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IRAS AND TRUSTS David B. McKinney. IRAs. SCOPE. ALL IRAS EXCEPT ROTHS . MANY QUALIFIED DC PLANS. IRAs. PLAN TERMS CAN REDUCE YOUR OPTIONS. DC PLANS – REAL CONCERN. “BIG BOX” PROVIDERS. IRA TAX BASICS. INCOME – ALWAYS TAXED WHEN DISTRIBUTED. TAXED WHEN ASSIGNED .
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IRAs • SCOPE. • ALL IRAS EXCEPT ROTHS. • MANY QUALIFIED DC PLANS.
IRAs • PLAN TERMS CAN REDUCE YOUR OPTIONS. • DC PLANS – REAL CONCERN. • “BIG BOX” PROVIDERS.
IRA TAX BASICS • INCOME – ALWAYS TAXED WHEN DISTRIBUTED. • TAXED WHEN ASSIGNED. • DON’T ASSIGN OWNERSHIPTO A TRUST OR FLP!
IRA TAX BASICS • ESTATE TAX: • NO STEPUP. • WITHDRAW: TWO TAXES! • SELL STEPPED-UP ASSETS TO PAY.
IRA TAX BASICS • HORROR STORY: • $1,000,000 IRA. AT DEATH: • ( 400,000) ESTATE TAX @40% • ( 240,000) INCOME TAX @40% • $ 360,000 NET TO FAMILY
IRA TAX BASICS • OKLAHOMA MAY EXEMPT SOME DISTRIBUTIONS FROM STATE INCOME TAX.
IRA TAX PLANNING • BEST SOURCE OF AFTER-DEATH CHARITABLE BEQUESTS: • NO ESTATE OR INCOME TAX.
IRA TAX PLANNING • INSTALLMENTS: DEFER INCOME TAX. • RMDS.
IRA TAX PLANNING • “LIFE EXPECTANCY”: • 65: ABOUT 88. • MARRIED, BOTH 65: ABOUT 92. • AGE 90 RULE.
IRA TAX PLANNING • PLANNING FOR DEATH: • Pay: 1 Yr., or 5 Yrs. or RMD. • OLDEST RMD FOR ALL. • SEPARATE ACCOUNTS. • NO RECALCULATION.
IRA TAX PLANNING • BENEFICIARY CAN ELECT: • INSTALLMENTS. • NOT IN 401(k)/DC? BUT ROLLOVER … • IMMEDIATE PAYMENT.
IRA TAX PLANNING • BENEFICIARY CAN INVEST. • MULTIPLE BENEFICIARIES.
TRUST AS BENEFICIARY • WHY WOULD YOU DO IT?
The trust must be a valid trust under state law; • The trust must be irrevocable or become irrevocable upon the IRA owner’s death; • The trust must have identifiable beneficiaries who are to receive the interest in the IRA; and • The trust document (or a certified list of all beneficiaries, including contingent and remainder beneficiaries, and a description of conditions on their entitlement to the interest in the IRA) must be provided to the plan administrator. IRA TAX PLANNING • VALID, IRREVOCABLE, TRUST. • HUMAN BEINGS AS BENEFICIARIES. • IDENTIFIABLE UNDER ALL POSSIBLE SCENARIOS. • THE ADMINISTRATOR HAS A COPY OF THE TRUST OR LIST OF ALL BENEFICIARIES & CONDITIONS TO ENTITLEMENT.
IRA CLAUSE FOR TRUSTS • HANDOUT. • TRUSTEE CAN ALLOCATE TO CHARITIES OR HUMANS. • PLRRIGHTS. • “RESIGN.” • EDUCATION.
IRA TAX PLANNING • 1099 GOES TO THE TRUSTEE?? • CHARITIES! • POWERS OF APPOINTMENT DISQUALIFY. • REQUIREMENTS FOR SPOUSES? • LOCATION OF PROOF – NOTICE TO ADMINISTRATOR? • “BIG BOX” PROVIDERS?
PROBLEMS IN TRUSTS • INSOLVENT TRUST OR BENEFICIARIES. • SHORT-TERM TRUST WITH INSTALLMENTS. • TRUSTEE SOPHISTICATION. • INVESTMENT AUTHORITY. • OLDEST RMD FOR ALL. • FAMILY DISPUTES.
SOLUTIONS: • PLR 201241017: • SEPARATE THE IRA INTO ACCOUNTS. • TRUSTEE-TO-TRUSTEE IRA TRANSFERS • EACH IRA IS “INHERITED.” • RMD: OLDEST BENEFICIARY.
SEGREGATED TRUST • [DISCUSSION]
SOLUTIONS: • CAN THE TRUSTEE DISCLAIM AND PASS TO INDIVIDUALS? • NEED CONSENTS. • ATTRIBUTED TO THE BENEFICIARY? • REVIEW THE IRA’S DEFAULT BENEFICIARIES.
SOLUTIONS: • DISTRIBUTE IMMEDIATELY AND PAY THE TAXES. • THE DEFERRAL IS NOT WORTH MUCH!
LOCK-IN IRAS • CONCEPT. • NEED: FLEXIBLE TRUSTEE. • LOCAL TRUSTEES …
LOCK-IN IRAS - REASONS • BLENDED FAMILY. • SPENDTHRIFT. • AGE GAP. • UNSOPHISTICATED TRUSTEE.
LOCK-IN IRAS • INVESTMENT DIRECTION. • CREDITORS – DECEDENT OR BENEFICIARIES. • SHAKY MARRIAGES – BENEFICIARIES.
LOCK-IN IRAS • TRUSTS WITH CHARITIES OR POAs. • MEDICAID.
LOCK-IN IRAS • FLEXIBILITY: YOU CAN DO ANYTHING THAT YOU COULD DO WITH A TRUST.
LOCK-IN IRAs • DISCLAIMERS. • QTIP. • BYPASS, CREDIT SHELTER, GST TERMS.
LOCK-IN IRAs • EXTRA DISTRIBUTIONS. • HEMS OR OTHER STANDARDS.
LOCK-IN IRAS • YOU ALSO CAN: • SEPARATE ACCOUNTS & RMDS. • SEPARATE INVESTMENTS. • PRE-SET THE INSTALLMENT METHOD.
LOCK-IN IRAS CURRENT PROJECT: LOCKED-IN IRA WITH MEDICAID SUPPLEMENTAL BENEFIT TRUST TERMS.
LOCK-IN IRAS • AVOID A GENERATION OF INCOME/ESTATE TAXES. • PREVENT SECOND SPOUSE ROLLOVER.
LOCK-IN IRAS • AVOID DISTRIBUTION TO THE DECEDENT’S CREDITORS.