Life and Death Planning for Retirement Benefits

418

Life and Death Planning for Retirement Benefits

D. Exemptions. Certain transactions necessary for an IRA to function are either explicitly exempted or assumed to be exempt, such as making legally permitted contributions to the IRA, taking distributions from the IRA (§ 4975(d)(9); see DOL AO-2009-02A), naming or changing the designated beneficiary, and dividing the IRA in the case of divorce (see PLR 2002-15061). The Department of Labor has granted certain “class” exemptions to permit some standard transactions, such as the purchase of life insurance from a QRP and using an IRA balance as part of a collection of accounts to meet a minimum balance requirement (PTE 93-2, PTE 93-33). The DOL can also grant an individual exemption for a proposed transaction, and can issue an “Advisory Opinion” about whether a proposed transaction is a PT. See: http://www.dol.gov/ebsa/compliance_assistance.html . E. Enforcement of the PT rules. The best hope for clients and advisors who come too close for comfort to the PT rules is the chaotic state of the PT law and its enforcement. The statute contains mistakes (has contained them since 1974!) that make the law nonsensical in some respects. The meaning of certain terms such as “beneficiary” and “engages” have never been clarified. Enforcement of the rules with respect to IRAs was originally granted to both the IRS and the DOL, then was supposedly divided between them, and is now claimed sporadically by both of them, so no one seems to know who is really in charge if anyone. The DOL and Courts have issued rulings that appear incorrect. The IRS has issued contradictory rulings on PTS, and is generally so uncomfortable with this area that it tends to use anything other than PTS to attack transactions, such as gift taxes, § 482, improper IRA contributions, and listed transactions. F. Recommendations for estate planners and advisors. Promoters and planners look for flaws in the PT rules that they can exploit to allow the IRA owner to engage in various transactions generally designed to maximize the advantage of investing inside a tax- deferred IRA or tax-free Roth IRA. Hopes have been pinned on such notions as that the PT rules do not apply on formation of an entity; that the IRA owner is not a DQP if he can be positioned so that he is not a “fiduciary” of the IRA; and that any transaction with an in- law, sibling, or nonspouse significant other is not a PT because those persons are not DQPs. It is not recommended that a client rely on such approaches. It is recommended that the estate planner not “dabble” in PTS. If involved with a transaction that may raise PT questions, the estate planner should either hire or become an expert. To get started, see Chapter 24 of The Pension Answer Book ( Appendix C ). No estate planner should advise regarding a transaction between an IRA and any related party unless (1) there is a class exemption that clearly applies, or (2) the planner devotes the time to study the applicable rules, or (3) an ERISA expert gives an opinion that the PT rules are not violated. Another approach is to follow the Department of Labor and IRS procedures for getting an Advisory Opinion (DOL), PT “exemption” (DOL or IRS), or private letter ruling (IRS). Since the potential penalty for a PT is disqualification of the IRA, use one IRA for the proposed transaction and a different IRA to hold the owner’s other, less controversial, investments. If the separation of the two accounts occurs prior to the year in which the questionable transaction occurs, a PT in one account presumably would not put the other IRA at risk.