Martin Shenkman

Planning During Economic Turmoil

Insiders still enjoy this high-risk/high-reward game.

January 20, 2009
by Martin Shenkman, CPA, PFS

With the worst downturn since the depression, every facet of CPA planning is affected. How do you guide your clients? Some advice is obvious, such as revise your will if the size of your estate has changed dramatically; re-evaluate life insurance coverage if your nest egg has been compromised and your family will no longer be able to get by if you die before savings recover. Others less obvious advice include timing the funding of a bypass trust to maximize its funding depending on whether it is a fractional share or pecuniary bequest. The downturn has a significant emotional impact on clients. As a result, many are acting like the proverbial deer frozen in the headlights. Practitioners who can offer sound planning can help guide clients from fear to action. The impact of the current economic situation is so broad and deep that the issues below, which you as a practitioner can address with clients, is just a mere starting point in the process.

Planning for Your Practice

You as a practitioner need to address your own business planning, as well as help clients with similar business issues. For example:

  • Have you revisited your firm’s shareholders’ agreement?
  • Does your practice buy-sell reflect a price formula or stipulated value reflective of a different economic climate that is now unrealistic? Will executing a new certificate of stated value suffice or should you revise your shareholders agreement?
  • What about the promise to make a manager in your firm a partner? Must you? What commitment was made? Can the decision be deferred?
  • Can you fire an unprofitable partner? Perhaps in good times you were willing to carry such a partner, but no longer. What are your obligations under the practice-partnership agreement? What are your fiduciary obligations to a partner?

Retirement Plan Minimum Required Distributions

IRAs and retirement plans have been devastated by the market. Congress has provided some flexibility by waiving the requirements for minimum required distributions ("MRDs") in 2009.

  • If a participant turns age 70½ in 2009 normally the first MRD would have to be made by April 1, 2010, but this new relief provision provides that no MRD will have to be made in 2009.
  • For all other purposes a taxpayer’s required beginning date ("RBD") remains April 1, 2010, even though no distribution is required.
  • Exercise caution. If a participant turned 70½ in 2008 the MRD for 2008 would have to be made no later than April 1, 2009. If the participant did not make this initial MRD before the close of 2008, it would be due, by April 1, 2009. It still is, even though no MRDs are required for 2009.
  • If a plan participant died before age 70½ without a designated beneficiary, the plan balance generally has to be paid out over five years. Since no payment is required in 2009, the five years stretches to six. The Worker, Retiree and Employer Recovery Act of 2008. Pub. L. 110 – 458.

There is another safety valve. If you’re under 59½ and want to avoid the tax on early distributions from a retirement plan, you can withdraw funds in substantially equal periodic payments over your life or the joint-life expectancy of you and a beneficiary. IRC Sec. 72(t)(2)(A)(iv); Rev. Rul. 2002-62. One of three prescribed methods is permitted for the determination of these payments:

  1. minimum required distributions calculation using the standard tables and recalculation each year;
  2. the fixed amortization method using an interest rate and table you select, which provided some flexibility in determining payments, the amount determined is then paid in all years; and
  3. the fixed annuitization method.

While either of the latter methods might have made sense when done, it might be preferable to use the MRD approach so that payments fluctuate with the changing plan balance. The fixed payment previously calculated may now deplete the plan to zero long before life expectancy. You can elect to permanently switch to the RMD method so that a changing percentage of each year’s actual balance will be paid. This may be essential to preserving your plan for your lifetime.

Investment Theft Losses

Bernie Madoff may be the most famous Ponzi scheme, but is not the only fraud. The rapid and substantial downturn exposed many schemes that may have remained undetected in better times. If you were caught up in these financial maelstroms, consider:

  • How much is covered by government insurance? This will depend on account titles. For example, if you hade an IRA and personal account, you should be able to avail yourself of separate claims for each.
  • Review homeowner's insurance for a fraud endorsement and file a claim if justified.
  • Consider income tax consequences. Can you file a loss claim under IRC Sec. 165(a)?
  • Evaluate transfer tax consequences. If the theft occurred before death it may be appropriate to argue that the "assets" simply did not exist when filing a Form 706.
  • Analyze lessons to be learned to apply to future investments: separation of investment decisions from custodianship for funds, allocation of advisers as well as asset classes, more significant due diligence, etc.

Matrimonial Obligations and Changed Circumstances

If you have alimony or child support obligations, has the decline in your portfolio, the cut-backs at your employment, or the impact on your family business, undermined your ability to meet those payments. Whether circumstances have changed sufficiently to warrant a court to order a modification of these obligations will be an issue that will likely see more litigation. Factors which might be considered include:

  • How and to what degree have the circumstances changed (e.g., see Lepis v. Lepis, 83 N.J. 139 (1980)?
  • Are current obligations fair and equitable?
  • Are the changes temporary or permanent?
  • How much time has passed from the agreement creating the obligations, etc.?

Projections for businesses, revised family budgets, updated estimates of earnings from investment assets, may all be necessary to evaluate these issues.

This may also affect estate planning obligations. Is the amount of life insurance coverage you were mandated to maintain under your property settlement agreement still affordable? What about commitments to fund 529 or other college savings or gifts?


Economic declines will bust grantor retained annuity trusts (“GRATs”). Consider:

  • Funding new GRATs with assets paid out from busted GRATs.
  • Use long term ones to lock in historically low interests rates and hopefully be grandfathered if Congress changes the rules (e.g., the IRS indications that a GRAT should have a 10% remainder) in its need to raise revenues.
  • Use the power to substitute to take depressed assets out of the GRAT and re-GRAT them in new GRATs.


No client or area of planning remains unaffected. Be proactive and help clients identify issues for which they can take affirmative planning steps.

Find out more about this and other issues visit AICPA Conference on Tax Strategies for the High-Income Individual.

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Martin M. Shenkman, CPA, MBA, PFS, JD, is an attorney in Paramus, New Jersey and New York City. His practice concentrates on estate planning and administration, tax planning, and corporate law. He was listed in Worth magazine’s top 100 attorneys in 2007 and CPA magazines Top 50 IRS practitioners in 2008. He is a source for numerous financial publications including The Wall Street Journal, Fortune, Money and The New York Times. He has published 36 books and 700+ articles. His most recent book is: Life Cycle Planning for the CPA Practice (AICPA). He is admitted to the bar in New York, New Jersey and Washington, D.C. He is a CPA in New Jersey, Michigan and New York.