Are IRA’s exempt from IRS levies for unpaid taxes of the owner of the IRA?
IRA’s are not exempt from IRS levies for the unpaid taxes of the owner of the IRA. While it is the policy of the IRS to avoid levying against a taxpayer’s IRA or qualified pension plan benefits, it can do so as a last resort (Internal Revenue Manual 5.11.16). It is also well settled that the IRS lien and levy powers contained in the Internal Revenue Code take precedence over any asset protection provisions in state law, such as FL Stat. 222.21. The good news is that there is a Tax Court case which holds that in the case of death benefits payable under a qualified pension plan, the IRS levy does not attach to the death benefit, even if the IRS levies against the delinquent taxpayer’s pension account before the death (Asbestos Workers Local 2004-1 USTC 50129). There does not appear to be any similar case involving IRA death benefits but the analysis should be the same. It is somewhat similar to IRS levies against life insurance policies owned by a delinquent taxpayer who dies. While the IRS can reach the cash surrender value, it can’t reach the pure insurance portion of the death benefit payable to a third party beneficiary.
Fred: In the tax and business areas, I have also represented and advised business owners on succession planning. That is, how do you get a business from one generation down to the next in the most efficient way, both from a tax standpoint and also from a governing standpoint. Frequently, when a business is passed from the founder to the next generation, you have controversies and disputes between the children in the operation of the business. In many cases some want to sell, some don’t want to sell. You can provide for that and prevent those kinds of disputes with well thought-out succession planning in the form of buy/sell agreements, employment agreements and operating agreements that will state with some specificity just who has the right to make the decisions, and who is going to be running the business while still treating all of the beneficiaries of a business owner equally.
Babette: One of the things that an elder law attorney specializes in is estate planning for a disabled beneficiary. Many of our clients have children or grandchildren who are suffering from various disabilities and receive governmental benefits. If they receive medicaid, they need to do a special needs trust in order for that beneficiary to be able to receive an inheritance and have their governmental benefits protected. We often work on a team approach doing the estate planning for a family that’s very concerned about a disabled beneficiary.
Fred: The special needs trust is a very exacting document. You must draft the document so that the beneficiary, that is, the disabled person, gets all the benefits from the trust that the creator of the trust intended but at the same time, does not get kicked off medicaid or another governmental benefit. The way you accomplish that is to give to the trustee, whether it be a family member or perhaps a trust department of a bank, the complete discretion as to whether or not to distribute income or principle benefits to the disabled beneficiary so long as everything is done in the best interests of the beneficiary.
Fred: Many times clients express concern about the costs and delays of going through the probate process. One of the ways to avoid that is to establish what’s called a living trust during your lifetime. A living trust involves a document whereby you create a trust. The creator of the trust is both the trustee and the creator. That person puts substantially all of their assets into the name of the trust. Upon the death of that person, their property passes under the terms of the trust document, and those assets are not subject to probate and can be distributed to the beneficiaries in a relatively short period of time in accordance with the terms of the trust document. There is less time involved, and in some cases less expense in winding up the affairs of the trust as opposed to a probate estate. In the case of a probate estate, at every stage along the process you must get the approval of the court to do such things as making distributions, hiring outside consultations, and things of that sort. The revokable living trust is not a panacea. It does not accomplish all things and in some cases may actually be disadvantageous to a person. I personally feel that the probate process is more protective of beneficiaries, particularly in the case of minor beneficiaries such as young children. I think it’s an advantage to go through the probate process where there are young children who absolutely must be protected if both the mother and father are deceased.
Babette: Both Fred and I have litigation experience, and unfortunately in elder law, even with good planning, sometimes you end up in court. Fred: The typical case is a gentleman passes away, and leaves substantially all of his assets to a person or persons other than his natural beneficiaries, and by natural beneficiaries we mean typically the children of the decedent. Many times, people, particularly elderly people, come under the influence of persons and are induced to leave portions of their estate to those persons. In many cases the elderly person did not fully realize what he or she was doing. In a typical case, someone will come into the office and say, “my goodness, this is my dad’s will. I hardly know this person! how could he have possibly left so much to so-and-so? Can you do anything about this?” And at that point, Babette takes over.
Babette: On the other hand, there are times when an elderly person knows exactly what they’re doing, and they intentionally disinherit an heir. We can get very involved in preparing that case for litigation, even while the testator is alive and preparing the will, because we anticipate that it might be contested at a later date and so we develop the case right then and there on the spot. Unfortunately, that’s not always the case, but we believe in a person’s right to leave their estate to who they choose. That is one of the liberties we have in the United States and in the Florida Constitution. In protecting the elderly that means protecting their freedom of choice. Not every state is the same.
Fred: In those types of situations, we will frequently videotape the person who is making the will. We will record the signing of the will, we will ask that person questions like, “who you are? Do you understand what you’re doing? Who are your beneficiaries? What is the nature and extent of your financial assets? How come you’re not leaving so much to so-and-so and how come you’re making a bequest to so-and-so?”
In other words, we have it all on tape, and when the person dies and if there is litigation, the judge and the jury and everyone else can see the person who prepared the will while they were alive, and can make a determination of whether they feel that person was competent, and they also hear right out of the person’s own mouth why they are or are not doing a certain thing with regard to the disposition of their assets. We have found that that videotaping can be very persuasive in a court of law.
