[IMGCAP(1)]Many individuals in the United States have IRA accounts. These retirement accounts may be substantial and are often the target of financial planners who are interested in handling and managing the IRA assets, for a fee, of course. This is big business for financial planners.
In addition, many accountants are licensed to sell insurance products and manage money. Accountants who are financial planners often have an interest in a wealth advisory unit that is connected, directly or indirectly, with their accounting firm.
Here comes the liability headache that involves the retirement plan area.
Let’s say Jack is a financial planner who is aggressive and is looking to manage money. He finds a new prospect who has $50,000 in a CD IRA at a local bank.
Jack is interested in investing the $50,000 and merely tells the IRA owner to withdraw the $50,000 amount from her CD, which is about to mature. The IRA owner, Mary, 75 years of age, is not sophisticated and withdraws the $50,000 from her IRA.
Unfortunately, Jack fails to tell the IRA owner that she will owe income taxes on the IRA distribution. Jack does not tell her about any rollover options.
At income tax time, the IRA owner is told by her tax preparer that she now owes $15,000 in additional income taxes, triggered by the IRA distribution.
Question: Is Jack vulnerable to any liability? Answer: You bet.
In arbitration proceedings the financial planner can be held liable because of the failure to tell his unsophisticated client about the tax consequences of an IRA distribution.
The author is aware of a number of cases that held the advisor liable for improper IRA advice. The following are several examples of errors known to the author:
A CPA in New York State is engaged by an IRA beneficiary to give advice regarding an inherited IRA. The CPA did not know the stretch payment rules and told the client that the five-year rule was operative, rather than the life expectancy rule. He received $400 for his advice. He was sued for giving incorrect advice and stated in a deposition that, in essence, he had no idea as to the proper IRA rules. The settlement paid by his malpractice carrier was $25,000!
An attorney in New York State handling an estate matter was asked how to handle an inherited IRA of about $500,000. He advised the beneficiary to just take it out. Ultimately, in an arbitration proceeding, the attorney was held liable to the tune of about $250,000 for failing to know the IRA distribution rules.
A financial planner in Florida tells an unsophisticated and elderly client to withdraw about $30,000 from a CD IRA.
The client does so and goes to her tax preparer. She finds out she owes $9,000 in additional income taxes on the IRA distribution.
This situation ultimately went to arbitration in the case of Marilyn Green and Melissa Green (Claimants) vs. LPL Financial LLC (Respondents).
One of the allegations against LPL Financial LLC was that the LPL broker never advised the client about the income tax consequences of the IRA distribution. A number of additional allegations were made as well.
The attorney representing the claimants was Jon A. Jacobson of Jacobson Law, P.A. in West Palm Beach, Fla.
The arbitrator’s decision, made on Nov. 10, 2015, granted the claimants an award in the amount of $52,062 and included:
1. Compensatory damages: $10,260
2. Treble damages: $21,240 (double the $10,620)
3. Attorney fees: $20,202
According to Mr. Jacobson, brokers and firms in a number of FINRA cases can be held liable for failing to advise their clients about the tax consequences of transactions that they recommend.
Imagine the liability for practitioners such as accountants, attorneys and financial planners who give advice regarding IRA matters, but don’t know the intricate IRA rules.
An attorney drafts what he thinks is an IRA and retirement benefit QTIP (Qualified Terminable Interest Property) trust. It turns out that the trust does not satisfy Rev. Rul. 2006-26. As a result the $2,500,000 payable to the trust is subject to an estate tax liability of over $1,000,000.
The client decides not to sue the attorney.
An attorney drafts a noncompliant IRA trust that is part of a testamentary trust. As a result the stretch payment of over $7,000,000 is lost.
For technical reasons the trustee decides not to sue the attorney.
The trustee of an IRA trust fails to timely file the IRA post-death trust documentation paperwork with the IRA institution by the October 31 deadline date. The deadline is October 31 following the year of death of the IRA owner. The result is the stretch payment of the trust beneficiary is lost.
The real problem is that many IRA account holders are passing away with substantial retirement accounts. The attorney for the estate may be a great probate lawyer but may not know all the post-death IRA rules and IRA penalty issues. If the beneficiaries of the estate are also beneficiaries of the IRA, they may ask the attorney for post-death IRA advice. If the attorney gives the wrong advice, then the attorney has potential liability. If the attorney tells the IRA beneficiary to go to their accountant for advice and the accountant gives the wrong advice, then the accountant has a problem. If the attorney and accountant are connected through some type of relationship, then they both can have professional liability if the wrong advice is given.
One wonders how an attorney, accountant or financial planner can know all the complex rules regarding IRAs. These IRA rules require the advisor to have knowledge regarding traditional IRAs, Roth IRAs, the multiple non-spouse inherited IRA rules, the rollover rules, the IRA excise tax rules, the year of death RMD rules, the IRA trust rules and many other rules. The bottom line is that very few people are IRA gurus and know the subject area.
The real bottom line is that if you don’t know the area, then don’t mess with it.
Seymour Goldberg, CPA, MBA, JD a senior partner in the law firm of Goldberg & Goldberg, P.C., Long Island, N.Y., is Professor Emeritus of Law and Taxation at Long Island University. He has taught many CLE and CPE programs at the state and national level as well as CLE courses for the New York State Bar Association, City Bar Center for Continuing Legal Education, NJICLE, local bar associations and law schools. He has been quoted in major publications including The New York Times, Forbes and The Wall Street Journal and has been interviewed on CNN, CNBC and CBS. Mr. Goldberg is a member of the IRS Long Island Tax Practitioner Liaison Committee and the Northeast Pension Liaison Group. He was formerly associated with the Internal Revenue Service and has been involved in conducting continuing education outreach programs with the IRS. He is the chairman of the Estate & Financial Planning Committee of the Suffolk Chapter of the New York Society of CPAs. He is the author of The IRA Distribution Rules: IRS Compliance and Audit Issues for the American Institute of CPAs as well as Inherited IRAs: What Every Practitioner Must Know, 2015 Edition for the American Bar Association.