Inherited IRAs


I’ve inherited a substantial IRA from my parent. What are my choices?  Can I roll over the money into my own IRA? What I’d really like to do is convert the inherited IRA to a Roth IRA.




Those approaches are not available to you.  Because you are not the spouse of the decedent, you only are permitted to arrange a trustee-to-trustee transfer of the money to another IRA in the name of the decedent and yourself.  A death triggers the process of exposure of the IRA accumulation to taxation. Although that taxation can be extended over your actuarial lifetime, it can’t be delayed beyond that, which is why the decedent’s name always must appear on the IRA.

If you attempt to convert an inherited IRA into a Roth IRA, the conversion will be treated as a complete and taxable distribution of the IRA followed by an excess contribution to the Roth IRA.  Similarly, if you attempt a trustee-to-trustee transfer from the inherited IRA to one in your own name, it will be treated as a complete distribution followed by a regular contribution to your IRA (not a rollover contribution).


Do you have a question concerning wealth management or trusts? Send your inquiry to

© 2016 M.A. Co. All rights reserved.


Washington Talk

Deadline deferred. On July 31, 2015, the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. One minor component of the legislation implemented an idea that had been included in the President’s earlier budget messages: requiring consistent basis reporting for income and estate tax purposes. To this end, executors of estates large enough to be required to file a federal estate tax return will have additional paperwork requirements. They have to inform both the IRS and beneficiaries of the tax basis of all bequests.

The law requires such filing within 30 days of the due date for the estate tax filing or 30 days after the actual filing. There was no transition rule, so the IRS created one with Notice 2015-57, 2015-36 IRB 294, which provided that no such filings would be due before February 29, 2016. Next the IRS further extended the deadline to March 31, 2016. Proposed Regs. had not yet been issued, and the Service suggested that executors wait for the Regs. before filing.

Temporary Regulations (T.D. 9757) were published codifying the delayed deadline to March 31, with an effective date of March 4, 2016.

Regulations proposed. On the same day as the temporary Regs. on the transition rule was published, the IRS issued the anxiously awaited Proposed Regs. on consistent basis reporting (REG-127923-15). The new rules apply only to property that increases the federal estate tax obligation. The proposed Regs. confirm that property that qualifies for the marital or charitable estate tax deduction is exempt from basis reporting, because it does not generate a federal estate tax

The Regs. cover the situation is which additional estate property is discovered after the time for submitting basis reports, as well as the application of the rules to property that is sold during the period of estate administration.

Early reactions to the proposed Regs. have been positive, and practitioners have found them helpful. However, some called for an additional extension of time for these filings. Form 8971 for reporting “Information Regarding Beneficiaries Acquiring Property From a Decedent” to the IRS was only released in January. The IRS has allowed less than a month for the filings, following release of the proposed Regs., and it comes at the height of the tax filing season to boot.

According to the preamble to the newly proposed Regs. on consistent basis reporting, only about 10,000 taxpayers are expected to be affected by the information reporting per year. According to the analysis of the fiscal effects of the new law created by the Joint Committee on Taxation (JCX-105-15), the change will raise $117 million this year alone. That comes to $11,700 per taxable estate. The increased revenue grows each year, reaching $173 million in 2025.

As seen on Craigslist. The following ad really appeared on Craigslist: “Wanted: kids to claim on income taxes — $750 (Springfield, MO)[.] If you have some kids you aren’t claiming, I will pay you $750 each to claim them on my income tax. If interested, reply to this ad.”

The poster of that ad has now been indicted for filing false tax returns using real Social Security numbers for persons who were not his dependents.

While the candidates vying for the Republican presidential nomination have proposed a variety of tax reduction plans for promoting economic growth, Hillary Clinton has called for a wide range of tax increases. Among them:

  • Implementing a 4% “millionaire’s surcharge” on adjusted gross income above $5 million.
  • Requiring a 30% minimum tax on individuals making more than $1 million, the so-called Buffett rule named after billionaire investor Warren Buffett, who contends many of the wealthy are not taxed enough.
  • Limiting the value of deductions and exclusions to 28%. While this would limit the home mortgage interest deduction, it would not apply to the deduction for charitable contributions.
  • Requiring the wealthy to hold assets for six years to benefit from the preferential 23.8% capital gains tax rate—20% plus the 3.8% net investment income tax enacted under the Affordable Care Act. Assets held less than six years would be taxed on a sliding scale that goes upward from 23.8%. Those holding assets less than one year, for instance, would face a capital gains rate of 43.4%.

Reducing the tax threshold on estates to $3.5 million ($7 million for married couples), along with increasing the top estate tax rate to 45% from the current 40% and setting a lifetime limit on the gift tax exemption at $1 million.

The entire Clinton tax proposal was projected by the Urban-Brookings Tax Policy Center to increase tax revenue by $1.1 trillion over the first decade of implementation. The current proposal does not include the elimination of stepped-up basis at death, which the President had proposed and sources in the Clinton campaign said will be forthcoming.

The Tax Foundation’s analysis came to a different conclusion, finding that just $498 billion would be raised. They use a dynamic scoring model. As the tax increases would be likely to slow economic growth, that development gets factored into their tax math.

Harper Lee’s will remains a mystery. The author of To Kill a Mockingbird and, more recently, To Set a Watchman, Lee died in February. Her estate is estimated to be worth tens of millions of dollars, and there is considerable interest in what will happen to her personal papers. Lee never married and had no children, so her only living relatives are nieces and nephews. However, we may never know the terms of her will because, at the request of the attorneys for her estate, the Alabama probate judge ordered it sealed. He ruled: “The court finds by clear and convincing evidence that information contained in the will and associated court filings pertains to wholly private family matters; poses a serious threat of harassment, exploitation, physical intrusion, or other particularized harm to persons identified in those documents or otherwise entitled to notice of this proceeding; and poses potential for harm to third persons not entitled to notice of this proceeding.” reported that Lee had apparently taken steps to prevent Hollywood from ever remaking To Kill a Mockingbird.

Scorecard. According to the Congressional Budget Office, the federal budget deficit through February 2016 was $352 billion. That’s $34 billion less than the year earlier period. Individual income and payroll tax collections were up 6%, and spending was up 2%. Spending on Social Security was up 4%, primarily due to an increase in the number of beneficiaries.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Penciled changes to a photocopy of a will, including “void,” does not revoke it.

In re Estate of Sullivan, 868 N.W.2d 750 (Minn. Ct. App. 2015)

Esther Sullivan executed her will in January 2006. The will was properly notarized and had the required two witnesses. Esther divided her estate between her grandson, Joseph, a former employee, Tara Jean. The nature of the employment was not disclosed by the court, but Tara Jean was named as personal representative of the estate. She would be responsible for collecting the estate’s assets, filing the tax and probate forms, and distributing the assets.

By 2008 Esther had a change of heart. On a photocopy of the original will, she wrote across the top “[t]he Will dated January 19, 2006 is void and to be replace[d] with this and all written in changes.” A variety of alterations were penciled in, the most consequential of which was naming Joseph the personal representative instead of Tara Jean.

Not yet completely satisfied with her handiwork, in October 2010 Esther downloaded a will form and completed it by hand. This time, in addition to naming Joseph as personal representative, she made him the sole heir of all of her property, “after her debts are payed (sic).” Interestingly, Tara Jean witnessed Esther’s signature on the 2010 will.

After Esther died, Tara Jean offered the 2006 will for probate. Joseph objected, and he submitted the 2008 and 2010 alternatives as being more consistent with Esther’s final intentions for her property.

Both the lower court and then the appellate court held that the statutes governing wills must be strictly adhered to. The same formalities that apply to creating a will apply equally to its revocation. Neither the 2008 nor the 2010 will was executed with sufficient witnesses to Ester’s signature, so they failed the test. Alternatively, the appellate court held, a will may be revoked by a “revocatory act on the will,” including “burning, tearing, canceling, obliterating, or destroying the will or any part of it․” Such an act must be done to the original will, not to a photocopy of it.

Without the required witnesses, the 2008 and 2010 documents amounted to nothing more than notes for making a future will.

During the appeal, Joseph argued that Tara Jean had breached her fiduciary duty to the estate by offering the 2006 will for probate when she herself was a witness to the 2010 attempted revocation. Unfortunately, the Court held, he brought that argument up too late to be considered.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Unexpectedly strong post-death auction sale raises date-of-death death value.

Estate of Newberger v. Comm’r, T.C. Memo. 2015-2464

Bernice Newberger died in July 2009. Her estate included three valuable pieces of art, for which it obtained appraisals from Sotheby’s and Christie’s. The valuation was complicated by the fact that the market for fine art took a steep dive in 2008, as the economy slipped into recession. For example, in October 2008 some 44% of pieces put up for auction failed to attract minimum bids, double the rate of a year earlier. They had to be returned to their owners. In 2009 Sotheby’s revenue declined by 53% and Christie’s by 46%. Bernice’s death came at the trough of the slump.

Based upon the advice of appraisers, the estate valued two lesser pieces at $450,000 and $500,000. The real prize was a Picasso. Sotheby’s offered a $3.5 million guaranteed price. Christie’s offered the estate better guarantees and a professional estimate of date-of-death value of $5 million, which the estate duly included on its estate tax return, timely filed in October 2010.

The IRS challenged all three valuations. Perhaps to create some liquidity for paying taxes, the estate had accepted the terms from Christie’s and put the Picasso up for auction in February 2010. The expected sale price was $4.7 million to $6.3 million, consistent with the appraisal. In the event, including the buyer’s premium, the painting fetched over $12 million. The IRS cited that fact as it claimed that the Picasso had been undervalued by the estate.

Although events occurring after death are not to be taken into account to determine date-of-death values, the Tax Court held that the later sale may be used as evidence of value. The estate’s argument that the high price was “a fluke” that was unforeseeable at the date of death was rejected. The Court accepted the IRS’ downward adjustment to $10 million to reflect the changing market conditions. The estate’s values for the two lesser pieces were sustained.

Had Newberger lived another seven months, her estate would have avoided all estate taxes, as 2010 was the year when the federal estate tax was optional. In the absence of estate tax, carryover basis would apply. In that event the heirs would have been exposed to a very large capital gains tax upon the sale of the art, as Newberger had acquired the Picasso for just $195,000 in 1981.

Portability election errors

The increase in the amount exempt from federal estate tax to $5 million per taxpayer (plus inflation adjustments) has been a game changer for estate planners. Nearly as important, when it comes to estate plans for married couples, is the advent of the portability of the estate tax exemption, the Deceased Spouse’s Unused Exemption (DSUE). By simply filing an estate tax return at the death of a spouse, even if no estate tax is due, the estate tax exemption for the surviving spouse may roughly double. Such a filing is not required, but it would be a good precaution to take. The future course of the family fortune as well as the federal transfer tax regime are difficult to predict, so any step that could save substantial tax dollars in the future should at least be considered.

But this is a brand new planning area with which we are becoming familiar. Lawyers Alan Gassman, Ed Morrow, Ken Crotty, Christopher Denicolo, Seaver Brown and Brandon Ketron have prepared “Ten Common Portability Mistakes and What You Need to Know to Avoid Them” as a guide [LISI Estate Planning Newsletter #2395 (February 29, 2016)]. Here are just four errors they highlighted to keep in mind.

Accidental election out of portability

Failure to file an estate tax return for the first spouse to die will forfeit the DSUE for the survivor. The estate tax return must be filed within nine months of death, but a six-month extension may be granted. Timely filing Form 4768 will gain an estate an automatic six-month extension.

Estates smaller than the statutory threshold for filing may apply for a discretionary extension of time even beyond the normal 15-month period. Many recent Private Letter Rulings have granted an additional 120 days for filing [see Private Letter Rulings 201610013 and 201608010, for example].

Given the relative newness of portability, we may expect many more such private rulings in the coming years. Eventually, more and more executors will recognize the need to file the estate tax return even when no taxes are owed.

Assuming that no estate tax planning will be needed

If total family wealth is about $5 million, a couple may assume that a single federal exemption amount will be sufficient to shield the family fortune from the federal estate tax. Thus, they might decide to forego planning for the portability election as not worth the expense of hiring a professional to file an otherwise unnecessary estate tax return.

There are two potential defects with this plan. First, the amount exempt from federal estate tax could be sharply reduced in the future—both of the Democratic candidates for President this year have endorsed
that idea.

Second, the surviving spouse may live for decades, and may not consume all of the income from that $5 million. If asset appreciation plus savings comes to just 7.2% annually, the family fortune will grow to $10 million in ten years, $20 million in 20 years. At a 10% growth rate, it could reach $40 million in 22 years. Inflation adjustments to the exempt amount are unlikely to keep up with that.

Losing the DSUE through remarriage

A surviving spouse may have a DSUE only from his or her most recently deceased spouse. Assume, for example, that widow with $8 million in assets has a $5 million DSUE through her late husband. She remarries a widower who has $10 million, and through a prenuptial agreement they waive their marital rights to each other’s assets. The second husband dies, leaving his entire estate to his descendants, using up his estate tax exemption. The widow’s DSUE from her first husband will be extinguished at that moment. Her heirs now may be exposed to substantial
estate taxes.

It is entirely possible that when she consulted her lawyers about the pre-nup, they might have recommended against the marriage at all, considering the tax consequences. The authors suggest consideration of a credit shelter or bypass trust to mitigate this potential problem.

Not maximizing the DSUE with an irrevocable life insurance trust

Assume that Husband and Wife have a $5 million joint estate, and they each have $2 million life insurance policies. At Husband’s death, his assets and the insurance proceeds pass into a credit shelter trust. That will use up $4.5 million of his exemption, leaving Wife a $950,000 DSUE. She has her own exemption amount, which will be inflation indexed, and the DSUE, which is not.

The better alternative may be to have the life insurance owned by an irrevocable life insurance trust. In that situation, the insurance proceeds may be excluded from Husband’s estate, leaving Wife a much larger DSUE.

Summing up

The advent of portability, coupled with larger exemptions, has allowed much greater flexibility in estate planning. However, that is not quite the same as simplicity. There remains a wealth of considerations for clients and their advisors to weigh as they find the best way forward in a challenging environment.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Rocky Start

April 4, 2016—Equity indices tumbled in January, amid uncertainty about global economic growth, oil prices and developments in China. Oil prices bottomed in February, and stocks slowly struggled back to where they’d started the year. At the end of the first quarter, the S&P 500 was up 13% off its lows, up 0.8% on the quarter. The Dow Jones Industrial Average was ahead 1.5%, while the NASDAQ was down 2.7%. The outlook for oil prices remains uncertain, as OPEC members appeared to be near an agreement on curbing output as the quarter ended. The possibility of Iranian oil entering the world market later this year adds still more to the supply side.

The standout performer in the first quarter was the price of gold, up 16.5%. Two forces generally drive the price of gold, which otherwise has relatively little intrinsic value. The first is inflation or inflationary expectations, of which there is presently not much evidence. The second is uncertainty—economic, political, military, or what have you. Of that there has been an abundance. Some observers believe that gold is on the verge of a correction, while others point out that the price remains about 35% below the peak of nearly $1,900 an ounce, set in 2011.

Interest rates

The Fed finally raised short-term interest rates by a quarter point in December. At that time, additional increases were anticipated through 2016, perhaps as much as a full percentage point. By March the tune had changed, as the economy evidently needs more time to absorb more interest rate increases. In an address to the Economic Club of New York, Federal Reserve Chairwoman Janet Yellen acknowledged that the economic performance this year was “somewhat mixed,” so the Fed will be cautious about future increases. Two more quarter-point bumps are expected this year, the first perhaps by June.

The Fed believes that a stable economy will include 2% price inflation, and that is their target. The target has not been hit; through the 12 months ended in January inflation was 1.7%, and it has slowed since then. Measures of inflationary expectations similarly show little sign of reaching the 2% threshold. Said Yellen: “Taken together, these results suggest that my baseline assumption of stable expectations is still justified. Nevertheless, the decline in some indicators has heightened the risk that this judgment could be wrong. If so, the return to 2% inflation could take longer than expected and might require a more accommodative stance of monetary policy than would otherwise be appropriate.”


The economy added 215,000 jobs in March, a strong showing. Despite that, the unemployment rate rose to 5.0%. But that fact is actually good news, because the increase in unemployment was due to an increase in the labor force participation rate, the percentage of working-age people who are in the work force. After bottoming at 62.4% in September 2015, which was the lowest since the Carter administration, the rate has been edging up, reaching 63%. Not robust improvement, but moving in the right direction again.

Unpacking the employment numbers, manufacturing jobs were down 29,000, and oil and gas jobs fell 19,200. Mining jobs were down 12,000, with total industry job losses a staggering 185,000 since September 2014. The monthly losses were offset by increases in retail trade (48,000), construction (37,000), health care (37,000) and food services (25,000). Average hourly earnings for private nonfarm payrolls were up seven cents, to $25.43. The average workweek was unchanged, at 34.4 hours.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Rent or Own?

In 2009 the average age of a home seller was 46. Last year, according to the National Association of Realtors, it was 54. The Wall Street Journal reports a notable increase in the number of older renters. There were an estimated 7.5 million renters age 55 and older in 2005, and about 10.8 million in 2015.

Those changes are not just the result of the continued aging of the baby-boom generation. They are a sign of empty nesters who are making adjustments to their living arrangements in anticipation of their retirement. In some cases, they are choosing to rent rather than own.

Unlocking the equity

For those who have not saved enough for retirement—and even many who have—the appreciation in the value of one’s home may make a welcome addition to the nest egg. Special tax provisions for homeowners encourage sales, as the first $250,000 of gain is tax free ($500,000 for married couples filing jointly, in most cases).

After a sale to allow a move to smaller retirement quarters comes the decision to rent or own. Renting can be a short-term decision, as leases generally are year to year. Renting an apartment leaves more money in the portfolio to earn more income or to cover additional retirement expenses. With a rental the chores of lawn care, snow removal and repairs are taken care of by the landlord, making retirement living more worry free.

On the other hand, as rents rise in the future, there is no offsetting appreciation in the value of the residence to provide a cushion. Those who have unlocked their equity need to husband some of that gain to cover future increases in the cost of living.


Some experts advise those selling before retirement to invest their proceeds in a smaller home that they can own debt free, and bank the difference. Debt free does not mean expense free, however. One rule of thumb suggests that taxes, insurance and maintenance will come to 3% of a home’s value. For a $500,000, home that comes to $15,000 annually, or $1,250 per month.

Another important consideration is the desire to age in place. What renovations might be needed to keep the residence accessible and livable as one becomes somewhat infirm with age? Grab bars, walk-in tubs and doors wide enough to accommodate wheelchairs are among the considerations.

In the words of the sage, “Getting old requires planning.”

(April 2016)
© 2016 M.A. Co. All rights reserved.

Zuckerberg’s Choice

Last year Facebook Chairman and CEO Mark Zuckerberg and his wife, Dr. Priscilla Chan, dedicated 99% of their Facebook shares to charity. The estimated value of the commitment was then $45 billion. The couple chose not to follow the example set by Bill and Melinda Gates, in that they did not set up a private foundation to manage their charitable endeavors. Instead, they created a limited liability company, or LLC. Regardless of the LLC’s activities, there is no charitable deduction for transfers to it. What’s more, the income of an LLC is fully taxable and must be reported on the personal tax returns of the owners.

Why would they take this approach? Why sacrifice the important tax benefits afforded to private foundations?

Because, in this special case, it was not much of a sacrifice at all.In the first place, the charitable deduction for the transfer would be limited to 20% of adjusted gross income. Unused deductible amounts may be carried forward, but only for five years. The couple’s annual income, even if very high, could not possibly use up all of a $45 billion deduction in just five years. Most of this “tax benefit” would be wasted.

Secondly, Facebook does not pay dividends, and it is not likely to pay them in the near future. If there is no income, there is no need for the income tax exemption that a private foundation would get.Opting for the LLC approach allows the couple to escape some very tough regulatory requirements that apply to private foundations. Chief among these is the requirement to spend 5% of the foundation assets on charitable endeavors every year. Here, that would come to over $2.25 billion annually. The Chan Zuckerberg Initiative likely is not ready to spend so much so soon. Other bullets dodged include:

  • the requirement to file Form 990-PF, which discloses to the public all the expenditures and activities of the private foundation;
  • the “excess business holdings rule,” which would have mandated selling a portion of the Facebook shares;
    the “jeopardy investment rule”;
  • the “self dealing rules” that limit transactions with founders; and
  • the “taxable expenditure rules” prohibiting political and lobbying spending.

What’s more, assets placed in the LLC are not permanently set aside for charity. Such a transfer is really a charitable pledge, rather than a charitable gift. The LLC could be dissolved and its assets returned to the owners without tax penalty.

Although using an LLC for philanthropy may be novel, it is not new. Reportedly, Steve Jobs’ widow, Laurene Powell Jobs, channels her charitable gifts through an LLC she created, so as to keep the gifts anonymous.

(April 2016)
© 2016 M.A. Co. All rights reserved.

Siobhan M. Connolly Presents Estate Planning Check Up to Avoid Pitfalls

Siobhan M. Connolly trust officerAt a recent seminar held in the community room of Boscov’s, Siobhan Connolly conducted a class outlining how to avoid the pitfalls while creating an effective estate plan.

According to Ms. Connolly, “A good estate plan not only is effective after death but also provides for the possibility of incapacitation, the inability to manage your financial and medical affairs. Many people do not plan effectively for the “what ifs” in life. In this course, we tried to bring those possibilities to light and how to better prepare for them.”

Representing GSTC as a member and sponsor of the Social Communities Activities Network (SCAN), Siobhan facilitated the workshop as part of SCAN’s free schedule of classes serving the mature population in Monmouth and Ocean counties.

During her presentation, Siobhan explained how to identify and name an executor. Additionally, she addressed critical probate and tax planning issues.

As Vice President and Trust Officer, Siobhan concentrates her focus on day-to-day client management and nurturing strong relationships with investment management, trust, and charitable foundation clients.

Among her professional activities, Siobhan is a board member of the Social Communities Activities Network (SCAN) that provides quality social education and resources to the active adult population in Monmouth and Ocean counties.

Siobhan graduated from Cannon Trust School and is currently pursuing her Certified Trust & Financial Advisor (CTFA) designation. She also holds a Master’s degree in Education from Long Island University and a Bachelor of Science degree from University of Albany.