© robert s. keebler, cpa, mst [email protected] (920)490-5626 1 iras & other qualified...

11 © Robert S. Keebler, CPA, [email protected](920)490-5626

IRAs & Other Qualified PlansIRAs & Other Qualified PlansPayable to TrustsPayable to Trusts

Presented by:Presented by:Robert S. Keebler, CPA, MSTRobert S. Keebler, CPA, MSTVirchow, Krause & Company, LLPVirchow, Krause & Company, LLP1400 Lombardi Avenue1400 Lombardi AvenueSuite 200Suite 200Green Bay, WI 54304Green Bay, WI [email protected]@virchowkrause.com


Potential tax exposure to IRA without planning

Federal & State Estate Tax, 50.00%

Income Tax, 21.00%

Net to Family 29.00%

Why Retirement Distribution Why Retirement Distribution Planning is ImportantPlanning is Important


• Maximize use of Unified Credit (where Maximize use of Unified Credit (where needed)needed)

• Coordinate estate plan under will or Coordinate estate plan under will or revocable trustrevocable trust

• Generally, the IRA or qualified plan is the Generally, the IRA or qualified plan is the largest asset of the estate largest asset of the estate

• To minimize income tax on distributions To minimize income tax on distributions and thereby maximize deferraland thereby maximize deferral



• Fluctuation in asset valueFluctuation in asset value

• Increase in the applicable exclusion Increase in the applicable exclusion amount under EGTRRAamount under EGTRRA

• Fixed State applicable exclusion amountFixed State applicable exclusion amount

• Perceived need of surviving spousePerceived need of surviving spouse

• Tax apportionmentTax apportionment



IRA PlanningIRA Planning


Foundation ConceptsFoundation Concepts

• IRAs are not taxed until distributedIRAs are not taxed until distributed

• Distributions must begin no later than Distributions must begin no later than one’s Required Beginning Date one’s Required Beginning Date (RBD)(RBD)

• IRA Elections are Required After IRA Elections are Required After DeathDeath



• Generally, April 1 of the year following Generally, April 1 of the year following the year the owner turns age 70½ is the year the owner turns age 70½ is the RBDthe RBD

• Once at RBD, required minimum Once at RBD, required minimum distributions (RMD) must begindistributions (RMD) must begin



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

Prior Year12/31 BalanceLife Expectancy Factor

RMD =


• Life expectancy tablesLife expectancy tables– Uniform Lifetime TableUniform Lifetime Table– Single Life TableSingle Life Table– Joint and Last Survivor TableJoint and Last Survivor Table

• Available where the spouse is the sole Available where the spouse is the sole beneficiary and is greater than 10 years younger beneficiary and is greater than 10 years younger than the account ownerthan the account owner




• Single Life TableSingle Life TableAge 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


Foundation ConceptsFoundation Concepts• Post-death RMDs based on whether Post-death RMDs based on whether

“designated beneficiary” exists“designated beneficiary” exists– Only “individuals” with quantifiable life Only “individuals” with quantifiable life

expectancy can be “designated beneficiaries”expectancy can be “designated beneficiaries”– If trust qualifies, look through to underlying If trust qualifies, look through to underlying

trust beneficiariestrust beneficiaries• Distribution out of trust to beneficiary Distribution out of trust to beneficiary does does

notnot make the beneficiary the “designated make the beneficiary the “designated beneficiary”beneficiary”


Foundation ConceptsFoundation Concepts• Permissible “designated beneficiaries”:Permissible “designated beneficiaries”:

– IndividualsIndividualsSpouseSpouseChildChildGrandchildGrandchildParentParentBrother/sisterBrother/sisterNiece/NephewNiece/NephewNeighborNeighbor

− Certain TrustsCertain Trusts


Foundation ConceptsFoundation Concepts• Non-permissible “designated beneficiaries”:Non-permissible “designated beneficiaries”:

– EstatesEstates− Charities Charities − Most TrustsMost Trusts


Foundation ConceptsFoundation Concepts• Death before age 70½Death before age 70½

– Five-year ruleFive-year rule– Exceptions to the five-year ruleExceptions to the five-year rule– Delayed distributions – spousal beneficiaryDelayed distributions – spousal beneficiary

• Death after age 70½Death after age 70½– Life expectancy distributions if you have a designated beneficiaryLife expectancy distributions if you have a designated beneficiary

– Distributions must begin by December 31st of the year after deathDistributions must begin by December 31st of the year after death

– Year of death distribution – life expectancy of IRA ownerYear of death distribution – life expectancy of IRA owner


Life Expectancy Life Expectancy RuleRule

Life Expectancy Life Expectancy

RuleRule

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

““Ghost” Life Ghost” Life Expectancy Expectancy

RuleRule




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



• Spousal rollover where spouse is Spousal rollover where spouse is “sole beneficiary”“sole beneficiary”

– Rollover may occur at any timeRollover may occur at any time

• Rollover from trustsRollover from trusts

• Rollover from estatesRollover from estates


Critical dates:Critical dates:• September 30September 30 of the year following the year of death of the year following the year of death

– Date at which the beneficiaries are identifiedDate at which the beneficiaries are identified

• October 31October 31 of the year following the year of death of the year following the year of death– Date at which trust documentation (in the case where as Date at which trust documentation (in the case where as

trust is named as a designated beneficiary) must be filed trust is named as a designated beneficiary) must be filed

• December 31December 31 of the year following the year of death of the year following the year of death– Date at which the first distribution must be made by each Date at which the first distribution must be made by each

IRA beneficiaryIRA beneficiary– Date at which separate shares must be createdDate at which separate shares must be created



““Inherited IRA”Inherited IRA”

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



• An IRA is treated as “inherited” if the An IRA is treated as “inherited” if the individual for whose benefit the IRA is individual for whose benefit the IRA is maintained acquired the IRA on maintained acquired the IRA on account of the death of the original account of the death of the original owner.owner.

• Under the tax law the IRA assets can be Under the tax law the IRA assets can be distributed based upon the life distributed based upon the life expectancy of the beneficiary.expectancy of the beneficiary.


““Inherited IRA”Inherited IRA”• Two StrategiesTwo Strategies

– Spousal RolloverSpousal Rollover– Inherited IRAInherited IRA

• Advantages Advantages – Rollover delays RMD until spouse’s own Rollover delays RMD until spouse’s own

RBDRBD– Inherited IRA provisions allow Inherited IRA provisions allow

beneficiary’s life expectancy to be used beneficiary’s life expectancy to be used for distributions after death of IRA ownerfor distributions after death of IRA owner


• Marital deduction should be availableMarital deduction should be available• Typically the defaultTypically the default• If no rollover is chosen, then the life expectancy If no rollover is chosen, then the life expectancy

factor of spouse is used by reference to the factor of spouse is used by reference to the Single Life Table beginning in the year the IRA Single Life Table beginning in the year the IRA owner would have turned age 70owner would have turned age 70½. Each year ½. Each year thereafter the life expectancy divisor is thereafter the life expectancy divisor is recalculated by referencing the Single Life Table.recalculated by referencing the Single Life Table.

““Inherited IRA”Inherited IRA”Spousal Beneficiary


• Exception to Inherited IRA rules.Exception to Inherited IRA rules.• Only available to surviving spouse.Only available to surviving spouse.• Allows spouse to roll over assets received Allows spouse to roll over assets received

as beneficiary to a new IRA in his/her own as beneficiary to a new IRA in his/her own name.name.

• Spouse’s age used to determine when Spouse’s age used to determine when required minimum distributions must begin.required minimum distributions must begin.

• Spouse may use the Uniform Lifetime Table Spouse may use the Uniform Lifetime Table to determine distributions.to determine distributions.

““Inherited IRA”Inherited IRA”Spousal Beneficiary - Rollover


• Utilizes the exemption to the five year Utilizes the exemption to the five year rule.rule.

• Avoids IRA assets being subject to Avoids IRA assets being subject to estate tax in spouse’s estate.estate tax in spouse’s estate.

• Achieves Achieves ““Inherited IRAInherited IRA” ” to the degree to the degree that distributions occur over life that distributions occur over life expectancy of the designated expectancy of the designated beneficiary.beneficiary.

““Inherited IRA”Inherited IRA”Child / Grandchild Beneficiary


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

““Inherited IRA”Inherited IRA”Child / Grandchild Beneficiary


• Beneficiary Designation FormsBeneficiary Designation Forms

• Tax ApportionmentTax Apportionment

• Irrevocable Life Insurance Trust (ILIT)Irrevocable Life Insurance Trust (ILIT)

““Inherited IRA”Inherited IRA”Key Issues in Making the “Inherited IRA” Work


• Step One – IRA Owner creates Irrevocable Life Insurance Trust (ILIT)Step One – IRA Owner creates Irrevocable Life Insurance Trust (ILIT)• Step Two – IRA Owner’s deathStep Two – IRA Owner’s death• Step Three – Surviving Spouse performs an IRA rolloverStep Three – Surviving Spouse performs an IRA rollover• Step Four – Surviving Spouse names children (and/or grandchildren) Step Four – Surviving Spouse names children (and/or grandchildren) beneficiaries of the IRA 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 dueTax 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 Step Five – Surviving Spouse takes payments over his/her life expectancy expectancy • Step Six – Surviving Spouse’s death Step Six – Surviving Spouse’s death • Step Seven – Payment of estate taxes of Surviving SpouseStep 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 ILITEstate 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 Step Eight – Divide Surviving Spouse’s IRA into separate shares for each child (and/or grandchildren) child (and/or grandchildren) • Step Nine – Payments made over each beneficiary’s life expectancy Step Nine – Payments made over each beneficiary’s life expectancy

““Inherited IRA”Inherited IRA”Example


““Inherited IRA”Inherited IRA”Spousal Beneficiary – No Rollover

Surviving Spouse's

Age YearBeginning

IRA Balance Life Exp.Required

Distribution Growth @Ending IRA

Balance8.00%

72 2005 1,000,000$ 20.3 (49,261)$ 76,059$ 1,026,798$ 76 2009 1,036,914$ 12.7 (81,647)$ 76,421$ 1,031,689$ 81 2014 961,390$ 9.7 (99,112)$ 68,982$ 931,260$ 86 2019 758,627$ 7.1 (106,849)$ 52,142$ 703,921$ 91 2024 465,745$ 5.2 (89,566)$ 30,094$ 406,273$ 96 2029 199,779$ 3.8 (52,573)$ 11,776$ 158,982$ 101 2034 48,939$ 2.7 (18,126)$ 2,465$ 33,279$ 106 2039 3,810$ 1.7 (2,241)$ 125$ 1,694$ 111 2044 3$ 1.0 (3)$ -$ -$


““Inherited IRA”Inherited IRA”Spousal Beneficiary - Rollover

Surviving Spouse's

Age YearBeginning

IRA Balance Life Exp.Required

Distribution Growth @Ending IRA

Balance8.00%

72 2005 1,000,000$ 20.3 (49,261)$ 76,059$ 1,026,798$ 76 2009 1,137,036$ 22.0 (51,683)$ 86,828$ 1,172,181$ 81 2014 1,297,284$ 17.9 (72,474)$ 97,985$ 1,322,795$ 86 2019 1,387,314$ 14.1 (98,391)$ 103,114$ 1,392,037$ 91 2024 1,350,159$ 10.8 (125,015)$ 98,012$ 1,323,155$ 96 2029 1,144,141$ 8.1 (141,252)$ 80,231$ 1,083,120$ 101 2034 786,881$ 5.9 (133,370)$ 52,281$ 705,792$ 106 2039 392,818$ 4.2 (93,528)$ 23,943$ 323,233$ 111 2044 114,103$ 2.9 (39,346)$ 5,981$ 80,738$


““Inherited IRA”Inherited IRA”Child Beneficiary

Beneficiary's Age Year

Beginning IRA Balance Life Exp.

Required Distribution Growth @

Ending IRA Balance

8.00%50 2005 1,000,000$ 20.3 (49,261)$ 76,059$ 1,026,798$ 54 2009 1,176,941$ 30.3 (38,843)$ 91,048$ 1,229,146$ 59 2014 1,443,947$ 25.3 (57,073)$ 110,950$ 1,497,824$ 64 2019 1,702,337$ 20.3 (83,859)$ 129,478$ 1,747,957$ 69 2024 1,885,210$ 15.3 (123,216)$ 140,960$ 1,902,954$ 74 2029 1,864,766$ 10.3 (181,045)$ 134,698$ 1,818,419$ 79 2034 1,409,879$ 5.3 (266,015)$ 91,509$ 1,235,373$ 84 2039 117,259$ 1.0 (117,259)$ -$ -$ 89 2044 -$ 1.0 -$ -$ -$


““Inherited IRA”Inherited IRA”Grandchild Beneficiary

Beneficiary's Age Year

Beginning IRA Balance Life Exp.

Required Distribution Growth @

Ending IRA Balance

8.00%

20 2005 1,000,000$ 20.3 (49,261)$ 76,059$ 1,026,798$ 24 2009 1,230,983$ 59.1 (20,829)$ 96,812$ 1,306,967$ 29 2014 1,655,697$ 54.1 (30,604)$ 130,007$ 1,755,100$ 34 2019 2,207,922$ 49.1 (44,968)$ 173,036$ 2,335,991$ 39 2024 2,913,799$ 44.1 (66,073)$ 227,818$ 3,075,545$ 44 2029 3,795,916$ 39.1 (97,082)$ 295,907$ 3,994,740$ 49 2034 4,864,217$ 34.1 (142,646)$ 377,726$ 5,099,297$ 54 2039 6,099,164$ 29.1 (209,593)$ 471,166$ 6,360,737$


FACTS:IRA Value $1,000,000Decedent’s Age 78Surviving Spouse’s Age 72Oldest Child’s Age 50Youngest Grandchild’s Age 20


Immediate Distribution

IRA Payable to Non-Qualified Beneficiary

IRA Payable to Surviving Spouse (No

Spousal Rollover)

IRA Payable to Surviving

Spouse (Spousal Rollover)

IRA Payable to Child

IRA Payable to Grandchild

1 2005 646,229$ 654,202$ 654,202$ 654,202$ 654,202$ 654,202$ 5 2009 834,992$ 877,560$ 880,779$ 883,540$ 884,641$ 886,133$ 10 2014 1,150,277$ 1,234,120$ 1,256,987$ 1,273,128$ 1,279,961$ 1,289,617$ 15 2019 1,584,610$ 1,700,967$ 1,767,522$ 1,814,631$ 1,836,178$ 1,868,594$ 20 2024 2,182,943$ 2,343,235$ 2,458,603$ 2,560,351$ 2,611,457$ 2,695,877$ 25 2029 3,007,202$ 3,228,018$ 3,398,277$ 3,580,246$ 3,680,941$ 3,872,823$ 30 2034 4,142,692$ 4,446,886$ 4,684,842$ 4,970,814$ 5,139,044$ 5,539,648$ 35 2039 5,706,932$ 6,125,987$ 6,454,243$ 6,869,012$ 7,102,147$ 7,888,990$ 40 2044 7,861,814$ 8,439,100$ 8,891,311$ 9,470,162$ 9,783,849$ 11,183,398$

Year

Comparison



Net Wealth to Family

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

Year

Immediate Distribution IRA Payable to Non-Qualified BeneficiaryIRA Payable to Surviving Spouse (No Spousal Rollover) IRA Payable to Surviving Spouse (Spousal Rollover)

IRA Payable to Child IRA Payable to Grandchild


Naming a Trust as a Naming a Trust as a “Designated Beneficiary”“Designated Beneficiary”

IRA distributions over IRA distributions over the life expectancy of the life expectancy of the oldest beneficiarythe oldest beneficiary

An IRA Can Be Payable to a Trust An IRA Can Be Payable to a Trust

Trust

IRABeneficiary Designation Form

Spouse

Children


Standard Issues With Naming Standard Issues With Naming a Revocable Living Trust as a a Revocable Living Trust as a

“Designated Beneficiary”“Designated Beneficiary”• The need for proper apportionment language The need for proper apportionment language

regarding payment of debts, expenses and taxes regarding payment of debts, expenses and taxes of estate (See PLR 9820021)of estate (See PLR 9820021)

• Recognition of income in respect of a decedent Recognition of income in respect of a decedent (IRD) if pecuniary funding clause is utilized(IRD) if pecuniary funding clause is utilized

• Unanticipated loss of designated beneficiary due Unanticipated loss of designated beneficiary due to the inclusion of power of appointment (general to the inclusion of power of appointment (general or limited)or limited)

• Solution – Stand alone IRA trust such as IRA Solution – Stand alone IRA trust such as IRA legacy trustlegacy trust


• Fractional v. Pecuniary clausesFractional v. Pecuniary clauses– Recognition of incomeRecognition of income

• Entire trust irrevocable at death of IRA ownerEntire trust irrevocable at death of IRA owner• No separate share treatmentNo separate share treatment• Payment of debts, taxes, and expensesPayment of debts, taxes, and expenses

– Apportionment languageApportionment language– Firewall provisionFirewall provision

• Powers of appointmentPowers of appointment• Stand alone trust – highly recommendedStand alone trust – highly recommended• Adoption of older individualsAdoption of older individuals

Standard Issues With Naming Standard Issues With Naming a Revocable Living Trust as a a Revocable Living Trust as a

“Designated Beneficiary”“Designated Beneficiary”


Revocable Living Trust as Revocable Living Trust as “Designated Beneficiary”“Designated Beneficiary”

• Revocable trust should use a fractional Revocable trust should use a fractional funding clause to determine the marital funding clause to determine the marital and bypass sharesand bypass shares– PLRs in which pecuniary funding clause PLRs in which pecuniary funding clause

utilized and no IRD acceleration issue (PLRs utilized and no IRD acceleration issue (PLRs 199912040, 9808043, 9744024)199912040, 9808043, 9744024)


Pecuniary ClausePecuniary Clause• The Marital Share shall consist of assets in a pecuniary amount The Marital Share shall consist of assets in a pecuniary amount

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


The Marital Share shall consist of that fractional share of the trust The Marital Share shall consist of that fractional share of the trust estate which shall be determined as follows:estate which shall be determined as follows:

(a)(a) The numeration of the fraction shall be the smallest amount which, The numeration of the fraction shall be the smallest amount which, after taking into account all other property included in the Settlor’s after taking into account all other property included in the Settlor’s gross estate for federal estate tax purposes which qualifies for the gross estate for federal estate tax purposes which qualifies for the federal estate tax marital deduction and which passes or has federal estate tax marital deduction and which passes or has passed to the Settlor’s wife under this instrument or in any other 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 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 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 least federal estate tax payable by the Settlor’s estate. In determining “federal estate tax payable”, all credits and deductions determining “federal estate tax payable”, all credits and deductions against that tax shall be taken into account, provided that the federal 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 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 does not create or increase a state death tax which is based on the federal credit for state taxes.federal credit for state taxes.(b)(b) The denominator of the fraction shall be the value of the The denominator of the fraction shall be the value of the trust estatetrust estate

Fractional ClauseFractional Clause


Four Requirements for ALL Four Requirements for ALL TrustsTrusts

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

Number OneNumber One



• 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

Number TwoNumber Two



• Beneficiaries of the trust are identifiable from the trust instrument

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

Number ThreeNumber Three



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

Number FourNumber Four


Two Types of TrustsTwo Types of Trusts

• Accumulation Trusts

• Conduit Trusts

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


Conduit TrustConduit Trust

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


Accumulation TrustAccumulation Trust

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


Accumulation Trust vs. Conduit Accumulation Trust vs. Conduit TrustTrust

Year

RMD Taken from IRA and Paid to Trust

Additional Withdrawals

from IRA Paid to Trust

Total Amount Withdrawn from

IRA & Paid to Trust

Accumulation Trust

Distributions to Trust

Beneficiary

Conduit Trust Distribution to

Beneficiary1 100$ 300$ 400$ 200$ 400$ 2 125$ -$ 125$ 50$ 125$ 3 150$ 25$ 175$ -$ 175$ 4 175$ 100$ 275$ 600$ 275$ 5 200$ 225$ 425$ 150$ 425$ 6 225$ 50$ 275$ 200$ 275$

In the conduit trust, the distributions to the beneficiary is always, at least, the total of withdrawals from the IRA


Accumulation TrustsAccumulation 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.


Accumulation Trust – Example Accumulation Trust – Example #1#1

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


Accumulation Trust – Example #2Accumulation Trust – Example #2

IRA

SisterAge 67

Grandchildren

Trust

Discretionary Distributions

Grandchildren



Accumulation Trust

Sister measuring life for determining required minimum distributions

Facts same as PLR 200228025



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.

Treas. Reg. § 1.401(a)(9)-5 Q&A 7

IRA



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 deathContingent beneficiaries must be counted.

Possible non-individual contingent beneficiaries.

General Power of Appointment disqualifies accumulation trust.

IRA


Conduit TrustConduit Trust

Allows for easier identification of beneficiaries


Conduit Trust – Example #1Conduit Trust – Example #1

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



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.



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



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


Conduit TrustsConduit Trusts

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



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



In this instance, the QTIP trust is designed as requiring the greater of income or RMD be distributed. Additional distributions may occur and be trapped inside the trust, therefore, the trust is not a conduit trust but rather must be tested as a lifetime distribution trust.

Better language : Greater of income or total withdrawals from IRA


Disclaimer PlanningDisclaimer Planning

Disclaimer must be “qualified.”Disclaimer must be “qualified.”• IIn writingn writing

• Within 9 monthsWithin 9 months• No acceptance of the interest or any of its No acceptance of the interest or any of its benefits,benefits,• Interest passes without any direction on the Interest passes without any direction on the part of the person making the disclaimerpart of the person making the disclaimer


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

– Disclaimer must occur within nine months from Disclaimer must occur within nine months from date of deathdate of death

– Disclaimer must be served to the IRA custodianDisclaimer must be served to the IRA custodian– Disclaimer must be fractional to avoid immediate Disclaimer must be fractional to avoid immediate

income taxationincome taxation

Disclaimer Planning - Disclaimer Planning - ExampleExample



IRA

Spouse

Disclaimer must be Qualified Disclaimer

Life Expectancy of Oldest Beneficiary of Trust

Trust FBO Spouse and Children

Spouse Disclaims



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



IRA

Children in same fashion as provided

under the Family Trust as if spouse

had died

PLR 200522012 (Obtained by Virchow, Krause & Company)

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


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

Disclaimer PlanningDisclaimer PlanningRevenue Ruling 2005-36


SCENARIO 1 – Pecuniary Disclaimer by SpouseSCENARIO 1 – Pecuniary Disclaimer by Spouse

IRA

Spouse

Child A

Primary Beneficiary


Pecuniary disclaimer of IRA balance ($600,000) plus income earned since date of death ($12,000)

Required Minimum Distribution ($100,000) Result: Spouse’s

pecuniary disclaimer, after taking RMD, still results in a “qualified disclaimer”

Key assumptions:IRA Balance (date of death) - $2,000,000

IRA Balance (date of disclaimer) - $2,040,000

Required Minimum Distribution - $100,000



SCENARIO 2 – Fractional Disclaimer by SpouseSCENARIO 2 – Fractional Disclaimer by Spouse

IRA

Spouse

Child A

Primary Beneficiary


Fractional disclaimer (30%) of net remaining IRA balance after RMD (including income attributable to RMD) plus income earned since date of death

Required Minimum Distribution ($100,000) plus income earned since date of death ($2,000) Result: Spouse’s

fractional disclaimer, after taking RMD (plus attributable income), still results in a “qualified disclaimer”






SCENARIO 3 – Full Disclaimer by Child ASCENARIO 3 – Full Disclaimer by Child A

IRA

Child A

Spouse

Primary Beneficiary

First Contingent Beneficiary – If Child A disclaimed IRA as Primary Beneficiary

Full disclaimer of net remaining IRA balance after RMD (including income attributable to RMD) plus income earned since date of death

Required Minimum Distribution ($100,000) plus income earned since date of death ($2,000) Result: Child A’s full

disclaimer, after taking RMD (plus attributable income), still results in a “qualified disclaimer “






Spousal Rollover Planning Spousal Rollover Planning Through EstateThrough Estate

Estate

Spouse sole residuary

beneficiary

Surviving spouse is executor

PLR 200236052

IRA


Spousal Rollover Planning Spousal Rollover Planning Through TrustThrough 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


September 30September 30thth Determination Date Determination Date

• Designated Beneficiary 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


September 30September 30thth Determination Date Determination Date

• 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)


September 30September 30thth Determination Date Determination DateExampleExample

• Jane names a trust as beneficiary of her IRA. 90% of the trust is payable to her children over their lifetimes. 10% of the trust is payable to Jane’s favorite charity.

• If the charity’s 10% is paid out of the trust by September 30th of the year following the year of Jane’s death, the charity’s interest will not taint the rest of the trust.

• See PLR 200218039 (Obtained by Virchow, Krause & Company)



• 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.



• 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.


Separate Share RuleSeparate Share Rule• In proper circumstances, the IRS allows the In proper circumstances, the IRS allows the

division of the IRA into separate shares per division of the IRA into separate shares per beneficiarybeneficiary

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

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


Separate Share RuleSeparate Share Rule

Payable to single trustPayable to single trust

No separate shares identified in the No separate shares identified in the beneficiary designation formbeneficiary designation form

IRA paid over oldest life expectancyIRA paid over oldest life expectancy


Separate Share RuleSeparate Share Rule

IRA payable to multiple trustsIRA payable to multiple trusts

Each trust named in Each trust named in

beneficiary designation formbeneficiary designation form

IRA paid trust beneficiary’s life expectancyIRA paid trust beneficiary’s life expectancy


• Payout by September 30Payout by September 30

• Division by December 31Division by December 31

Separate Share RuleSeparate Share RuleIRA Where Charity is Named as

One of the Beneficiaries


60-Day Rollover60-Day Rollover

• Rollover must occur within 60 DaysRollover must occur within 60 Days

• Failure = Distribution = Taxable IncomeFailure = Distribution = Taxable Income


60-Day Rollover - Relief60-Day Rollover - Relief• Exception to 60-Day Rollover RuleException to 60-Day Rollover Rule• See PLR 200332026See PLR 200332026• IRC § 408(d)(3)(I) provides that the Secretary may waive the 60-day IRC § 408(d)(3)(I) provides that the Secretary may waive the 60-day requirement where:requirement where:

– the failure to waive such requirement would be against equity or the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events good conscience, including casualty, disaster, or other events beyond the reasonable control of the individualbeyond the reasonable control of the individual

• Relief available under Rev. Proc. 2003-16Relief available under Rev. Proc. 2003-16– IRS will consider all relevant facts and circumstances, including: IRS will consider all relevant facts and circumstances, including:

• errors committed by a financial institution;errors committed by a financial institution;• inability to complete a rollover due to death, disability, inability to complete a rollover due to death, disability,

hospitalization, incarceration, restrictions imposed by a hospitalization, incarceration, restrictions imposed by a foreign country or postal error; foreign country or postal error;

• the use of the amount distributed (for example, in the case the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and of payment by check, whether the check was cashed); and

• the time elapsed since the distribution occurred.the time elapsed since the distribution occurred.


Roth IRAsRoth IRAs


Roth IRAs Roth IRAs • 100% of growth is tax-exempt100% of growth is tax-exempt• No required minimum distributions at age 70½No required minimum distributions at age 70½• $100,000 Modified Adjusted Gross Income $100,000 Modified Adjusted Gross Income

(MAGI) limitation (MAGI) limitation


Beginning January 1, 2005, required Beginning January 1, 2005, required minimum distributions minimum distributions do notdo not count towards count towards the $100,000 MAGI limitation for purposes of the $100,000 MAGI limitation for purposes of Roth IRA conversionsRoth IRA conversions

– Applies only to IRAs and not to any other Applies only to IRAs and not to any other qualified retirement plansqualified retirement plans

(see Treas. Reg. (see Treas. Reg. §1.408A-3 Q&A 6)§1.408A-3 Q&A 6)

Roth IRAs Roth IRAs


Computation of MAGI - New Rule (Conversions After 12/31/2004)Adjusted Gross Income $XX,XXXLess:

Income from Roth Conversion ($XX,XXX)Required Minimum Distribution (IRAs Only) (XX,XXX) (XX,XXX)

Add-in:Traditional IRA Deduction $X,XXXStudent Loan Interest X,XXXTuition & Fee Deduction X,XXXForeign Income/Housing Exclusion X,XXXForeign Housing Deduction X,XXXExclusion of Interest on U.S. Series EE Savings Bonds X,XXX XX,XXX

Modified Adjusted Gross Income (Must be less than $100,000) $XX,XXX

Roth IRAs Roth IRAs


Qualified distributions are not subject to income tax

Non-qualified distributions will be subject to income tax

Taxation of Distributions from Taxation of Distributions from Roth IRAsRoth IRAs


Certain Distributions Within Five Years Are Non-Certain Distributions Within Five Years Are Non-QualifiedQualified

• Five-year period including the year of Five-year period including the year of contributioncontribution

• Five-year period including the year of Five-year period including the year of rolloverrollover

• Basis distributions firstBasis distributions first



• Basis Can be Withdrawn Tax-Free (FIFO Basis Can be Withdrawn Tax-Free (FIFO Method)Method)

• Distributions are not subject to income Distributions are not subject to income tax if they do not exceed aggregate tax if they do not exceed aggregate contributions and/or conversions to the contributions and/or conversions to the Roth IRA.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 $675,000 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 Seven Reasons to Convert to a Roth IRARoth IRA


Estate Tax First Income Tax FirstTraditional IRA Roth IRA

IRA Balance 2,500,000$ 2,500,000$ Less: Federal & State Income Taxes @ 40% -$ (1,000,000)$ Subtotal 2,500,000$ 1,500,000$ Less: Federal Estate Tax @ 49% (1,225,000)$ (735,000)$ Less: State Estate Tax (180,000)$ (80,000)$ Subtotal 1,095,000$ 685,000$

IRA Balance 2,500,000$ Less: IRC §691(c) Deduction* (1,225,000)$ Subtotal 1,275,000$ Less: Federal & State Income Taxes @ 40% (510,000)$

Net Wealth to Family 585,000$ 685,000$

* NOTE: Under IRC §691(c), a deduction is allowed ONLY for federal estate taxes paid.* NOTE: Under IRC §691(c), a deduction is allowed ONLY for federal estate taxes paid.

Advantages of Paying Income Advantages of Paying Income Tax Prior to Estate TaxTax Prior to Estate Tax


Roth IRA Conversions - Tactical Roth IRA Conversions - Tactical ConsiderationsConsiderations

• Utilize unused charitable contribution Utilize unused charitable contribution carryoverscarryovers

• Offset current year ordinary lossesOffset current year ordinary losses• Utilize current year Net Operating Losses Utilize current year Net Operating Losses

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

carryoverscarryovers


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

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

• Taxpayers may choose to “reconvert” their recharacterizationTaxpayers may choose to “reconvert” their recharacterization- Reconversion may only take place at the later of the - Reconversion may only take place at the later of the

following two dates:following two dates:(1) The tax year following the original conversion (1) The tax year following the original conversion OROR(2) 30 days after the recharacterization(2) 30 days after the recharacterization

Roth IRA Conversions - Tactical Roth IRA Conversions - Tactical ConsiderationsConsiderations


Roth Conversion Period Recharacterization / Reconversion Period

1/1/2005 – First day conversion can

take place

2005

12/31/2005 – Last day conversion can

take place

4/15/2006 – Normal filing date for 2005 tax return

/ last day to recharacterize 2005 Roth IRA

conversion

10/15/2006 – Latest filing date

for 2005 tax return / last day to

recharacterize 2005 Roth IRA

conversion

12/31/2006

2006

Roth IRA Conversion TimetableRoth IRA Conversion Timetable


Bankruptcy & IRAsBankruptcy & IRAs


Bankruptcy & IRAsBankruptcy & IRAsPrior LawPrior Law

• 11 U.S.C. 11 U.S.C. §522(d)(10)(E) holds that retirement assets may be exempted from the §522(d)(10)(E) holds that retirement assets may be exempted from the bankruptcy estate if:bankruptcy estate if:1) The right to receive payment is from:1) The right to receive payment is from:

• Stock bonusStock bonus• PensionPension• Profit-sharing planProfit-sharing plan• Annuity ORAnnuity OR• Similar plan or contractSimilar plan or contract

ANDAND2) The right to receive payment is on account of:2) The right to receive payment is on account of:

• IllnessIllness• DisabilityDisability• DeathDeath• Length of service ORLength of service OR• AgeAge

ANDAND

3) The right to receive payment is “3) The right to receive payment is “reasonably necessary toreasonably necessary to supportsupport” the account holder or his dependents” the account holder or his dependents


• 11 U.S.C. 11 U.S.C. §522 §522

– Retirement Asset ProtectionsRetirement Asset Protections

• IRA and Roth IRA LimitationsIRA and Roth IRA Limitations

• $1 Million$1 Million

– Rollover IRA ProtectionsRollover IRA Protections

• Separate AccountsSeparate Accounts

– Protection for Business OwnersProtection for Business Owners

• 11 U.S.C. 11 U.S.C. §541 §541

– Coverdell Accounts and 529 Plans Coverdell Accounts and 529 Plans

2005 Bankruptcy Act2005 Bankruptcy Act


What have we learned from this act?What have we learned from this act?1.1. Rollover and contributory IRAs should not be Rollover and contributory IRAs should not be

commingledcommingled− Keep rollover IRAs pristineKeep rollover IRAs pristine

2.2. Roth IRAs and traditional IRAs protection are Roth IRAs and traditional IRAs protection are afforded the same protectionafforded the same protection

− Analyze conversions before bankruptcyAnalyze conversions before bankruptcy

2005 Bankruptcy Act2005 Bankruptcy Act

© robert s. keebler, cpa, mst [email protected] (920)490-5626 1 iras & other qualified...

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