviving spouse files a Survivorship Affidavit along with a certified copy of the death certificate.

Property owned in a Revocable Living Trust of a couple doesn’t require any filings with the county to change title as the Trust remains the sole owner and typically the surviving spouse simply becomes the sole beneficiary for their remaining life of the assets of the trust.

We routinely assist clients with title transfers  to their LLCs and Trust and also assist clients who may have title with a deceased spouse still listed as an owner. The rules and procedures are a little tedious but it is important to update title upon the passing of a spouse as the surviving spouse’s heirs will have problems and possibly two probates upon inheriting title from the surviving spouse. While we want every client to have a well tailored estate plan and to not even need to know these rules, we realize many families still rely on property to transfer by reason of “rights of survivorship” so these rules and the procedure are important for many.

2014 Tax Reporting for Your Self-Directed IRA

by | Jan 27, 2015 | Uncategorized

Self-Directed IRA investors should be aware of the following IRA tax reporting responsibilities.  Some of these items are completed by your custodian and some of them are the IRA owner’s sole responsibility. Here’s a quick summary of what should be reported to the IRS each year for your IRA.

IRA Custodian Files

Your IRA Custodian will file the following forms to the IRS annually:

IRS FORM PURPOSE WHAT DOES IT REPORT
Form 5498 Filed to the IRS by your custodian. No taxes are due or paid as a result of Form 5498. IRA contributions, roth conversions, the accounts fair market value as of 12/31/14, and required minimum distributions taken.
Form 1099-R Filed to the IRS by your custodian to report any distributions or Roth conversions. The amounts distributed or converted are generally subject to tax and are claimed on your personal tax return. IRA distributions for the year, Roth IRA conversions, and also rollovers that are not direct IRA trustee to IRA trustee.

IRA Owner’s Responsibility

Depending on your self-directed IRA investments, you may be required to file the following tax return(s) with the IRS for your IRA’s investments/income:

IRS FORM DOES MY IRA NEED TO FILE THIS? DUE DATE
1065 Partnership Tax Return If your IRA is an owner in an LLC, LP, or other partnership, then the Partnership should file a 1065 Tax Return for the company to the IRS and should issue a K-1 to your IRA for its share of income or loss. Make sure the account preparing the company return knows to use your custodian’s tax ID for your IRA’s K-1’s and not your personal SSN. If your IRA owns an LLC 100%, then it is disregarded (single member LLC) and the LLC does not need to file a tax return to the IRS. April 15th, 6 month extension available
990-T IRA Tax Return (UBIT) If your IRA incurs unrelated business income tax (UBIT), then it is required to file a tax return. The IRA files a tax return and any taxes due are paid from the IRA. Most self-directed IRAs don’t need to file a 990-T for their IRA, but you may be required to file for your IRA if your IRA obtained a non-recourse loan to buy a property (UDFI tax), or if your IRA participates in non-passive real estate investments such as construction, development, or on-going short-term flips. You may also have UBIT if your IRA has received income from an active trade or business (c-corp dividends exempt). Rental income (no debt leverage), interest income, capital gain income, and dividend income are exempt from UBIT tax. April 15th, 3 month extension available

 

Frequently Asked Questions

I’ve answered the most frequently asked questions below as they relate to your IRA’s tax reporting responsibilities.

Q: My IRA is a member of an LLC with other investors. What should I tell the accountant preparing the tax return about reporting profit/loss for my IRA?

A: Let your accountant know that the IRA should receive the K-1 (e.g. ABC Trust Company FBO John Doe IRA) and that they should use the Tax-ID of your custodian and not your personal SSN. Contact your custodian to obtain their Tax ID. Most custodians are familiar with this process so it should be readily available.

Q: Why do I need to provide an annual valuation to my custodian for the LLC (or other company) my IRA owns?

A: Your IRA custodian must report your IRA’s fair market value as of the end of the year (as of 12/31/14) to the IRS on Form 5498 and in order to do this they must have an accurate record of the value of your IRA’s investments. If your IRA owns an LLC, they need to know the value of that LLC. For example, let’s say you have an IRA that owns an LLC 100% and that this LLC owns a rental property and that it also has a bank account with some cash. If the value of the rental property at the end of the year was $150,000 and if the cash in the LLC bank account is $15,000, then the value of the LLC at the end of the year is $165,000.

Q: I have a property owned by my IRA and I obtained a non-recourse loan to purchase the property. Does my IRA need to file a 990-T tax return?

A: Probably. A 990-T tax return is required if your IRA has income subject to UBIT tax. There is a tax called UDFI tax (unrelated debt financed income) that is triggered when your IRA uses debt to acquire an asset. Essentially, what the IRS does in this situation is they make you apportion the percent of your investment that is the IRAs cash (tax favorable treatment) and the portion that is debt (subject to UDFI/UBIT tax) and your IRA end up paying taxes on the profits that are generated from the debt as this is non-retirement plan money. If you have rental income for the year, then you can use expenses to offset this income. However, if you have $1,000 or more of gross income subject to UBIT then you should file a 990-T tax return. In addition, if you have losses for the year you may want to file 990-T to claim those losses as they can carry-forward to be used to offset future gains (e.g. sale of the property).

Q: How do I file a 990-T tax return for my IRA?

A: This is filed by your IRA and is not part of your personal tax return. If tax is due, you will need to send the completed tax form to your IRA custodian along with an instruction to pay the tax due and your custodian will pay the taxes owed from the IRA to the IRS. Your IRA must obtain its own Tax ID to file Form 990-T. Your IRA custodian does not file this form or report UBIT tax to the IRS for your IRA. Our law firm is preparing and filing 990-T tax returns for our self-directed IRA and 401(k) clients. Contact us at the law firm if you need assistance.

Sadly, not many professionals are familiar with the rules and tax procedures for self-directed IRAs so it is important to seek out those attorneys, accountants, and CPAs who can help you understand your self-directed IRA tax reporting obligations. Our law firm routinely advises clients and their accountants on the rules and procedures that I have summarized in this article and we can also prepare and file your 990-T tax return.

IRAs and Annuities: What You Need to Know

by | Jan 20, 2015 | Uncategorized

IRAs are the most commonly held retirement account and annuities are one of the most popular investments for retirees. Despite the popularity of each, the two concepts shouldn’t ordinarily be combined together. On the topic of IRAs and annuities, I am routinely asked the following questions.

  1. Can I buy an annuity with my IRA?
  2. Should I buy an annuity with my IRA?
  3. How do I get out of an annuity I bought with my IRA?
  4. Can I roll-over my annuity IRA to a self-directed IRA?

In this article I’ll answer each question, but before I do, let me first explain how an annuity works as it is essential to understanding the questions and your options. IRS Publication 939 is helpful in explaining the annuity tax rules and can be found here.

Annuity Basics

An annuity is an insurance product you can purchase whereby you invest funds with the annuity insurance company and they agree to make payments to you for the rest of your life or for a set period of years. The typical candidates of annuities are retirees seeking a guaranteed steady stream of income. The retiree gives up their cash now in exchange for payments back from the insurance company over time. There are many different types of annuities but the two most common are fixed annuities and variable annuities. In a fixed annuity, the insurance company agrees to pay you back based on a fixed payment schedule. Under a variable annuity, the insurance company agrees to pay you back based on the performance of the annuity investment (you have some limited choices in how those funds are invested in a variable annuity).

An annuity can begin paying you back immediately or it can be invested over a period of time and grow tax deferred and then later pay you out at retirement age. The income from an annuity is taxed as it is received by the annuity owner. Typically, when you receive payments from an annuity you personally own (outside a retirement account),  a portion of the payment is taxable (the income/growth part) and the portion that is a return of your investment or premium is not taxable. The portion of the annuity payment that is taxable is subject to ordinary income tax rates.

Tax Deferral

One of the benefits of an annuity is that the funds grow in the annuity tax deferred with the funds compounding and without having to pay tax on any income the IRS. When you start receiving payments from the annuity, the funds you invested into the annuity are not taxed but the earnings are taxed.

No Contribution Limits

When you purchase an annuity outside of a retirement account such as an IRA, you can invest as much money as you want and you are not limited to annual contribution limits like you are with IRAs or 401(k)s. So, for example, if you want to buy a $250,000 annuity with $250,000 of cash, then you can make that investment all in one-year. You are not subject to $5,500 annual contribution limits.

Early Penalty

If you take funds from an annuity before you’re 59 ½, you’re subject to a 10% early withdrawal penalty on any taxable earnings. Any investment gains (above your initial investment) are also subject to tax and must be included as regular income on your personal tax return.

Surrender Charge

When you own an annuity you will typically have an account value for that annuity and if you decide to “cash-out” the annuity, instead of receiving the scheduled payments, you will likely be subject to a surrender charge. The surrender charge differs amongst annuity products and companies but the most common penalty is a 7% surrender charge during your first couple of years and then it goes down 1% each year until it is removed. So, if you have only had an annuity for a few years it is likely that you will have to pay the insurance company a surrender charge in order to “cash-out” the annuity. If you have had an annuity for ten years or longer, you are likely able to “cash-out” the annuity without penalty.

IRAs and Annuities

Now that we have the basics of annuities out of the way, let’s get to the questions about annuities and IRAs.

1. Can I buy an annuity with my IRA?

Yes, you can purchase an annuity with your IRA. However, just because you can doesn’t mean that you should. In my opinion, annuities can be part of a well structured financial plan but should be purchased with non- retirement plan (e.g. IRA) funds.

2. Should I buy an annuity with my IRA?

Probably not. One of the benefits of an annuity is that it gives you tax-deferral on the income that is being generated and as a result, using an IRA where you already obtain tax-deferral just doesn’t seem to make sense. If you like the annuity concept of fixed and guaranteed payments, albeit with modest gains from your principal, then you should consider an annuity with your non-retirement plan funds as those dollars aren;t getting any special treatment under the tax code when they are invested. If you already have a large nest-egg of retirement plan funds, why use that set of tax favorable funds to buy an investment product that you could buy with non-retirement plan funds and receive the same tax-treatment. Some say that buying an annuity with an IRA is like wearing a belt and suspenders since your money is already tax-deferred in a traditional IRA. Secondly, annuities are subject to surrender charges and as a result you are locked into that investment and face surrender penalties at the investment level (let alone the account level) if you want to get money out of the annuity to invest in something else or for personal use.

3. How do I get out of an annuity bought with my IRA?

You can usually “cash-out” your annuity owned by your IRA, however, cashing out the annuity to the account value will typically cause a surrender charge. Most annuities have a surrender charge during the first 7 years or so, whereby the penalty is 7% for the first year or two and then decreases 1 percent each year until it is removed. Check with you annuity company or financial advisor in your specific situation though as the products and surrender charges do vary. If you “cash-out” an annuity owned with IRA funds and if those funds are returned to an IRA, then there is no taxable distribution or tax penalty. The only “penalty” would be the surrender penalty by the annuity insurance company. If you take the cash personally though, instead of sending it to your IRA, then those funds are subject to the regular IRA distribution rules and as a result you could be subject to taxes and early withdrawal penalties on the amounts received.

 4. Can I roll-over my annuity IRA to a self-directed IRA?

Yes. You can roll-over your annuity IRA to a self-directed IRA. You’ll need to “cash-out” the IRA, pay any applicable surrender charges, and then instruct the annuity company to process a direct roll-over of the funds to your self-directed IRA custodian as a direct rollover. This rollover will NOT be subject to taxes or penalties. Keep in mind though, there may be a surrender penalty though with the annuity company. If there is a surrender penalty, you’ll want to determine whether the benefit and payments owed under the annuity are worth hanging on to the annuity investment or if you are better off simply paying the penalty and moving on to other investment options.

Unfortunately, the annuity and IRA rules can be a little tricky, but once understood you can make informed decisions about how to best use and invest your retirement dollars.

2015 IRA ROLLOVER RULE CHANGE IS IN EFFECT

by | Jan 13, 2015 | Uncategorized

Starting January 1, 2015, you are only allowed one 60-day rollover for all of your IRAs in a twelve-month period. This change was the result of a Tax Court case reported on my blog last year known as Bobrow. Click here for the details. The important details of the new rule is that you can only take one 60-day rollover, in a 12 month period. The prior practice was that you could take one 60-day rollover per IRA per 12 month period. However, the Bobrow case changed that rule and now you can only take one 60-day rollover for all of your IRAs per 12 month period. Keep in mind that a 60-day rollover is a rollover of IRA funds whereby you receive the money personally from the IRA custodian and then you have 60 days to re-deposit them into the same IRA or into a new IRA to avoid a distribution of the funds. This new rule does not apply to trustee-to-trustee transfers (aka, direct rollovers)whereby one retirement plan custodian (IRA or 401(k)) transfers funds directly to your new custodian. You can do as many direct trustee-to-trustee transfers as you desire and as a result we recommend that clients always use a trustee-to-trustee transfer when rolling over retirement plan funds as you will avoid any potential issues under the new 60-day rollover rules. The IRS has provided a helpful summary of the new rule here. I have prior articles written on the case history of the 60-day rollover subject here.

ROTH IRA CONVERSION RE-CHARACTERIZATION

by | Jan 6, 2015 | Uncategorized

If you have converted a Traditional IRA to a Roth IRA in 2014, you can reverse the conversion by doing what is called a Roth IRA conversion re-characterization. Under a re-characterization, the Roth IRA funds and assets are rolled back into a Traditional IRA and the amounts converted are considered contributed to the traditional IRA and you effectively cancel out the amounts converted. As a result of the re-characterization, the taxes that would have been owed for the Roth IRA conversion are no longer due and the assets and funds re-charaterized go back to a  Traditional IRA.

A Roth IRA conversion re-characterization is an excellent strategy in two situations. First, if you do not have the funds to pay the taxes on the conversion. Reversing the re-characterization will remove the tax liability. Problem solved. Second, if the investments in your Roth IRA, following the conversion, did not fare so well and if the account decreased in value you are generally better off re-characterizng the conversion and going back to a traditional IRA and then conducting a new Roth IRA conversions at the lower valuation. If you have completed a Roth IRA conversion re-characterzation, you do have to wait until the next year to convert the same amounts back to Roth as the IRS restricts you from immediately re-converting after a re-characterization.

Here are a few keys facts to keep in mind for Roth IRA conversion re-characterizations.

1. You must coordinate the re-conversion with your IRA custodian as they will need to roll the Roth IRA funds back to a Traditional IRA. Your tax return also needs to properly report the re-conversion so that you don’t end up paying taxes on the 1099-R you will have received for the Roth IRA conversion.

2. You can re-characterize up to October 15th of the year following the year you converted. So if you conducted a Roth IRA conversion in 2014, you have until October 15, 2015 to re-characterizer the conversion. You have until October 15th even if you did not file an extension and even if you have already filed your tax return for the prior year. If you filed a tax return already and claimed the Roth IRA conversion amounts as income, the tax return will need to be amended.

3. Roth 401(k) or other employer in-plan Roth conversions cannot be re-characterized so once those are reported to the IRS you cannot reverse them as the rules applicable to Roth IRA conversion re-characterizations do not apply to 401(k) or other in-plan Roth conversions.

Because of the re-characterization rules, the decision to convert funds to a Roth IRA isn’t as “taxing” as you’d think as you can later have a change of heart if the odds don’t end up in your favor (e.g. lower investment value, or no personal funds to pay taxes on the conversion).

More details and information can be obtained from an informative FAQ page from the IRS here.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook.

3 THINGS TO DO WITH YOUR IRA BY DEC 31

by | Dec 23, 2014 | Uncategorized

As we end 2014, there are three critical items that you must be aware of as these items must be completed by December 31, 2014.

1. Required Minimum Distributions.  If you are age 70 1/2 or older and if you have a traditional IRA (or SEP or SIMPLE IRA or 401k), you must take your required minimum distributions (“RMD”) for 2014 by December 31, 2014. While 2014 contributions can be made up until April 15 of the next year, RMD payments must be taken before the end of the year. If you have a Roth IRA, relax,  the RMD rules don’t apply to Roth IRAs.  Click here for a nice summary of the RMD rules from the IRS.

2. Charitable RMD Distribution Income Exclusion Rule. Congress just passed the tax extenders bill and one of the items extended was the Qualified Charitable Distribution rules. Under this rule, an IRA owner who is 70 1/2 or older can donate up to $100,000 from their IRA to a qualifying charity and such donation from their IRA will count towards their required minimum distribution requirement and will not be included into their gross income. This is a great way to pull money out of your IRA tax-free as the distribution is not included in your gross income. This only applies to those 70 1/2 or older and again it will also satisfy RMD requirements. It’s unfortunate that Congress only recently extended this law as it would have been a great planning tool if we knew it were available in 2014. Regardless, this can be an excellent option for those who are 70 1/2 and who would like to contribute to a charity by year-end. Keep in mind though that you don’t get a charitable deduction for the amount given to charity from the IRA, instead, you are able to exclude up to $100,000 from the IRA distribution on your income (something that would otherwise be taxable). The IRS has more details here. This page explains the 2013 rule but the rule was extended just two weeks ago and it now applies in 2014 as well. Note that it was only extended for 2014 so the rule is not available in 2015 at this time.

3. Roth IRA Conversions.Conversions from Traditional IRAs to Roth IRAs must be completed by December 31, 2014, in order to apply to 2014 taxable income. Keep in mind that when you convert a traditional IRA to a Roth IRA that the amount converted is included as income on your tax return. There are no longer any income restrictions on Roth IRA conversions so everyone qualified regardless of income. Converting to a Roth can be a great strategy if you have a low-income year or if you have losses that can be used to off-set the income from the conversion. It is also a great strategy if you have investments will current low fair market values, which you believe will appreciate over time. Many clients wait until year-end to determine if this is a good year to convert or not. . If you are unsure about whether a Roth conversion makes sense for you, keep in mind that you can re-characterize a Roth conversion back to Traditional IRA before you file your 2014 tax return on April 15, 2015  (including extensions).

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook