In Uncategorized on 12/19/2016 at 18:27

Getting it wrong is bad enough, when you can correct it. But when you can’t, things get much worse.

Suzanne D. Oster Ozimkoski, 2016 T. C. Memo. 228, filed 12/19/16, lets Judge Paris show us how bad it can get.

Suzanne’s husband dies, leaving an IRA with $235K in it. Suzanne is ex’r and beneficiary named in simple will done by a “small, local ‘full service law firm.’” (2016 T. C. Memo. 228, at p. 3, footnote 4).

I’m sure my ultra-sophisticated readers have just asked “and who was the beneficiary of the IRA?” We all know that wills can’t change IRA beneficiaries.

Well, Suzanne isn’t. So when a fracas arises between Suzanne and Junior (son of deceased spouse), trustee freezes the IRA, until the litigation is settled. Then trustee rolls IRA over to Suzanne, who draws down to pay Junior the settlement (cash plus a Harley), and draws again for herself.

Judge Paris finds under FL law that, where there is no beneficiary, or where the estate is the beneficiary, the IRA goes to the estate. Trustee had no basis for freezing the IRA, which should have gone to the ex’r. Especially since trustee couldn’t find the beneficiary designation.

The trustee (Wells Fargo’s predecessor Wachovia) had other problems, but we’ll skip those.

Since apparently spouse died before distributions were required to be taken, IRA must be distributed within five years to estate, as there is no beneficiary. As surviving spouse Suzanne wasn’t named beneficiary, distributions are taxable.

And the 10% thingy is on the table as well, Suzanne being under 59-1/2 years of age at the time.

“Under Florida law Wachovia should have distributed the IRA assets to Mr. Ozimkoski, Sr.’s estate because either it was named as the beneficiary or there was no named beneficiary and because the settlement agreement makes no direction as to the disposition of the IRA.  Although the Court finds that Wachovia incorrectly rolled over Mr. Ozimkoski, Sr.’s IRA to petitioner’s IRA, the Court has no jurisdiction to unwind that transaction and must decide petitioner’s tax liability on the basis of Wachovia’s erroneous transfer of Mr. Ozimkoski, Sr.’s IRA assets to her IRA and the subsequent distributions from her IRA.” 2016 T. C. Memo. 228, at pp. 11-12.

It’s real bad for Suzanne, but for the “small, local full service law firm,” supra, it gets worse. The attorney knew there would be taxes to pay. “Wachovia’s employee journal notes state that petitioner’s probate attorney understood that someone would have to pay income tax on the $110,000 allocated to Mr. Ozimkoski, Jr., under the terms of the settlement agreement. “ 2016 T. C. Memo. 228, at p. 12 (Footnote omitted, but Judge Paris says it’s unclear if the attorney included the estate as being liable.)

“It is unclear from the record before the Court how petitioner’s probate attorney counseled her to comply with the payment obligation under the settlement agreement–as the personal representative of Mr. Ozimkoski, Sr.’s estate, as an IRA beneficiary, or as a surviving spouse.  What is clear from the record before the Court is that petitioner’s probate attorney failed to counsel her on the full tax ramifications of paying Mr. Ozimkoski, Jr., $110,000 from her own IRA.  While the Court is sympathetic to petitioner’s argument, the distributions she received were from her own IRA and therefore are considered taxable income to her….” 228 T. C. Memo. 228, at pp. 13-14. (Footnote omitted, but all Suzanne was arguing about was the $110K to Junior, so she waived the draws she took for herself.)

Maybe she wouldn’t have been better off if the estate paid the $110K and the tax, but for the passage of time.

Suzanne beats the 20% accuracy penalty on the tax on the $110K because she had limited education and relied on Wachovia and her lawyer. Her own draws are her problem.

But the takeaway is essential: make sure there’s a named beneficiary for every IRA and update it. And watch rollovers and distributions. Really carefully.


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