1. ACCOUNTABLE
ADVICE
S e p t e m b e r / O c t o b e r + 2 0 1 4
Bitcoins + PG2
When is an IRA not a retirement plan? + PG3
Second chance for portability election + 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
A 1994 parallel?
What happens to the bond mar-
ket then? No one knows for certain,
because this long period of very low
interest rates is without modern prec-
edent. But some market observers are
looking to 1994 for clues.
Fortune magazine referred to that
year as “The Great Bond Massacre” in
an article datelined October 17, 1994.
As the year began, bond yields were
low, inflation minor, and the economy
was healthy, in its 34th month of
expansion. In February that year, the
Fed began to nudge short-term rates
higher. Long-term rates soon followed
suit, rising from 6.2% in January to
7.75% in September for the 30-year
Treasury bond. Fortune estimated that
the value of U.S. bonds fell by $600 bil-
lion during that period. Other coun-
tries also experienced rising rates, and
the worldwide loss of wealth was esti-
mated at $1.5 trillion.
As interest rates rise, the value
of previously issued bonds necessar-
ily falls, that’s just math. However,
there are factors that can exacerbate
the portfolio damage. In 1994, exces-
sive leverage was fingered as one of
the culprits, because it magnified the
losses of those who had bet on stable
interest rates. This year, one concern is
that some investors have been reach-
ing out to riskier bonds with longer
durations to improve their yield. That
could make them more vulnerable to
a rate upturn. Another concern is that
mutual funds are now major players
in the bond markets, and exchange-
traded funds also have a role. Should
investors start a stampede to exit the
funds to cut their losses, that might
exacerbate the problem.
Investors need to stay sharp, and
not take their investment strategies for
granted.
(August 2014) © 2014 M.A. Co. All rights reserved.
The Federal Reserve has not yet announced when it plans to raise short-term
interest rates. The fact that Gross Domestic Product grew by an estimated 4% in
the second quarter suggests that the economy may soon be strong enough to begin
returning to rates that are more normal by historical standards. The fact that the
Fed has tapered off its bond purchases, and has announced that the program will
end in October, also suggests that a rate change may not be very far off.

2. Commercial acceptance of bitcoins as payment has been
slow; most of the bitcoin action has been in speculation. The
value of one bitcoin was $15 in January 2013, and it rose to a
peak of $1,100 in December of that year. At press time, one
bitcoin was worth about $600.
Last spring, a bitcoin project was announced at MIT. Two
students raised enough money from donors to permit them
to give $100 worth of bitcoin to every undergraduate student
next fall. The goal is to develop a “bitcoin ecosystem” in
which the use of bitcoin in purchases becomes routine. The
group has been working through the summer on bringing
local businesses on board.
The project has the support of ten faculty members.
Professor Alex Pentland commented: “While the specific
properties of bitcoin have some real problems, getting every-
one at MIT to start playing with bitcoin … will prompt the
MIT community to begin thinking seriously about how we
can live in an all-digital future.”
The IRS weighs in
In March, the IRS delivered its views on the emergence of
digital currencies. The most important observation was that
a digital currency such as bitcoin is property, not currency.
As such, it has a tax basis. Using bitcoin in making payments
will generate taxable events, a major defect in using it for
routine transactions.
For example, assume an individual used a bitcoin acquired
for $15 in January 2013 to buy something today worth $600.
Seems like quite a bargain. But the use of the bitcoin in this
situation generates a taxable gain of $585, the difference
between the $15 basis and the $600 value of the transaction.
That amount will be subject to income tax. The tax may be at
capital gain rates if the bitcoin is a capital asset in the hands
of the owner. On the flip side, if a coin acquired for $1,100 is
used for that $600 purchase, a loss may be incurred. The loss
may or may not be deductible.
The Service clarified that bitcoins won’t be an avenue
for avoiding other tax rules. For example, bitcoins received
by an independent contractor for performing services will
be considered self-employment income, subject to self-
employment tax as well as income taxes. If wages are paid in
bitcoins, they are still subject to employment taxes. Payments
made in bitcoin are subject to the same information-report-
ing requirements as payments made in dollars. Payments
made in virtual currencies are subject to backup withholding
in a manner similar to payments in dollars.
Finally, the IRS warns that tax penalties will apply,
including accuracy-related penalties and penalties for failure
to file information returns when required. Limited relief may
be available for transactions before March 21, 2014, the date
of the announcement.
Some observers believe that the effect of the IRS
announcement will be to seriously impair the utility of bit-
coin as a virtual currency. However, that hasn’t dampened
the enthusiasm at MIT, where the project is still expected to
go forward in the fall.
(August 2014) © 2014 M.A. Co. All rights reserved.
Bitcoins
There’s a new phenomenon emerging in the digital world; it’s called “bitcoin.” Bitcoin
is a digital payment system that uses a peer-to-peer network to facilitate payments made
in units called bitcoins. Members of the network can use an open-source cryptographic
protocol to verify payments in return for transaction fees and new bitcoins in a process
called “mining.”
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3. In 2000, Ruth Heffron established a traditional IRA,
probably by rolling over a lump sum distribution from
her employer’s retirement plan. At her death the next year,
the IRA was worth $450,000. Heidi Heffron-Clark, Ruth’s
daughter, was the sole beneficiary of the account. She began
taking monthly distributions from it.
Fast forward to October 2010, when Heidi and her hus-
band filed for bankruptcy. Some assets are exempt from
creditor claims in a bankruptcy proceeding, among them
“retirement funds” from qualified plans, as enumerated in
the tax code. Because inherited IRAs are among these, the
couple identified the inherited IRA, then worth $300,000, as
an exempt asset. In so doing, they set off a legal controversy
that ultimately landed in the U.S. Supreme Court.
Different courts, different answers
The bankruptcy court rebuffed the claim for protection
of the inherited IRA, because those funds are not distrib-
uted during retirement. In fact, such funds are required to
be distributed, regardless of the age or the wishes of the
beneficiary. The district court reversed the decision of the
bankruptcy court, ruling that the language of the bankruptcy
law covers any account containing funds “originally” “accu-
mulated for retirement purposes.” Then the Seventh Circuit
Court of Appeals reversed that ruling, stating that “inherited
IRAs represent an opportunity for current consumption,
not a fund of retirement savings.” However, in a similar case
in another part of the country, the Fifth Circuit Court of
Appeals reached the opposite conclusion. The U.S. Supreme
Court stepped in to resolve the ambiguities.
Unanimous decision
Although it may seem obvious to nonlawyers that some-
thing called an “Individual Retirement Account” is for retire-
ment, whether inherited or not, words can be slippery things
in the hands of lawmakers. In June, the high court ruled
unanimously that, in the context of a bankruptcy proceed-
ing, an inherited IRA is not a retirement fund. Three char-
acteristics distinguish inherited IRAs from other tax-favored
retirement accounts:
• Contributions of new money to inherited IRAs are
prohibited. All other retirement funds encourage more
saving.
• Distributions from inherited IRAs are required, regard-
less of how far off retirement may be. Either minimum
distributions must be made over the life of the benefi-
ciary, or the entire fund must be disbursed within five
years of the death of the owner.
• No penalty on withdrawals. Most retirement plan dis-
tributions trigger a 10% tax penalty if made before the
owner reaches age 59 ½. That tax provision encourages
IRA owners to wait until retirement for their distribu-
tions. In contrast, there is no 10% penalty for withdraw-
als from inherited IRAs, regardless of the age of the
beneficiary. Accordingly, this is a pot of money that can
be used freely for current consumption.
A trust alternative
For those who are concerned about protecting inherited
IRA funds from the creditors of beneficiaries, there is an alter-
native to consider. The IRA may be made payable to a qualified
trust for the benefit of the heir, rather than to the beneficiary
directly. The minimum distribution rules still will apply, but
such an arrangement may provide for stronger asset protection.
(August 2014) © 2014 M.A. Co. All rights reserved.
IRA
When is an IRA
not a retirement plan?
Hint: It’s a trick question.
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Second chance for
portability election
The IRS described the following situation. Spouse 1 died
on January 1, 2011, survived by Spouse 2. Spouse 1’s estate
consisted of $2 million in joint bank accounts with Spouse 2.
No estate tax return was required for Spouse 1, and none was
filed. That inherently means that Spouse 1’s estate did not
make a DSUE election. Next Spouse 2 dies on January 14,
2011, with a taxable estate of $8 million. An estate tax return
is filed, and taxes are paid on the $3 million in excess of the
exclusion from federal estate tax. However, if the DSUE elec-
tion had been made for Spouse 1, no estate tax would have
been due.
Under the IRS announcement, Spouse 1’s executor has
an extension of time to file the DSUE election, which will
get Spouse 2’s estate a full refund of taxes. The reason for the
surprising generosity of the IRS is the Windsor decision in
2013, mandating that same-sex married couples be eligible
for the marital deduction from federal estate taxes. That
means that they are eligible for the DSUE election as well,
though they couldn’t know that in 2011. Although that may
motivate the new policy, the tax relief is not limited to same-
sex married couples. The extension of time is available for
any decedents who:
• had a surviving spouse;
• died after December 31, 2010, and on or before
December 31, 2013;
• had an estate small enough so that no estate tax return
was required; and
• did not have an estate tax return filed.
If you might be in this situation, talk to your estate
planning advisors soon, before time runs out. To recover
estate taxes paid, a claim for credit or refund must be filed
by October 14, 2014, even if the DSUE election hasn’t been
made by then.
(August 2014) © 2014 M.A. Co. All rights reserved.
(September, 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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In a rare circumstance, the IRS earlier this year announced an automatic extension of time for certain
taxpayers to obtain a tax break potentially worth millions of dollars. The matter concerns the election of
portability of the federal estate tax exemption by a surviving spouse, which has only been available since
January 2011. Estate planners—and the general public—are still getting used to the new concept. The idea
is that a married couple should have a double estate tax exemption, and they should not need a fancy trust
plan to get it. But they can’t just take it for granted. To obtain what’s called a Deceased Spouse’s Unused
Exemption, or DSUE, an estate tax return must be filed for the first spouse to die, even though no estate
tax will be due. The IRS has to be notified of the value of the DSUE.
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