Back-Door Roth IRA’s for the wealthy

Forbes.com contributing author Ashlea Ebeling, recently reported on the so-called “back-door Roth” whereby high income earners can make contributions to a Roth IRA. Congress ended income limits on Roth conversions in 2010, but retained the income limits for contributions. The back-door approach, perfectly legal according to statements by tax authorities, utilizes a two-step approach and qualified employer retirement accounts to allow high-income earners to contribute to a Roth, bypassing the income restrictions.

See Roths For The Rich. Forbes Magazine, Feb. 27, 2012

IRA Beneficiary Planning

Retirement-Income.net has published an excellent article titled IRA Beneficiary Selection. The article discusses common mistakes made in naming IRA beneficiaries, and addresses such issues as naming trusts as IRA beneficiaries and how to title inherited IRA’s.

The introduction to the article is below:

Every week, more than 28,000 people reach the age where they must begin to take mandatory IRA distributions.  When the IRS “simplified” the IRA distribution rules in January 2001, many people mistakenly assumed that the process of distribution planning would now be simpler and that detailed planning was less necessary. But selection of IRA beneficiaries is now more important than ever. 

The new rules have not, in fact, made planning simpler; in truth there are many significant errors in IRA distribution planning that could prevent your legacy from ending up where you really want it to go.

State v. Smith and State v. Snelling (Indiana)

The Indiana state securities regulators pursued an action alleging that Jerry Smith and Jasen Snelling bilked investors out of more than $4.5 million in a nearly decade-long Ponzi scheme where Mr. Smith and Mr. Snelling told investors they were talented day traders and promised up to 20% returns. Mr. Smith and Mr. Snelling, through various companies, encouraged investors to roll over their traditional IRA accounts into self-directed IRAs at a trust company. Mr. Smith and Mr. Snelling would immediately take the funds from those accounts and use them for personal living expenses, but investors continued to receive statements from the trust company, as well as bills for custodial fees, even after their money was taken out of the ac-counts. Mr. Smith and Mr. Snelling are charged with more than fifty counts of violations of the Indiana Uniform Securities Act.

To read more on this case, click here.

SEC v. Durmaz, et al

The SEC filed charges alleging that a company and its partners perpetrated a Ponzi scheme in which at least $20 million was raised from more than 120 investors. In particular, the SEC alleged that the defendants promised safe, guaranteed returns in purported investments in foreign bonds and raised money by convincing investors to invest in self-directed IRAs and steering them to custodians who offered the self-directed IRAs. $20 million of the funds invested in the fraudulent scheme came from self-directed IRAs.

The SEC alleges that USA Retirement Management Services (“USARMS”) and managing partners Francois E. Durmaz and Robert C. Pribilski mass-mailed promotional materials to prospective investors and invited them to estate planning seminars held at country clubs and banquet halls. They gained retirees’ confidence in follow-up meetings and portrayed themselves as educated and experienced in foreign investments specifically tailored to the needs of seniors. Durmaz and Pribilski then pitched what they represented as safe, guaranteed investments in “Turkish Eurobonds” through the purchase of USARMS promissory notes that would earn annual returns between 8 and 11 percent.

The SEC alleges that USARMS raised at least $20 million from more than 120 investors, but did not actually invest the money in Turkish Eurobonds as promised. Instead, returns were paid to earlier investors with funds received from new investors in Ponzi-like fashion. Durmaz and Pribilski further misused investor funds to finance their other businesses and purchase such things as luxury automobiles, homes, vacations, and web-based pornography. They also wired investor money into bank accounts belonging to individuals living in Turkey who are named as relief defendants in the SEC’s case.

To read the full complaint, click here.

SEC v. Robert Stinson, Jr., et al.

The SEC filed charges alleging that an individual perpetrated an offering fraud and Ponzi scheme in which at least $16 million was raised from more than 140 investors. In particular, the SEC alleged that the defendant promised “safe and risk free” returns in purported investments in real estate and commercial mortgage loans. The defendant raised money by targeting, among others, investors in self-directed IRAs. Approximately $9.2 million of the funds invested in the fraudulent scheme came from self-directed IRAs.

According to the SEC’s complaint, from at least 2006 through the present, Robert Stinson, primarily through Life’s Good, Inc. and Keystone State Capital Corporation, two companies he controlled, sold purported “units” in four Life’s Good private real estate hedge funds. (“Life’s Good Funds”). Stinson falsely claimed that the Life’s Good Funds generated annual returns of 10 to 16 percent by originating more than $30 million in commercial mortgage loans, and other investment income gained on the sale of foreclosure and investment properties. In reality, the SEC’s complaint alleges that Stinson has been stealing investor funds for his personal use, transferring money to family members and others, and using new investor proceeds to make payments to existing investors in the nature of a Ponzi scheme.

To read the full complaint, click here.

SEC v. United American Ventures, LLC, et al

The SEC filed charges alleging that two companies and four individuals misrepresented and concealed numerous material facts in connection with the offer and sale of $10 million in bonds to approximately 100 individual investors in various states. In particular, the SEC alleged that the defendants promised guaranteed returns in purported investments in medical technologies and raised money by convincing investors to invest through self-directed IRAs and steering them to custodians who offered the self-directed IRAs. Approximately $3.5 million of the funds invested in the bonds came from self-directed IRAs.

The SEC’s complaint alleges that the defendants misrepresented and concealed numerous material facts in communications with investors. They assured investors, for example, that UAV had a strong track record of profiting from medical-related investments and that investors would earn a guaranteed 25 percent annual return on UAV’s bonds. In reality, UAV had no such record or experience, and never earned a return from any investment. Instead, UAV used nearly all of the money it raised from investors for purposes other than investments in medical ventures, such as paying exorbitant salaries and benefits,  paying referral fees, and making Ponzi-type interest payments to investors. Further, the defendants misrepresented their venture capital experience and educational background, and failed to inform investors that one of the principals was previously barred by a California court from being involved in any securities offering.

To read the full complaint, click here.

SEC Issues Fraud Alert for Self Directed IRAs

Self Directed IRA’s (SDIRA) can be a great way for individuals to invest IRA assets outside of traditional financial assets. With some limitations on permitted investments such as collectables, and Non-U.S. minted coins, investors can direct IRA investments into such assets as investment real estate, limited liability companies that hold allowable assets, limited partnerships, mortgage notes, and even interests in closely held corporations as long as certain self-dealing rules that apply to ERISA Plans and IRA’s are followed.

Death, Divorce, Remarriage and Retirement Assets

According to Cogent Research LLC, a Cambridge, Mass., research and consulting firm, IRAs and 401(k)s now account for roughly 60% of the assets of U.S. households with at least $100,000 to invest. Most people are unaware that a single sheet of paper and some tricky rules govern who will receive these assets when they die.

Qualified Retirement Plans sponsored by employers including 401k plans, defined contribution (aka profit sharing plans) and pension plans are governed by The Employee Retirement Income Security Act of 1974 (ERISA) which require that spouses of participant plans be considered as primary beneficiary unless the spouse waives his or her rights under the plan. This rule has prevailed in courts even in cases of divorce or a first spouse’s death or when the participant failed to update his beneficiary form.

Consider the case of CHARLES SCHWAB & CO. v. CHANDLER in the US Court of Appeals, Ninth Circuit. Wayne Wilson married Katherine Chandler in 2000 after having lived with her unmarried for ten years. In 2002 he opened an IRA at Charles Schwab Corp. and named his four grown children from a prior marriage as beneficiaries. The IRA funds originated from Wilson’s former employer’s 401k plan. Three years after that, at the age of 65, he died. His wife tried to claim the IRA assets, arguing for spousal protection under ERISA. But last year the U.S. Court of Appeals for the Ninth Circuit awarded them to the children, ruling that spouses have no ERISA rights to IRA benefits.

This ERISA loophole adds flexibility to participants with large 401k Plan balances, but can also undo the very protection that the law was designed to protect.

More recently, in Cajun Industries LLC v. Robert Kidder, et al., the U.S District Court ruled that a spouse was entitled to the Participant’s death benefit arising from his 401k plan even though his beneficiary designation clearly named his four children from a previous marriage as beneficiaries. Since no spousal waiver had been obtained, the default plan beneficiary was the participant’s spouse, even though she was not the named beneficiary. In this particular case, the spouse inherited the 401(k) after just six weeks of marriage.

Finally, the U.S. Supreme Court weighed in on the issue in the case of Kennedy V. Plan Administrator For Dupont Savings And Investment Plan et al. William and Liv Kennedy divorced after 20-plus years of marriage. As part of their divorce agreement, Liv waived her rights to any benefits under William’s DuPont Co. retirement plan. William never remarried. He also never changed the beneficiary designation on his retirement account from Liv. When William died, a dispute arose between Liv and the couple’s daughter, Kari Kennedy, over who had the right to the funds in the DuPont plan. After conflicting rulings in the lower courts, the Supreme Court agreed to hear the case and in a unanimous decision in 2009 held that the person named on the beneficiary form gets the money—even if that person happens to be the employee’s ex-spouse, and even if that ex-spouse waived any right to the money in a divorce agreement. Kari Kennedy was disinherited.

The lessons from these stories are plentiful. To Plan participants, let your advisors know when there are any changes to your marital status, and seek professional counsel when designating retirement plan or IRA beneficiaries. Remember, beneficiary assets are NOT controlled by your will unless your estate is the named beneficiary. To advisors, review your client’s beneficiary designation and Plan documents with the same thoroughness as you would a will, deed, or other estate document. Often the beneficiary form will control more assets than your client’s Will. To spouses of Plan participants, be aware that your rights are different under non-ERISA plans such as IRA’s than they are under traditional employer plans. A coordinated estate plan that considers all of these factors is the best way to prevent unwanted results.

For more information, see the Wall Street Journal Online article, Family Feuds: The Battles Over Retirement Accounts .