Get Your Estate Plan in Gear

Estate planning laws have undergone swift changes over the past several years and may change again in the years ahead. If you're creating or updating an estate plan, it's essential that you seek the advice of an attorney who's well versed in this area. Before you hire an estate-planning attorney to draft or update your estate plan, it's important to understand your role in the estate-planning process.
Find a qualified attorney: Because your estate plan will likely need to be updated as the years go by and your personal circumstances change, it makes sense to find an attorney who practices in the community where you live. This can help you meet with him/her on an ongoing basis.
Take stock of your assets: Before you meet with your attorney, spend some time enumerating your assets and their value: your investment accounts, life insurance, personal assets such as your home, and your share of any businesses that you own. Also gather current information about any debts outstanding. Your estate-planning attorney is likely to provide you with a worksheet to document your assets and liabilities, but it's helpful to collect this information in advance.
Identify key individuals: Another important aspect of estate planning is identifying the individuals you trust to ensure that your wishes are carried out once you're gone.
Executor: A person who gathers all of your assets and makes sure that they are distributed as spelled out in your will.
Durable (Financial) Power of Attorney: A person you entrust with making financial decisions on your behalf if you should become disabled and unable to manage your own financial affairs.
Power of Attorney for Health Care: A person you entrust with making health-care decisions on your behalf if you are disabled and unable to make them on your own.
Guardian: A person who would look after your children if you and your spouse were to die when your children are minors.
Know the key documents you need: When you meet with your estate-planning attorney, he or she will make recommendations about your estate plan. At a minimum, you should ask your attorney to draft the following documents.
Last Will and Testament: A legal document that tells everyone, including your heirs, how you would like your assets distributed after you're gone.
Living Will: A document that tells your loved ones and your health-care providers how you would like to be cared for if you should become terminally ill; usually includes details about your views toward life-support equipment.
Durable (Financial) Power of Attorney: A document that gives an individual the power to make financial decisions and execute financial transactions on your behalf if you are unable to do so.
Medical Power of Attorney: A document that gives an individual the power to make health-care decisions on your behalf if you are unable to do so.
Manage your documents: Once your estate-planning documents are drafted, destroy any older versions of them. Notify your executor of the whereabouts of your estate-planning documents, and provide copies of the relevant documents to your executor, powers of attorney, and the guardian for your children.
Plan to keep your plan current: Last but not least, plan to keep your estate plan current. One of the biggest estate-planning pitfalls is drafting an estate plan but not keeping it up to date. Changes may include change in marital status, assets, financial status, death or ill health of your beneficiaries, executor, power of attorneys, or guardian.

More 72(t) Questions: Modifying a 'SOSEPP'

by Natalie Choate, June 15 2013

Taking an IRA or plan distribution prior to age 59 1/2 normally results in a 10% penalty--in addition to the income tax on the distribution. There are more than a dozen exceptions to this "premature distributions" penalty, but they are tough to qualify for.
One that every IRA owner can use (but that can be difficult to stick to) is the "series of substantially equal periodic payments," or "SOSEPP." The series of payments are sometimes called "72(t)" payments, but that's a misnomer. § 72(t) of the Internal Revenue Code is the section that imposes the 10% penalty. The SOSEPP exception is actually found in § 72(t)(2)(A)(iv).

Under the SOSEPP exception, payments made before age 59 1/2 that are part of a SOSEPP are exempt from penalty. The series can be designed using any of several IRS-approved methods. However, if the series is "modified" in any way prior to attaining age 59 1/2 (or within five years of starting the series, if later), the exemption is lost retroactively.

Frequent questions arise around what constitutes this dreaded "modification" of a SOSEPP. Here are two that came in this month.

Question: "Wolfgang," age 57, has been taking a "series of substantially equal periodic payments" (SOSEPP) from his IRA for the last eight years. The SOSEPP payments of $3,000 per month were determined using the IRS "annuity" method. Unfortunately, due to low interest rates and unfavorable investment results, the IRA is now down to $12,000, and it clearly is going to run out of money before he reaches age 59½. If he stops taking the payments because the IRA runs out of money, would that be considered a "modification" of the SOSEPP, making him liable for the 10% penalty retroactively on all prior payments?

Answer: Here is good news about your bad investment results: The IRS anticipated this problem and lets Wolfgang off the hook if his account runs out of money.
The IRS recognizes that, if investment performance is poor, fixed payments under the amortization or annuitization method might exhaust the account. Accordingly, the IRS has ruled that running out of money due to taking the payments called for by the SOSEPP will not be considered a "modification" of the series. See Rev. Rul. 2002‑62, § 2.03(a).

There is actually a similar exception under the minimum distribution rules: An individual's minimum required distribution from a particular IRA or account is, in any year, the amount determined under the usual minimum distribution formula for such year (see Chapter 1 of Life and Death Planning for Retirement Benefits for how to compute annual required distributions) or, if less, the entire value of the account at the time of the distribution. If the account value has plunged (whether due to investment results or some other cause--such as a divorce court awarding the entire account to your ex-spouse) so that the total value has shrunk below the amount of the required distribution, the required distribution is reduced to not exceed the account value. See Treas. Reg. § 1.401(a)(9)-5, A-1(a).

Question: My new client "Mathilda" has an IRA at ABC Bank. She has been taking a "SOSEPP" from this account for six years. She is now age 58; she will turn age 59 1/2 in eight months.
We want to transfer her IRA to a new IRA at XYZ Bank, where all my clients' IRAs are held. This would be done by means of a direct IRA-to-IRA transfer into a new separate IRA. There would be no commingling of this SOSEPP-supporting IRA with any other IRA. Can this be done without causing a modification of her SOSEPP?

Answer: I would not recommend doing such a transfer without getting an advance favorable ruling from the IRS. Since that process would probably take at least a year and cost many thousands of dollars in IRS filing fees and professional fees, it is obviously not cost effective, and Mathilda would be better off to just wait eight more months (i.e., until she reaches age 59 1/2)  before transferring her IRA to your firm.
Here's why I say this. The IRS regulation defining what constitutes a modification of the SOSEPP provides that "... a modification to the series of payments will occur if...there is...any nontaxable transfer of a portion of the account balance to another retirement plan... ." Rev. Rul. 2002-62, § 2.02(e)(ii).
Now maybe what the IRS meant to say, and maybe what they should have said, was that a transfer that caused the SOSEPP account funds to be commingled with other funds would be considered a modification. And the IRS has actually issued four PLRs (private letter rulings) supporting the conclusion that a SOSEPP-paying IRA may be transferred tax-free to a new, otherwise-empty, IRA account with a different custodian, without causing a modification of the SOSEPP. See PLRs 2006-16046, 2006-31025, 2009-29021, and 2009-30053.

But the regulation still says that any nontaxable transfer is a modification, and the IRS has never stated in any form that can be relied upon as "authority" that such a transfer actually is permissible if there is no commingling with other funds. Therefore it would be unwise, in my opinion, to do such a transfer without getting an advance ruling.

Resources: For more detail on the 10% penalty applicable to distributions before age 59 1/2, and on all the exceptions to the penalty including the SOSEPP, see Chapter 9 of Natalie Choate's book Life and Death Planning for Retirement Benefits (7th ed. 2011).