60 Day Rollover Dividend and Life Insurance
This question refers to my post on October 10. During the 60 day rollover period for the in kind stock that was transferred from a 401K to a brokerage account, the ex-date for a dividend will be Nov. 6 and the pay date around Nov. 22. My 60 day rollover period ends on Dec. 5. How badly does this dividend complicate my situation? If I still haven’t decided what to do with this distribution prior to the ex-date for the dividend, does that dividend void my ability to roll over to an IRA? Or does it need to be treated by me as income into the brokerage account and does not get rolled over with the stock postion if I decide to roll over? Or can it be rolled over if the shares are rolled over? Does the pay date dictate how it is treated by the IRS or is it the ex-date? I didn’t know if I should be making a decision (which I might anyway) before November 6.
Also, if the IRA grows in future years and probably will be subject to Estate Taxes, what options are available to pay those taxes if there is not enough cash outside the IRA? I have read pros and cons on this website about a Life Insurance Trust. I know Ed Slott seems to encourage them, so I’m not sure if I should be thinking about that and just roll over the stock. How much insurance can someone purchase for a Life Insurance Trust and how expensive would it be for a 62 year old female in good health?
From what I have read and what Ed Slott has indicated, it doesn’t seem advisable to liquidate part of an IRA to pay Estate Taxes so that is something that is entering into my decision about whether or not to leave the company stock in the brokerage account vs. rolling it over. I already have a considerable amount of this stock as well as some other investments in an IRA.
Thanks for your help.
Judy
Permalink Submitted by charles lore on Wed, 2008-10-22 01:30
Let me answer the second part of the question which may help you with first part. First do an illiquidity ratio of your projected estate. This is illiquid asset over all assets. Illiquid assets are your residence, other real estae , closely held business interests , art work etc. Most importantly illiquid assets includes IRA and qualified plans. Even if they are in cash or t bills. Why is this?
Think of your other illiquid asset like real estate. Since it’s illiquid if you had to sell in a fire because you had to pay estate tax in 9 months you’d get may 60, 70 cents on the dollar since you didn’t have time to get your price.
When you pull a dollar out of an ira to pay that estate tax what do you keep ?
After all income taxes maybe 60 cents on the dollar. Being forced to take that dollar results in the same discount your going to have to take on the real estate except the reason was taxes.
Now that you’ve identified your illiquid assets do a projection of what estate taxes and other estate expenses may be. Look at liquid resources to cover . The potential shortfall can be funded by a life insurance policy owned by an ILIT. You need a permanent policy… look at guaranteed UL.
Bottom line is that the insurance will insure the ability for the family to stretch the ira.
Permalink Submitted by Alan Spross on Wed, 2008-10-22 03:38
Judy,
With respect to the dividend payment during the outstanding rollover period, the cash dividend should be eligible for rollover, but I cannot assure you that you will not get a 1099 DIV for it, which would cause complications. There is no doubt that the shares can be rolled over with or without the cash dividend. The shares could also be sold prior to the ex div date and the cash rolled over to the IRA, and that would eliminate the question regarding whether the dividend was rollover eligible.
All I could find on this issue was that ESOP plan dividends issued from the ESOP plan are NOT rollover eligible, but that is not the situation here since even if you had a former ESOP rolled into the 401k, the dividend issued here is after the shares had been distributed from the plan.