Do you have an IRA or 401(k) rollover account? If so, like most
Americans in your position, your money is probably invested in some
combination of fixed income and/or equity products. Also like many
people in today's economy, you may be re-considering your investment
strategies in light of the low rates of return currently being offered
on fixed assets, or the volatility and lack of predictability
associated with the stock markets. Have you considered Real Estate?
What if I told you that you could use your IRA or 401(k) rollover
money to take advantage of the depreciated values of real estate by
investing in a primary residence, a second home, a vacation rental or
investment property?

   If you qualify and have a balance of $100,000 or more in your IRA
or 401(k) rollover account, the OUTSIDE method developed by Lasaii (a
division of Uranga & Associates) allows you to move your retirement
funds into a SAFE HARBOR directed IRA account. Through this account,
structured by a Lasaii consultant, you can purchase and occupy the new
home, vacation getaway, or an investment property of your choice.
Don't wait until retirement to begin enjoying your retirement savings!
Visit Lasaii.com for more information.

Dammeron Valley, UT 84783
March 18, 2010

Dear Uranga Associates,

We wanted to write and let you know how impressed we have been with you company. We first heard about you while reading an airline magazine while on vacation. We were both nearing retirement so it was fortuitous that we happened upon your advertisement.

Although it took a little convincing by my husband, we finally made that first phone call to inquire about your OUTSIDE method of purchasing a home. Alberto arranged a conference call with us and explained how the process worked. He patiently answered all of our questions. There was no pressure and no hype. We took our time making the decision to participate in the SAFE HARBOR IRA. After the process was in place, we located our dream home in Southern Utah. With your help and guidance, the entire purchase process was flawless.

Rick Uberuaga was a tremendous help in securing financing and guiding us through the process. We really appreciated his patience with the large number of phone calls that we initiated asking question after question. We were also impressed with the professionalism of your entire staff.

Here we are one year later sitting in our lovely home in Southern Utah. It was a good year for the SAFE HARBOR IRA. The value after one year is greater than the initial investment. This is quite impressive as we have withdrawn a considerable amount to fund the payments on our new home.

Thank you for all your help. It has been a pleasure doing business with a group of people who are so highly specialized in this field.

Yours truly,

Steven H. and Susan A. Madsen

P.S. You may use all or any part of this letter in your blog.

    TRUSTS AND ESTATES NOVEMBER COLUMN, 2002   

Professor Christopher R. Hoyt

Univ. of Missouri (Kansas City) School of Law 

      Do you feel that you are seeing IRAs and retirement accounts increase both in frequency and size in the estates of your clients?  Recent IRS statistics confirm your experiences. 

      Just 15 years ago, IRAs, retirement plans and annuities only appeared on 25% of federal estate tax returns and they represented only 2.3% of the assets reported on those returns.  For returns filed in the year 2000, they appeared on 53% of all returns and comprised 8% of reported assets (Table (A)).  For estates under $2.5 million they comprised 12% of all reported assets (Table (B)).  These are, of course, just the averages.  Every estate planner has met individuals who have a majority of their wealth in retirement plan accounts. 

      Why the dramatic growth?  It is due in large part to the fact that IRAs, 401(k) plans and other qualified retirement plan accounts are creatures of the 1980's.  It was just in 1981 that Congress permitted anybody who worked to contribute $2,000 to an IRA.  Although this provided an opportunity for younger workers, it was too late for retirees to take advantage of it.  Consequently, the estate tax returns filed in the 1980's and early 1990's reflected the fact that most of the individuals who died during those years were ineligible to establish these type of accounts.   

      The situation is changing.  Dealing with these accounts is destined to become an even bigger issue for estate planners in the coming years.  IRS statistics give us an idea of what we are in store for.  Whereas retirement accounts and annuities appeared on 47% of all federal estate tax returns filed for males in 1998, they appeared on only 43% of returns filed for male decedents over age 65 but on over 63% of returns filed for males under age 65.  The statistics in Table (C) also demonstrate a stunning disparity based on gender.  Whereas the frequency and size of retirement accounts in the estates of decedents under age 50 is about the same for men and women, there is a huge gender-correlated disparity for individuals over age 50.  For these individuals, men tend to have retirement assets much more frequently than women.  The numbers reflect the important changes in the nation's work force over the past 30 years and the shape of things to come in the long term.

INTEGRATED PLANNING IS NECESSARY

      Planning for retirement accounts is, therefore, a growth industry for estate planners.  The challenge, though, is that it is harder to plan for retirement accounts than for virtually any other asset in an estate.  The planner needs to understand not just the estate tax laws, but also income tax laws and ERISA mandatory distributions laws and how they all interact. 
 

      This is not something that planners are likely to have learned in school.  Whereas most schools teach separate courses on transfer taxes and income taxes, retirement accounts are the pinnacle of integrated tax planning.  These accounts can trigger both significant income taxes and estate taxes.   

      Except for Roth IRAs, distributions from a retirement account are usually taxed in full as ordinary income -- during the employees lifetime to the employee and then after death to the beneficiaries.  Whereas these accounts are wonderful for deferring income tax, they can be an estate planning nightmare.  Barring a divorce, they are virtually impossible to give away during a person's lifetime because of anti-alienation laws.  A lifetime transfer or pledge of the account can be treated as a taxable distribution.  Sec. 72(p)(1)(B) and (A).   

      At death, these accounts often magnify the size of the estate tax liability.  Estate taxes must be paid on the entire retirement account balance -- including the portion of the account that represents deferred income taxes.  When the maximum income and estate tax rates reach their lowest point in 2007 (35% income tax rate and 45% estate tax rate), a distribution from a retirement account will be subject to a combined estate and income tax rate of over 64% (see Table (D)).  In 2001, the comparable rate was over 76%!  These are the effective tax rates in states that have no state income tax.  An even higher rate applies to beneficiaries who live in states with a state income tax.   

      It is, therefore, no wonder that many estate planners suggest charitable dispositions of these assets for people whose estates are overloaded with retirement accounts.  There is increasing activity in this area.  Just this year, the IRS approved two new and ingenious charitable transfer strategies in private letter rulings.  They will be analyzed in next month's column. 

CONCLUSION 

      Retirement accounts are destined to appear in over two thirds of the estates of the nation's more affluent citizens.  In order to give the best advice, estate planners must learn all of the applicable fields of law that affect these assets -- estate tax, income tax and ERISA distribution rules -- and how they interact.  For estates that are overloaded with these types of assets and will likely feel the pain of tax rates of 64% or more, a charitable bequest may be the choice that brings the parties the greatest satisfaction. 

                  TABLE A

FEDERAL ESTATE TAX RETURNS 

RETIREMENT PLAN ASSETS AND ANNUITIES 

           TOTALS        RETIREMENT PLANS/ANNUITIES 

Year    # of  Gross  # of  Value

Filed  Returns Estates  Returns  %  (millions)  %

              (millions)

2000  108,322 $217,402  56,921 53  $17,410 8.0

1997   90,006 $162,251    41,788  46  $10,116  6.2

1995   69,772 $117,735  30,938  44   $6,632  5.6

1992   59,176 $ 98,850  22,738  38   $4,095  4.1

1989   45,695 $ 77,997    14,223  31   $2,309  3.0 

1986   45,125 $ 59,805    11,244  25   $1,350  2.3 

SOURCE: IRS Statistics of Income Bulletins for the applicable years.  

See web http://www.irs.ustreas.gov/prod/tax_stats/estate.html

TABLE B

Estate Tax Returns Filed in 2000: Retirement Plans, IRAs and Annuities

For this and other IRS statistics, see the IRS web page: <http://wwwirsustreasgov/prod/tax_stats/estate.html>

SOURCE: IRS Statistics of Income Bulletins for the applicable years.  

See web <http://www.irs.ustreas.gov/prod/tax_stats/estate.html> 

TABLE C 
 
 

Estate Tax Returns Filed in 1998: Retirement Plans, IRAs and Annuities --

Variations Based on Age and Gender

(A) Percent of Returns that Report Any Retirement Plan Assets and

(B) Percent of All Assets that are in Retirement Plan Accounts

Source:  Barry Johnson and Jacob Mikow, “Federal Estate Tax Returns, 1998-2000,” Figures F and G,  IRS Statistics of Information Bulletin, available at <http://wwwirsustreasgov/prod/tax_stats/estatehtml> 
 
 

TABLE D 

            COMBINATION OF ESTATE AND INCOME TAXES ON INCOME IN RESPECT OF A DECEDENT -- (Years 2007 through 2009).

             EXAMPLE: Assume that Mother's total taxable estate is $4,000,000 and that all of it will be transferred to her sole heir: Daughter.  Assume that the probate estate will pay the entire estate tax regardless of how her daughter acquired the assets (e.g., joint tenancy, etc.).  If $100,000 in an IRA is immediately distributed to Daughter and if Daughter is in a 35% marginal income tax bracket, then the combined estate and income taxes on the $100,000 of IRA assets would be $64,250.  The amount is calculated as follows: 

Beginning Balance in Retirement Plan $ 100,000  

Minus: Total Estate Tax Paid by the Probate Estate   (45,000) 

Minus: Income Tax On Distribution 

      Gross Taxable Income    $ 100,000 

      Reduced By §691(c) Deduction for

            Federal Estate Tax 

            Total Estate Tax $ 45,000

            State Tax Credit*             Zero

      Deduction for Federal Estate Tax **                 (45,000) 

      Net Taxable Income ***    $  55,000 

      Times Income Tax Rate     x  35.0% 

      Net Income Tax on Income In Respect Of Decedent   (19,250) 

      NET AFTER-TAX AMOUNT TO DAUGHTER   $ 35,750  

*  Treas. Reg. Section 1.691(c)-1(a) limits the deduction to federal estate tax.  The 2001 Tax Act provides that  the Section 2011 state tax credit will be fully repealed by the year 2007 so there is no state tax adjustment. 

** The deduction is an itemized deduction on Schedule A that is claimed on the last line of the form ("other miscellaneous deductions").  It is not subject to the 2%-of-adjusted-gross-income ("AGI") limitation that most miscellaneous deductions are subject to.  Sec. 67(b)(7). 

*** The net taxable income from the IRD will actually be greater than this amount  The IRD will increase the recipient's AGI by $100,000 which will decrease the recipient's itemized deductions by 3%, which would be $3,000 in this example.  Sec. 68.  The 3% reduction was omitted from this calculation in order to simplify the computation. 
 
 
 
 
 
 

TRUSTS AND ESTATES

The Journal of Wealth Management

for Estate Planning Professionals

      October 2002

“The 800-LB. GORILLA”

by Professor Christopher R. Hoyt

University of Missouri (Kansas City) School of Law 
 
 
 
 
 

“This article reinforces why our IRA/Real Estate Plan has the best solution to this problem.  Our program, combining the use of IRA monies to purchase real estate with a simple and flexible estate plan, can result in unprecedented tax savings for you and your heirs. It is sad to see that the only way these estate-planning professionals can fix the problem is by giving your IRA monies away to charities (no deduction allowed).  Not that I have anything against giving to charities, but it should be by choice and not for lack of an alternative.”

                                                Alberto Uranga 
 

Reported By Paul Menchaca of Financial Planning Magazine
October 27, 2009

SEC Chairman Mary Schapiro today reiterated her support for a universal fiduciary standard that would apply to all financial service professionals who provide investment advice about securities. Schapiro, speaking at the annual meeting of the Securities Industry and Financial Markets Association (SIFMA) in New York, said that the standard should apply to both broker-dealers and investment advisors because “investors don’t make a distinction between the two—and neither should we.” The fiduciary duty, Schapiro added, is about advisors putting the investor’s interests above their own. Her remarks come on the same day that the House Financial Services Committee will begin discussing the creation of a universal fiduciary duty. Schapiro’s speech mostly focused on restoring investor confidence in the financial markets and in U.S. regulators. She stressed the need to create transparent financial products that do away with “complex fee arrangements or product descriptions.” Schapiro said the SEC is going to focus in the coming year on issues related to disclosure, product development and marketing for retirement products. She also created a task force to review the growth of the life settlements market, and also has target date funds on the commission’s “radar screen.” Schapiro said that in order to restore investor confidence, the SEC has to shore up several regulatory gaps. Hedge funds, she said, “have flown under the regulatory radar for too long.” Schapiro supports the Obama administration’s recommendation that advisers to private funds be required to register with the SEC. She also credited the recent passage of bills from two House committees to regulate OTC derivatives. Responding to an audience question asking for her thoughts about the “regulatory pendulum,” Schapiro said she does not think the pendulum has swung too far in the direction of over-regulation. She said many of the issues the SEC is addressing have been on its list for years—including money market reform and corporate governance—but were pushed to the side as the commission dealt with more pressing matters in the wake of the economic meltdown. Perhaps seeking to reassure those concerned about how the U.S. will compete on the global markets in the wake of new reforms, Schapiro added that the policies being considered here are also being considered by regulators all over the world. “We will not create a disjointed regulatory regime that for inappropriate reasons migrates business from one part of the world to another,” Schapiro said.

"The income limitation for single tax payers went up from $75,000 under the old rules to $125,000 under the new rules. For married tax payers, the income limitation went up from $150,000 to $225,000. "This means that more people will qualify for the credit - especially in parts of the country with higher costs of living," Nicholas said. "This should help stimulate parts of the housing market that may not have been impacted by the old version of the credit."

There are creative ways of structuring your home purchase transaction in ways that maximize the benefits of the credit. Here are a few examples suggested by Nicholas (www.CMPSInstitute.org):

• The credit applies to 1-4 unit homes as long as you live in one of the units as your primary residence - you could live in one unit and rent out the others
• If two unmarried individuals buy a home, and only one of the individuals qualifies for the credit based on their income or past home ownership status, the individual who qualifies for the credit can claim the full credit. (Note: In the case of married couples, both spouses must qualify for the credit.)

The credit applies even if you have co-signers on your mortgage loan

Case outline:  When Mr. Murphy became a client of Uranga & Associates he was 66 years old and in the process of buying a second home which would ultimately become the retirement home for him and his wife.  Mr. Murphy had the necessary down payment for the second home of his choice, but in order to afford the monthly mortgage payments it would be necessary for him to draw from his retirement fund. Mr. Murphy enquired at a local bank to find out if they could assist him with structuring his IRA for the purchase.  The Bank informed him it was outside of their expertise to structure IRA real estate purchases and referred him to our company, Lasaii of Uranga & Associates. Mr. Murphy consequently contacted us to learn how his retirement monies could be utilized for his real estate purchase. The OUTSIDE® method allows for non IRA monies to be coordinated with IRA monies and also allows legal occupancy for the purchaser of the real estate. Additionally the OUTSIDE® method structures the retirement monies dedicated to supporting the real estate purchase to avoid any loss of principal through investment exposure.  This precaution is important at any stage in life, but particularly in one’s latter years, where a substantial loss in the principal value of a retirement account has a high probability of never recovering to its prior value within the lifetime of the owner. The Lasaii division of Uranga & Associates structured a plan for Mr. Murphy placing approximately $1,100,000 of his IRA in a SAFE HARBOR® IRA account to create the structural foundation for his IRA real estate plan. This SAFE HARBOR® IRA account, guaranteed to earn a minimum of 3% with a potential of 4% – 5% as a ten-year average , was structured to provide an income stream to be used toward paying Mr. Murphy’s monthly mortgage payments. Any tax liability generated by this income stream was calculated to be offset by allowable real estate tax deductions. 

Summary:  This structure was implemented four years ago in 2005.  In the past twelve months many retirement funds exposed to stock market fluctuations have lost as much as forty percent of their value.  Mr. Murphy’s SAFE HARBOR® account lost no principal value whatsoever.  Had Mr. Murphy’s retirement monies not been protected by the vigorous safeguards of the SAFE HARBOR® directed program, the monies he had planned to have support the mortgage for his retirement home would have been diminished to the point where they would have been exhausted long before his home mortgage was paid off. He would now be faced with the difficult prospect of having to sell his dream home in a poor market environment and at a capital loss or to continue to support the mortgage with his remaining retirement monies and face the consequences of the cash flow running out at an accelerated rate in just a few years. However, since Mr. Murphy chose to apply the SAFE HARBOR® strategies to his IRA real estate purchase, his home purchase plan has been unaffected by the recent upheaval in the investment markets and so he and his wife can continue to enjoy their retirement lifestyle in the resort community they chose to retire in.

Case outline: Mr. Bennett is 46 years old and married.  Mr. Bennett has a high level sales position with an international company which requires extensive travel.  However, when he is not on the road, he is able to work from home.  This allows him and his wife to live anywhere that is within reasonable distance of an airport.  Because Mr. Bennett is away from home much of the time, his wife wanted to move closer to family.  They found just the home they were looking for on small acreage just thirty minutes drive from Mrs. Bennett’s sister.  Mr. Bennett liked the idea of dedicating IRA monies to support the purchase of the new home so that the tax free capital gains from the sale of his existing home could be applied to other investments. 

The Lasaii division of Uranga & Associates assisted Mr. Bennett in placing approximately $380,000 of his IRA in a SAFE HARBOR® IRA account - the structural foundation to his IRA real estate plan.   This SAFE HARBOR® IRA account insures against loss of principal value due to investment exposure during the life time of the contract.  Mr. Bennett’s SAFE HARBOR® IRA account was then structured to provide an income stream to be used to pay interest and principal on the home mortgage for their new home.  Any tax liability generated by this income stream was calculated to be offset by allowable real estate tax deductions.  Mr. Bennett’s IRA will continue to make these mortgage payments for a minimum of 18 years, with a potential of up to 27 years depending upon the interest he receives in his SAFE HARBOR® IRA account.  

Summary: The IRA real estate plan enabled Mr. & Mrs. Bennett to purchase their new home without the necessity of selling their existing home first, thereby facilitating a seamless transition to their new home in a different State. By structuring Mr. Bennett’s IRA to support the purchase of his new home, Mr. Bennett was able to benefit from tax free capital gains on the sale of the old home without having to reinvest it back into real estate.  The Bennett’s IRA real estate plan has been structured over a 14 year period to be in compliance with Federal IRA regulations.  During this time, they are free to turn their property, but it will be to their advantage to continue to apply the income stream generated by Mr. Bennett’s IRA to a real estate purchase.  After the 14 year term, Mr. Bennett may choose to redirect his IRA investment, or he can continue to apply it to real estate until either the IRA is fully utilized or the real estate is paid in full.  Additionally there are Estate Planning benefits to this IRA real estate plan that are not covered in this brief synopsis.

Case outline: Mrs. Dawson is 57 years old, she and her husband are recently retired. Prior to contacting Uranga & Associates Mrs. Dawson and her husband had been researching the possibility of purchasing a new primary residence to retire to in another state. After completing the Compatibility Form and consulting with Mr. Uranga, Mrs. Dawson, placed approximately $500,000 of her 401k rollover in a SAFE HARBOR® IRA account. This established the structural foundation for her IRA/real estate plan. This SAFE HARBOR® IRA account, guaranteed to earn a minimum of 2% with a potential of 5% or higher as a ten-year average, insures against loss of principal value due to investment exposure during the life time of the contract. Uranga & Associates then structured Mrs. Dawson’s SAFE HARBOR® IRA account to provide an income stream to be used to pay interest and principal on the traditional 30-year mortgage obtained to purchase the new primary residence. Any tax liability generated by this income stream has been calculated to be offset by allowable tax deductions on the real estate. Mrs. Dawson and her husband plan to relocate to their new primary residence and rent their old home until the housing market stabilizes and market conditions are more favorable to sell. At that time, they will be able to keep any capital gain up to $500,000 tax free on their old home and invest that gain in such a way as to supplement their retirement income. Mrs. Dawson’s IRA will continue to support the mortgage payments on their new home for a minimum of 18 years, with a potential of 27 years or more depending upon the interest she earns in her SAFE HARBOR® IRA account.  

Summary: The IRA/real estate plan enabled Mr. & Mrs. Dawson to purchase their retirement home immediately, allowing them to relocate to the community they want to live in without having to wait, possibly years, for their current primary residence to sell. By structuring Mrs. Dawson’s rollover 401k to support the purchase of the new home the Dawson’s essentially flipped the more conventional roll of their retirement monies and real estate equity. The equity they have accumulated in their current home, which they had always intended to use to purchase their retirement home, is inaccessible until the home sells. Mrs. Dawson’s retirement fund however, when structured by the OUTSIDE® method can be accessed immediately. 

By using the retirement monies to purchase their retirement home, the Dawson’s achieved several things. Firstly it enabled them to take advantage of attractive prices in the currently deflated real estate market. Secondly, by structuring retirement fund withdrawals to pay the mortgage on their real estate purchase they offset most, if not all, of the tax liability they would have, at some time otherwise, had to pay when they eventually withdrew from the 401k account. Thirdly, since the Dawson’s are now in the financial position to not having to sell their old home in order to purchase the new home, they can bide their time until the market is more favorable for a profitable sale and in the meantime benefit from rental income. And lastly, and perhaps most importantly, the OUTSIDE® structure allows the Dawson’s to move on with their life.  No matter what your age is, it is painful to feel trapped, unable to move ahead with your plans because of financial commitments that keep you from experiencing the change you are ready to make in your life. The OUTSIDE® method gives the Dawson’s the freedom to live the life they want, in a secure financial framework that makes sense for their future.

Additionally there are estate planning benefits to this IRA real estate plan that are not covered in this brief synopsis.