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Estate Planning for Retirement Plans

Estate Planning for Retirement Plans. Gary Altman, JD, CFP, LLM (Tax) Rockville, Maryland. Why Retirement Distribution Planning is Important. Coordinate estate plan under will or revocable trust Generally, the IRA or qualified plan is the largest asset of the estate

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Estate Planning for Retirement Plans

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  1. Estate Planning for Retirement Plans Gary Altman, JD, CFP, LLM (Tax) Rockville, Maryland

  2. Why Retirement Distribution Planning is Important • 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 • Maximize use of Unified Credit (where needed) • Charitable Planning

  3. 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

  4. Basic Concepts • Wills control probate assets • Trusts control trust assets • IRAs and qualified retirement plans are controlled by beneficiary designation form or default provisions of contract

  5. IRA Basics • IRAs are not taxed until distributed • Distributions must begin no later than one’s Required Beginning Date (RBD) • IRA elections are required after death

  6. Required Beginning Date • Required Beginning Date (RBD): Generally, April 1 of the year following the year the owner turns age 70½ • Once at RBD, required minimum distributions (RMD) must begin

  7. Required Beginning Date - Example • Example-Birthdate is Oct 18, 1937 • Turn age 70 on October 18, 2007 • Turn age 70½ on April 18, 2008 • RBD -- April 1, 2009 • Example-Birthdate is April 18, 1937 • Turn age 70 on April 18, 2007 • Turn age 70½ on October 18, 2007 • RBD -- April 1, 2008

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

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

  10. Designated Beneficiaries • 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”

  11. Designated Beneficiaries • Qualifying “designated beneficiaries”: • Individuals • Spouse • Child • Grandchild • Parent • Brother/sister • Niece/Nephew • Friend • Certain Trusts

  12. Designated Beneficiaries • Non-qualifying “designated beneficiaries”: • Estates • Charities • Most Trusts • Partnerships, LLC and corporations

  13. RMDs – Death before age 70 1/2 • Life expectancy distributions if you have a designated beneficiary • If no designated beneficiary, five-year rule • Delayed distributions – spousal beneficiary • Distributions must begin by December 31st of the year after death • Failure to do so does not automatically cause the five-year rule to apply (PLR 200811028)

  14. RMDs – Death before after 70 1/2 • Life expectancy distributions if you have a designated beneficiary • If no designated beneficiary, five-year rule or remaining life expectancy of IRA owner, whichever is longer • Delayed distributions – spousal beneficiary • Distributions must begin by December 31st of the year after death • Failure to do so does not automatically cause the five-year rule to apply (PLR 200811028) • Year of death distribution – life expectancy of IRA owner

  15. RMDs_______________________________________ Life Expectancy Rule Death Before Required Beginning Date Death On or After Required Beginning Date Designated Beneficiary Life Expectancy Rule Owner’s “Ghost” Life Expectancy Rule Non-Designated Beneficiary Five-Year Rule

  16. RMDs • Generally, if individual beneficiaries exist, post-death RMDs are based upon oldest designated beneficiary’s life expectancy under the Single Life Table • If separate shares are created by 12/31 of the year following the year of death, then each beneficiary’s life is used

  17. Spousal Rollover • Spousal rollover where spouse is “sole beneficiary” • Rollover may occur at any time • Non-spousal rollovers • Not permitted • But, direct transfers are permitted

  18. 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 a 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. 9/30 Determination Date • “Designated beneficiary” is not determined until September 30 of the year following the year of the IRA owner’s death • Treas. Reg. § 1.401(a)(9)-4, Q&A 4(a) • Allows for disclaimer planning • If a beneficiary dies before the September 30 date without disclaiming, such beneficiary continues to be treated as a beneficiary in determining the designated beneficiary • Treas. Reg. § 1.401(a)(9)-4, Q&A 4(c)

  20. 9/30 Determination DateExample 1 • Jane names a charity (10%) and a trust (90%) as beneficiary of her IRA. The trust is payable to her children over their lifetimes. • If the charity’s 10% is paid out by September 30th of the year following the year of Jane’s death, the charity’s interest will not taint the distribution to the children through the trust (which will be payable over the lifetime of the oldest child).

  21. 9/30 Determination DateExample 2 • John names his sister as primary beneficiary of his IRA and his nephew as contingent beneficiary. • If John’s sister dies before September 30th of the year following the year of John’s death without performing a qualified disclaimer, RMDs are still calculated based on the sister’s life expectancy.

  22. 9/30 Determination DateExample 3 • John names his wife as primary beneficiary of his IRA and his grandchild as contingent beneficiary. • If John’s wife performs a qualified disclaimer by September 30th of the year following the year of John’s death, RMDs can be calculated based on the grandchild’s life expectancy.

  23. Weaving the IRA BeneficiaryDesignation Form into the Overall Plan • Contingent beneficiaries • Trust as beneficiary • Second marriage issues • Creditor protection issues • Charitable bequests

  24. “Inherited IRA”

  25. “Inherited IRA”IRA Distribution Flowchart

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

  27. “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 designated beneficiary

  28. Spousal Beneficiary • 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

  29. Spousal BeneficiaryRollover • 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. • Surviving spouse’s age used to determine when required minimum distributions must begin • Surviving spouse may use the Uniform Lifetime Table to determine distributions

  30. Spousal Rollover Trap • Spousal rollover before age 59 ½ • Will cause pre-59 ½ distributions to be subject to the 10% early distribution penalty • If no rollover occurred, pre-59 ½ distributions can be taken penalty free • Solution • Do not perform spousal rollover until spouse reaches age 59 ½

  31. Child orGrandchild Beneficiary • Trumps the five year rule • Achieves “Inherited IRA” to the degree that distributions occur over life expectancy of the designated beneficiary • The life expectancy factor of beneficiary is determined by reference to the Single Life Table beginning in the year following the year of death. Each year thereafter the life expectancy divisor is reduced by one

  32. Pension Protection Act of 2006 • Beginning in tax years after 12/31/2006, non-spousal beneficiaries (e.g. children, grandchildren, friends, etc.) are permitted to “transfer” a qualified retirement plan (e.g. 401(k)), via a trustee-to-trustee transfer, into an “inherited” IRA • “Designated beneficiary” trusts are also permitted to transfer qualified retirement plans to “inherited” IRAs • Notice 2008-30: If plan permits, can transfer qualified plan to Roth IRA (normal income tax limits apply)

  33. Key Issues • Beneficiary Designation Forms • Child vs. Grandchildren as Beneficiary • Tax Apportionment • Careful drafting in Revocable Trust • Standalone IRA Trust • Irrevocable Life Insurance Trust (ILIT)

  34. Common Mistakes • Incorrect titling • Failure to take RMDs • Failure to utilize disclaimers when appropriate • Failure to analyze contingent beneficiaries when utilizing disclaimers • Failure to analyze or consider contingent beneficiaries in trust documents • Spousal rollover before age 59 ½ • Taking a lump-sum distribution

  35. Inherited IRA Title For non-spousal beneficiaries, it is critical to keep inherited IRA in the name of the deceased IRA owner. Example: John Smith, deceased, IRA, for the benefit of James Smith

  36. IRAs Payable to Trusts - Basic

  37. Benefit of Using a Trust • Minors • Creditor or Predator Protection • Inherited IRAs not creditor protected • Divorce Protection • Special Needs • Investment Management • Estate Planning • Payment of Estate Taxes • Irresponsible Beneficiaries or Control from the Grave • Per Stirpes generally not allowed

  38. Disadvantages of Utilizing a Trust • Trust Income Tax Rates • Legal and Trustee Fees • Trust Income Tax Returns • 1041 • 1099 • K-1 • Greater Complexity

  39. 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

  40. Four Requirements for ALL Trusts • Trust is valid under state law • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(1) • Trust is irrevocable upon death of owner • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(2) • Beneficiaries of the trust are identifiable from the trust instrument • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(3) • Documentation requirement is satisfied • Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(4)

  41. Types of Testamentary Trusts • Unified Credit Trust • Marital Trust • QTIP Trust • Trust for single individual • Trust for multiple individuals • Generation Skipping Trusts

  42. Types of Inter Vivos Trusts • Revocable Trust • Standalone IRA Trust

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

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

  45. Conduit Trust A trust in which all distributions from the IRA are immediately distributed to the trust beneficiary(ies)

  46. Accumulation Trust • 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

  47. 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

  48. 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

  49. Accumulation Trust Example #3 Discretionary Distributions Trust IRA Child #1 Contingent beneficiary must be counted. Non-individual contingent beneficiary. No designated beneficiary status. At Child #1’s death To Red Cross

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