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Recently, I worked on a case involving an individual who wanted to put his $90,000 IRA into a Self-Settled (d)(4)(A) Trust. Even though I could get the IRA transferred into a tax-deferred annuity owned by the trust, there was a question as to whether the transaction involved a taxable event. To eliminate the question, the safest course of action was to obtain a favorable private letter ruling. However, the cost of such a ruling, whether favorable or not, is approximately $16,000. This is a high cost in light of the fact that the ruling may not even be favorable.
In the alternative, I determined that if the entire account was subjected to income tax, both state and federal, the individual would be left with net investable proceeds of $73,650.
Not wanting to accept the economic risk of an unfavorable private letter ruling, and being left with only $74,000 of investable proceeds, the individual opted to proceed with the second alternative.
Additionally, in that the individual had no immediate income needs, the Trustee invested the $73,650 into a tax-deferred annuity, which included an eight-year rate guarantee of 4.10%. Assuming no withdrawals, the annuity would have a value of $101,573.07 at the end of the eight-year term. Finally, with the annuity being annuitant-driven, the trust as the primary beneficiary would collect the entire account value following the insured’s death.