Legal Update

PARTICIPANTS AND BENEFICIARIES OF QUALIFIED RETIREMENT ACCOUNTS: Changes Allow Rollover by Non-Spouse Beneficiaries

For distributions after December 31, 2006, a non-spouse designated beneficiary of a qualified retirement plan can avoid taking an immediate distribution (or five-year payout) from a 401k by rolling over these inherited amounts, via a trustee-to-trustee transfer, into an IRA (Section 829 of the Pension and Protection Act of 2006). In other words, the ability to roll over (thereby delaying income tax) has been extended to children and other non-spouse beneficiaries. Whereas a child could have been forced to take immediate distributions from a retirement plan, the child can instead transfer the retirement plan fund to an IRA in his/her parent's name, an "inherited IRA", and take distributions over the child's life expectancy according to the required minimum distribution rules.

ASSET PROTECTION: Recent Ruling Leaves Us Wondering if All Asset Protection Constitutes a Fraudulent Transfer

In an overly broad opinion, the Ninth Circuit Court of Appeals in U.S. v. Townley, 2006 U.S. App. Lexis 12372 (9th Cir. 2006), held that the Townley's transfer to a trust to protect their assets from future unknown creditors , showed an actual intent to hinder, delay or defraud creditors amounting to a fraudulent conveyance. As often happens, bad facts make bad law: The Townley's egregious behavior (putting ALL their assets into the trust, intentionally understating their income tax for the year before and after the transfer making the IRS a creditor), lead the court to conclude that protecting themselves from future unknown creditors constituted a fraudulent conveyance. Although some experts opine that the Townley decision is more of an aberration than a restatement of the laws of fraudulent conveyance, if your goal is asset protection, be sure that the client has no known creditors, that the transfer does not render the client insolvent, that accurate income tax returns have been filed and paid, and that you conduct due diligent to determine the client's solvency and obtain the client's affidavit of such. And document other business and personal reasons/goals for the transfers, other than asset protection.