Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

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 .

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.

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.