DISTRIBUTION AND ESTATE PLANNING FOR DEFERRED COMPENSATION AND IRA BENEFITS

DISTRIBUTION AND ESTATE PLANNING FOR DEFERRED COMPENSATION AND IRA BENEFITS By Noel C. Ice ARTICLE 1 IMPORTANT PRELIMINARIES.... 2 1.1 Disclaimer.... 2 1.2 The Taxonomy of Employee benefits.... 2 1.2(a) The Difference between Pension Benefit Plans and welfare Plans.... 2 1.2(a)(1) Employee Pension Benefit Plans.... 2 1.2(a)(2) Employee Welfare Benefit Plans.... 3 1.2(b) Pension Plans and Profit Sharing Plans/ Defined Contribution Plans and Defined Benefit Plans.... 3 1.2(b)(1) Pension Plans.... 3 1.2(b)(1)(A) Defined Benefit Pension Plans.... 3 1.2(b)(1)(B) Defined Contribution Pension Plans.... 4 1.2(b)(2) Profit Sharing And Other Plans That Are Not Pension Plans.... 5 1.2(b)(3) Pension And Profit Sharing Plans Are Employee Pension Benefit Plans.... 5 1.2(c) Deferred compensation plans/ Qualified and Nonqualified plans/ ERISA and non ERISA plans.... 6 1.2(c)(1) Governmental and Church Plans.... 6 1.2(c)(2) Excess Benefit Plans.... 6 1.2(c)(3) Top Hat Plans... 6 1.2(c)(4) IRC 457 Plans.... 7 1.2(c)(5) Taxation/Coverage Under ERISA.... 9 1.2(c)(6) IRAs... 9 1.2(c)(7) SEPs and 403(b) Plans.... 11 1.2(c)(8) Plans Without Employees.... 11 1.2(c)(9) Bonus Plans Such as Phantom Stock Plans May Not be Pension Plans.... 12 1.3 Community property laws... 12 -i-

ARTICLE 1 IMPORTANT PRELIMINARIES. 1.1 Disclaimer. This outline has been prepared in an effort to help others to successfully navigate the ERISA distribution maze. However, be advised that these are muddy waters to chart, and here and there, a marker may have been misplaced. The reader is warned not to place blind faith in the statements of the rules set forth below, 1 but to independently verify any point on which reliance is to be placed. 1.2 The Taxonomy of Employee benefits. Employee benefits include an ever widening range of emoluments. Understanding the taxonomy of these benefits is necessary, but the task is made difficult as a result of the overlap in the categories described by the accepted nomenclature. In order to navigate in this area, it will be helpful to first understand the following distinctions. 1.2(a) The Difference between Pension Benefit Plans and welfare Plans. Benefits provided by Employee plans which are covered under Title I of ERISA 2 are generally divided into two categories: (1) employee welfare benefit plans 3 and (2) employee pension benefit plans. 4 In this outline we will be primarily concerned with the latter. The term employee benefit plan includes both. 5 1.2(a)(1) Employee Pension Benefit Plans. The terms employee pension benefit plan and pension plan as used in ERISA mean any plan, fund, or program which provides retirement income to employees or results in a deferral of income for periods extending to the termination of covered employment or beyond. 6 At other times the phrase pension plan alone is used to denote those particular subspecies of employee pension benefit plans that are not subject to the minimum funding rules of IRC 412, and that do not have to provide definitely 1 There are several thousand separate rules which govern this area. Count them. 2 The Employee Retirement Income Security Act of 1974. ERISA is codified at 29 U.S.C. 1001, et seq., however, all citations to ERISA herein are to the Act itself. As in the case with many other Federal laws, one may cite to the section of the act or the section of the United States Code. This can cause a great deal of confusion if one is not aware of the two systems of citation. There is a useful table in CCH Pension Plan Guide Vol. 4 at p. 18,075, 14,051. USC 1131=ERISA 501, 1132=502, 1133=503, etc. 3 ERISA 3(1). 4 ERISA 3(2). 5 ERISA 3(3). 6 ERISA 3(2)(A). -Page 2 of 13-

determinable benefits. 7 Profit sharing and stock bonus plans are not pension plans in this sense, 8 though they are employee pension benefit plans and pension plans as those terms are used in ERISA 3(2)(A) clearly encompass both pension and profit sharing plans. This nomenclature naturally causes some confusion to the uninitiated. 1.2(a)(2) Employee Welfare Benefit Plans. The terms employee welfare benefit plan or welfare plan, as used in ERISA, mean any plan, fund, or program which provides, through the purchase of insurance or otherwise, medical, hospital, disability death or unemployment, vacation benefits, severance pay benefits, supplemental retirement benefits, etc. 9 Welfare benefits, including severance pay, are not deferred compensation. 10 1.2(b) Pension Plans and Profit Sharing Plans/ Defined Contribution Plans and Defined Benefit Plans. 1.2(b)(1) Pension Plans. Pension plans 11 are primarily designed to provide benefits after retirement. 12 That is why an in-service distribution under a pension plan prior to normal retirement age is usually prohibited and can cause plan disqualification. 13 1.2(b)(1)(A) Defined Benefit Pension Plans. 1.1(a)(1)(A)(1) Benefits Provided By Defined Benefit Plans. Defined benefit pension plans promise the participant a benefit in the form of an annuity or its actuarial equivalent at normal retirement age. The benefit promised by the plan is usually paid for out of a trust which is funded primarily by contributions from the employer. It is the function of the funding method to ensure that sufficient funds will be available under the trust to provide the needed retirement benefits. ERISA and the IRC require that certain minimum funding requirements be met by quarterly employer 7 Treas. Reg. 1.401-1(b)(1)(i). 8 Treas. Reg. 1.401-1(b)(1)(ii). 9 ERISA 3(1) and 3(2)(B); DOL Reg. 2510.3-1 and 2510.3-2(b). 10 Cf., Greensboro Pathology Associates, P.A. v. United States, 698 F.2d 1196 (Federal Circuit 1982); Treas. Reg. 1.162-10. 11 Defined Benefit Plans and Money Purchase Plans are pension plans. Treas. Reg. 1.401-1(b)(1)(i). 12 IRS Pub. 778, Part 2 (c) (2/72). Treas. Reg. 1.401-1(b)(1)(i). 148. 13 Rev. Rul. 74-254, 1974-1 C.B. 91. Rev. Rul. 56-693, 1956-2 C.B. 282. Rev. Rul. 60-323, 1960-2 C.B. -Page 3 of 13-

contributions to the trust fund. 14 Failure to make the minimum contributions required by the minimum funding rules can result in an excise tax. 15 Participants do not have individual accounts under a defined benefit plan. Theoretically, a participant need not be concerned at all as to the investment experience of the trust, because such investment experience will not affect a participant s promised benefit under the plan. The investment experience may indirectly affect a participant s benefit, however, since if there is not enough money in the trust fund at such time as benefits become payable, then it may be that certain benefits will not be paid. If upon termination of the plan there is more money in the trust fund than is needed to pay all benefits, the excess will either revert to the employer subject to a 20%-50% excise tax 16, or will be used to provide increased benefits to participants, subject to the limitations on benefits under IRC 415. Benefits promised under a defined benefit plan are often insured, to a certain extent, by the Pension Benefit Guaranty Corporation (PBGC). The PBGC does not insure defined contribution plans. 1.1(a)(1)(A)(2) 415 Limits Applicable To Defined Benefit Plans. IRC 415(b) imposes a limit on the size of the benefit that can be paid to the participant. In a defined contribution plan, by way of contrast, the limit is on the amount that can be allocated annually. 17 1.2(b)(1)(B) Defined Contribution Pension Plans. 1.1(a)(1)(A)(3) Benefits Provided By Defined Contribution Plans. A participant under a defined contribution plan is not promised a benefit at retirement of a specified amount. A participant under a defined contribution is entitled to whatever is in the participant s account. The participant s account consists of contributions allocated to the account and the earnings (or losses) thereon. If a contribution is required to be made to the account under the minimum funding rules of IRC 412, the defined contribution plan is a pension plan (e.g., a money purchase pension plan or a target 14 IRC 412. All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated. 15 IRC 4971. 16 IRC 4980. 17 IRC 415(c). -Page 4 of 13-

benefit plan); otherwise, the plan is something other than a pension plan (e.g., a profit sharing or stock bonus plan or an ESOP). 1.1(a)(1)(A)(4) 415 Limits Applicable To Defined Contribution Plans. Under IRC 415 as it applies to defined contribution plans, there is no limit on the size of the benefit that can be paid to the participant, but there is a limit on the size of the annual allocations that can be made to the participant s account under the trust. 18 1.2(b)(2) Profit Sharing And Other Plans That Are Not Pension Plans. Profit sharing and stock bonus plans are not pension plans. It may not even be entirely accurate to describe them as retirement plans. Profit sharing and stock bonus plans can make distributions prior to normal retirement age and prior to a separation from service. 19 For example, a profit sharing plan may provide that distributions may take place after a fixed number of years (not less than two) or upon the prior occurrence of a stated event. 20 It used to be that if the Plan was integrated with social security rules similar to the pension plan distribution rules applied with respect to the integrated excess amount 21 ; however, the advent of the permitted disparity rules under IRC 401(l) as amended by TRA 86 probably change this rule and the fact that the plan is integrated with social security should no longer make a difference. 22 SEP-IRAs (Simplified Employee Pension Plans) are not thought to be pension plans either. This issue is discussed elsewhere in this outline. A SEP, i.e., a Simplified Employee Pension is a type of IRA, a creature of the tax Code alone, and not a part of ERISA. 1.2(b)(3) Pension And Profit Sharing Plans Are Employee Pension Benefit Plans. Profit sharing and stock bonus plans are subsumed under the headings of pension plans, employee pension benefit plans and employee benefit plans, as those terms are defined by ERISA, 23 even though these plans are not pension plans as that 18 IRC 415(c). 19 Treas. Reg. 1.401-1(b)(1)(ii). This does not mean, however, that an employee who is under age 591/2 can escape the 10% premature distribution tax of IRC 72(t). That is a separate issue. 20 Rev. Rul. 68-24 and Rev. Rul 71-295. IRS Pub. 778, Part 2 (c) (2/72). Treas. Reg. 1.401-1(b)(1)(ii). 21 Rev Rul 71-446. See also IRS Pub. 778 (2-72) Part 2 (c). 22 Preamble to Prop. Treas. Reg. 1.401(l)-4 (Proposed 11/15/88.) 53 Fed. Reg. 45,917 at 45,918. 23 ERISA 3(2)(A). -Page 5 of 13-

phrase is frequently used elsewhere, particularly in the IRC. 24 Are you still with me? 1.2(c) Deferred compensation plans/ Qualified and Nonqualified plans/ ERISA and non ERISA plans. Benefits under an employee pension benefit plan are a form of deferred compensation. Deferred compensation plans can be either qualified or nonqualified. All qualified and most nonqualified employee benefit plans are covered by Title I of ERISA, with precious few exceptions. 1.2(c)(1) Governmental and Church Plans. All governmental and most church plans, are entirely exempt from Title I. 25 1.2(c)(2) Excess Benefit Plans. Unfunded excess benefit plans, 26 are entirely exempt from Title I. 27 An excess benefit plan is a plan, whether or not funded, which is maintained by an employer solely for the purpose of providing benefits for certain employees in excess of the limitation on contributions and benefits imposed by IRC 415. 1.2(c)(3) Top Hat Plans. There is another type of nonqualified plan, sometimes called a top hat plan, which although covered by ERISA is exempt from most of the more burdensome provisions of Title I, such as participation, funding, vesting and most reporting. 28 Top hat plans are probably more common than true excess benefit plans, since the latter are only applicable where the employee is already receiving the maximum qualified plan benefit which the law allows. A top hat plan must not cover the rank and file (i.e., it must be solely for the benefit of a select group of management or highly compensated employees), and it must be unfunded. If the plan is not for a select group of management or highly compensated employees, then whether or not qualified, the funding and vesting rules must be met, unless the plan is exempt from Title I of ERISA. We know that a plan which extends coverage beyond a select group of management of highly compensated employees would not constitute a top hat plan for purposes of Parts 2, 3 and 4 of Title I of ERISA. 29 Unfortunately, we do not really know what exactly is meant by the phrase solely for the benefit of a 24 Treas. Reg. 1.401-1. 25 ERISA 4(b). 26 ERISA 3(36). 27 ERISA 4(b). 28 ERISA 201(2), 301(3), and 401(1). 29 ERISA Opinion Letter No. 90-14A. Cf. ERISA Opinion Letter No. 92-13. -Page 6 of 13-

select group of management or highly compensated employees. If an employee is part of management, must the employee be highly compensated? Presumably not. What does highly compensated mean in this context? We have no guidance. The select group requirement would imply that the top-hat plan cover less than all of management and less than all of the highly compensated. Management may require active control. 30 The DOL has informally indicated that the IRS definition of highly compensated employee, found in 414(q), is not restrictive enough!, and that in order to be highly compensated the employee must be in the top 2% of all employees by salary, or (and?) have a salary at least three times the social security wage base. 31 JPA 32 1431(a) amended the definition of highly compensated employee found in IRC 414(q), so that, effective in years beginning after 1996, the term "highly compensated employee" means any employee (a) who was a 5-percent owner at any time during the year or the preceding year, or (b) for the preceding year had compensation from the employer in excess of $80,000 (adjusted for COLA), and, if the employer so elects, was in the top 20% of employees based on compensation for such preceding year. 1.2(c)(4) IRC 457 Plans. An IRC 457 Plan is a type of nonqualified plan for tax exempt organizations (other than churches 33 ). If the plan is sponsored by a governmental entity it will be entirely exempt from Title I. Otherwise, I see no escape from the conclusion that the more burdensome provisions of Title I will apply in full force unless the plan is a top hat plan (or perhaps, an excess benefit plan). In order to be a top hat plan, the plan must be unfunded and solely for the benefit of a select group of management or highly compensated employees. An indication that the IRS agrees with my interpretation is that, unless the plan is a top-hat plan, the IRS will not rule that the plan qualifies under 457. 34 Deferrals under a 457 plan may be voluntary. However, the most compensation that an individual can defer each year (that is not subject to a substantial risk of forfeiture) is the lesser of 33.3% of includable compensation or $7500 35 (indexed 30 Pension Publ. of Denver (PPD) Flexible Compensation Arrangements, p. 920.10. 31 Pension Publ. of Denver (PPD) Flexible Compensation Arrangements, p. 920.10. 32 H.R. 3448, The Small Business Job Protection Act of 1996 (JPA). 33 IRC 457(b)(2). 34 PLR 8950056. 35 457(e)(15). -Page 7 of 13-

beginning in 1997 36 ). Note that it cannot be often that the percentage limit could apply if the participant is a member of a select group of management or highly compensated employees. A nonqualified plan sponsored by a tax exempt entity must subject benefits exceeding these limitations to a substantial risk of forfeiture if tax is to be deferred. If a nongovernmental plan were to include employees other than a select group of management or highly compensated employees, Title I of ERISA apply with all its rigor. If Title I applied in full, the plan would almost certainly fail to be an eligible 457 plan, because 457 requires that all of the benefits under the plan shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer's general creditors. 37 This requirement cannot be met by a plan fully subject to Title I, because ERISA 404 requires that Title I assets be held in trust, and a grantor or Rabbi trust will not satisfy this requirement. And if the assets were in a real trust, one not subject to creditors, the plan would fail 457(b)(6). A related problem is whether an amount voluntarily deferred is a plan asset, because if it is it must be held in trust. However, the DOL has graciously opined that elective deferrals under a top-hat plan are not plan assets, and therefore are not required to be held in trust. 38 (Would that they would apply this logic consistently to cafeteria plans.) Further, as we know, assets held in a Rabbi Trust are not deemed to be plan assets by virtue of being so held, and therefore, the existence of such a trust does not cause the plan to be funded. 39 If the plan has assets or (unless it is an excess benefit plan) if it benefits someone not a member of a select group of management or highly compensated employees, then, unless the plan is a governmental plan, Title I will apply with all the rigor applicable to a qualified plan, the effect of which would make the whole arrangement thoroughly undesirable. As discussed above, IRC 457(b)(6)(C) expressly provides all income attributable to such amounts, property, or rights, shall remain (until made available to the participant or other beneficiary) solely the property and rights of the employer (without being restricted to the provision of benefits under the plan), subject only to the claims of the employer's general creditors. And, as also just discussed, this more or less prevents the use of a trust to fund a 457 plan for a plan subject to ERISA. However, SBJPA 1448 amended IRC 457(g)(1) to provide that 457 plans of state and local governments will not be tax exempt, 36 1447 of H.R. 3448, The Small Business Job Protection Act of 1996 (JPA) amended IRC 457(e)(15), to index the $7500 deferral limit under IRC 457(b)(2)(a) to reflect increases in cost of living, effective for plan years beginning after 12/31/96. 37 IRC 457(b)(6). 38 ERISA Op. Letter 90-14A. 39 ERISA Op. Letter 91-16A. -Page 8 of 13-

unless all assets and income of the plan described in subsection (b)(6) are held in trust [or in a custodial account] for the exclusive benefit of participants and their beneficiaries, and amends IRC 457(b)(6)(C) by making it subject to the new trust provisions of IRC 457(g)(1). The solution to this conundrum, and the reason this a governmental 457 plan can use a trust, is that, unlike a charity, a governmental plan is usually totally exempt from Title I, and thus does not have to rely on the limited Title I exemption applicable to unfunded plans. (Governmental plans are not exempt from the IRC, and so must still comply with 457, however.) Prior to the advent of 457 a tax exempt organization had a situation that was too good to be true. It could establish reserves to fund a vested nonqualified plan without any significant limitations other than those normally associated with top hat or excess benefit plans. Because of being tax exempt, the loss of the deduction made no difference and the funds set aside grew tax free. In other words the tax exempt employer enjoyed the same tax benefits that non tax exempt employers could get from a qualified trust, but without the participation and vesting requirements and without the deduction and annual addition limits applicable to qualified trusts. 1.2(c)(5) Taxation/Coverage Under ERISA. If a participant s benefit is funded and vested, as Title I requires of all plans subject to it, then the participant will generally be taxed, of course, unless the plan is qualified under IRC 401 or unless some other section of the IRC provides for special treatment. 1.2(c)(6) IRAs Funds in an Individual Retirement Account (IRA) do not necessarily constitute deferred compensation, unless the IRA is a SEP or a rollover IRA. However since most large IRAs were originally funded as a rollover from a qualified plan, it may be convenient, even if not always accurate, to refer to IRA proceeds as a form of deferred compensation. An IRA (including a SEP-IRA) is not a qualified plan because it is not described in IRC 401(a). Taxation of IRAs is governed by IRC 408. An IRA is generally not subject to Title I because an IRA does not constitute an employee benefit plan.40 Further, an IRA is specifically exempted from Parts 2 (participation and vesting) and 3 (minimum funding) of ERISA. 41 There are, however, circumstances under which an IRA may become subject to other parts of ERISA: (d) Individual Retirement Accounts. (1) For purposes of Title I of the Act and this chapter, the terms employee pension benefit plan and pension plan shall not include an individual retirement account described in section 408(a) of the Code, an individual retirement annuity 40 DOL Reg. 2510.3-2(d). 41 ERISA 201(6) and 301(a)(7). -Page 9 of 13-

described in section 408(b) of the Internal Revenue Code of 1954 (hereinafter the Code ) and an individual retirement bond described in section 409 of the Code, provided that- (i) no contributions are made by the employer or employee association; (ii) participation is completely voluntary for employees or members; (iii) the sole involvement of the employer or employee organization is without endorsement to permit the sponsor to publicize the program to employees or members, to collect contributions through payroll deductions or dues checkoffs and to remit them to the sponsor; and (iv) the employer or employee organization receives no consideration in the form of cash or otherwise, other than reasonable compensation for services actually rendered in connection with payroll deductions or dues checkoffs. 42 Note that 408(c) contemplates that an employer may establish a common trust fund for its employees, which will be treated as an IRA: 408 (c) Accounts Established by Employers and Certain Associations of Employees. A trust created or organized in the United States by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees (which may include employees within the meaning of section 401(c) (1)) for the exclusive benefit of its members or their beneficiaries, shall be treated as an individual retirement account (described in subsection (a)), but only if the written governing instrument creating the trust meets the following requirements: (1) The trust satisfies the requirements of paragraphs (1) through (6) of subsection (a). (2) There is a separate accounting for the interest of each employee or member (or spouse of an employee or member). The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust. 43 42 DOL Reg. 2510.3-2(d). 43 IRC 408(c). -Page 10 of 13-

1.2(c)(7) SEPs and 403(b) Plans. SEPs (Simplified Employee Pensions) are a form of IRA described in IRC 408(k). Like IRAs, SEPs and 403(b) plans are not qualified plans; nevertheless they do enjoy many of the tax benefits of qualified plans. However, SEPs might be subject to some parts of Title I of ERISA, because they are employer funded, 44 and the same will also be true of 403(b) plans unless certain conditions are met. 45 However, since a SEP is a form of IRA, it ought in any event to be able to enjoy the specific IRA exemption from Parts 2 (participation and vesting) and 3 (minimum funding) of ERISA. 46 403(b) plans will usually be exempt from application of Title I if funded solely through salary reduction contributions (i.e., there are no employer contributions including matching contributions). And governmental and church 403(b) plans may be exempt no matter how funded. 47 1.2(c)(8) Plans Without Employees. Plans without common law employees can be qualified under 401(a), but they are not employees benefit plans and thus, are not subject to Title I of ERISA. 48 For this purpose, an individual and his or her spouse are not treated as employees of a business, whether or not incorporated, which is wholly owned by them, 49 and a partner in a partnership and his or her spouse are likewise not treated as employees of the partnership. 50 At least one welfare benefit case involving a health plan funded with insurance, stands for the interesting proposition that even if the Plan is subject to Title I of ERISA because it covers some common law employees, Title I (and the preemption doctrine) does not apply to the sole owner and his dependents. 51 A federal district court case arising in the Fifth Circuit has held that a sole proprietor cannot be an employee, and therefore the owner could sue the insurance company under the Texas Deceptive Trade Practices-Consumer 44 Compare Taft, Robert In re, (1995, DC NY) 184 BR 189 and Henderson In re, (1993, Bktcy Ct MS) 167 BR 67 [SEPs not ERISA plans], with Schlein In re, (1993, CA11) 8 F3d 745, 17 EBC 2020 and Garratt v. Walker 121 F.3d 565 (10th Cir., 1997), 21 EBC 1444, 1997 US App Lexis 19291 [SEP is governed by ERISA]. 45 DOL Reg. 2510.3-2(f). 46 ERISA 201(6) and 301(a)(7). 47 ERISA 4(b)(1)&(2), and 3(32)&(33). DOL Op. Letters 75f-33 and 80-19A. 48 DOL Reg. 2510.3-3(b). Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir. 1986), cert. den. 479 U.S. 1089, 107 S.Ct. 1296 (1987). Schwartz v. Gordon, 761 F.2d 864 (2nd Cir. 1985). 49 DOL Reg. 2510.3-3(c)(1). 50 DOL Reg. 2510.3-3(c)(2). 51 Fugarino v. Hartford Life and Accident Insurance Company, 969 F.2d 178 (6th Cir. 1992). -Page 11 of 13-

Protection Act, without fear of ERISA preemption, even though the policy was a group policy purchased by the employer and covering two nonowner employees. 52 As should be apparent by now, one must take care in describing employee benefits as retirement benefits, deferred compensation, pension benefits, qualified, nonqualified, subject to Title I, etc. For the most part, the term deferred compensation will suffice to cover the spectrum. There have recently been a spate of cases holding that plans covering only owners are not covered by Title I, and some stated that the rule applied even if nonowner employees were formerly covered. 53 This issue is discussed in detail later on in this outline. 1.2(c)(9) Bonus Plans Such as Phantom Stock Plans May Not be Pension Plans. DOL Reg. 2510.3-2(c) provides: (c) Bonus program. For purposes of Title I of the Act and this chapter, the terms employee pension benefit plan and pension plan shall not include payments made by an employer to some or all of its employees as bonuses for work performed, unless such payments are systematically deferred to the termination of covered employment or beyond, or so as to provide retirement income to employees. The Eighth Circuit, reversing a district court, held that a phantom stock plan was a bonus arrangement, and not a plan of deferred compensation. 54 1.3 Community property laws. It is clear that benefits under a deferred compensation plan or IRA, whether or not qualified and whether or not vested, are a form of community property in most if not all community property states, if acquired during the marriage. 55 It is true that the United Supreme Court has not formally so held but it is nevertheless assumed that it would not hesitate to do so. 52 Harris v. TMG Life Insurance Co., (1996, SD Tex), 1996 US Dist LEXIS 5088. 53 Meredith v Time Insurance Company, 980 F.2d 352 (5th Cir., 1993), 16 EBC 1296. Re Lane, Jr. (1993, ED NY) 1993 Bankr LEXIS 103. Re Branch, Robert L. (1994, CA7) 1994 US App LEXIS 2870. Robertson v. Alexander Grant & Co., 798 F.2d 868 (5th Cir. 1986), cert. den. 479 U.S. 1089, 107 S.Ct. 1296 (1987). In re Kaplan, 162 B.R. 684 (Bkrtcy. E.D. Pa. 1993). In Re Blais, (1994, BC SD FL) 1994 Bankr Lexis 1427. Fugarino v. Hartford Life and Accident Insurance Company, 969 F.2d 178 (6th Cir. 1992). 54 Emmenegger v. Bull Moose Tube Company (1999, CA8 WS 1063468). 55 Herring v. Blakeley, 385 S.W.2d 843 (Tex. 1965); Cearley v. Cearley, 544 S.W.2d. 661 (Tex. 1976); Taggart v. Taggart, 552 S.W.2d 551 (Tex. 1977); Allard v Frech, 754 S.W.2d (Tex. 1988). -Page 12 of 13-

Valuing the community interest may be difficult, however. This is to say the least. There are a number of divorce cases that have wrestled with the issue, not necessarily successfully. 56 Also unclear is the extent to which the operation of the community property laws can divest benefits intended to be protected by ERISA. If the operation of the state community property laws is in fundamental conflict with ( relates to?) the Federal law embodied in ERISA, state law is to be preempted. 57 The fact that benefits under a deferred compensation plan or IRA may constitute community property is a primary concern of the estate planner. Any time there is a transfer or relinquishment of such interest to anyone, including the other member of the community, there are transfer tax issues to consider. 56 Berry v. Berry, 647 S.W.2d 945 (Tex. 1983); Grier v. Grier, 731 S.W.2d 931 (Tex. 1987). 57 ERISA 514. -Page 13 of 13-