Morton Legal Blog

Non-Spouse Beneficiaries of Retirement Plans May Convert to Roth

A recent IRS notice seems to permit beneficiaries of inherited retirement plans and IRA's to convett those inherited accounts to a Roth IRA.  Notice 2008-30 provides guidance about the distribution provisions of the Pension Protection ACt of 2006.  Prior to this Notice, only spousal beneficiaries had this option, via the spousal IRA rollover privilege.  Non-spouses did not have this option.  "If you inherited a traditional IRA from someone other than your spouse, you cannot convert it to a Roth IRA." IRS Publication 590 (2007). 

Trustee Allowed to Create SNT After Death of Testator

A New York trial court recently approved a trustee's petition to reform his deceased father's trust in order to protect his disabled sister's Medicaid benefits. In Matter of Newman (2008 NY Slip Op 50127, Jan. 22, 2008).

When he died in 1988, William Newman established a trust in his will for his disabled daughter. The will required the trustee to use the trust income for the daughter's benefit and gave the trustee discretion to spend the trust principal for her support and maintenance. Mr. Newman's daughter lived on her own until 2006, when she moved into an adult care facility and qualified for Medicaid. In order to maintain her eligibility, her brother, the trustee, then petitioned the court to reform the trust to make it a Supplemental Needs Trust. The guardian ad litem opposed the petition, arguing that the trustee, who was also a remainderman, had a conflict of interest.

The court approved the petition, finding that the trust meets all of the statutory conditions for reformation. Specifically, the court determined: 1. that the beneficiary is disabled; 2. that the intent of the donor was to supplement her benefits; 3. that the trust prohibits the trustee from using the assets to jeopardize her benefits; and 4. that the beneficiary cannot compel distributions from the trust. Finally, the court dismissed the guardian ad litem's argument regarding the conflict of interest, calling the analysis "restrictive" and contrary to the intent of the donor.

Deficient Nursing Homes Listed

The federal Centers for Medicare & Medicaid Services (CMS) has released the complete list of U.S. nursing homes that have failed to meet safety and quality standards for care.

The list, which identifies 131 "Special Focus Facilities" that require additional oversight, follows the release in November 2007 of a list of 54 such facilities. At that time, CMS came under intense criticism for making public only a partial list of Special Focus Facilities while sharing the full list with three associations representing the nursing home industry. (See "Feds Publish List of 54 Poorest-Performing Nursing Homes.")

Planning for the New "Zero Percent" Tax Bracket

This article addresses a law change that is important to all wealth planning professionals and their clients. Beginning January 1, 2008 and continuing through at least 2010, a zero tax rate may apply to long-term capital gain and dividend income that would otherwise be taxed at the regular 15% and/or 10% rates. The new zero tax rate is available to the extent that the taxpayer's other taxable income minus exemptions and deductions is less than a specified amount.

Undue Influence in Trust Amendment Results in Attorneys Fees

The Oklahoma Supreme Court has ruled that the nearly disinherited step-grandchildren of an elderly decedent are entitled to attorneys fees in their action to set aside a trust amendment that was obtained through undue influence. Corr v. Smith (Okla., No. 102687, Feb. 12, 2008).

Seniors Need to File Tax Return to Get Rebate Check

Seniors can benefit from the economic stimulus law enacted on February 13, 2008, but they need to file an income tax return. Seniors, disabled veterans, and veterans' widows will receive $300 payments if they earned $3,000 in Social Security or veterans' disability benefits in 2007. In addition, workers who earned at least $3,000, but not enough to pay income taxes, will be eligible for payments of $300. For higher income individuals, the law provides rebate checks of up to $600 per individual. The stimulus payment begins to phase out for individuals with adjusted gross incomes (AGI) over $75,000 and married couples who file a joint return with AGI over $150,000.

In order to get a rebate, you need to file an income tax return even if you do not have any tax liability. You will need to report any Social Security income on the tax return. This does not mean you will be taxed on your Social Security income, but you must report it in order to get the rebate. If you file the tax return on time, you should receive the rebate check in May or June.

For more information on the stimulus payments and what income tax forms to file, go to www.irs.gov or call 1-800-829-1040.

For a Senior Journal article "IRS Helps Low-Income Senior Citizens Qualify for Economic Stimulus Payments," click here.        

Supreme Court Says Individuals Can Sue Over 401(k) Losses

 In a unanimous decision, the Supreme Court on Tuesday ruled that employees can sue their employers to recover loses from the mismanagement of a 401(k) plan. The decision, a reversal of the lower court, has implications for the more than 50 million individuals who have more than $3 trillion invested in retirement plans.

James LaRue sued his former employer under the Employee Retirement Income Security Act of 1974 (ERISA), alleging that he asked his employer to make certain changes to the investments in his individual account, but the employer never carried out these directions. LaRue claimed the employer's inaction cost him approximately $150,000. The U.S. Court of Appeals for the Fourth Circuit ruled that employers were not liable for losses suffered by their employees, even if the retirement accounts had been mismanaged. According to the court, ERISA "provides remedies only for entire plans, not for individuals."

In a decision written by Justice John Paul Stevens, the U.S. Supreme Court overturned the Fourth Circuit's decision. Stevens recognized that the retirement landscape has changed since prior decisions on this issue, with 401(k) plans increasing in popularity. Because 401(k) plans have individual accounts, Steven's wrote, an individual employee can sue his or her employer for mismanagement of the employee's account even if the entire plan is not affected.

LaRue v. DeWolff, 552 U. S. ____ (2008).

Exciting New Developments in Buy-Sell Planning

This article examines exciting new developments in business succession planning - specifically, the use of LLCs or partnerships to own life insurance for buy-sell planning purposes.  Such a structure obtains the advantages of cross-purchase and stock redemption buy-sell agreements without many of the disadvantages of either traditional structure.  This development is significant to all wealth planning professionals and their business-owner clients.