NEW DEVELOPMENTS IN INDIVIDUAL RETIREMENT ACCOUNTS
(1997)

IRA's Are Exempt from Lien if Reasonably Necessary for the Support of the Debtor and Any Dependent of the Debtor.

An issue outstanding in the Ninth Circuit (which includes California, Arizona, Nevada, Oregon, Washington, Hawaii, and Alaska) is the extent to which individual retirement accounts (IRAs) are exempt from lien. The Ninth Circuit has now ruled that they are exempt, subject to a showing by the debtor that the IRA is reasonably necessary for the support of the debtor and/or any dependent of the debtor. Thus, IRA accounts are subject to the same rules that apply to pension and profit sharing plans. (Bankruptcy of Rawlinson, U.S.B.A.P. No. 96-1669 (5-30-97).

Excess Accumulation Tax on Individual Retirement Accounts: A Trap for the Unwary

An individual with an IRA that is growing rapidly may have no sense of the potential tax trap lurking behind the successful investment. The historical advice given by many pension plan advisors was to accumulate the assets in the plan as long as possible. Although this advice may still be valid for the very wealthy client whose IRA is just one of a number of assets, keeping an IRA intact may prove disastrous for the average investor.

The IRS penalizes the taxpayer if he has been too successful in accumulating assets in his IRA and he then dies with "excess accumulations" in his account. The excess accumulation tax is referred to as the "too late" tax, which is imposed at 15 percent on excess accumulations held in a plan at the death of a participant. The "too late" tax provides for taxation at the rate of 15 percent of the value of the IRA in excess of the present value of a hypothetical annuity paying the maximum permissible amount indexed for inflation, for the actuarial life expectancy of a person who was the decedent's age at death, using an interest rate equal to 120 percent of the mid-term Applicable Federal Rate for the month of death.

Thus, Congress has decreed that there will be a tax on excess accumulations based on the value of the account (which is unknown) at the participant's date of death (which is unknown), to the extent the value of the account exceeds the value of a hypothetical annuity paying an amount (which is unknown) for a period (which is unknown), calculated using an interest rate (which is unknown). It has been said that life is uncertain, but the uncertainties in this area are pervasive to a fault.

Although there are advocates for accumulating funds in an IRA without regard to the excise tax, those advocates presuppose a substantial period of post-death earnings and appreciation in the IRA. But the post-death time period is not available if the IRA must be used to pay the estate and excise tax. Taxpayers approaching retirement age with substantial assets in their IRAs should consult competent planning professionals to avoid the "too late" tax before it is, indeed, too late.

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