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

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 To minimize income tax on distributions and

thereby maximize deferral Maximize use of Unified Credit (where needed) Charitable Planning

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

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

IRA Basics

IRAs are not taxed until distributedDistributions must begin no later than

one’s Required Beginning Date (RBD)IRA elections are required after death

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

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

Required Beginning Date- Example

RMD BasicsRMDs are calculated based upon prior

year ending account balance divided by life expectancy factor

Prior Year12/31 BalanceLife Expectancy Factor

RMD =

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

Life Expectancy

Owner Dies

Before RBD

Spouse may defer required distributions until the year the owner would have reached age 70 1/2. Thereafter, RMDs are calculated based upon spouse's life expectancy by referencing her attained age for the year of distribution based on the Single Life Table in A-1 of Treas. Reg. § 1.401(a)(9)-9. For each succeeding year, this process is repeated. (RECALC'D)

Owner Dies After RBD

RMD for year of death must be taken based upon decedent's life expectancy factor under the Uniform Lifetime Table. Thereafter, the applicable distribution period is longer of: (1) the surviving spouse’s life expectancy based on the Single Life Table using the surviving spouse’s birthday for each distribution calendar year after the calendar year of the employee's death up through the calendar year of the spouse’s death. For each succeeding year, this process is repeated (RECALC'D); or (2) the life expectancy of the deceased spouse under the Single Life Table using the age of the deceased spouse as of his or her birthday in the year of death, whereby in subsequent years, this factor is reduced by one.

Inherited Spousal Beneficiary

Death Before RBD

Entire balance must be distributed no later than December 31st of the fifth anniversary year of the decedent's death. However, consider (if possible) the potential to cash out non-individual beneficiaries, or segregate interests. PLR required.

Death After RBD

RMD must be taken for year of decedent's death based upon decedent's age in year of death based on the Uniform Lifetime Table in A-2 of Treas. Reg. § 1.401(a)(9)-9. For the first distribution year, determine factor by referencing the owner's age in year of death and reduce by one. This factor is then reduced by one for each succeeding year.

Non-Designated Beneficiary

Attained Age in year of distribution

Applicable Divisor under Final Regulations

Attained Age in year of distribution

Applicable Divisor under Final Regulations

70 27.4 93 9.6

71 26.5 94 9.1

72 25.6 95 8.6

73 24.7 96 8.1

74 23.8 97 7.6

75 22.9 98 7.1

76 22.0 99 6.7

77 21.2 100 6.3

78 20.3 101 5.9

79 19.5 102 5.5

80 18.7 103 5.2

81 17.9 104 4.9

82 17.1 105 4.5

83 16.3 106 4.2

84 15.5 107 3.9

85 14.8 108 3.7

86 14.1 109 3.4

87 13.4 110 3.1

88 12.7 111 2.9

89 12.0 112 2.6

90 11.4 113 2.4

91 10.8 114 2.192 10.2 115 and older 1.9

UNIFORM LIFETIME TABLE FOR DETERMINING FACTORLIFETIME DISTRIBUTIONS

Age Multiple Age Multiple Age Multiple

0 82.4 37 46.5 74 14.11 81.6 38 45.6 75 13.42 80.6 39 44.6 76 12.73 79.7 40 43.6 77 12.14 78.7 41 42.7 78 11.45 77.7 42 41.7 79 10.86 76.7 43 40.7 80 10.27 75.8 44 39.8 81 9.78 74.8 45 38.8 82 9.19 73.8 46 37.9 83 8.610 72.8 47 37.0 84 8.111 71.8 48 36.0 85 7.612 70.8 49 35.1 86 7.113 69.9 50 34.2 87 6.714 68.9 51 33.3 88 6.315 67.9 52 32.3 89 5.916 66.9 53 31.4 90 5.517 66.0 54 30.5 91 5.218 65.0 55 29.6 92 4.919 64.0 56 28.7 93 4.620 63.0 57 27.9 94 4.321 62.1 58 27.0 95 4.122 61.1 59 26.1 96 3.823 60.1 60 25.2 97 3.624 59.1 61 24.4 98 3.425 58.2 62 23.5 99 3.126 57.2 63 22.7 100 2.927 56.2 64 21.8 101 2.728 55.3 65 21.0 102 2.529 54.3 66 20.2 103 2.330 53.3 67 19.4 104 2.131 52.4 68 18.6 105 1.932 51.4 69 17.8 106 1.733 50.4 70 17.0 107 1.534 49.4 71 16.3 108 1.435 48.5 72 15.5 109 1.236 47.5 73 14.8 110 1.1

111 1.0

A-2 of Treas. Reg § 1.401(a)(9)-9

Single Life Table

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”

Designated Beneficiaries Qualifying “designated beneficiaries”:

• IndividualsSpouseChildGrandchildParentBrother/sisterNiece/NephewFriend

• Certain Trusts

Designated Beneficiaries Non-qualifying “designated beneficiaries”:

• Estates

• Charities

• Most Trusts

• Partnerships, LLC and corporations

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)

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

Life Expectancy Rule

Life Expectancy

Rule

Five-Year RuleFive-Year Rule

Death Death BeforeBefore Required Required Beginning DateBeginning Date

Death Death On or AfterOn or After Required Required Beginning DateBeginning Date

Designated Designated BeneficiaryBeneficiary

Non-Non-Designated Designated BeneficiaryBeneficiary

Owner’s Owner’s “Ghost” Life “Ghost” Life Expectancy Expectancy

RuleRule

RMDs_______________________________________

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

Spousal Rollover

Spousal rollover where spouse is “sole beneficiary”

• Rollover may occur at any timeNon-spousal rollovers

• Not permitted

• But, direct transfers are permitted

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

Critical Dates

• ““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)

9/30 Determination Date

• Jane names a charity (10%) and a trust (90%) as Jane names a charity (10%) and a trust (90%) as beneficiary of her IRA. The trust is payable to her beneficiary of her IRA. The trust is payable to her children over their lifetimes. children over their lifetimes.

• If the charity’s 10% is paid out by September 30If the charity’s 10% is paid out by September 30 thth of of the year following the year of Jane’s death, the the year following the year of Jane’s death, the charity’s interest will not taint the distribution to the charity’s interest will not taint the distribution to the children through the trust (which will be payable over children through the trust (which will be payable over the lifetime of the oldest child).the lifetime of the oldest child).

9/30 Determination DateExample 1

• John names his sister as primary beneficiary of his John names his sister as primary beneficiary of his IRA and his nephew as contingent beneficiary. IRA and his nephew as contingent beneficiary.

• If John’s sister dies before September 30If John’s sister dies before September 30 thth of the of the year following the year of John’s death without year following the year of John’s death without

performing a qualified disclaimer, RMDs are still performing a qualified disclaimer, RMDs are still calculated based on the sister’s life expectancy.calculated based on the sister’s life expectancy.


• John names his wife as primary beneficiary of his John names his wife as primary beneficiary of his IRA and his grandchild as contingent beneficiary. IRA and his grandchild as contingent beneficiary.

• If John’s wife performs a qualified disclaimer by If John’s wife performs a qualified disclaimer by September 30th of the year following the year of September 30th of the year following the year of John’s death, RMDs can be calculated based on the John’s death, RMDs can be calculated based on the grandchild’s life expectancy.grandchild’s life expectancy.


Contingent beneficiaries Trust as beneficiary Second marriage issues Creditor protection issues Charitable bequests

Weaving the IRA BeneficiaryDesignation Form into the Overall Plan

“Inherited IRA”

“Inherited IRA”IRA Distribution Flowchart

Yes Yes Yes

No No No Yes No

Yes No Yes No

Is there more than one beneficiary?

Trust

Charity

Estate

Child or grandchild

by disclaimer

Child or grandchild

Is the trust a designated beneficiary?

See PLRs 200228025 and 200235039.

Life expectancy

of each beneficiary

Life expectancy

of oldest beneficiary

Did you create separate accounts by Dec. 31st of year following the year of

death?

Did owner die before

RBD?

Remaining life

expectancy of decedent as of death based on Single Life

Table

Five-year

rule

Were separate shares

created?

Possible life expectancy of each beneficiary if separate trust share is in existence on the date that a person dies and the BDF specifically

names each separate share as beneficiary.

See PLR 200537044

Life expectancy

of oldest beneficiary

Need to separate accounts by Dec. 31st

of year following the year of death and

follow chart

Is the IRA owner living?

Spouse

Rollover or inherited

IRA?

Trust by disclaimer

Is the spouse the “sole

beneficiary”?

Is the spouse more than 10 years

younger than IRA participant?

Calculate using Joint and Last Survivor Table

Calculate using Uniform Lifetime

Table

Calculate using Uniform Lifetime

Table

Rollover (take RMD, if applicable, then go to step one treating

survivor as new owner)

Inherited IRA

Yes

No

Yes No

OR the owner’s life expectancy if the owner is younger than the oldest trust beneficiary

SPECIAL NOTE Pursuant to §829 of the Pension Protection Act of 2006, beginning in tax years after December 31, 2006, non-spousal qualified retirement plan beneficiaries (e.g. children, siblings, friends, etc.) will be permitted to make trustee-to-trustee transfers from qualified retirement plans to Inherited IRAs.

“Inherited IRA”

Objective: Prolong IRA payments over longest possible period of time, thus increasing wealth to future generations

“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

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

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

Spousal BeneficiarySpousal BeneficiaryRolloverRollover

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

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

Child orGrandchild Beneficiary

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)

Pension Protection Pension Protection Act of 2006Act of 2006

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

Key Issues

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

Common MistakesCommon Mistakes

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

IRAs Payable to Trusts - Basic

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

Disadvantages of Utilizing a Trust

Trust Income Tax RatesLegal and Trustee FeesTrust Income Tax Returns

• 1041

• 1099

• K-1Greater Complexity

Naming a Trust as a “Designated Beneficiary”

IRA distributions over the life expectancy of the oldest beneficiary

An IRA Can Be Payable to a Trust

Trust

IRABeneficiary Designation Form

Spouse

Children

Four Requirements for ALL Trusts

• Trust is valid under state lawTrust is valid under state law− Treas. Reg. Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(1)§ 1.401(a)(9)-4, Q&A 5(b)(1)

• Trust is irrevocable upon death of ownerTrust is irrevocable upon death of owner− Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(2)Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(2)

• Beneficiaries of the trust are identifiable Beneficiaries of the trust are identifiable from the trust instrumentfrom the trust instrument

− Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(3)Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(3)

• Documentation requirement is satisfiedDocumentation requirement is satisfied− Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(4)Treas. Reg. § 1.401(a)(9)-4, Q&A 5(b)(4)

Types of Testamentary Trusts

• Unified Credit Trust

• Marital Trust

• QTIP Trust

• Trust for single individual

• Trust for multiple individuals

• Generation Skipping Trusts

Types of Inter Vivos Trusts

• Revocable Trust

• Standalone IRA Trust

Two Types of Trusts

• Accumulation Trusts

• Conduit Trusts

• Treas. Reg. § 1.401(a)(9)-4, Q&A 5 requirements apply to both types

Accumulation Trust

A trust in which distributions

from the IRA are allowed

to accumulate within the trust

Conduit Trust

A trust in which all distributions from

the IRA are immediately distributed

to the trust beneficiary(ies)

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

Accumulation Trust

Mother – Age 80

Trust

Discretionary Distributions

Entire Trust outright upon Grandchildren reaching age 30

If Grandchildren die before reaching age 40

Mother is “countable” for determining applicable life expectancy

See PLR 200228025 and Treas. Reg. § 1.401(a)(9)-5 Q&A 7

Child – age 30

Child – age 30

IRA

Example #1Example #1

IRA

SisterAge 67

Grandchildren

Trust

Discretionary Distributions

Grandchildren



Accumulation Trust

Sister measuring life for determining required minimum distributions

Facts same as PLR 200228025


Accumulation Trust

Trust

To Red Cross

Child #1Discretionary Distributions

At Child #1’s death Contingent beneficiary must be counted.

Non-individual contingent beneficiary.

No designated beneficiary status.

IRA

Accumulation Trust Example #3Example #3

QTIPTrust

Issue of IRA owner in such a manner (in trust or otherwise) as the surviving

spouse appoints by will.

SpouseAll income

At spouse’s death

Contingent beneficiaries must be counted.

Possible non-individual contingent beneficiaries.

General Power of Appointment disqualifies accumulation trust.

IRA

Example #4Example #4Accumulation Trust

Conduit Trust

• Allows for easier identification of beneficiaries

• Do not have to consider contingent or remote beneficiaries

Conduit Trust

MotherAge 80

Trust

Discretionary Distributions, but no less than total withdrawals from IRA



Mother is not “countable” for determining applicable life expectancy

Treas. Reg. § 1.401(a)(9)-5 Q&A 7

Child – age 30

Child – age 30

IRA


Trust

To Red Cross

Child #1All distributionsfrom IRA

At Child #1’s death

See Treas. Reg. § 1.401(a)(9)-5 Q&A 7

IRA

Conduit TrustExample #2Example #2

•As all distributions from the IRA are required to be distributed to the beneficiary; if Child #1 lives to his or her life expectancy, the entire IRA will be distributed to Child #1.

•Therefore, Child #1 is the only “countable” beneficiary and the Red Cross can be ignored

Conduit TrustExample #2

Trust

To my lineal descendants as

appointed by Child #1 in his/her last will and

testament

Child #1

All distributionsfrom IRA

At Child #1’s death

IRA

Conduit TrustExample #3Example #3

• Lineal descendants can be ignored Lineal descendants can be ignored because all distributions are paid because all distributions are paid through the trust to Child #1through the trust to Child #1

• Where a conduit trust is used, potential appointees under a power of appointment can be ignored


Conduit Trust

QTIPTrust

Issue of IRA owner in such a manner (in trust or otherwise) as the surviving

spouse appoints by will.

Spouse

Greater of RMD or all income

At spouse’s death

IRA



• The QTIP trust is designed as requiring The QTIP trust is designed as requiring the “greater of income or RMD” be the “greater of income or RMD” be distributed. Additional distributions may distributed. Additional distributions may occur and be trapped inside the trust, occur and be trapped inside the trust, therefore, the trust is therefore, the trust is notnot a conduit trust a conduit trust but rather must be tested as a lifetime but rather must be tested as a lifetime distribution trust. distribution trust.

•Better language : “Greater of income or Better language : “Greater of income or total total withdrawalswithdrawals from IRA” from IRA”

IRAs Payable to Trusts - Advanced

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

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

Standard Issues With Naming a Revocable Living Trust

as a “Designated Beneficiary”

Revocable Living Trust as “Designated Beneficiary”

Revocable trust should use a fractional funding clause to determine the marital and bypass shares

IRAs Payable to TrustsCommon Mistakes

Older or unidentifiable contingent beneficiary Estate as contingent beneficiary Powers of appointment Failure of beneficiaries clause Failure to provide trust document to custodian by October 31 of year following year of death Making lump sum distribution to trust

Separate Share Rule

In proper circumstances, the IRS allows the division of the IRA into separate shares for each beneficiary

In the case of an individual beneficiary, this must be determined by December 31 of the year following the year of death• Separate shares established when divided

No separate shares available for estates Disclaimer rule Death by September 30

Separate Share Rule

Payable to single trust

No separate shares identified in the beneficiary designation form

IRA paid over oldest life expectancy

Separate Share Rule

IRA payable to multiple trusts

Each trust named in beneficiary designation form

IRA divided into separate shares and each share paid to each trust over oldest beneficiary’s life

expectancy of each trust

Where a charity is named as one of many beneficiaries, must pay out charity by September 30

Must divide IRA by December 31

Charity as Beneficiary

Disclaimer Planning for IRAs

Disclaimer Planning

Disclaimer must be “qualified.”• In writing

• Within 9 months

• No acceptance of the interest or any of its benefits,

• Interest passes without any direction on the part of the person making the disclaimer

Disclaimer Planning - Example Alex dies at age 70. Alex’s wife disclaims amount of Alex’s unified credit to bypass trust for benefit of herself and their children

• Disclaimer must occur within nine months from date of death

• Disclaimer must be served on the IRA custodian

• Disclaimer must be fractional to avoid immediate income taxation

Disclaimer Planning

IRA

Spouse

Disclaimer must be Qualified Disclaimer

Life Expectancy of Oldest Beneficiary of Trust

Trust FBO Children

Spouse Disclaims

Disclaimer Planning

IRA

IRA LEGACY Trust

F/B/O SPOUSEand CHILDREN

Contingent = MotherAge 88

DB Status – Trust is Irrevocable

No Separate Share Treatment

Life Expectancy of Oldest Beneficiary

Mother and Spouse Disclaim 100%

Oldest Child is DB

Disclaimer Planning

IRA

Children in same fashion as provided

under the Family Trust as if spouse

had died

Life Expectancy of Oldest Beneficiary of Family Trust = Spouse

Third Contingent Beneficiary – If spouse disclaims IRA and Benefit under First and Second Contingent Beneficiary

Primary Beneficiary

First Contingent Beneficiary – If spouse disclaimed IRA as Primary Beneficiary

Second Contingent Beneficiary – If spouse disclaimed IRA and Benefit under First Contingent Beneficiary

Spouse

Marital Deduction Trust

Family Trust

Fractional Disclaimer

Disclaimer

Revenue Ruling 2005-36

A beneficiary's disclaimer of a beneficial interest in a decedent's IRA is a qualified disclaimer even though, prior to making the disclaimer, the beneficiary receives the required minimum distribution for the year of the decedent's death from the IRA.

Marital Planning for IRAs

Spousal Rollover Planning Through Estate

Estate

Spouse sole residuary

beneficiary

Surviving spouse is executor

PLR 200644031

IRA

Spousal Rollover Planning Through Trust

Rev. Trust

SpouseTrustee of GPA Trust

Spouse is trustee vested with power to allocate assets among trusts.

PLR 199942052

Rollover Allowed

Marital Trust GPA

Credit Shelter Trust

IRA


Estate of IRA owner

Spouse is sole trustee

Surviving spouse is sole executor

Pour over will

Revocable Trust

All to spouse unless disclaimed

IRA

Spousal RolloverPlanning Through Trust

Trust

GPA vested in spouse

Spouse and sons co-trustees; only spouse has right to allocate assets

PLR 9851049

Rollover Allowed

Marital Trust Credit Shelter Trust

IRA


TrustNon-spouse trustees

PLRs 9145041 & 9303031

Rollover Not Allowed

GPA Marital Credit Shelter Trust

Formula Funding

IRA


Estate

By will

See PLRs 9401039, 9450041 and 9820010

Rollovers Allowed

Credit Shelter

Spouse and issue disclaim interest in credit shelter trust and allow IRA to be payable to spouse by intestate succession.

IRA

Roth IRAs

Roth IRAs

100% of growth is tax-exempt No required minimum distributions at age 70½ $100,000 Modified Adjusted Gross Income

(MAGI) limitation RMDs on Inherited Roth IRAs Roth 401(k) plans

Roth IRAs

Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer applies• The tax incurred on a Roth IRA conversion in 2010

may be spread over the following two tax years (i.e. 2011 and 2012)

Married Filing Separately taxpayers can convert to a Roth IRA

(1) Taxpayers have special favorable tax attributes including charitable deduction carry-forwards, investment tax credits, etc. (2) Suspension of the minimum distribution rules at age 70½ provides a considerable advantage to the Roth IRA holder. (3) Taxpayers benefit from paying income tax before estate tax (when a Roth

IRA election is made) compared to the income tax deduction obtained when a traditional IRA is subject to estate tax.

(4) Taxpayers who can pay the income tax on the IRA from non IRA funds benefit greatly from the Roth IRA because of the ability to enjoy greater tax-free yields.

(5) Taxpayers who need to use IRA assets to fund their $2,000,000 unified credit bypass trust are well advised to consider making a Roth IRA election for that portion of their overall IRA funds.

(6) Taxpayers making the Roth IRA election during their lifetime reduce their overall estate, thereby lowering the effect of higher estate tax rates.

(7) Because federal tax brackets are more favorable for married couples filing joint returns than for single individuals, Roth IRA distributions won’t cause an increase in tax rates for the surviving spouse when one spouse is deceased because the distributions are tax-free.

Seven Reasons to Convert to a Roth IRA

Roth IRA Conversions- Tactical Considerations

Utilize unused charitable contribution carryovers

Offset current year ordinary losses Utilize current year Net Operating Losses

(NOL) or carryovers from prior years Utilize Alternative Minimum Tax (AMT)

carryovers

Taxpayers may recharacterize (i.e. “undo”) the Roth IRA conversion in current year or by the filing date of the current year’s tax return

- Recharacterization can take place as late as 10/15 in the year following the year of conversion

Taxpayers may choose to “reconvert” their recharacterization- Reconversion may only take place at the later of the following two dates:

(1) The tax year following the original conversion OR(2) 30 days after the recharacterization

Roth IRA Conversions- Tactical Considerations

Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value

(IRS Notice 2000-39)

All gains and losses to the entire Roth IRA, regardless of the actual stock or fund re-characterized, must be pro-rated

Roth IRA ConversionDilemma

On January 2, 2006, when John Smith’s IRA was worth $500,000, he converted the entire amount to a Roth IRA. John will owe ordinary income tax on the entire $500,000. The IRA consisted of 50% ABC Fund ($250,000) and 50% YYZ Fund ($250,000). As of April 15th, 2007 the ABC fund had declined in value to $125,000, while the YYZ fund had increased in value to $275,000. Thus, the total value of the IRA account declined in value to $400,000.

Even though John would like to re-characterize all of his ABC fund and leave the YYZ fund in his Roth IRA, he must allocate the total loss to each fund pro-ratably. As a result of this loss allocation, John may only

recharacterize $156,250 (31.25% * $500,000) instead of $250,000.

Roth IRA ConversionDilemma – Example

Other IRA Planning Issues

Other IRA Planning Issues

Estate tax exclusion QTIP-IRA Planning Income in Respect to a Decedent (IRD) / IRC

§691(c) deduction Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 Charitable Remainder Trust (CRT) Traps for the unwary

Traps for the Unwary

Prohibited IRA investments Prohibited transactions Unrelated Business Taxable Income (UBTI) 60 Day Rollover Period IRC §72(t) Excess Accumulations Tax Pecuniary bequests to charity

Prohibited Transactions

Any direct or indirect sale or exchange,

or leasing, of any property between a plan and a “disqualified person”.

• Residence or cottage

• Business interest

• Investment real estate

Section 72(t)

10-percent penalty for early withdrawals from IRAs and qualified plans Technically, the 10-percent is not a

penalty; rather, it is an additional tax. Therefore, there is no excuse for reasonable cause. The code section itself provides all the exceptions to the tax.

Exceptions to the Penalty

Death Disability Medical expenses that exceed 7.5

percent of income Age 55 or older in year of separation

from service (not applicable to IRAs)

Exceptions to the Penalty

Qualified higher education expenses (IRAs only)

First time home purchase, limited to $10,000 lifetime (IRAs only)

Payment of health insurance by unemployed individuals

Series of Substantially Equal Periodic Payments (SEPPs)

Series of Substantially Equal Periodic Payments (SEPPs)

Required Minimum Distribution (RMD) method

Fixed amortization method Fixed annuitization method

Series of Substantially Equal Periodic Payments

Payments must continue under the LATER of age 59½ or five years

If payments are substantially modified prior to that point, the 10-percent additional tax will be imposed on all pre-59½ withdrawals

In addition to the 10-percent additional tax, an additional amount is added to reflect the interest on the penalty from the original year of withdrawal

Revenue Ruling 2002-62

One-time election to switch to RMD method No 10% additional tax if funds run out before end of series Annual recalculation under annuity or amortization method is

no longer available New prescribed “reasonable” interest rate must be used

• 120% of the mid-term AFR (by reference to the two months preceding the first distribution month)

Three possible life expectancy tables• Single life table

• Joint life table

• Uniform Lifetime table

Excess AccumulationPenalty Requesting a Waiver

Under IRC § 4974(d), the tax may be waived if the taxpayers can establish that the shortfall in distributions was due to reasonable error and reasonable steps are being taken to remedy the shortfall. An accumulation occurs because of “reasonable error" when it occurs through no fault of the plan participant.

Complete Form 5329

Attach letter requesting waiver

Charitable Bequests

Pecuniary bequest to charitable beneficiary

Acceleration of income

No 642(c) deduction - terms of trust did not direct or require that the trustee pay the pecuniary legacies from the trust's gross income.

Charitable Bequests

Using fractional funding clause

Name charities as beneficiaries directly in beneficiary designation form

Use language in trust directing or requiring the trustee to pay the pecuniary legacies from the trust's gross income

Gary AltmanAltman & Associates11300 Rockville Pike

Suite 605Rockville, Maryland 20852

(301) 468-3220

[email protected]

www.altmanassociates.net

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

Documents

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