Avoidable IRA Disaster

IRAs are great financial tools that carry valuable tax advantages, and are an important part of many clients’ portfolios. When IRAs are part of an estate, however, they are subject to rules that are highly inflexible. When survivors receive advice that does not address these rules adequately, there can be disastrous financial consequences.

A ruling handed down in U.S. Tax Court in December provides one such tax horror story, and it could easily have been avoided. It is worth recounting in detail to uncover lessons that could help advisers in creating estate plans that include IRAs.

The case involved the estate of a Florida man, Thomas W. Ozimkoski Sr., who died in August 2006. Just seven months before his death, Ozimkoski executed a will that left the bulk of his property to his wife, Suzanne D. Oster Ozimkoski, and named her as personal representative of his estate. At the time of his death, Ozimkoski had a traditional IRA at Wachovia and a 1967 Harley-Davidson motorcycle.

He also had a son, Thomas Jr., who was unhappy about the will. The son went to probate court and faced off against Suzanne, his stepmother. The IRA custodian, Wachovia Securities, froze the funds in the IRA pending the outcome of the litigation.

When the dust settled, a settlement had been reached. Suzanne would pay Junior the sum of $110,000 and transfer title of Senior’s motorcycle to him. The settlement provided that the payment would be made within 30 days of the date on which Senior’s IRA was unfrozen by Wachovia. The settlement also said that “all payments shall be net payments free of any tax.”


The motorcycle transfer seems to have gone smoothly, but the same was not true of the payment of the IRA funds.

On July 2, 2008, Wachovia transferred $235,495 from the deceased’s IRA to an IRA set up in Suzanne’s name. Suzanne took a distribution from her IRA and wrote a personal check for $110,000 to Junior to make the payment required under the settlement agreement. She also took other distributions from her IRA in 2008 for a total of $174,597.

Wachovia issued a 2008 Form 1099-R showing taxable distributions of $174,597 to Suzanne in 2008. The distributions were coded as early distributions because Suzanne took them from her own IRA and she was under age 59 ½.

Suzanne filed her 2008 federal income tax return late and reported only her wage income from the Boys and Girls Club, just under $15,000. She did not report any of the IRA distributions as income.

The IRS subsequently issued a notice of deficiency to Suzanne for 2008. The IRS said she owed $62,185 in taxes and a 10% penalty on the IRA distributions. It also hit her with an accuracy-related penalty of $12,437. Suzanne disagreed and brought her case to the Tax Court, representing herself.

The Tax Court held that Suzanne owed income taxes, the 10% early distribution penalty and part of the accuracy penalty. The court did not buy Suzanne’s argument that the IRA distributions should not be included in her income because Junior was entitled to $110,000 of the IRA under the settlement agreement. Instead, the court agreed with the IRS that the distributions were taxable to Suzanne because they were from her own IRA.


The Tax Court began its decision by tackling the important issue of exactly who was the beneficiary of Senior’s IRA. Generally, the beneficiary of an IRA is whoever is named on the IRA beneficiary designation form. However, there was a problem. Wells Fargo, the successor to Wachovia, did not have Senior’s IRA beneficiary designation form. It is unclear whether the form had never been filled out or somehow went missing.

In the absence of the form, the estate became the beneficiary by default. Because Suzanne inherited through the estate, the IRA became a probate asset, which can be subject to a will contest. If the beneficiary is named on IRA beneficiary form, however, the account bypasses probate and goes directly to her.

Because the estate, not Suzanne, was the beneficiary of the IRA, Wachovia “incorrectly” rolled it over to her IRA, according to the court. What Wachovia should have done, the court said, was distribute the IRA assets to Senior’s estate rather than to Suzanne’s IRA. The court said it had no jurisdiction to fix that mistake.

The court expressed sympathy for Suzanne, noting that her attorney during the probate litigation clearly failed to counsel her on the tax ramifications of paying Junior from her own IRA. However, the court said it could not change the fact that the distributions she received were from her own IRA and, therefore, taxable income.

The court also said Suzanne owed the 10% early distribution penalty on the funds taken from her IRA. There is such a thing as an exception to the penalty for distributions due to death, but that did not apply to her. This is because a spouse beneficiary may no longer claim the exception if she rolls over the funds from her deceased spouse’s IRA into her own IRA and then withdraws the funds from her IRA.

The court gave Suzanne a break on the accuracy penalty. The court said that in light of all the circumstances, including her limited experience, knowledge and education, she had acted in good faith with respect to the portion of her underpayment attributable to her failure to include in her taxable income the $110,000 she paid to Junior. However, she was still liable for the penalty on the other IRA distributions she took.


This case offers several lessons for advisers and their clients:

The importance of beneficiary forms. It’s easy to imagine another, much happier, outcome in this case. When Thomas Ozimkoski Sr. updated his will to leave everything to his wife, he should also have updated his IRA beneficiary designation form. If he had, the IRA would have passed directly to her and never became part of the disputed probate estate.

A competent adviser would have realized that any payment coming from an IRA will be taxable. If one party is not paying the tax, then someone else is.

The need for competent advisers. One thing that Suzanne Ozimkoski lacked in this case was advisers who understood the IRA rules. She needed a knowledgeable attorney who could have advised her better on the outcome of her settlement agreement.

A competent adviser would have realized that any payment coming from an IRA will be taxable. If Junior is not paying the tax, then someone else is. A competent adviser would have realized Wachovia’s error and had the custodian reverse the transaction and retitle the inherited IRA properly.

Naming a spouse on the beneficiary designation form allows her to roll over the funds to her own IRA. This avoids the result in this case, where the estate was the beneficiary and the rollover was “incorrect.”

Avoid “incorrect” rollovers. Naming a spouse on the beneficiary designation form allows her to roll over the funds to her own IRA. This avoids the result in this case, where the estate was the beneficiary and the rollover was “incorrect.”

With proper advice, the spouse could have elected to remain a beneficiary rather than do a spousal rollover. By remaining a beneficiary here, the spouse could have taken distributions she needed and avoided the 10% early distribution penalty.

A positive outcome in one court may be irrelevant for tax purposes. The settlement agreement said that all payments to Junior shall be net payments, free of any tax, and the widow was under the impression that she owed no taxes. But tax rules did not allow this outcome. During the settlement process, someone should have advised her that there was no way to avoid the tax on the IRA distribution.

After the mistaken rollover, the Tax Court could not unwind that transaction and instead had to decide the widow’s tax liability based on the erroneous transfer of the IRA assets to her own account and her subsequent distributions.

How the death exception to the 10% penalty actually works?

This exception to the penalty is for beneficiaries, but does not apply when the spouse rolls the retirement funds over to his or her own IRA. Once a spousal rollover occurs, the spouse is then the IRA owner and not a beneficiary.

If you sound confused, let me help you!

Tom Cooper, CFP.

Oh no, what if I don’t want to live too long?

The potential for living a very long and healthy life is greater now than ever before. New technologies, such as genomics and nanomedicine, are in the process of changing the face of medicine. For those who can afford state-of-the-art medical evaluations and treatments, as they are not usually covered by traditional health insurance, opportunities are increasing to live rewarding lengthy lives.

For the ultra-wealthy, who have considerable liquidity, paying for cutting-edge healthcare is often not a problem. On the other hand, for the wealthy as well as for the ultra-wealthy whose assets are locked up in one manner or another, such as being predominately the privately held family business, steps can be taken to address the prospective costs of dealing with higher probability illnesses.

living to 120

According to Daniel Carlin, M.D., founder and CEO of WorldClinic, one of the foremost concierge healthcare firms, “Comprehensive longevity planning uses advanced medical testing, like genomics and biomarkers, to create expert healthcare plans. For many affluent families, this healthcare planning also incorporates financial planning. This means ensuring that the affluent families have the financial resources to cover the costs of these tests, cutting-edge treatments, and likely rehabilitation expenses.”

“A number of sophisticated wealth management strategies are used with the affluent to address their diverse needs and wants including having the funds available to deal with possible illnesses and rehabilitation,” says Daniel Geltrude, Managing Partner of Geltrude & Company and Director of the firm’s Family Office Practice. “Sometimes, part of the financial answer is for the wealthy to purchase life insurance, which is used in a number of ways. It’s many times the easiest and most cost-effective solution. For example, there are ways a business owner can use traditional or private placement life insurance to pay for these heath benefits.”

Clearly for the wealthy, comprehensive longevity planning will become increasingly important for them and their loved ones. In a large percentage of situations, life insurance can play a meaningful role in helping to deal with the potential considerable costs of state-of-the-art healthcare.


This article was written by Russ Alan Prince from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.

4 Steps People Who Weren’t Born Rich Can Take to Get Rich

President-elect Donald Trump was born into wealth. His first job was literally handed to him in the form of a lofty title and loan from his real estate tycoon father. Most of us aren’t that lucky. In fact, it’s incredibly far from the norm to spend day one of your life rich.

The path to wealth for most people is more nuanced, complicated, riddled with hurdles and unique to personal circumstances. While Trump had wealth handed to him, the rest of us have to do it the other way around. We have to make smart decisions with the money we do have and build wealth over time. Here is the swiftest way to do it:

1. Pay down high interest debt.

The first step to wealth is to settle outstanding debt. Holding significant debt inhibits people’s ability to make new investments and buy assets. Start with high interest loans and work backwards. Low cost debt can be okay — think under 3 percent — but high-interest loans, with rates between 5-20+ percent, should get paid off as fast as possible. In order to sustainably gain control of your finances, pay down debt until you have paid off all loans with higher interest rates.

2. Spend less than you make.

This step is perhaps the easiest to say and hardest to do. Get a handle on what your monthly expenses are and look to get that amount to be less than your monthly income. The key is lowering spending to less than your income so you can build a savings cushion. Start slow by putting away a certain amount every month that allows you to keep enough money on hand to pay bills, pay off debt and live somewhat comfortably.

3. Build a savings cushion.

You never know what could happen to your income. Maintaining a savings cushion to cover three to sixth months of expenses in savings is an important contingency plan. Small business owners take a similar approach. Many work to build a three to six month liquidity cushion so they can stay afloat while establishing their businesses and scaling their operations to meet growing consumer demand.

4. Become an owner.

Start investing after your savings cushion is built. We have all been told “work hard and you will be rewarded,” but that doesn’t mean you will be wealthy. Wealth comes from ownership. Take savings above your cushion and buy a diversified portfolio of stocks, bonds and other assets that will grow. Monitor the progress of your investments, and keep expanding your portfolio.

People don’t build wealth just by working hard. They build a nest egg by owning things that become more valuable over time and investing responsibly. In order to become an owner, you need to pay down debt, spend less than you earn, save enough to live for three to six months without an income — just in case — and invest in attainable assets. The jury is still out on whether we can still classify President-elect Trump as lucky to be hand-delivered wealth, but the door is open for everybody else to earnestly pursue it if they follow these steps.

Enjoy Entrepreneur Magazine. Permission granted to Thomas Cooper

Video: Women & Retirement The statistics don’t add up to a very comforting picture: women earn less than men and leave work for an average of eleven years to raise children and provide care for aging parents. It’s a challenge to save for retirement, but not impossible.

Employers need a 401k’s to attract millennial talent

A study from Fisher Investments 401(k) Solutions found that 80 percent of millennials say they would prefer to work for a company that offers a 401k plan, dispelling a commonly-held belief that millennials are not as interested in 401k plans as other generations.

However, despite their high levels of interest, millennials also tend to be (understandably) less educated on the ins and outs of retirement planning, with the same percent (80) failing Fisher’s 401(k) IQ in the Workplace Quiz. That’s higher than the 70 percent of general respondents who earlier failed the same workplace quiz, missing at least three of the nine basic questions.

“We’re encouraged that the vast majority of millennials recognize that 401k plans can be indispensable to meeting their long-term savings goals,” Nathan Fisher, managing director and founder of Fisher Investments 401(k) Solutions, said in a statement. “However, when you get down to the nuts and bolts of planning, it becomes clear there’s an education gap”.

The Fisher study also found that millennials are more likely than other groups to receive and trust information about retirement planning from individual contacts, whether they be friends, relatives or co-workers, countering the view that younger savers are more reliant on internet-based information and advice.

In fact, nearly one in three millennials trust a friend or family member’s advice on retirement planning most. In keeping with their desire for individual attention, millennials are more likely than other age groups to wish their retirement provider would reach out to them personally, and to know more about their company’s 401k plans.

Millennials at small businesses (which Fisher defines as those with between 5 and 200 employees) tend to be less engaged in retirement planning, with nearly one in four saying they are not enrolled in a plan.

Those who are enrolled in a plan are also less likely to receive information from their 401k provider than their counterparts at larger companies, and, perhaps most troubling, they are less likely to trust the 401k plan offered by their employer.

The survey also found some stark differences between millennial women and men. Millennial women are much less confident in their ability to pick the right investments and save enough for retirement than their male peers. They are also less likely to be enrolled in their company’s 401k plan and more likely to fail the 401(k) IQ Quiz.

“This study really strikes at the heart of the assumptions many employers and planners have about the millennial generation,” Fisher continued. “While they are very technologically savvy, millennials are in fact the most likely generation to seek individual rather than web-based information about their retirement plans. We were also surprised to find that a significant gender gap continues to exist when it comes to investing and retirement planning, something that employers and 401k providers must address.”

Should I take my pension as a lump sum or lifetime payments?

I’m getting ready to retire from the company where I’ve worked for many years. I keep hearing conflicting answers as to whether I should take my pension as a lump sum or monthly lifetime annuity payments. What’s your advice? –C.L.

I’m not surprised you’re getting conflicting advice. The lump sum-or-annuity decision can be a complicated one, and the decision that’s right for one person may not be best for another. Which makes it all the more important that you really think through your choices and settle on an option that makes the most sense for your particular circumstances.

Let’s start that process by taking a quick look at the pros and cons of going with a lifetime stream of monthly payments vs. taking your lump.

The main advantage of the annuity payments is certainty. You know exactly how much pension income you’ll receive each month, and you know you can count on that money to keep flowing in even if you live a long, long time and even if the financial markets go into a prolonged and deep slump.

But that certainty comes with some drawbacks. If in a given month you need more cash for an emergency or to pay a large health-care bill, you have no way of getting more income from your pension. You have the monthly payments, but that’s it.

So if you opt for the annuity payments, you’ll want to be sure you have other resources you can dip into for extra cash and liquidity, say, money in an IRA or other retirement account or home equity you can tap by downsizing or taking out a reverse mortgage, two options that are laid out in detail in a report from the Boston College Center For Retirement Research.

And should you die soon after opting to receive the payments, you will have received much less from your pension than had you just taken the cash upfront. So if you’re in poor health or have reason to believe you might have a short lifespan, you may be able to get more income during the time you’re around by going with the lump sum.

Then again, people tend to underestimate how long they’ll live. If you’re married, it’s important to remember that you’ll be counting on your pension to provide income not just for you, but for your spouse, who could very well live many years after you’re gone.

To get a better idea of just how many years you — and if you’re married, your spouse — may spend in retirement based on your ages and health, check out the Actuaries Longevity Illustrator tool.

As for taking a lump sum, the chief allure is that you have a lot more control. You decide how much you want to spend each year. If you want to splurge, you’re not limited to the income from your annuity payments. You also decide how to invest your lump sum. So opting for the lump may be a good choice if, say, you want to spend more and live larger in the early years of retirement when your health is better and you can enjoy yourself more and you’re confident you can invest your money in a way that will support you without depleting your assets too soon.

But that control also has a potential downside. If you spend too freely early in retirement, you may not have the cash you need later in life. And while the idea of investing your pension on your own or even hiring a pro to do it for you may seem like a sure-fire way to generate more income than humdrum annuity payments, investing also opens you up to a variety of risks.

Invest too conservatively and you may not earn the returns needed to support the level of spending you envision. Take too aggressive a stance and your lump sum could take a hit during a severe bear market, which could result in you running out of money before you run out of time.

One way to get at which of these options makes the most sense for you is to ask yourself this question: Would your retirement prospects be better if you had more guaranteed income beyond Social Security or if you had more in accessible savings than you already have in 401(k)s, IRAs and other retirement accounts?

If, for example, after totaling up your retirement living expenses (which you can do by going to BlackRock’s Retirement Expense Worksheet), you see that your monthly Social Security benefit covers all or nearly all of your essential living expenses, then you may have all the guaranteed income you need. In that case, you may want to go with a lump sum (which should go into an IRA rollover account to avoid having the entire sum immediately taxed). You can then invest that money in a mix of stock and bond funds that jibe with your tolerance for risk and draw on that stash as needed for discretionary outlays (travel, entertainment, etc.) and to cover emergencies and unexpected expenses.

If, on the other hand, Social Security doesn’t come close to covering your basic living expenses — or you just think you’ll have more peace of mind with extra guaranteed income — then consider going with the annuity payments.

If you’re inclined to go with the annuity, you should first determine whether the monthly payments you’ll receive from your pension will be higher than what you could get by taking the lump sum, rolling it into an IRA and then buying an immediate annuity within that IRA that will make lifetime payments. The chances that you’ll be able to do better than the monthly payments offered by your employer are low — a 2015 General Accounting Office on pensions and lump sums found that payouts on company pensions are generally much more generous than those offered by private insurers — but it doesn’t hurt to check.

You can get an idea of what size annuity payment your lump sum might buy from a private insurer by going to a site like

Of course, the ideal solution for many people may be to split their pension — that is, take a portion as a lump sum and the rest in annuity payments. By doing that, you’re better able to fine-tune your overall mix of guaranteed income and investable assets and avoid ending up with too little, or too much, of either one. Unfortunately, many, if not most, companies that have a lump sum option offer only an either-or choice.

But that may be changing. In September, the Treasury Department issued new regulations that will make it easier for companies to offer pension participants the ability to take part of their benefit as a lump sum and the rest in annuity payments.

If your company doesn’t offer the partial lump sum option, you might consider duplicating that arrangement on your own by taking the lump and using a portion of it to buy an immediate annuity from an insurance company. If you decide to go this route, you’ll want to ask these three questions and follow these five tips to ensure you end up with the right annuity.

One more important note about the lump sum vs. annuity decision: If you’re married, your company pension plan must offer “joint-and-survivor” annuity options that ensure your spouse will continue to receive lifetime payments upon your death that are equal to at least half of the payout you received while you were alive.

What’s more, you’re required to take such a joint-and-survivor annuity option unless your spouse signs a waiver consenting to another form of payment, such as a lump sum. (In the case of state and local government pensions, the waiver requirement, if any, varies by state. To see what the spousal consent rules are in your state, check out this Pension Rights Center’s fact sheet.)

I mention the spousal consent requirement not just to let you know you may have to get your spouse’s permission to go with a lump sum, but to stress that for married couples this needs to be a joint decision.

Fortunately, there’s help available if you’re not confident about making the decision on your own. For example, the Pension Rights Center’s PensionHelp America site can put you in touch with counseling projects, government agencies and legal services that provide free information and assistance about lump sums and other pension issues.

If you have questions about whether your pension benefit — be it annuity payments, a lump sum or both — has been calculated correctly, the American Academy of Actuaries’ Pension Assistance List may provide answers.

You should also check out the Consumer Financial Protection Bureau’s lump-sum payout guide and the Department of Labor’s “Beyond the Numbers” report, both of which provide a good overview of the annuity vs. lump decision.

And to see whether your pension benefit is covered by the PBGC and, if so, how much of your benefit this federal government agency would pay should your company default on its pension obligations, you should go to the Pension Benefit Guaranty Corp’s site.

Plus, you can always go to a financial adviser for help. Be forewarned, though, that some advisers may be more inclined to recommend the lump so they can invest it for you for an annual fee. But one way or another, you need to set aside some time and sort through the issues I’ve outlined above. This definitely isn’t a decision you want to make without methodically exploring all your options.


This article was written by Walter Updegrave from CNN Money and was legally licensed by AdvisorStream through the NewsCred publisher network. Permission granted to Tom Cooper.