IRAs & Other Qualified Plans Payable to Trusts

1. IRAs & Other Qualified PlansPayable to Trusts Presented by:Robert S. Keebler, CPA, MSTVirchow, Krause & Company, LLP1400 Lombardi AvenueSuite 200Green Bay, WI 54304rkeebler@virchowkrause.com

2. Why Retirement Distribution Planning is Important Potential tax exposure to IRA without planning

3. Why Retirement Distribution Planning is Important • Maximize use of Unified Credit (where needed) • Coordinate estate plan under will or revocable trust • Generally, the IRA or qualified plan is the largest asset of the estate • To minimize income tax on distributions and thereby maximize deferral

4. Why Retirement Distribution Planning is Important • Fluctuation in asset value • Increase in the applicable exclusion amount under EGTRRA • Fixed State applicable exclusion amount • Perceived need of surviving spouse • Tax apportionment

5. IRA Planning

6. Foundation Concepts • IRAs are not taxed until distributed • Distributions must begin no later than one’s Required Beginning Date (RBD) • IRA Elections are Required After Death

7. Foundation Concepts • Generally, April 1 of the year following the year the owner turns age 70½ is the RBD • Once at RBD, required minimum distributions (RMD) must begin

8. Foundation Concepts • RMDs are calculated based upon prior year ending account balance divided by life expectancy factor Prior Year12/31 BalanceLife Expectancy Factor RMD =

9. Foundation Concepts • Life expectancy tables • Uniform Lifetime Table • Single Life Table • Joint and Last Survivor Table • Available where the spouse is the sole beneficiary and is greater than 10 years younger than the account owner

10. Foundation Concepts • Single Life Table

11. Foundation Concepts • Post-death RMDs based on whether “designated beneficiary” exists • Only “individuals” with quantifiable life expectancy can be “designated beneficiaries” • If trust qualifies, look through to underlying trust beneficiaries • Distribution out of trust to beneficiary does not make the beneficiary the “designated beneficiary”

12. Foundation Concepts • Permissible “designated beneficiaries”: • Individuals • Spouse • Child • Grandchild • Parent • Brother/sister • Niece/Nephew • Neighbor • Certain Trusts

13. Foundation Concepts • Non-permissible “designated beneficiaries”: • Estates • Charities • Most Trusts

14. Foundation Concepts • Death before age 70½ • Five-year rule • Exceptions to the five-year rule • Delayed distributions – spousal beneficiary • Death after age 70½ • Life expectancy distributions if you have a designated beneficiary • Distributions must begin by December 31st of the year after death • Year of death distribution – life expectancy of IRA owner

15. Foundation Concepts Life Expectancy Rule Death Before Required Beginning Date Death On or After Required Beginning Date Designated Beneficiary Life Expectancy Rule “Ghost” Life Expectancy Rule Non-Designated Beneficiary Five-Year Rule

16. Foundation Concepts • Generally, if individual beneficiaries exist, post-death RMDs are based upon oldest designated beneficiary’s life expectancy under the Single Life Table

17. Foundation Concepts • Spousal rollover where spouse is “sole beneficiary” • Rollover may occur at any time • Rollover from trusts • Rollover from estates

18. Foundation Concepts Critical dates: • September 30 of the year following the year of death • Date at which the beneficiaries are identified • October 31 of the year following the year of death • Date at which trust documentation (in the case where as trust is named as a designated beneficiary) must be filed • December 31 of the year following the year of death • Date at which the first distribution must be made by each IRA beneficiary • Date at which separate shares must be created

19. “Inherited IRA” Objective: Prolong IRA payments over longest possible period of time, thus increasing wealth to future generations

20. “Inherited IRA” • An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained acquired the IRA on account of the death of the original owner. • Under the tax law the IRA assets can be distributed based upon the life expectancy of the beneficiary.

21. “Inherited IRA” • Two Strategies • Spousal Rollover • Inherited IRA • Advantages • Rollover delays RMD until spouse’s own RBD • Inherited IRA provisions allow beneficiary’s life expectancy to be used for distributions after death of IRA owner

22. “Inherited IRA” Spousal Beneficiary • Marital deduction should be available • Typically the default • If no rollover is chosen, then the life expectancy factor of spouse is used by reference to the Single Life Table beginning in the year the IRA owner would have turned age 70½. Each year thereafter the life expectancy divisor is recalculated by referencing the Single Life Table.

23. “Inherited IRA” Spousal Beneficiary - Rollover • Exception to Inherited IRA rules. • Only available to surviving spouse. • Allows spouse to roll over assets received as beneficiary to a new IRA in his/her own name. • Spouse’s age used to determine when required minimum distributions must begin. • Spouse may use the Uniform Lifetime Table to determine distributions.

24. “Inherited IRA” Child / Grandchild Beneficiary • Utilizes the exemption to the five year rule. • Avoids IRA assets being subject to estate tax in spouse’s estate. • Achieves “Inherited IRA” to the degree that distributions occur over life expectancy of the designated beneficiary.

25. “Inherited IRA” Child / Grandchild Beneficiary • Life expectancy of child and/or grandchild determined in year after year of the IRA owner’s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year.

26. “Inherited IRA” Key Issues in Making the “Inherited IRA” Work • Beneficiary Designation Forms • Tax Apportionment • Irrevocable Life Insurance Trust (ILIT)

27. “Inherited IRA” Example • Step One – IRA Owner creates Irrevocable Life Insurance Trust (ILIT) • Step Two – IRA Owner’s death • Step Three – Surviving Spouse performs an IRA rollover • Step Four – Surviving Spouse names children (and/or grandchildren) beneficiaries of the IRA • Tax apportionment clause should be adopted so as to not require the estate to use IRA monies to pay any estate taxes due • Step Five – Surviving Spouse takes payments over his/her life expectancy • Step Six – Surviving Spouse’s death • Step Seven – Payment of estate taxes of Surviving Spouse • Estate taxes and other expenses of the estate are paid from the proceeds of the life insurance policy held in the ILIT • Step Eight – Divide Surviving Spouse’s IRA into separate shares for each child (and/or grandchildren) • Step Nine – Payments made over each beneficiary’s life expectancy

28. “Inherited IRA” Spousal Beneficiary – No Rollover

29. “Inherited IRA” Spousal Beneficiary - Rollover

30. “Inherited IRA” Child Beneficiary

31. “Inherited IRA” Grandchild Beneficiary

32. “Inherited IRA” Comparison FACTS: IRA Value $1,000,000 Decedent’s Age 78 Surviving Spouse’s Age 72 Oldest Child’s Age 50 Youngest Grandchild’s Age 20

33. “Inherited IRA”

34. Naming a Trust as a “Designated Beneficiary” An IRA Can Be Payable to a Trust IRA Beneficiary Designation Form Trust IRA distributions over the life expectancy of the oldest beneficiary Spouse Children

35. Standard Issues With Naming a Revocable Living Trust as a “Designated Beneficiary” • The need for proper apportionment language regarding payment of debts, expenses and taxes of estate (See PLR 9820021) • Recognition of income in respect of a decedent (IRD) if pecuniary funding clause is utilized • Unanticipated loss of designated beneficiary due to the inclusion of power of appointment (general or limited) • Solution – Stand alone IRA trust such as IRA legacy trust

36. Standard Issues With Naming a Revocable Living Trust as a “Designated Beneficiary” • Fractional v. Pecuniary clauses • Recognition of income • Entire trust irrevocable at death of IRA owner • No separate share treatment • Payment of debts, taxes, and expenses • Apportionment language • Firewall provision • Powers of appointment • Stand alone trust – highly recommended • Adoption of older individuals

37. Revocable Living Trust as “Designated Beneficiary” • Revocable trust should use a fractional funding clause to determine the marital and bypass shares • PLRs in which pecuniary funding clause utilized and no IRD acceleration issue (PLRs 199912040, 9808043, 9744024)

38. Pecuniary Clause • The Marital Share shall consist of assets in a pecuniary amount which, after taking into account all other property included in the Settlor’s gross estate for federal estate tax purposes which qualified for the federal estate tax marital deduction and which passes or has passed to the Settlor’s wife under this instrument or in any other manner, is equal to the smallest amount which will eliminate all federal estate tax payable by the Settlor’s estate, or if that is not possible, the amount which will result in the least federal estate tax payable by the Settlor’s estate. In determining “federal estate tax payable”, all credits and deductions against that tax shall be taken into account, provided that the federal credit for state death taxes shall only be considered for the extent it does not create or increase a state death tax which is based on the federal credit for state death taxes.

39. Fractional Clause The Marital Share shall consist of that fractional share of the trust estate which shall be determined as follows: (a) The numeration of the fraction shall be the smallest amount which, after taking into account all other property included in the Settlor’s gross estate for federal estate tax purposes which qualifies for the federal estate tax marital deduction and which passes or has passed to the Settlor’s wife under this instrument or in any other manner, will eliminate all federal estate tax payable by the Settlor’s estate, or if that is not possible, the amount which will result in the least federal estate tax payable by the Settlor’s estate. In determining “federal estate tax payable”, all credits and deductions against that tax shall be taken into account, provided that the federal credit for state death taxes shall only be considered to the extent it does not create or increase a state death tax which is based on the federal credit for state taxes. (b) The denominator of the fraction shall be the value of the trust estate

40. Four Requirements for ALL Trusts Number One • Trust is valid under state law • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(1) • Easily met

41. Four Requirements for ALL Trusts Number Two • Trust is irrevocable upon death of owner • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(2) • Difficult to satisfy when using joint revocable trust

42. Four Requirements for ALL Trusts Number Three • Beneficiaries of the trust are identifiable from the trust instrument • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(3)

43. Four Requirements for ALL Trusts Number Four • Documentation requirement is satisfied • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(4)

44. Two Types of Trusts • Accumulation Trusts • Conduit Trusts • Treas. Reg. § 1.401(a)(9)-4, Q&A 5 requirements apply to both types.

45. Conduit Trust • A trust in which all distributions from the IRA are immediately distributed to the trust beneficiary/beneficiaries.

46. Accumulation Trust • A trust in which distributions from the IRA are allowed to accumulate within the trust.

47. Accumulation Trust vs. Conduit Trust In the conduit trust, the distributions to the beneficiary is always, at least, the total of withdrawals from the IRA

48. Accumulation Trusts The key issue in analyzing an accumulation trust is to determine which beneficiaries are “countable.” All beneficiaries are countable unless such beneficiary is deemed to be a “mere potential successor” beneficiary.

49. Accumulation Trust – Example #1 Trust Mother is “countable” for determining applicable life expectancy See PLR 200228025 andTreas. Reg. § 1.401(a)(9)-5 Q&A 7 IRA Discretionary Distributions Child – age 30 Entire Trust outright upon Grandchildren reaching age 30 Child – age 30 If Grandchildren die before reaching age 40 Mother – Age 80

50. Accumulation Trust – Example #2 Accumulation Trust Sister measuring life for determining required minimum distributions Facts same as PLR 200228025 Trust IRA Discretionary Distributions Grandchildren Entire Trust outright upon Grandchildren reaching age 30 Grandchildren If Grandchildren die before reaching age 30 Sister Age 67