In the September, 1995 issue of Asset Protection Strategies, I responded to a question about whether the government is planning to take control of our tax qualified retirement and pension funds by regulating how that money could be invested or by new taxes imposed on pension funds. 

My reply was that I felt the problem was on the "back burner" because the Clinton Administration lost it's clout with the Congress in the 1994 election. I also suggested that if you had your money in a self directed plan (such as an IRA), you would have ample warning to decide whether to withdraw your money from your qualified plan and pay the taxes that would be due at the time or be subject to whatever new controls might be imposed. (The downside to the IRA is the lack of asset protection available in most states for funds in an IRA.) 

Most of the publicity about the potential pension grab has been the result of a book by Ron Holland, Escape The Pension Trap, published by Offshore Publications (POB 1201, Skyland, NC, 28776). I sent Ron a copy of the September, 1995 issue of APS and he replied with a copy of his latest book and the following comment.

A letter from a client prompted me to take another look at Ron's book a few days ago. After re-reading Ron's book, I concluded that this problem requires a more thoughtful analysis than the one I offered in the September issue of APS. For many of us, the money in our tax deferred retirement plan is either the largest part of our wealth or very close to it. 

Ron Holland and I appear to agree on the question of whether Newt Gingrich and his friends represent a counter-trend to the tax and spend allies of President Clinton. Here's what Ron said about "Newt" at the end of his book.

"I wish Newt Gingrich well in his efforts to reduce government in America. While I don't agree with him 100 percent, he has the drive and political ambition to make the next few years interesting times. If he is successful, I look forward to sending a letter to each buyer of this book, saying the threat is over."

Socialist and fascist systems have been breaking up all over the world. It seems that Clinton could well represent the "Last Hurrah" for socialism in America. We are near the beginning of a period of great change but the old guard isn't ready to give up meekly. 

If Gingrich and his followers represent the vanguard of a new social order, is it possible for Clinton and his allies to push through any really damaging legislation before they are kicked out of the halls of power? Could Clinton push through any laws that would make Ron Holland's alarm an immediate concern? 

As I ponder the issue, Clinton and the leaders of Congress are negotiating over the details of a budget and related tax law. Included in that legislation are some onerous rules to deter U.S. citizens from moving their assets abroad and to give the IRS more information about the ways in which we are using foreign trusts. 

Frankly, I don't see any strong opposition to those new rules that help the government to deter U.S. citizens from moving their money to another country. (They don't seem to care where we move. They just don't want us to take our money with us.) 

Are these the vestigial, grasping efforts of those in power to prevent the free movement of money across national borders? 

Prior to the 1994 elections, I was concerned about some of the signals that indicated that Clinton might try to confiscate private pensions for political purposes. After the elections, it seemed to me that Clinton would not be able to get away with any new regulations or laws that would give the government more control over your private retirement savings. 

After rereading Ron Holland's book, I sent a long letter to Ron, inviting him to enter into a dialog with me about the question of how to tell when the risk would justify the financially masochistic act of volunteering to pay taxes on the withdrawal of tax deferred retirement savings. If you take money out of a tax deferred retirement plan before you must, you are volunteering to pay taxes on funds that could be kept at work. The government would get the revenue it wants by your voluntary act of withdrawing your funds. 

Those who are concerned about government controls over how they invest their pension funds are caught in a "catch-22". If you leave your money in your retirement plan, the government might prevent you from investing it in the manner you consider to be best for you. If you take it out, you could lose up to half of it through state and federal income taxes. 

At what point would it make sense to amputate your pension savings by up to 50% in order to protect the balance from further government control? What are the clues that would indicate that a government pension grab isn't out of the question? 

It seems to me that if the pending tax law passes with the new information reporting for foreign trusts and the onerous new rules to discourage expatriation, that's a cause for concern. The new political order will be pursuing actions adverse to your freedom. This would suggest that a gradual and orderly diversification of your assets out of the U.S. would be a prudent move. 

If Clinton wins the 1996 election and if there is a shift back to a Democratic majority in both houses, I would regard that as a serious "fire alarm". The plans to raid pension assets that were put into the "deep freeze" after the 1994 election would most certainly be put back onto the "front burner". If the Democrats regain control of the Congress and the Administration, it would be time for prompt action to preserve your retirement assets. 

As a precaution against making ill advised decisions if the political climate turns around, you might want to start now to learn about the rules you must follow for moving money offshore and to learn as much as you can about foreign banks, foreign stock markets and even doing business in other countries. 

If diversification is a sensible method of risk management for your U.S. based assets, doesn't it make sense to also spread your assets among different countries? At the very least, if you find yourself unable to withdraw your pension assets because of some new government controls, you would have something to fall back on. 

When (or if) it does seem like it's time to start moving your assets out of government regulated retirement funds, are there any ways to mitigate the tax cost? 

If you can draw your assets out as a lump sum distribution eligible for the five year averaging tax, the federal tax bite is currently 15% on the first $100,000 of benefits, about 26% on the first $500,000 of benefits and about 31% on $1 million of taxable plan benefits. That compares to the 39.6% rate on ordinary income. (If you are eligible for the ten year averaging tax, the results are even better.) You also need to consider the impact of state income taxes on a lump sum distribution. 

If your retirement distribution is not eligible for the five or ten year averaging tax, then you will have to add the distribution to your other income in the year of the distribution. For a couple who file a joint return, the 36% federal tax bracket begins with a taxable income in excess of $94,250, for 1995. A pension distribution of $100,000 in addition to that much taxable income would be subject to a federal tax rate of 36% instead of 15%. If a pension distribution pushes your total taxable income over $256,500, the excess is taxed at a 39.6% rate in 1995. 

Some people are eligible for two or more distributions from multiple plans. For example, you might have a defined benefit pension plan and a profit sharing plan with your employer. If you can arrange for a lump sum distribution of the funds from one plan late in one year and a rollover distribution from the other plan early the next year, you can get better results than by treating both distributions the same way. 

If you are comfortable with the use of a charitable remainder trust (CRT), you can get a partial tax deduction for contributions to a CRT to offset some of the taxable income on distributions from a qualified plan. If the government tries to impose mandated investments on retirement savings plans, it isn't likely they will also do that with charities at the same time. The CRT may therefore be a lesser of the evils. If you take $100,000 out of an IRA or other retirement savings plan and put it into a CRT, you might get a tax deduction of about 40% at age 60. Thus, only $60,000 of the distribution is taxable. However, if you don't have other assets to pay the tax on the $60,000, you will need to make a smaller contribution to the CRT to adjust for the income taxes that have to be paid on the non-deductible part of the pension distribution. 

As for being able to manage the money in a CRT, I was recently told by a representative of Renaissance, Inc. that they have designed a charitable trust agreement that permits donors to be the trustees of the trust. For more details, their phone number is (317) 843-5400. They provide charitable trust support services for lawyers and financial advisors. 

Another way to offset some of the income tax that would be generated by taking money from a retirement plan is to invest it in low income housing. You can convert up to $25,000 a year of pension savings into low income housing with no increased tax burden. However, low income housing is also a government controlled activity and it doesn't help move any of your assets offshore. 

If (or when) you feel it's time to get your money out of your retirement savings plan to keep the politicians from consuming it, don't just draw the money out and pay the taxes without looking at the alternatives. There may be some other options to help you reduce the tax burden on your retirement plan distributions.

Further details about protecting your assets from future lawsuits  are available in our subscriber's web site. Changes in the tax laws and various federal and state laws affecting various asset protection devices are provided in our monthly newsletter on Asset Protection Strategies.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

About the author:

Vernon Jacobs is a CPA/CLU who works as a tax author and consultant.  He  sponsors and moderates a free discussion group on asset protection and offshore topics.  His email address is vkj@rpifs.com.  He can be reached by phone or fax at (913) 362-9667.

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