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Presented by:Jonathan A. Mintz, J.D.The Advisors Forum WealthCounsel, LLC

Asset Protecting IRAs - Particularly Inherited IRAs

The Advisors Forum Interdisciplinary Series Teleconference

November 12, 2009

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What We’ll Cover Today

• The Need - and the Problems• Rules You Must Know• A Unique Solution

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• Account for 34% of all household financial assets - up from 14% in 1978!

• IRAs alone account for more than 10% - and 47 million US households have IRAs

* According to 2009 (2nd qtr.) Investment Company Institute study

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Retirement Planning Assets

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Impact of Taxes

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IRA Value $1 million Decedent’s Age 60Spouse’s Age 54Oldest Child’s Age 28Youngest Child 25

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Different Levels of Protection for IRAs and Inherited IRAs

• State law exemption for IRAs (& Roths?)• Review state statutes and case law

• Unlimited protection or specified dollar amount?

• Or amount reasonably necessary for the debtor and any dependents (e.g., CA)?

• $1 million bankruptcy protection

The Problem?

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Inherited IRAs• Apparently no asset protection!

• See Robertson v. Deeb (FL 2nd Dist. Ct of Appeal 2009)

• See In re Jarboe, 2007 WL 987314 (Bkrtcy S.D. Tex. 2007)

The Problem?

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Do beneficiaries take only the required minimum distributions (RMD)?

• Accounts left outright are “found money” for the beneficiary

• How long does it take a beneficiary to spend or consume found money?

Another Problem?

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Can We Provide Asset Protection and Ensure Maximum Stretch Out?

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• Generally, Participant must commence Required Minimum Distributions (RMDs) by Required Beginning Date (RBD)

Basic Concepts

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• RBD = April 1st in the year following the calendar year in which the participant reaches age 70½

• or the calendar year in which the employee retires from employment

• Exception for Less Than 5% Owners

Required Beginning Date

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Applies to all: • Qualified plans• IRAs (including Roth IRAs held by

beneficiaries)• Deferred compensation plans under IRC

§457• IRC §403(b) annuity contracts

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Required Minimum Distributions (RMDs)

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RMDs are calculated based upon prior year ending account balance divided by life expectancy factor

Prior Year 12/31 BalanceLife Expectancy Factor

RMD =

Calculating RMDs

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• Uniform Table for participant’s lifetime distributions

• Exception if spouse is actually more than 10 years younger than participant - then use Joint & Last Survivor Table

• Single Life Table for use by “qualified beneficiary” after participant’s death

• Determines “Stretch Out” for “Inherited IRAs”

Life Expectancy Factor

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Uniform TableAge Divisor Age Divisor Age Divisor

70 27.4 86 14.1 102 5.5

71 26.5 87 13.4 103 5.2

72 25.6 88 12.7 104 4.9

73 24.7 89 12.0 105 4.5

74 23.8 90 11.4 106 4.2

75 22.9 91 10.8 107 3.9

76 22.0 92 10.2 108 3.7

77 21.2 93 9.6 109 3.4

78 20.3 94 9.1 110 3.1

79 19.5 95 8.6 111 2.9

80 18.7 96 8.1 112 2.6

81 17.9 97 7.6 113 2.4

82 17.1 98 7.1 114 2.183 16.3 99 6.7 115 and older 1.9

84 15.5 100 6.385 14.8 101 5.9

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Single Life Table

Age Divisor Age Divisor Age Divisor Age Divisor Age Divisor Age Divisor Age Divisor

0 82.4 16 66.9 32 51.4 48 36.0 64 21.8 80 10.2 96 3.8

1 81.6 17 66.0 33 50.4 49 35.1 65 21.0 81 9.7 97 3.6

2 80.6 18 65.0 34 49.4 50 34.2 66 20.2 82 9.1 98 3.4

3 79.7 19 64.0 35 48.5 51 33.3 67 19.4 83 8.6 99 3.1

4 78.7 20 63.0 36 47.5 52 32.3 68 18.6 84 8.1 100 2.9

5 77.7 21 62.1 37 46.5 53 31.4 69 17.8 85 7.6 101 2.7

6 76.7 22 61.1 38 45.6 54 30.5 70 17.0 86 7.1 102 2.5

7 75.8 23 60.1 39 44.6 55 29.6 71 16.3 87 6.7 103 2.3

8 74.8 24 59.1 40 43.6 56 28.7 72 15.5 88 6.3 104 2.1

9 73.8 25 58.2 41 42.7 57 27.9 73 14.8 89 5.9 105 1.9

10 72.8 26 57.2 42 41.7 58 27.0 74 14.1 90 5.5 106 1.7

11 71.8 27 56.2 43 40.7 59 26.1 75 13.4 91 5.2 107 1.5

12 70.8 28 55.3 44 39.8 60 25.2 76 12.7 92 4.9 108 1.4

13 69.9 29 54.3 45 38.8 61 24.4 77 12.1 93 4.6 109 1.2

14 68.9 30 53.3 46 37.9 62 23.5 78 11.4 94 4.3 110 1.1

15 67.9 31 52.4 47 37.0 63 22.7 79 10.8 95 4.1 111 1.0

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Caveats: No Required Minimum Distributions in

2009– Under Notice 2009-82, Participants have

until 11/30 or 60 days (whichever is later) to rollover 2009 “RMDs”

The qualified plan provides otherwise• Beware of optional plan provisions!

Required Minimum Distributions

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• Only a surviving spouse can rollover an IRA (or qualified plan) to his or her own IRA

• Once rolled over, spouse uses Uniform Table to determine RMDs

• RMDs from rolled over IRA or qualified plan must commence by spouse’s RBD

Spousal Rollovers

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Pension Protection Act of 2006

• As of 1/1/07, a non-spouse beneficiary may be able to do a trustee-to-trustee rollover of a qualified plan to his or her own Inherited IRA

• Once rolled over, beneficiary uses Single Life Table to determine RMDs

• RMDs from rolled over IRA or qualified plan must commence by 12/31 of year following year of participant’s death

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Rollovers by Non-Spouse Beneficiaries

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• Under WRERA, plans must amend as of 1/1/10 to permit non-spouse “rollovers”

• Account must be titled in participant's name (e.g., the 401(k) owner) for the benefit of the beneficiary (e.g. "Mary Smith, Deceased IRA f/b/o Jim Smith”)

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Rollovers by Non-Spouse Beneficiaries

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Two Critical Questions:1. Did the participant reach his or her

Required Beginning Date (RBD)?

2. Is there a “designated beneficiary” (DB)?

Critical Questions?

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Life Expectancy Rule

Life Expectancy

Rule

Five-Year Rule

Death Before Required Beginning Date

Death On or After Required Beginning Date

Designated Beneficiary

Non-Designated Beneficiary

“Ghost” Life Expectancy

Rule

Required Minimum Distributions (RMDs)

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Planning Tip:• Consider continuing with the

participant’s hypothetical life expectancy if spouse wishes to access funds but is younger than 59 ½

• To avoid 10% penalty

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Death After Required Beginning Date

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Treas. Reg §1.401(a)(9)-4

• Must be named a DB under the terms of the plan or by an affirmative election by the employee

• DB need not be specified by name but must be identifiable on the date of death

• May be a class of beneficiaries capable of expansion or contraction (e.g., my children or grandchildren)

• DB must be an individual alive on the date of death

• DB may also be individuals named as beneficiaries of a qualifying trust

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What is a Designated Beneficiary?

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These are NOT a “designated beneficiary”• Estate• Charity• Non-qualifying trust• Any non-individual other than a qualifying trust• Individual born after the date of the participant’s

death

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What is a Designated? Beneficiary?

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The Retirement Trust

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Advantages of Using Trusts Generally

• Spendthrift protection

• Creditor protection

• Divorce (“Predator”) protection

• Special needs

• Consistent investment management

• Estate planning

• “Dead-hand” control

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Disadvantages of Using Trusts Generally

• Trust tax rates

• Legal and trustee fees

• Income tax returns

• Greater complexity

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Four Requirements of All IRA Trusts

1. Trust is valid under state law

2. Trust is irrevocable upon death of owner

3. Beneficiaries of the trust are identifiable from the trust instrument

4. Documentation requirement is satisfied

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IRAs Payable to Trusts

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IRA Payable to Family Trust under RLT

Joint RLT

Joint RLT does not get DB Status, because Survivor’s Trust is not Irrevocable

IRS views trust as one trust (See PLRs 200317041, 200317043 & 200317044)

Survivor TrustIrrevocable Family Trust

Irrevocable Requirement

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1. Conduit Trusts

2. Accumulation Trusts

*RMD Requirements apply to both types

Two Types of Trusts

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Conduit Trust

• Trust in which ALL distributions from the IRA are immediately distributed to the trust beneficiary/beneficiaries Allows for easier identification of countable beneficiaries - but at a cost

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Accumulation Trust

Trust in which distributions from the IRA are allowed to accumulate within the trust

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Conduit Trusts - Example 1

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Conduit Trusts - Example 2

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Accumulation Trusts

• The key issue is to determine which beneficiaries are “countable.”• All beneficiaries are countable unless such beneficiary is deemed to be a “mere potential successor” beneficiary.

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Accumulation Trust - Example 1

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Accumulation Trust - Example 2

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• Separate Retirement Trust or a trust in the client’s revocable trust or will?

• Separate Retirement Trust gives the trust maker more control over the downstream beneficiaries

• This is particularly important if the trust is an accumulation trust rather than a conduit trust

Retirement Trusts

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Issues with RLTs and Trusts in Wills

• Formula funding clause•Pecuniary clauses and recognition of income (IRC § 661)

• Powers of appointment • Adoption• Payment of debts, taxes and expenses•Apportionment language / Firewall provision• Older or unidentifiable contingent beneficiary or beneficiaries• Ultimate beneficiary or beneficiaries

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IRS has permitted a one-time“Toggle” from Conduit to Accumulation Trust• See PLR 200537044 – Gives Trust

Protector the power to toggle ab initio• Note that we must convert GPOAs to

LPOAs, creating potential GSTT issues• Can addresses other issues within RLT or

will

Hybrid Option

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Separate Shares

Payable to single trust

No separate shares identified

in the beneficiary designation form

IRA paid over oldest life expectancy

IRAs Payable to Trusts

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Separate Shares

IRA payable to multiple sub-trusts

Each trust named inbeneficiary designation form

IRA paid trust beneficiary’s life expectancy

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IRAs Payable to Trusts

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• Naming a separate trust as designated beneficiary is preferable to naming beneficiaries outright• Ensures that the client’s goals are carried out, including

maximum stretch out

• Provides only level of asset protection against beneficiaries creditors or upon divorce

• Keeps the assets under current advisor’s management!

• Examine on a case-by-case basis with input from all advisors

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Summary: The IRA “Legacy” Trust

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Questions?

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Feel free to contact me at

Jonathan.Mintz@AdvisorsForum.com

or (888) 659-4069 ext 800

Thank You!