Newsletter: October 2010
October 22, 2010
In this issue: Beneficiary Conversion Strategies for Roth Ira's; Best Practices for Retention Of Business Records; Life Care Planning for Seniors
BENEFICIARY CONVERSION STRATEGIES FOR ROTH IRA'S
The option to convert a traditional IRA to a Roth IRA may be available to the IRA...
Although 2010 has brought welcome changes to the rules and regulations regarding Roth conversions (particularly the repeal of the $100,000 income limit and a continued 35% top marginal tax bracket), taxpayers are sometimes wary about lifetime Roth conversions, which accelerate income into the current year.
These same concerns do not generally exist regarding Roth conversions of retirement accounts by beneficiaries. The client may wish to take the steps necessary now to facilitate a Roth conversion by a typical beneficiary. Only a beneficiary who is a "designated beneficiary" may make a Roth conversion of a qualified plan or IRA. This includes a named individual, such as a spouse or child, and certain trusts. Care must be taken when charities or estates are named as retirement account beneficiaries since these entities are not considered "designated beneficiaries."
Roth conversions by surviving spouses may be made whether the IRA funds are in an inherited IRA for the spouse's benefit or have been rolled into the survivor's separate IRA. Once converted, IRA funds in the survivor's own name have no required lifetime distributions; a fact that enhances their value in maximizing wealth transfer opportunities. Beneficiaries of inherited Roth accounts, whether spousal or non-spousal, on the other hand, are subject to the same RMD requirements as traditional IRA's. While non-spouse IRA beneficiaries may not convert to Roth IRA's, non-spouse beneficiaries of qualified plans do have that option. Special rules apply, however, and a lifetime payout option must be selected and distributions must begin within rigid timeframes that do not apply when spouses are the named beneficiaries. Care must be taken to avoid unfortunate outcomes from the imposition of these rules.
If the IRA or qualified plan is payable to a trust, and if the trust meets the requirements for its beneficiaries to be treated as "designated beneficiaries," the retirement assets will be distributed over the life expectancy of the oldest beneficiary. Unless the trust provides otherwise, the otherwise eligible non-spouse designated beneficiary who takes through a trust may make a Roth conversion of the qualified plan. If the IRA owner's surviving spouse is a trust beneficiary, the trust language may limit the spouse's ability to rollover and convert the IRA assets if it limits the spouse's access to the retirement funds by imposition of a distribution standard. Roth conversions may be particularly useful when the trusts accumulate rather than distribute their assets, such as in the case of spendthrift or special needs trusts. They also provide significantly more income-tax-efficient funding for bypass or credit shelter trusts than do traditional IRA's.
Combining a Roth conversion by a beneficiary with a "stretch" strategy for a retirement vehicle can provide lasting benefits to families of clients who shy away from lifetime Roth conversions. Consulting a knowledgeable attorney is critical so that a plan can be developed to provide the unified treatment and best possible outcomes.
BEST PRACTICES FOR RETENTION OF BUSINESS RECORDS
Proper retention and management of business records can save clients considerable time and expense.
One of the most difficult challenges we face with regard to business transactions is dealing with destroyed, lost or misplaced records. When we review corporate records, many times we find that the corporate record book has not been adequately kept updated, and important documents relative to the governance of the corporation have not been inserted in the record book. But further, often times we discover that the record book was never assembled or if it previously was, it is now lost. Although we use the term corporate record book, it applies to all business entities including partnerships (both general and limited) as well as limited liability companies.
We suggest that the records of the business entity be reviewed for completeness and properly updated each year. This review should address the following items in the corporate record book:
- Formal minutes of the annual meeting;
- Approval of any significant financing;
- Election of officers (and directors for corporations);
- Approval of new members or shareholders; and
- Approvals of language required by recent laws with regards to employment issues, qualified retirement plans or similarly recently enacted laws.
If you desire, we can review with you these issues and update the documents for your business for a small fee.
Another question that arises is how long to keep old financial statements and income tax returns for a business entity. While banks and brokerage firms now are only required to keep financial records for six years, we believe this is an unduly short period of time, as disputes can arise more than six years after a business transaction. Therefore, we suggest a retention period of at least ten years for such materials. With regards to the actual financial statements, summaries and copies of income and payroll tax returns, we believe there is no detriment to keeping these documents forever, and doing so may just prevent a costly dispute in the future.
If space is a limitation, we suggest that companies scan these documents into digital format and store them on multiple platforms, (i.e. CD-Rom, tape backup, hard-drive) and in multiple locations in case of a disaster to prevent loss of the data. In fact, even if hard copies of the documents are kept in storage, it is good practice to make backup digital copies in case there is a fire, flood, or some other catastrophic event. If titled and organized correctly it may be much easier to find the digital documents on a disk or hard-drive than going through boxes of hard copies in search of a particular document. The original hard copies and the record book should be kept in a safe place, perhaps under lock and key with access to them limited to only a few authorized persons so they are not lost or destroyed.
The most important guideline to follow concerning records retention is to use common sense when deciding whether to keep or destroy old documents. Remember, if you have original documents or copies of those documents underlying the business and the business's transactions, it is always easier to prove the transaction and the financial results of the company than if there are no documents and someone challenges what was done in the past. The costs in both time and money in trying to recreate lost or destroyed documents can be significantly more expensive than if the documents had been simply scanned, organized and kept in a safe place.
LIFE CARE PLANNING FOR SENIORS: A REVOLUTIONARY APPROACH TO CHALLENGES IN LONG TERM CARE
Take a sneak peek into the transition of Smith and Condeni LLP's elder law practice!
When most people think about elder law, wills, trusts and Medicaid planning typically come to mind. Over the past years, our clients and their family members have had additional questions that centered around care issues: The skilled nursing facility is telling us that Mom needs this therapy and not that one – what does this mean and which one should we choose? What are Dad's residential options now that his health has improved but he can't return home? How do we take care of Mom during the day while both of us work? My husband has been diagnosed with X, Y, Z – what are the likely outcomes? Can I take care of him at home? What support services are available to me? While these aren't legal questions per se, as elder law attorneys who aspire to a "holistic" approach, we felt the need to provide a more comprehensive service to address the intersection of the legal and healthcare issues our clients and their families were facing.
Instead of focusing primarily on "Medicaid Planning", we are transitioning the practice to a model referred to as Life Care Planning for Seniors. Life Care Planning is a holistic, elder-centered approach to the practice of law that helps families respond to every challenge caused by chronic illness or disability of an elderly loved one. The goal of Life Care Planning is to promote and maintain the good health, safety, well-being and quality of life of seniors and their families. Seniors and their families get access to a wider variety of options for care as well as knowledgeable guidance from a team of compassionate advisors who help them make the right choices about every aspect of their loved one's well-being.
Our Life Care Planning Practice for Seniors Practice will rely on an interdisciplinary team that will work to identify present and potential future care needs, locate appropriate care, and ensure high-quality care. This approach relies less on crisis-oriented transactions and more on the development of on-going relationships with families.
The heart of the elder-centered law practice, a Life Care Plan defines, organizes, prioritizes and mobilizes every aspect of a senior's care. In addition to traditional asset-focused elder law services such as estate planning, asset preservation, and public benefits qualification, a Life Care Plan includes provisions for care coordination, family education, health care and financial decision-making, care advocacy, crisis intervention, support and other services. Every Life Care Plan will be custom designed to achieve three primary objectives:
- Make sure the senior gets appropriate care, whether at home or in a residential facility, to maintain the quality of life that he or she desires;
- Locate public and private sources to help pay for long-term care while resolving issues created by the high cost of care; and
- Offer peace of mind that results when the right choices are made to ensure loved ones are safe and getting the right care while preserving family resources.
Stay tuned for more information regarding the transition to our Life Care Planning for Seniors Practice!