Recently, I worked on a case involving an individual who wanted to put his $90,000.00 IRA account into a self-settled d(4)(A) (“the Trust”). Even though I could get the IRA account transferred into a tax deferred annuity (“TDA”) by way of a tax-free rollover (the individual is the owner/annuitant), and the insurance company was willing to re-title the TDA into the Trust (the trust is the owner, the individual is still the annuitant, and the trust is the primary beneficiary), there was a question as to whether, or not, the transaction involved a taxable event.
Of course, the safest way to proceed in such a case is to obtain a favorable private letter ruling. However, the cost to obtain such a letter is approximately $16,000.00, and there was some concern that a favorable ruling was not available. Additionally, as a result of the high cost, he would only have net investable proceeds of $74,000.00
In the alternative, I determined that if he put the IRA proceeds through the federal taxation system, after his personal exemption of $3,650.00 and standard deduction of $5,700.00, his federal income tax liability would be based on $80,650.00 of taxable income. Accordingly, the federal income tax liability would be $16,350.00, leaving him net investable proceeds of $73,650.00.
Without any guarantees under the private letter ruling option and for the fact that he needed to qualify for Medicaid benefits as soon as possible, he chose the second alternative. Additionally, in that he had no immediate income needs, the Trustee chose to invest the $73,650.00 into a TDA with a 5 year term, and a guaranteed interest rate of 5% over the term. Assuming no withdrawals from the TDA, at the end of the term the account balance would increase to $93,998.13. However, if income was needed, the owner/Trustee could withdraw 10% of the account value once per year, with any unused 10% withdrawals being allowed to accumulate. Finally, at the death of the individual/annuitant (the product is “annuitant driven”), the primary beneficiary/Trustee is entitled to collect the full account value and settle the Trust
As a result of the cost effective planning, everyone achieved their goals, and the tax reporting was minimized.
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