Trying to figure out how Roth IRA distributions are taxed can be mind-boggling, since there are two components to be analyzed (contributions and earnings); two taxes to analyze (the income tax and the 10% penalty tax); two 5-year rules (the income tax rule, which tests on the first Roth IRA established; and the 10% penalty rule, which tests exclusively on the converted Roth IRA); and two time periods (the recipient having attained age 59½ or not). All of these factors and their ramifications are summarized on the chart found here: Roth Distribution Chart. We hope that you find this reference tool useful in advising your Roth IRA clients.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

In Estate of Malkin v. Commissioner, T.C. Memo 2009-212 (September 16, 2009), the Tax Court, in a memorandum decision, determined which stock that a decedent transferred to two family limited partnerships was includible in his gross estate under Section 2036(a) of the Internal Revenue Code. There was an implied agreement that the decedent retained possession or enjoyment of the stock and/or that he retained unrestricted control over the stock after its purported transfer. The bona fide sale exception to Section 2036(a) did not apply, because the transfers were made to fulfill purely testamentary objectives.

Estate of Malkin is almost a textbook case of how not to create and maintain a family limited partnership. The partnerships were created close to the decedents death for what appear to be testamentary reasons. The decedent continued to use the assets of the partnerships for his own personal benefit (in this case for personal guarantees). Finally, assets were purportedly transferred to the partnerships before the partnerships were legally established.

For more information regarding this topic, please e-mail your requests to Julius Giarmarco, or call Julius at (248) 457-7200.

The recent Michigan Court of Appeals case of In re Gaylord Genaw, Sr. Estate deals with the payment of life insurance death proceeds by an insurance carrier to a named beneficiary whom it knew was an ex-spouse. A decedent owned a life insurance policy on his life in the amount of $111,000.00. Prior to his divorce, decedent named his wife, Cindy, as his beneficiary. The decedent and Cindy divorced in 2006. The divorce judgment specifically contained a waiver provision which extinguished both parties respective interest in any life insurance policy on the others life. Shortly after divorce, decedent was killed in a motor vehicle accident. The beneficiary designation on this Unum life insurance policy had not been changed.

Following the decedents death, Cindy filed a claim for the death benefits. On the claim form, Cindy indicated that she was divorced from decedent. Along with the claim form, Cindy submitted the decedents death certificate which also indicated that they were divorced. Unum conducted an investigation and determined that benefits were payable pursuant the policy. Following its investigation, Unum remitted payment to Cindy in the full amount of the policy.

Approximately a month later, a personal representative was appointed for decedents estate who filed a lawsuit against Cindy and Unum to recover the monies remitted by Unum to Cindy. The Probate Court granted summary disposition in favor of the personal representative. The Probate Court ordered that the funds remaining in Cindys bank account in the amount of $42,659.00, which were paid to her by Unum, be seized and held in escrow. The Probate Court also held that Unum is responsible to pay the estate $111,000.00, set off by the $42,659.00. Unum appealed.

The Michigan Court of Appeals upheld the Probate Court based upon a Michigan statute which provides that an insurance company may only discharge from the imposition of liability if it pays the benefits in accordance with the policy designation and does not receive written notice of a divorce. Since Unum was aware that Cindy and the decedent were divorced, it was absolved of its liability for payment of the proceeds to Cindy.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.