Article Details How One Celebrity Ended Up With a Costly Deficiency and IRS Penalties Due to Failure to Report IRA Assets’ Fair Market Value and Properly Transfer a Non-Publicly Traded Hedge Fund Partnership
ROSELAND, NJ, November 15, 2023 /24-7PressRelease/ — Even wealthy celebrities who can afford top financial advisement get caught in the IRS’s crosshairs for faulty rollovers and failure to report the fair market value (FMV) of alternative assets within their retirement plans, as detailed in a recent article by Jaime Raskulinecz, CEO of Next Generation Trust Company.
The estate of the late actor James Caan lost its case in tax court in October, in a matter that began in 2015. At issue was an IRA rollover of a partnership interest in a hedge fund. The asset was distributed to another retirement account at a different brokerage house, a transaction that Caan claimed was a nontaxable event. However, the U.S. Tax Court determined that his estate owed nearly $936,000 due to a deficiency and accuracy penalty associated with an incorrect IRA rollover of the alternative asset.
That’s because the hedge fund interest was liquidated eventually a year later, and the cash was ultimately “rolled over” to the new custodian. However, to qualify as a rollover, the exact asset (the hedge fund interest) is what should have been transferred to the successor custodian.
In addition to the incorrect transfer of the non-publicly traded hedge fund, Caan and/or his financial management team had failed to provide the IRA’s fair market value back in 2015, which is required by the IRA of the retirement plan’s trustee or custodian. Because the custodian must file Form 5498 regarding the fair market value of the assets within each client’s IRA, and because Mr. Caan’s team did not provide the required information, the custodial agreement was terminated.
“This is a complicated issue but at its core, the two-prong failures of Mr. Caan’s custodians/brokerage firms and financial team—to report the assets’ fair market value timely and execute a rollover correctly and within the proscribed 60-day time frame—provide a cautionary tale for investors,” said Raskulinecz. “For individuals with self-directed IRAs—which may include a variety of alternative assets such as investments in hedge funds—it is crucial that they work with a custodian that specializes in these types of retirement accounts and the nontraditional investments they allow.”
Raskulinecz added that as an administrator and custodian of self-directed retirement plans, Next Generation sends reminders to all clients to provide the updated FMV on the assets held within their accounts (as of December 31st of the year) so that the firm can file Form 5498 with the IRS. The firm also ensures that IRA rollovers of assets in kind are done correctly, that the successor custodian is aware that it is a non-publicly traded asset to ensure they will accept it, and that the transaction is completed within the proper time frame to avoid IRS penalties.
About Next Generation Trust Company, LLC
Founded on the philosophy that every person should have control over their retirement plans, Next Generation educates consumers and professionals about self-directed retirement plans and nontraditional investments, a strategy at one time reserved only for the very wealthy. Next Generation Services provides comprehensive account administration and transaction support, and its sister company, Next Generation Trust Company, acts as custodian for all accounts. The neutral third-party professionals at Next Generation expertly guide clients and their trusted advisors as part of their white glove, personalized service for a seamless transaction experience from start to finish. For more information, visit www.NextGenerationTrust.com, or contact Next Generation at 888.857.8058 or [email protected].
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