October 12, 2017 RE: Thursday Report Understands Mass Paranoia

Re: Thursday Report Understands Mass Paranoia

Mike Markham on Chapter 11 Bankruptcies (pt 1 of 2)

Charitable Remainder Unitrust, Private Letter Rulings, and Little Known Advantages of Nimcrut Planning by Brandon Ketron 

Sneak Preview of the Updated Chapter 1 of Planning For

Ownership and Inheritance of Pension and IRA Accounts (part 2 of 2)-not by Ed Morrow 

Checklist: 2nd Marriage by Martin Shenkman 

5 Ways to Get Your Non-Sales Staff Selling for Your Business by David Finkel 

Richard Connolly’s World 

Humor! (Or Lack Thereof!)

 We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer, please email Alan at agassman@gassmanpa.com

This report and other Thursday Reports can be found on our website at www.gassmanlaw.com


Quote of the Week

Son, if you really want something in this life, you have to work for it. Now quiet! They’re about to announce the lottery numbers

-Homer Simpson

Boss’s Day is generally observed on or around October 16 in the United States. It has traditionally been a day for employees to thank their bosses for being kind and fair throughout the year. This day was created for the purpose of strengthening the bond between employer and employee.

Patricia Bays Haroski registered “National Boss’ Day” with the U.S. Chamber of Commerce in 1958. She was working as a secretary for State Farm Insurance Company in Deerfield, Illinois, at the time and chose October 16, which was her father’s birthday. She was working for her father at the time. The purpose of designating a special day in the workplace is to show the appreciation for her bosses she thought they deserved. This was also a strategy to attempt to improve intra-office relationships between managers and their employees. Haroski believed that young employees sometimes did not understand the hard work and dedication that their supervisors put into their work and the challenges they faced.  Four years later, in 1962, Illinois Governor Otto Kerner backed Haroski’s registration and officially proclaimed the day.


Mike Markham on Chapter 11 Bankruptcies (pt 1 of 2)  

Alan Gassman asked Michael Markham to provide some more background on Chapter 11 bankruptcies.  There is much to know about Chapter 11 bankruptcies, and I can cover a good deal of this in a way that should be very useful for business and estate planning lawyer.

Let’s start off with individuals.  Individuals can file under Chapter 7 for liquidation, and they can file under Chapter 13 for payment plans, which will normally apply when there is mostly consumer debt, but if there is more than approximately $1,000,000 of secured debt or $300,000 of unsecured debt, then they are required to file for a Chapter 11 reorganization if there is mostly consumer debt or when a reorganization works better than a Chapter 7 liquidation for them.  A husband and a wife can file a joint Chapter 11 if they have a joint creditor situation.

Sometimes individuals own companies that have to file in bankruptcy, and because the individuals have guaranteed the debt, they may also end up in a Chapter 11 reorganization.

As with any bankruptcy filing, the debtor completes a petition with schedules, has a Section 341 creditor meeting, and under Chapter 11 will have to file monthly operating reports showing all revenue and expenditures.  The bankruptcy court is not likely to tolerate things like private school tuition or other “luxury items” that many affluent individuals regard as necessities, so this can be somewhat of a culture shock.  In addition, the Office of the United States Trustee, which is a branch of the Department of Justice, will typically be fairly active in Chapter 11 cases.

The goal of a Chapter 11 is normally to prepare the plan that deals with all of your creditors, and then get that confirmed, and this is how in a Chapter 11 an individual gets a discharge, which I will talk about a little bit later, but the uniqueness of Chapter 11 for individuals is that the absence of equity gives unsecured creditors quite a bit of negotiating power, although some Chapter 11s are intended to keep the business and assets together and operational long enough to get the most value possible for the creditors and to keep the business operational, as discussed below.

Normally, in a corporate Chapter 11, equity is wiped out because the company is insolvent.  You can’t wipe out equity in an individual case, because that individual lives on, and so the rule – which is called the Absolute Priority Rule – is that you can’t force a plan on a dissenting class of creditors, if any inferior class of creditors is receiving or retaining anything under the plan.  For example, unsecured creditors are inferior to secured creditors, and shareholders are inferior to unsecured creditors.  You can’t successfully ask the bankruptcy court to reduce or adjust indebtedness owed to secured creditors unless the unsecured creditors are accepting a lower payment or other alteration, and you can’t ask the unsecured creditors to accept a court required alteration in favor of the debtor if the equity holders are not permitting a sacrifice.

It is therefore very important to think about who the creditors and equity holders will be well before a Chapter 11 is filed, because you need some friendly creditors and some cooperative shareholders or proprietors if there is going to be a debt adjustment, as described below.

There are interesting dynamics in the individual cases.  If you have creditors that are just never going to agree with you as a debtor because they do not like you, or there is some animosity, or they are family members or former partners – individual cases can be very difficult.  At the end of the day, hopefully though, you can convince people that as long as the plan provides more than what the person would get in Chapter 7, when the assets are liquidated, then hopefully you can convince creditors to vote in favor of the plan.

The problem with wealthier individuals that go to Chapter 11 is that they have a lot of non-exempt assets.  If you don’t have a lot of non-exempt assets, Chapter 7is usually the way to go.  File it, claim your exemptions, get your discharge and move on.  But people with more sophisticated financial situations might have investment properties or own interest in entities, and they don’t want to lose them through a kind of a fire sale auction process in a Chapter 7.

So a lot of interesting things can happen in Chapter 11, but generally speaking people use it to try to reorganize, and the first question I was asked before when they come to me is I’ve got this company and I want to file Chapter 11.  I want to try to get reorganized.  A lot of people, the thing they confuse is that bankruptcy and Chapter 11 don’t do anything for you on the revenue side of the ledger.  It might stop certain liabilities and put them over to the side for the moment, but the fact of the matter is if you are operating at a loss before you get into bankruptcy, if the budget tells you that you are going to continue to operate at a loss, then Chapter 11 is not going to work.

One of the critical things that a Chapter 11 lawyer or advisor of a company that is going in that direction needs to do is make sure you have a budget going forward in Chapter 11 that is going to work and takes into consideration the cost of the Chapter 11 reorganization and the kind of things that you might have to pay or the kind of things that you might not have to pay in Chapter 11.  Then at least you can operate, maybe for some period of time you can operate and preserve some value, lop off some bad assets and bad stores, bad locations, and then figure out if you can make the run of it going forward.

You see a lot of Chapter 11s get filed in the context of divorce cases.  Frankly, I have seen cases where individual Chapter 11 debtors file in order to get assets sold, because the spouse would not agree during the pendency of the bankruptcy to sell assets, or to just try to level the playing field in a divorce case.  However, the Bankruptcy Court is not going to take jurisdiction over the divorce issues.  They are not going to take jurisdiction over equitable distribution, alimony, support, the kind of things that happen in a divorce case.  But you do see individual cases that have a divorce angle to them, and that is fairly common.

The next kind of Chapter 11 case is called a single asset real estate case, which has in fact become a term of art under the Bankruptcy Code.  People have probably heard about single asset cases or bad faith filings, as they are called.  Maybe it is a company that just owns an entity that owns a single asset.  Maybe they own an office building or maybe they own a mobile home park, or a hotel or a piece of land, whatever it might be.  If it is in essence a single asset that generates income and doesn’t really have separate operations.  Maybe it has a couple of people on payroll, but generally it has a third party management company, and really has one main creditor which is the mortgage holder.  It probably has some individual creditors – typical unsecured creditors, but a lot of single asset cases – the only unsecured creditors they have is whoever kind of got caught up in the filing when the Chapter 11 was filed and in that last thirty day time frame didn’t get paid.

There are special rules that apply.  One of the rules is, generally speaking, that the debtor has to do one of two things within the first 90 days of the case.  They either have to start making interest payments at the non-default contract rate, which some single asset debtors can do and others can’t, depending on their operations and their cash flow.  Or, they have to file a plan that has a reasonable chance of confirmation within that same 90 day time frame.  Now, you can imagine what a plan would look like and whether a debtor would think it has a reasonable chance of success and whether the creditor would think it has a reasonable chance of success.  So it is kind of up to the judge to decide whether that plan does.

The problem you usually have in a single asset case is that the secured debt is greater than the value of the underlying collateral.  So, for example, if the creditor is owed $10,000,000, and the asset is worth $8,000,000, then bankruptcy would bifurcate that debt into two claims, an $8,000,000 secured claim, and a $2,000,000 unsecured claim.  Now you’ve got to deal with both of these claims in separate classes, and if the creditor votes no as a secured creditor and votes no as an unsecured creditor, which you can assume it is going to do, there is probably not sufficient other creditors to stop that unsecured deficiency claim from controlling the unsecured class.  So that is why single asset cases can be difficult.  Single asset cases, if they are going to work, need to have another secured debt of some kind.  One of the things you have to have in order to confirm a plan is at least one impaired class of creditors that vote in favor of your plan.  So you’ve got a secured debt, maybe in a case you’ve got more than one secured creditors.  If you do, that is very helpful, because that can be the impaired class that should get to vote on that let’s you move forward to a cramdown.

The law is cut and pretty clear that past due taxes, ad valorem real estate taxes can’t be used to constitute an impaired class.  This used to work many years ago, but no longer.

Single asset cases can work, but again, I think when they are way upside down on the debt versus the value of the land, you’ve got a difficult situation on your hands.

Another kind of a Chapter 11 cases that we are seeing a lot of in recent years are health care cases.  There are a lot of health care specific terms in the Bankruptcy Code now. One of the things unique about health care cases, obviously, is patient information, which is very confidential under HIPAA and other state and federal laws, and so one of the unique provisions that applies to a health care case is that the court may appoint what is called a Health Care Ombudsman, who takes control over that confidential information and keeps it confidential and makes sure that the debtor is keeping it confidential, so that if the debtor fails or the debtor goes through a sale process, or something like that, then there is a third party that will maintain the confidentiality of those records, because the debtor that’s failing might not have much in the way of incentives to take care of that obligation.

We have seen a lot of health care cases these days involving continuing care rehab-type facilities that are under the jurisdiction of the Office of Insurance Regulation, because in the continuing care, people pay a big lump sum up front, and it is deemed to be a type of insurance contract.  There is a lot of dispute and discussion about whether those continuing care health care cases are eligible for Chapter 11, and the state often comes in and challenge those kind of cases, that they are not eligible for Chapter 11 because one of the types of entities that is not eligible for Chapter 11 is a domestic insurance company, which is a term of art in the Bankruptcy Code.  I have been in cases where the state Office of Insurance Regulation – came in and argued that an entity was an insurance company in essence, and therefore it was not eligible for a Chapter 11.

Then we have the Chapter 11 liquidation planning, which is a variation on a Chapter 7 liquidation, because in Chapter 11 the business or investment situation can be kept intact and active while a buyer or other transitional situation is lined up to maximize what can be received and paid to the creditors.  A good example of this would be a restaurant that needs to stay operational in order to have any positive material value, and with a Section 363 sale the buyer can receive the assets free and clear of all liens.  The money is going to come into the case, and then the money is going to get distributed to secured creditors and administrative creditors and priority creditors and unsecured creditors pursuant to the priorities in the Bankruptcy Code.

You see a lot of liquidating cases.  In fact, most of the Ponzi scheme type cases are liquidating Chapter 11’s, because of the advantages that a liquidating Chapter 11 creates.  For example, one of the things that is very unique to Chapter 11 that can’t happen in other kinds of cases is the assignment of causes of action into a trust.  For example, let’s say you have a case where there are malpractice claims.  Malpractice claims, and there are other types of claims – personal type claims that are not assignable under state law, but those types of claims, whether they are malpractice claims or personal, non-assignable claims under state law, can be assigned into a trust that is created under a plan, and then that trust is administered by a Plan Trustee, who is usually a professional Trustee or receiver who gets appointed, and then they are the ones that prosecute that litigation for the benefit of all the creditors.  We also see that used to maintain a bad faith claim in an insurance situation assigned into a trust for the benefit of creditors.  Bad faith claims are generally not assignable under state law, and if a debtor is facing a claim that exceeds its insurance limits, and there was some wrongdoing on the part of the insurance carrier, it is very difficult under state law to assign that claim for the benefit of the creditor and then create a settlement that gets a release for the debtor, but that is much easier done in a Chapter 11 reorganization case that is a liquidating case.

One of the other things that is unique about Chapter 11 liquidating plans is that you might have a case that has insurance proceeds in it that are insufficient to pay the creditors.  It might have claims against that insurance, and again you can use the Chapter 11 liquidating plan to cut a deal with the carrier to have the proceeds paid into that liquidating trust, so that then the claimants receive a pro-rata distribution.

You can also have situations where net operating losses can be transferrable to a buyer of the company, through a merger or a more complicated corporate transaction.  It is possible to preserve NOLs for tax purposes and transfer those at least in part to the bottom line of a liquidating trust for the benefit of creditors where in essence you take the stock of the debtor and you reissue that stock to creditors and then the company takes advantage of the NOLs on a going forward basis, which creates tax-free revenue that can be distributed to shareholders.

Let’s go into more detail on 363 sales.  These happen in all kinds of bankruptcy cases, but you mostly see them in Chapter 11 cases.  Chapter 363 of the Bankruptcy Code is a provision that permits the sale of assets free and clear of any liens, whether they are disputed or not.  You can have a situation where you’ve got a dispute amongst creditors as to who is on first or second or third.  You can have somebody that filed a Lis Pendens against your property and locked it up where you could not close outside of bankruptcy.  Chapter 363 permits you to sell an asset free and clear of all those liens or even interest – liens and interest, which could even be theoretically an ownership interest, where somebody is asserting an equitable lien or a constructive trust or any number of clouds on the title to real estate or some other asset, and then you sell it.  The money is generally put into escrow.  The lien is attached to those funds in escrow, and then they get litigated out in the Bankruptcy Court.  Generally speaking, in a real estate case, a title company will write insurance over the clouds that are otherwise on the title that you can’t sell free and clear of outside of bankruptcy.  Title insurance companies have become very reluctant to write over any cloud of any kind, and can become a major challenge in a bankruptcy situation.  The title insurance industry has become very inflexible and intolerant of risk, and this kills a lot of otherwise feasible bankruptcy plans, and has been bad for the economy.

Now I want to talk about a couple of terms that exist in Chapter 11 that I am sure you’ve heard before.  I am sure people have heard the term “cramdown”, but in my experience the word cramdown gets misused, and confused with a “strip down” or “stripping down.”  When you strip down a lien, you are reducing it to the value of the asset.  For example, if you have a $10,000,000 debt on an $8,000,000 piece of real estate, under the Bankruptcy Code that debt gets stripped down to $8,000,000 from a secured perspective and then you have a separate $2,000,000 unsecured deficiency claim.  The stripping down becomes valuable in equipment-type situations, because equipment depreciates very rapidly, unlike real estate that maintains its value somewhat over time.  You can have great fluctuations in real estate depending upon market forces, but equipment – furniture, fixtures, and other “rolling stock,” which tends to lose value rapidly.

A cramdown simply means that you are cramming down or forcing the terms of a plan on a creditor.  A cramdown can apply to a secured creditor, an unsecured creditor, or even equity.  So the cramdown simply means that you are cramming the plan down over the objection of the creditor.  Now, you can have a plan that has both a strip down and a cramdown, but again, the cramdown just means you are cramming it down over their objection.

So what does that mean for a secured creditor?  You have to pay them the value of their secured claim as part of the plan based upon its net present value, with interest over time.  So if you are doing that over time, that means you have to do that at some interest rate that brings it back to a present value that is one of the terms in the Bankruptcy Code – the indubitable equivalent of their secured claims.  So that relates to the secured claim, meaning that if you strip them down from $10,000,000 to $8,000,000, then you are cramming down the treatment of that $8,000,000, which in a real estate case might be interest at prime plus 2% over 60 months, with a 30-year amortization and a balloon at the end of the 60 months.  That is a very common real estate cramdown plan that can be used with great leverage against secured creditors, so long as you have an impaired class that has voted in favor of your plan.

As mentioned above, one of the prerequisites for utilizing the cramdown provision in Section 1129(b) of the Bankruptcy Code is that you have to have the vote of at least one impaired class.  In other words, you can’t cram down everybody.  So all that tells you from a strategic perspective is that you’ve got to make a friend or have an ally in your case, and that is something you ought to be thinking about from day one – who is going to be your impaired class that is going to open the door for you to use a cramdown, because if you can’t use a cramdown, then you have no leverage at all and you are probably never going to get your case confirmed.

So that is how it works with secured creditors.  You can also cramdown unsecured creditors by having inferior classes, i.e., equity, receive or retain property under the plan.  So if you are wiping out equity, cramming down the unsecured is automatic, because they have to take whatever has been offered, if you are wiping out equity.  Now you can run into issues where in a closely held company, equity is getting wiped out but it is getting reissued to the brother or the cousin or the uncle or the father where it is not really getting wiped out, it is getting kept in the family – those can be interesting issues, but still from a strategic standpoint, even in those mom and pop or closely held cases, the debtor has much more negotiating power if they are wiping out equity.  If equity is unimpaired, meaning that the mom and pop are just going to keep the stock of the restaurant, then if the unsecured creditors vote no, that plan is non-confirmable.  So if you know you are going to have a problem with your unsecured creditors, you need to be thinking about wiping out the stock, and if you are going to bring in a family member or a friend to buy that stock, they need to buy it for real value, so have that person put money into the company, which is called new value.  Have them put in new value, so that they can get the stock, so you’ve wiped it out, they have paid new value.  The value of the stock post confirmation, whatever that might be, that can be a very complicated analysis, depending on the complexity of the entity, but if you have new value coming in, then unsecured creditors are fairly powerless to stop that plan from going forward, unless, of course, there is some other violation.

The primary rule in a plan is that the creditors receive more than they would have gotten in a Chapter 7 liquidation.  In most cases, where the debtor is woefully insolvent and upside down, it is not hard for the plan to provide more, because unsecured creditors would usually get zero in a liquidation, but you can have cases where there is equity over and above the secured debt.  Remember, when you do that analysis, you have to look at the administrative expenses, i.e., the attorney fees or Trustee fees that would come off of the top, what are the priority claims, taxes, employee claims, and then whatever is left would make its way to unsecured creditors, who receive more than they would have received without the Chapter 11.

Be sure to read the conclusion in the next Thursday Report!


Charitable Remainder Unitrust, Private Letter Rulings, and Little Known Advantages of Nimcrut Planning  

by Brandon Ketron


In  March of 2017, the IRS released Private Letter Rulings 201713002 and 201713003, which concluded that a Charitable Remainder Unitrust (“CRUT”) or a Net Income with Makeup Charitable Remainder Unitrust (“NIMCRUT”) would not be subject to the prohibited transaction or self dealing rules that would otherwise apply under Section 4947(a)(2) if the grantors do not take a income tax or gift tax charitable deduction on the remainder interest charitable value.

Most planners are aware that Charitable Remainder Unitrusts can provide long-term deferral of income tax on the sale of stock or other assets that are contributed to the CRUT within a sufficient period of time before the sale occurs.

The donors will have the right to receive payments based upon a percentage of value of the CRUT each year, but these payments will be deferred under a NIMCRUT to the extent that the otherwise applicable percentage payment exceeds the fiduciary accounting income generated by NIMCRUT assets.

Taxpayers who wish to receive the most tax advantage, with the least amount going to charity, can set the expected remainder interest of the charity to be 10% of the value of the contributed assets, as of the date of the contribution, under applicable tables.  Most planners have access to software programs which provide the applicable percentages.

For example, as of October of 2017, a 20-year Charitable Remainder Unitrust can have annual payments based upon approximately 11% of the Unitrust value each year for twenty years, with the remainder interest to pass to charity at the time of the 20th annual payment.

By second example, a married couple who are each age 55, could receive a Unitrust interest for life based upon 7.85% of the annual value of the Unitrust assets and the charity would not receive payment until the second death.

A public charity, private operating foundation, or private non-operating foundation can be the remainder interest recipient.

The grantors can retain the right to replace the first appointed charity or charities with an alternate charity or charities.  Oftentimes, clients will elect to initially name a public charity, but may thereafter designate a private operating foundation that can employ and provide arm’s-length on the job training to family members using the funds received by the charitable organization after the NIMCRUT payment term ends.

Most planners favor Charitable Remainder Unitrusts over Charitable Remainder Annuity Trusts, based upon an expectation that the assets in the trust will grow in value thus increasing the Unitrust payment each year.  Under a Charitable Remainder Annuity Trust, the payment is fixed and would not increase as the Charitable Trust increases in value.

While most planners are aware that NIMCRUTs can provide many years of deferral, under the 1998 regulation changes, the unitrust percentage each year is applied to all assets as opposed to the excess of (a) the NIMCRUT balance over (b) the deficit account.  The preamble to the regulations issued in 1998 explicitly permit the annual unitrust payment under a NIMCRUT to be calculated as if the deferred amounts did not exist.  This provides the non charitable beneficiaries with much more, and the charity with much less.  For example, if the trust has $400,000 in value at the end of year one, and a 10% annual unitrust payment applies, and if the trust has no income for the year, and continues to have a $400,000 value through year two, then the amount deferred is $40,000 in year one, and also $40,000 in year two, as opposed to being $36,000 in year two.  The resulting dynamic is significantly more advantageous for the grantors.

While many clients will be happy having a NIMCRUT own publicly traded stocks that are expected to go up in value over twenty years without paying significant dividends, many will prefer to have the NIMCRUT invest in assets that pay ordinary income, such as bonds, bond funds, and rental properties.

Those clients may be interested in using variable annuities, or having the NIMCRUT invest in an entity that may be taxed as a partnership, which would not distribute all of its income, this is because the measurement of income for payout purposes under a NIMCRUT is based upon the calculation of Fiduciary Accounting Income under state principal and income acts, which generally do not consider income within a separate partnership or LLC entity owned by a NIMCRUT to be income of the NIMCRUT unless or until it is distributed.

In 1999, the IRS issued Revenue Procedure 99-3, which indicated that it would not rule on whether a NIMCRUT owning such a “income blocker entity” would qualify for income tax and charitable deduction purposes.  This was considered by many to be a shot across the bow by the IRS at those using NIMCRUT blocker entities.  Since then, the IRS has been silent on the issue, and a great many blocker entities exist under NIMCRUTS which have not yet been challenged to the author’s knowledge.  Nevertheless, clients should understand the risk and work to assure that a blocker entity has legitimate business and planning purposes besides the incidental benefit of delaying distributions from a NIMCRUT.

Besides a loss of access and the perception that the family may decide before termination of the NIMCRUT that it is best not to have significant assets pass to charity, the next biggest objections and obstacles to NIMCRUT planning are the prohibition against prohibited transactions and the unrelated business income rules.

Under the prohibited transaction rules, the grantors and relatives and affiliates of the grantors as defined under Internal Revenue Code Section 4946, cannot have direct or indirect dealings with the NIMCRUT or any entity that it owns an interest in.  The result of violating these rules will be disqualification of the NIMCRUT and possible substantial penalties and interest.

This is where the two above-referenced Private Letter Rulings come in.  Pursuant to these rulings, if the taxpayer does not take a charitable deduction for the funding of the NIMCRUT, then the prohibited transaction rules will not apply, and the NIMCRUT and its subsidiary entities are able to enter into arm’s-length transactions with the grantors and related parties without disqualification of the NIMCRUT.  The unrelated business income tax rules including the excise tax on debt financed income will still apply to the NIMCRUT regardless of whether a charitable deduction is taken upon the funding of a NIMCRUT.

The ability to engage in these related party transactions under a NIMCRUT can provide a significant planning opportunity for the family, and encourage charitable giving.

Stayed tuned for a more detailed article in the near future with plenty of charts and examples to explain the advantages and traps for the unwary of the above planning.



Sneak Preview of the Updated Chapter 1 of Planning For

Ownership and Inheritance of Pension and IRA Accounts (part 2 of 2)-not by Ed Morrow

by Alan Gassman, Chris Denicolo & Brandon Ketron


The Florida Statutes provide that retirement plans are exempt from creditor claims.[1] Therefore, the U.S. Supreme Court decision of Clark v. Rameker,[2] which found that the federal bankruptcy law will not protect IRAs for those residing in states that do not have exemption statutes for IRAs, will not apply to Floridians.[3]

The authors believe that a distribution received by an individual beneficiary of an inherited IRA/Plan or a rollover IRA/Plan will be exempt from creditor claims from normal general creditors under Florida Statute Section 222.21(2)(c), and may therefore be placed into an exempt asset (such as a variable annuity contract, a cash value life insurance policy, or a tenancy by the entireties account) without being considered a fraudulent transfer.  The transfer of funds from one exempt class of asset directly to another exempt class of asset will generally not be considered to be subject to being set aside under the Florida Fraudulent Transfers Act, although a Florida Bar article dated February 11, 2011, which was authored by David Pratt and Lindsay A. Roshkind indicates that there is a possibility that distributions would not be considered to be exempt from creditor claims.[4]

Qualified Domestic Relations Orders (QDROs) – A transfer from one spouse to another in the event of a divorce

IRAs and pension accounts will normally not be transferrable between spouses, except upon death or divorce.  To transfer an account to a spouse, child or other person tax-free as the result of a divorce, it is necessary for the divorce court to issue a QDRO.  These can be very complicated instruments.

Essentially, a QDRO is a domestic relations order—either a decree, judgment, or order (including an approval any property settlement) that creates an alternate payee who has a “right to receive, or assign to an alternate payee the right to receive, all or a portion of the benefits payable with respect to a participant under a retirement plan.”[5]  In a QDRO, the alternate payee may only be a spouse, former spouse, child, or other dependent of the individual recognized by the order.[6]

A QDRO must contain the following information:

  • The name and last known mailing address of the participant and each alternate payee.
  • The name of each plan to which the order
  • The dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate
  • The number of payments or time period to which the order


A QDRO may not contain any of the following:

  • A requirement that the plan provide the alternate payee or other participant with any benefit or option that is not provided under the plan
  • A requirement that the plan provide for increased benefits based on actuarial value
  • A requirement that the plan pay benefits to an alternate payee that are required to be paid to a different alternate payee by different order previously determined a QDRO and
  • A requirement that a plan provide benefits to the alternate payee in a form of “a qualified joint and survivor annuity for the lives of the alternate payee and or his or her subsequent spouse.”[7]


Recent Pronouncement on Canadian Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) 

Taxpayers who hold RRSPs and/or RRIFs will now automatically qualify for tax deferral similar to U.S. IRA and 401(k) funds. Previously, Canadian taxpayers were required to file a From 8891 in order to qualify for tax deferral. The IRS has now eliminated Form 8891, and taxpayers are no longer required to file this form for any year, past or present.


Grandfather Rules 

The 1982 changes to the Tax Equity and Fiscal Responsibility Acts (TERFA) significantly affected the required minimum distribution (“RMD”) rules. For example, if an individual established an IRA prior to January 1, 1984, then Section 242(b) of TERFA would allow that individual’s Plan Participants to use the more liberal rules that applied before 1984. These rules include the option to postpone RMDs past age 70 1/2 until retirement, regardless of whether the Plan Participant owns more than 5% of the company. The pre-1984 rules also exempt death benefits from the 5-year rule.

Also note that, if separately identified, pre 1987 403(b) Plan balances are not subject to the Tax Reform Act of 1986 which applied the Required Minimum Distribution Rules to 403(b) Plans for the first time. So, if you are lucky enough to benefit from the prior rules here are some advantages to be aware of:

  • The Required Beginning Date is the later of retirement or age
  • The required distributions are computed using the incidental death benefits [8]
  • If the Owner/Participant dies on or before his or her Required Beginning Date, there are no requirements for how rapidly the death benefits must be [9]

Prohibited Transactions and LLCs Owned Under IRA 

Generally an IRA is limited to traditional investment categories. For example, investments in life insurance, certain types of derivative positions, antiques and collectibles, and most coin collections[10] are prohibited.

But, IRA trustees are permitted to impose additional restrictions on investments. For example, while the IRS does not prohibit an IRA from investing funds in real estate, due to the administrative burdens many IRA trustees do not permit IRA owners to invest in real estate.

However IRAs can invest in alternative arrangements if properly structured. Strict rules still apply, and the IRA risks losing its tax-deferred status if these rules are violated.

A prohibited transaction occurs when the IRA engages in a transaction with a disqualified person, which are defined to include the following:

  1. The IRA owner
  2. The IRA owner’s spouse
  3. The IRA owner’s ancestor
  4. The IRA owner’s lineal descendant
  5. Any spouse of the IRA owner’s lineal descendant(s)
  6. Investment advisors
  7. The IRA custodian or trustee
  8. Certain entities in which the IRA owner owns at least 50% interest, such as a corporation, partnership or trust

A prohibited transaction occurs when one of the following events has occurred:

  • Sale or exchange, or leasing, of any property occurs between the IRA and a disqualified person;
  • There is lending of money or other extension of credit between the IRA and a disqualified person;
  • There is a furnishing of goods, services or facilities between the IRA and a disqualified person;
  • The assets are transferred to – or used by or for the benefit of – a disqualified person;
  • Any action by a disqualified person who is a fiduciary whereby the fiduciary deals with the income or assets of the IRA in his or her own interests or for his or her own account; or
  • Receipt of any consideration by Plan Participant from any disqualified person who is a fiduciary dealing with the plan in connection with a transaction involving the income or assets of the plan[11]


Access Before Age 59 ½ 

Individuals may withdraw monies from an IRA or SEP-IRA at any time, but amounts distributed will be includable in taxable income, and subject to a 10% additional tax, if the withdrawing taxpayer is under age 59 ½, unless one of the exceptions below applies.  Additionally, if the taxpayer withdrawing monies from a Simple IRA within two years of creating it, there is an additional 25% tax.


There are a number of exceptions, however, from the 10% excise tax:[12]

  1. Automatic Enrollment – certain plans allow for permissible withdrawals.[?]
  2. Death – after death of the participant or IRA owner.
  3. Disability – participant has a total and permanent disability.
  4. Education – qualified higher education is exempt from the tax.[13]
  5. Equal Payments – series of substantially equal payments
  6. Homebuyers – qualified first time homebuyers may receive an exemption up to $10,000.
  7. Levy – because of an IRS levy of the plan
  8. 60 Day Rule – Any money can be withdrawn temporarily, as long as the money is placed back into the account within 60 days of the withdrawal.
  9. Medical Expenses – The taxpayer has unreimbursed medical expenses that are more than 10% (or 7.5% if you or your spouse was born before January 2, 1949) of your adjusted gross income.
  10. Medical Insurance– The distributions are not more than the cost of taxpayer’s medical insurance due to a period of unemployment.
  11. Military – certain distributions to qualified military reservists called to active duty.
  12. Returned IRA Contributions – if withdrawn by extended due date of return.
  13. Rollovers – in plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days.


Inherited IRAs are different, whether in trust or outright, Minimum Distribution Rules

will apply as discussed in more detail in the chapters that follow, once a taxpayer reaches the age of 59 ½.


Access between 59 ½ and 70 1/2 

Once you reach the age of 59 ½ withdrawals can be made from the IRA, but are not required.

Each withdrawal from a Traditional IRA is taxable as ordinary income unless (1) the withdraw  is rolled over within 60 days (only one per year per taxpayer under the Bobrow v. Commissioner case, discussed at Appendix D) or (2) to the extent considered to be a return of a nondeductible contribution.


The Coffee and Cream Situation (Partly Taxable Distributions)

Basis (investment in the contract) is received for any non-deductible contributions or rolled over after tax amounts made into an IRA. Until your entire basis has been distributed, each distribution is partly non- taxable and partly taxable.

The taxable and non-taxable portion is determined by the following formula:


Total Basis in the Contract            x          Distribution Amount

Total Value of the Contract



After 70 ½

A taxpayer who has reached age 70 ½ must withdraw the required minimum distribution amount by December 31st of each year to avoid paying penalties that can exceed 50% of the amount that should have been withdrawn.  A taxpayer who has reached age 70 ½ can withdraw more than the minimum without penalty, and all withdrawals will be included in taxable income, unless the taxpayer has made non-deductible contributions to the IRA and a portion is considered tax free. The Required Minimum Distribution rules apply during the lifetime of the taxpayer and/or to a surviving spouse who has rolled over an inherited IRA as a direct beneficiary thereof.

To calculate your minimum distribution there are two potential formulas.  The first applies only if you have designated your spouse as your sole beneficiary and such spouse is more than 10 years younger than you.  The second applies for everyone else.

If your spouse is ten years younger than you and is designated as the sole beneficiary the required minimum distribution is based upon the life expectancy of both you and your spouse.  To calculate the distribution you would take your IRA account balance as of December 31 of the previous year and divide it by the life expectancy indicated at the intersection of your age and your spouse’s age on the Joint Life and Last Survivor Expectancy Table.  This is discussed in more detail in the following chapters.

If your spouse is not ten or more years younger than you, or is not designated as your sole beneficiary, then your required minimum distribution is based solely on your life expectancy.  To calculate the required minimum distribution, you would take your IRA balance on December 31 of the previous year and divide it by the life expectancy indicated on the Uniform Life Table.  This is discussed in more detail in the following chapters.

If you do not take any distributions, or if your distributions are too small, then you may have to pay up to a 50% excise tax on the amount not distributed.

Generally, once you reach the age of 70 ½ you are required to withdraw the requirement minimum distribution from the account each year, however there are exceptions to the general rule.

First, if you have a Roth IRA no withdrawal is required until after the death of the owner. The second exception is for a participant in a Qualified Pension Plan or if your IRA allows you to wait until the year you actually retire to take your first required minimum distribution (often referred to as “RMDs”).  In these cases your RMD can be delayed for a period of time, typically one year following your retirement. Additionally, if you own 5% or more of the business sponsoring the IRA plan, you must begin receiving distributions by April 1 of the year after you reach age 70 ½, even if you have not retired.

Furthermore, the 2015 Protecting Americans from Tax Hikes (PATH)Act permanently makes the IRA Charitable Rollover Exemption allowing individuals who have reached age 70 ½ to donate up to $100,000 to charitable organizations directly from his or her IRA, without treating the distribution as taxable income.


After Death of Participant 

Spouses who are the sole designated beneficiary can:

  • Treat an IRA as their own,
  • Base RMDs on their own current age,
  • Base RMDs on the decedent’s age at death, reducing the distribution period by one each year, or
  • Withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date.

If the account owner died before the required beginning date, the surviving spouse can wait until the owner would have turned 70½ to begin receiving RMDs.


Surviving Spouse Exception

A surviving spouse named as beneficiary of a deceased Participant’s IRA/Plan who has not yet reached age 59 ½, may withdraw funds from the plan without being subject to the 10% excise tax unless or until the IRA/plan has been rolled over to the surviving spouse’s own IRA.

This may be a good reason to delay making a complete rollover. However, the spouse will not be able to change the beneficiary designation of the deceased Participant’s IRA/Plan.


Individual beneficiaries other than a spouse can:

  • withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or
  • calculate RMDs using the distribution period from the Single Life Table based on:
    • If the owner died after RMDs began, the longer of the:
      • beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or
      • owner’s remaining life expectancy at death, reduced by one for each subsequent year
    • If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year. 

Generally, Congress and the IRS have put a number of limitations on IRAs to ensure that they do not last indefinitely. However, Treasury Regulations do allow trusts, in certain circumstances, to be treated as designated beneficiaries that are eligible to stretch post-death RMDs over the life expectancy of the designated beneficiaries of the trust. This can be accomplished by creating a Conduit Trust or an Accumulation Trust, but in order to receive this protection the trust must be properly drafted as such.

A Conduit Trust assures the RMD calculations are distributed over the beneficiary’s life expectancy. Essentially this creates a “safe harbor” when there are multiple beneficiaries to the Trust that are different ages. The Conduit allows the designated primary beneficiary to be used to determine the age and RMD that needs to be withdrawn each year. Typically, the youngest beneficiary would be deemed the primary to ensure that withdrawals continue well into the future.

An Accumulation Trust provides greater asset protection benefits to the beneficiary because the Trustee is given discretion to distribute or withhold monies. However, the best practice for the wise retiree may be to toggle an Accumulation Trust to a Conduit Trust, or vice versa depending on the present situation or the beneficiary. Also note that the income distribution requirements must be met in order for the Trust to qualify for the marital deductions. According to the IRS,  if a marital trust is the named beneficiary of a decedent’s IRA, the surviving spouse will be considered to have a qualifying income interest for life in the IRA and in the trust for purposes of an election to treat both the IRA  and the trust as Qualified Terminable Interest Property (QTIP) under § 2056(b)(7).



Special Notre Dame Announcement

Please click here to see the amazing Notre Dame Tax and Estate Planning Institute agenda and  schedule for the dates in 2017 in South Bend, Indiana. This starts with a late Wednesday 2-hour presentation on what you need to know about bankruptcy law by Alan Gassman, and wraps up late Friday, followed by the Fighting Irish of Notre Dame vs. NC State on Saturday the 28th.

Alan thanks bankruptcy lawyers Al Gomez and Michael Markham of the Johnson Pope Law Firm for helping to critique and stand upon the outline for this presentation.  Stay tuned for the below webinars and please sign up.

The DoubleTree hotel adjoins the convention center, and the Thursday evening cocktail reception that is held there should not be missed. We’ll buy drinks after the Wednesday presentation for anyone who mentions the Thursday Report at the DoubleTree bar.


Checklist: 2nd Marriage

by Martin Shenkman

Summary: Planning for second and later marriages is complicated and each situation is unique. Further, as the relationship evolves (or doesn’t) your initial plan should be reviewed and updated. Take a broad approach, and don’t focus on the technical to the exclusion of the practical.

√ Nah, you don’t need to plan and pay lawyers.  Consider the stats.  50% percent of first marriages, 67% of second, and 74% of third marriages end in divorce. Get real dude!

√ Make sure it is YOUR plan.  Too often couples in second and later marriages, or their advisers, opt for “standard” planning that has worked for other second marriages (e.g. each keeps his/her property separate and bequeaths to his/ her children). That works for some, but not for others. Every situation is unique so start with your facts and goals and make sure the planning fits. If the prenuptial agreement your lawyer hands you says “Brady Bunch” on top, be suspicious.

√ What ifs – too many plans for second marriages fail because they are too rigid and do not consider the potential for changes in circumstance that undermine the plan. Example, one spouse becomes disabled at a peak earning age. What happens? Do both working spouses have adequate disability insurance?  Many prenups demand life insurance but give inadequate attention to disability coverage.

√ With late-in-life divorce (so called, silver divorce) becoming so common, how will the post-divorce couple, or each ex-spouse on remarriage, get by financially? See the $400,000+ medical figure below. This is a big issue.  Half of those over age 85 have some degree of dementia according to some reports. Older couple wants to marry and travel but in 3 years one is ill and the other becomes a caregiver.  Has this all been factored into the plan for a late-in-life marriage?

√ What if expenses rise faster than anticipated and the couple cannot afford to do what the original plan was? All plans need flexibility built in and need to address many uncertainties but too often they don’t.

√ Be practical. Make sure what you agree to do can actually work. So, if you are going to keep all assets separate who pays the monthly electric bill? Do you alternate? If your assets are supposed to be kept separate, but the income they generate is considered marital, how mechanically will that happen? If you don’t set up a plan from inception that is practical, the marital and non-marital assets will get commingled and untangling them later will be a messy hairball.

√ Don’t overlook the details. Too many plans neglect to get into the nitty gritty. What are the titles on each bank and brokerage account? Do you have to change a deed? What about beneficiary designations?

√ Powers of attorney. Who will you name as agent? What powers will they be given? So, you have a great relationship with your new partner but she names her eldest son the CPA as agent under her power of attorney. Will he continue to share expenses or cut of funds when your partner is ill and pressure you into negotiating a deal different then what you and your partner agreed to? Perhaps it might be better to name an institutional trustee that won’t get involved in the emotional baggage?

√ Trusts can save the day. If you are planning to wed for the 2nd or later time, look at the stats as to divorce rate for 2nd and later marriages.  Scary huh! Consider funding irrevocable trusts, even a self-settled trust, prior to the new marriage, to provide another layer of protection behind the prenuptial agreement you’ll sign.  Even if you want a simpler and less costly approach, consider setting up a revocable trust with its own tax identification number and funding it with assets you and your honey agree will be separate. Use the trust as separate accounting pot to minimize commingling issues.

√ Clean up the loose-ends from your prior marriage before starting a new one. If you have insurance obligations be certain they are in place.  Remove your ex and his family and buds from any fiduciary positions.  Change beneficiary designations.  Don’t flip so hard over your new “number one” that you neglect cleaning up the remnants of splitting from your last number one.

√ Consider how you file your income tax returns.

√ Investments count. If you’re going into a second or later marriage you’ve likely been hurt by the financial cost of the prior divorces. Investment planning is critical. Too often, however, folks spend to much time licking those old divorce wounds rather than focusing on rebuilding their wealth. Hug your financial adviser and get your asset allocation back to where it should be based on your new realities. As you enter a second or later marriage coordinate how you and your new spouse invest.  You can certainly each keep your own wealth managers if you wish but let them share information so they can coordinate the planning.


5 Ways to Get Your Non-Sales Staff Selling for Your Business

by David Finkel

Have you ever had this experience:  You are talking with an employee in a business and they help get you the information you are asking for, but at the end, you can almost see them squirm with discomfort at the thought of asking you to purchase?

Think about your own company.  Have you empowered your non-sales staff in helping you sell more?

Here are 6 simple ways to get your non-sales staff adding to your revenues.

  1. Educate your team that selling is everyone’s job. Too many employees have never made the connection between their role and sales for their company.  Not only is it your responsibility to help them connect the dots, but you need to also help them see how increasing sales benefits everyone, creating security, opportunity, and stability for them.  So start by explaining this to your team.  Share stories of how people in the company helped do just that.  Celebrate the successes of non-sales staff who help generate more business.  Reinforce this into the culture of your company.
  2. Teach your team to “recommend” or “share” their favorites. Ever wonder why the waiter at a good restaurant share’s his favorite appetizer?  After all, why should a total stranger’s opinion matter to what you order?    The answer is that it does matter.  We are social beings.  We care and are influenced by what other people like or do.  Social psychologists call this “social proof”.  Train your team to recommend a specific product, or service, or solution to any prospect they run into in the course of business.  What’s more, when you frame selling as “recommending” or “sharing”, this dissolves the internal barriers that many non-sales people have with the very idea of sales (and the potential rejection they fear.)
  3. Train your team how to spot new sales opportunities.

Every team member in your company should continuously be on the look out for new sales opportunities.  We call this activity, “Lead Spotting”.  What are the signals that hint at a good opportunity?  What situations are you best primed to solve for a prospect?  What clues indicate urgency, need, and budget?  Train your team to ask a few gentle probing questions and then make sure you have given your staff a simple process to hand these leads over to your sales team.  This could be a web form they fill out, a lead card they hand to your sales staff, or an email address they send all lead possibilities to.train your sales staff to “close the loop” by telling the referring team member what happened with the lead they handed in, this will encourage your staff to be on the lookout for even more sales opportunities.  Train your non-sales staff in how to appealingly and succinctly give your best scripted elevator pitch for what you do when they meet potential customers.  Don’t leave this one to chance.  Left to their own, they’ll likely ramble off a mind-numbing description, our mutter an obscure 5 word description of what you do, and a great opportunity will be lost forever.
Here is a powerful formula for an easy and effective “elevator pitch” when meeting a potential customer.  Script this out and then repeatedly role play this with your team.

Formula:  “You know how __[insert #1 biggest pain point of your target market that you solve]___, what we do is ___[insert your biggest solution and benefit to that pain point]___.”

Here’s an example we use at Maui Mastermind with our Business Coaching Program: 

“You know how most business owners end up trapped in their business, with no time freedom and their business totally dependent on them?  What we do is help business owners grow their companies and get their lives back by building a business, not a job for themselves.  In fact, our average business coaching client not only grows by 32.4% per year, but she also has reduced her company’s reliance on her by over 80%.”

The most important part to this is to make sure you train your team through actual role play to use the powerful scripting your marketing team has likely already created.

  1. Systematize how your non-sales staff can get key customer data and feedback to other parts of your company. Did a customer make a good suggestion for new features?  Make sure this information gets to your product team.  Did your client share a big win they enjoyed based on using your service?  Make sure that your sales and marketing teams hear about it.  Your marketing team might have a subject for your next case study; your sales team may have a reason to ask for referrals.  All too often as companies grow information from one section of the company doesn’t flow to other areas.  You need to have a process for how your team shares important customer and market feedback and data.


  1. Help your team learn to ask for prospects to buy.

I wanted to end with what might be the most important suggestion of all – training your team to get more comfortable and willing to ask for the sale.  This last suggestion isn’t rocket science, but it is rock solid.  Role play with your team, helping them get repetitive practice at asking for a prospect to purchase.  Don’t try to teach them 10 different sales closes, rather, train them in one simple “best practice” that will work in the widest number of sales situations.  And rehearse that one best practice of asking for the sale over and over and over.  This way when they are scared they will fall back on the default that they have practiced so often.

If you enjoyed the ideas I shared, then I encourage you to download a free copy of my newest book, Build a Business, Not a JobClick here for full details and to get your complimentary copy.

Richard Connolly’s World

Insurance advisor Richard Connolly of Ward & Connolly in Columbus, Ohio often shares pertinent articles found in well-known publications such as The Wall Street Journal, Barron’s, and The New York Times. Each issue, we feature some of Richard’s recommendations with links to the articles.

The attached article from last Friday’s (10/6) Wall Street Journal (page A2) reports:

Senate Republicans are running into internal resistance to their proposed repeal of the estate tax, making it a potential casualty of the trade-offs the GOP faces in its effort to overhaul the tax code.

The party’s leaders included estate-tax repeal in the tax-overhaul framework they released last week. But Republican Sens. Mike Rounds of South Dakota and Susan Collins of Maine said this week that repeal isn’t needed. Others say their desire to eliminate the tax must be balanced against other priorities including tax cuts for businesses and middle-class families.Following the lead of a handful of other federal judges, Judge Weinstein issued a court rule urging a more visible and substantive role for young female lawyers working on cases he is hearing.

To View the Full Article Click Here


 Humor! (Or lack thereof!)


[1] Fla. Stat. Ann. § 222.21.

[2] 134 S. Ct. 2242 (2014).

[3] Archive #251 by Christopher Denicolo, Alan S. Gassman and Brandon Ketron entitled Clark V. Rameker: Supreme Court Rules that Inherited IRAs Are Not Creditor-Exempt in Bankruptcy; See Appendix C to check your state’s creditor protection statute.

[4] See “Roth IRA Conversions as an Asset Protection Strategy: Does it Always Work?” Feb. 2011 Vol. 85, No.2

[5] Id.

[6] Id.

[7] Id., at 1-6.

[8] See Treas. Reg. § 1.403(b)-6(e)(6).

[9] Choate – Life and Death Planning for Retirement Benefits 1.4.05.

[10] Certain exceptions apply to coin collections: One, one-half, one-quarter or one-tenth ounce U.S. gold coins (American Gold Eagle coins are the only gold coins specifically approved for IRAs. Other gold coins, to be eligible as IRA investments, must be at least .995 fine (99.5% pure); one ounce silver coins minted by the Treasury Department; any coin issued under the laws of any state; a platinum coin described in 31 USC § 5112(k) ; and gold, silver, platinum or palladium bullion (other than bullion that is made into a coin) of a certain fineness that is in the physical possession of a trustee that meets the requirements for IRA trustees under Code Sec. 408(a).


[11] For potential sample Operating Agreement language see Appendix B.


[12] See generally IRS, Retirement Topic – Exceptions to Tax on Early Distributions, https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions.

[13] Qualified Education Expenses include: tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. In addition if the student is at least a half-time student, room and board are qualified education expenses.