1. ACCOUNTABLE
ADVICE
N o v e m b e r / D e c e m b e r + 2 0 1 4
Q&A on IRAs + PG2
Ask a trust officer + PG3
Who pays the estate tax? + PG4
F i n a n c i a l P l a n n i n g
I n v e s t m e n t M a n a g e m e n t
Tr u s t & E s t a t e S e r v i c e s
P r i v a t e B a n k i n g
R e t i re m e n t P l a n S e r v i c e s
Stronger dollars
Many had expected the markets
to be more jittery as the date for the
Fed’s ending of its Quantitative Easing
approached. No one is quite certain what
effect that will have, although Federal
Reserve officials have indicated that they
do not expect interest rates to increase
this year, and perhaps not next year
either. One part of the answer may
be that just as the Fed is tightening,
European central banks are loosening,
cutting interest rates in order to stimu-
late private sector growth. Accordingly,
the dollar is strengthening against both
the euro and the yen, by 8% for both in
just the third quarter. That makes U.S.
stocks and bonds more attractive to for-
eign investors, as they may reap currency
gains in addition to the performance of
the securities themselves.
Negative interest rates
The European Central Bank has start-
ed to charge eurozone banks for keeping
their deposits. This has pushed some
interest rates below zero. For example,
Ireland’s two-year bonds were yielding
minus 0.01% as the fourth quarter began.
Germany, the Netherlands, Austria,
Finland, Belgium and France also were
flirting with negative interest rates on
short-term borrowing.
The policy objective is to make bor-
rowing ultra-cheap in order to stimulate
more economic growth and employment
throughout Europe, which continues to
perform below capacity. The usefulness of
the policy remains to be seen.
Consumer confidence
After touching a seven-year high in
August, capping a four-month rising run,
consumer confidence dropped sharply in
September. The Conference Board’s read-
ing of sentiment fell from 93.4 to 86. One
might have expected the drop in gasoline
prices to boost consumer spirits, but a
perception of a weakening job market
seemed to be the dominant factor.
The number of optimists, those who
expect improving business conditions,
fell from 20.8% to 18.6%. Naturally, the
number of pessimists expecting worse
conditions rose, from 9.9% to 12%. Only
15.2% expect significant job growth in
the months ahead.
A drop in consumer confidence can
foreshadow a drop in consumer spend-
ing, leading to a recession. On the other
hand, some economists dismissed the
reading as a blip, given the steady, if slow,
growth in the economy.
(October 2014) © 2014 M.A. Co. All rights reserved.
Although economic growth remained less than robust, the financial markets did
well in the third quarter. The S&P 500 stock index rose 0.6%, while the Dow Jones
Industrial Average gained 1.3%. The price of 10-year U.S. Treasuries rose as the yield
slipped to 2.51%. (Prices and yields move in opposite directions.)

2. Inherited IRAs, nonspouses
Q. I’ve inherited a substantial IRA from my parent. What are
my choices? Can I roll over the money into my own IRA?
What I’d really like to do is convert the inherited IRA to a
Roth IRA.
A. Those approaches are not available to you. Because you
are not the spouse of the decedent, you only are permitted
to arrange a trustee-to-trustee transfer of the money to
another IRA in the name of the decedent and yourself. A
death triggers the process of exposure of the IRA accumu-
lation to taxation. Although that taxation can be extended
over your actuarial lifetime, it can’t be delayed beyond
that, which is why the decedent’s name always must appear
on the IRA.
If you attempt a trustee-to-trustee transfer from the inher-
ited IRA to one in your own name, it will be treated as a
complete distribution followed by a regular contribution
to your IRA (not a rollover contribution). Similarly, if you
attempt to convert an inherited IRA into a Roth IRA, the
conversion will be treated as a complete and taxable dis-
tribution of the IRA followed by an excess contribution to
the Roth IRA.
Deemed distributions
Q. Can I use my IRA as collateral for a loan?
A. No, you cannot. Any portion of an IRA used as security for
a loan is a deemed distribution, and that amount becomes
taxable.
The acquisition of a collectible by an IRA, such as a work
of fine art, is also a deemed distribution. The amount of
the distribution is the cost of the collectible.
Prohibited transactions
Q. My son needs to borrow $100,000. Can I lend him money
from my IRA if he signs the appropriate paperwork and the
IRA charges him an appropriate interest rate? The rate of
return on my IRA has been poor lately, and this could be a
win-win all around.
A. No, you cannot do this. Any direct business transaction
between an IRA or a Roth IRA and a “disqualified person”
is a “prohibited transaction.” You are a disqualified person,
and so are your spouse, your ancestors and descendants,
and your spouse’s ancestors and descendants.
A prohibited transaction results in the end of the IRA
being treated as an IRA. Instead, the entire IRA is treated
as distributed on January 1 of the year that the prohibited
transaction occurs, with the full amount subject to income
taxes. With a Roth IRA, there may not be immediate
taxation, but the future tax deferral is lost at that point.
Prohibited transactions must be avoided.
What if the borrower is a brother or sister? Although such
an individual may not be named a “disqualified person” in
the statute, this is at best a grey area. Better to avoid court-
ing trouble.
Q. I have an asset that I think is worth at least $100,000. I’d like to
sell it to my IRA for $50,000. That can’t hurt the IRA, can it?
A. Prohibited transactions are prohibited regardless of
whether or not the IRA is harmed. As you are a disquali-
fied person, you can’t sell assets to your IRA. If you think
about it, your bargain sale could really be considered an
excess IRA contribution.
Other examples of prohibited transactions:
• An IRA owner and his spouse tried to purchase from an
unrelated party (a bank) a promissory note on which the
couple were the obligors. The Department of Labor con-
sidered this an extension of credit between the IRA and
its owners, even though the IRA was not a party to the
original transaction and the purchase of the note was at
arm’s length [Advisory Opinion 2011-04A].
• An IRA owner signed an agreement with a brokerage
firm that gave the firm a security interest in the IRA to
secure the owner’s potential liability associated with a tax-
able futures trading account. The Department of Labor
found this to be a prohibited extension of credit [Advisory
Opinion 2011-09A]. However, the IRS has stated that if the
cross guarantee is not actually activated, the penalty may
not be imposed [IRS Announcement 2011-81].
(October 2014) © 2014 M.A. Co. All rights reserved.
QA on IRAs
A new report from the GAO estimates that 43 million taxpayers have IRAs, worth an
estimated $5.2 trillion. Some 42.3 million of these IRAs are worth less than $1 million,
and 800,000 are worth more. Three hundred fourteen taxpayers have IRAs worth $25
million or more. That is some serious capital, which can raise serious questions. Here are
four that crossed our desk recently.
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3. A S K A T R U S T O F F I C E R :
A N E W L I F E
W I T H A N E W W I F E
DEAR ENJOYING:
Congratulations and many years of happiness!
What springs to my mind immediately is the need to make
arrangements so that you don’t lose your federal gift and estate
tax marital deduction. The deduction, which allows tax-free
lifetime gifts and bequests between husband and wife, isn’t
available when the recipient is not a U.S. citizen (even if he or
she is a permanent resident).
But you will be entitled to the deduction if you set up a
qualified domestic trust (QDOT) and at least one trustee is a
U.S. citizen or a domestic corporation (a bank or trust com-
pany, for instance). Brigitte would be entitled to all of the trust’s
income, estate-tax free (but not income-tax free). However, if
the trustee distributes the trust’s assets to her, except in limited
circumstances, they will be subject to a tax.
There are other rules as well, some of them fairly technical.
I recommend that you seek help in setting up the trust. And,
if you have any questions about QDOTs, I would be glad to
answer them.
Do you have a question concerning wealth management or
trusts? Send your inquiry to wealthmanagement@fnni.com.
(October 2014) © 2014 M.A. Co. All rights reserved.
DEAR TRUST OFFICER:
With unexpected good fortune, I met my wonderful
new wife, Brigitte, on a cruise to Europe. She is a
French citizen, and we would like to know whether this
has any impact on our estate planning. Are there any
special steps that we need to take because she’s not a
U.S. citizen?
—ENJOYING A NEW BEGINNING
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Deposit and Lending Products are: First National Wealth Management is a division of
First National Bank of Omaha.
Who pays the estate tax?
According to published reports, Clancy’s estate is worth at
least $83 million. It includes a 12% interest in the Baltimore
Orioles as well as a functioning 1943 Sherman tank appraised
at $250,000.
When Clancy met with his lawyer in July 2013, he amended
trusts for his second wife to make certain that they qualified for
the marital deduction from the federal estate tax. As such, they
would not generate any estate tax due.
Imagine Mrs. Clancy’s surprise when the executor of the
estate—the same lawyer who drafted the trust amendments—
proposed that she share in paying the taxes due on the legacy
passing to the adult children. Of the $16 million in expected
estate taxes, her trust was to be assessed $6 million.
Mrs. Clancy has filed a lawsuit to have the executor
removed. Her lawyers point out that putting the tax burden on
her share makes no sense if minimizing taxes is the objective,
which would seem to be the case. To the extent that money
is withdrawn from the marital trust to pay taxes, the marital
deduction is reduced, which, in turn, means that still more
estate tax is due. It’s a vicious circle of taxation.
Make it clear
Very often a will and a trust will have a “tax apportion-
ment” clause to settle the question of which legacies will bear
the burdens of taxation. Typically, both marital and charitable
bequests are exempted, because they do not themselves trigger
death taxes. However, one is free to overrule that approach if so
desired, if tax minimization is not a concern.
Did Clancy anticipate that the marital trust for his surviv-
ing spouse might have to help pay the tax bills? Did he fully
appreciate the tax consequences of that? Those questions will
be answered in the course of litigation. But we probably can say
with confidence that Clancy did not expect a clash between his
surviving spouse and his chosen executor, one that would take
a lawsuit to resolve.
(October 2014) © 2014 M.A. Co. All rights reserved.
(November, 2014) © 2014 M.A. Co. All rights reserved.
The general information in this publication is not intended to be nor should it be treated as tax, legal or accounting advice.
Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek
advice from an independent tax advisor based on their particular circumstances before acting on any information presented.
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Author Tom Clancy, who died October 1, 2013, had attended to his estate planning just
a few months earlier in July. Clancy had four adult children from his first marriage. He also
had a daughter with his second wife, who was his primary beneficiary.
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