Transcript Document

Magical Mystery Tour: An
Introduction to IRA and Retirement
Plan Basics
Presented by:
Dennis M. Sandoval, J.D., LL.M. (Tax), CELA, EA
Director of Education
American Academy of Estate Planning Attorneys
Overview of Retirement Assets
 What are Retirement Assets?
 Individual Retirement Accounts
 SEP-IRAs / Simple Plans / Keoghs
 403(b) Plan
 457 Plan
 Qualified Plans
 Money Purchase
 Profit Sharing
 401(k) Plan
Overview of Retirement Assets
 Income in Respect of a Decedent (IRD)
 No step-up in basis under IRC § 1014
 Taxed to beneficiary as ordinary income when
distributed from a retirement plan
 Most heavily taxed assets, with double or triple
taxation possible: Income, Estate, GST
Overview of Retirement Assets
 IRD Deduction
 Income tax deduction allowed for federal estate taxes
attributable to the Retirement Assets. IRC § 691(c)
 Deduction =
 Difference between
 Federal Estate tax w/ Retirement Assets included and
 Federal Estate tax w/o Retirement Assets included
Treas. Reg. § 1.691(c)-1(a)
Overview of Retirement Assets
 Options for Distributions from Qualified Plans
 Joint and Survivor Annuity
 Single Life Annuity
 Period Certain Annuity
 Lump Sum
Overview of Retirement Assets
 Options for Distributions from Qualified Plans
 Retirement Equity Act (“REA”)
 most qualified plan benefits of a married person must be
paid as a joint and survivor annuity with payments to the
spouse equal to 50% of the benefits paid during the
participant’s life
 Modification allowed after participant is 35 or over, but only
with consent of spouse
IRC §§ 401(a)(11); 417(a)(6)(B)
Overview of Retirement Assets
 Rollover Options
 Distribution from Qualified Plan or IRA is eligible to
rollover to IRA unless:
 One of a series of payments taken over single or joint life
expectancies
 One of a series of payments received for a specified period of
ten years or more
 A Required Minimum Distribution (“RMD”)
IRC §§ 402(c)(1) and (4)
Overview of Retirement Assets
 Rollover Options
 Subject to 20% withholding for income tax
 Sixty Day Requirement
 IRA can waive. See Rev. Rul. 2003-16
 Trustee to trustee transfers
Overview of Retirement Assets
 Required Beginning Date (“RBD”)
 April 1st of calendar year AFTER the calendar year in which
participant reaches age 70 ½
 John is born 6/30/1934, so he turns 70 on 6/30/2004 and age 70
½ on 12/30/2004 – first Required Minimum Distribution
(“RMD”) on April 1, 2005
 John is born 7/1/1934, so he turns 70 on 71/2004 and age 70 ½
on 1/1/2005 – first RMD on April 1, 2006
Overview of Retirement Assets
 Required Beginning Date
 If participant is not retired at 70½ and is not a 5%
owner, then RMDs from QUALIFIED PLANS (not
IRAs) can be postponed until April 1 of year after
participant retires
Overview of Retirement Assets
 Required Minimum Distributions (“RMD”)
 Once participant has reached RBD
 Must take annual Required Minimum Distributions
 Based on the IRS Uniform Distribution Table
 EXCEPT:
 May use joint table if spouse is more than 10 years younger than
participant
Overview of Retirement Assets
Uniform Table
Age
RMD
Age
RMD
Age
RMD
Age
RMD
Age
RMD
70
27.4
79
19.5
88
12.7
97
7.6
106
4.2
71
26.5
80
18.7
89
12.0
98
7.1
107
3.9
72
25.6
81
17.9
90
11.4
99
6.7
108
3.7
73
24.7
82
17.1
91
10.8
100
6.3
109
3.4
74
23.8
83
16.3
92
10.2
101
5.9
110
3.1
75
22.9
84
15.5
93
9.6
102
5.5
111
2.9
76
22.0
85
14.8
94
9.1
103
5.2
112
2.6
77
21.2
86
14.1
95
8.6
104
4.9
113
2.4
78
20.3
87
13.4
96
8.1
105
4.5
114+
2.1
Overview of Retirement Assets
Selected Excerpt from Joint Table
Ages
50
51
52
53
54
55
56
57
58
70
35.1
34.3
33.4
32.6
31.8
31.1
30.3
29.5
28.8
71
35.0
34.2
33.3
32.5
31.7
30.9
30.1
29.4
28.6
72
34.9
34.1
33.2
32.4
31.6
30.8
30.0
29.2
28.4
73
34.8
34.0
33.1
32.3
31.5
30.6
29.8
29.1
28.3
74
34.8
33.9
33.0
32.2
31.4
30.5
29.7
28.9
28.1
75
34.7
33.8
33.0
32.1
31.3
30.4
29.6
28.8
28.0
76
34.6
33.8
32.9
32.0
31.2
30.3
29.5
28.7
27.9
77
34.6
33.7
32.8
32.0
31.1
30.3
29.4
28.6
27.8
78
34.5
33.6
32.8
31.9
31.0
30.2
29.3
28.5
27.7
Overview of Retirement Assets
 Penalties
 50% penalty for failure to take RMD
 IRC § 4974
 10% penalty for taking a distribution before age 59½
 IRC § 72
Overview of Retirement Assets
 Relief from 50% Penalty
 “Reasonable Cause”
Overview of Retirement Assets
 Exceptions to 10% Penalty
 Paid to estate or beneficiary
 Disability
 Series of Substantially equal periodic payments
 Medical care, but not in excess of medical expense
deductions for the year
Overview of Retirement Assets
 Exceptions to 10% Penalty, continued
 Higher education expenses (IRA only)
 Qualified acquisition costs for principal residence for
participant or family member – max. $10,000 (IRA
only)
 Separation of service after age 55 (Qualified Plan only)
Distributions at Death
 Determination of Beneficiary
 Beneficiary to be determined by September 30th of
year after participant’s death
 Allows participant to change designated beneficiaries after
RBD without increasing RMDs
 Allows beneficiaries to be changed after death of participant,
such as by disclaimer or by distribution in satisfaction prior
to September 30
 Useful where trust is named as beneficiary and stretch-out
for some trust beneficiaries is desired or where a charity is
named as a trust beneficiary
Distributions at Death
 Spouse as Beneficiary
 Spouse must be sole beneficiary of IRA
 Only beneficiary that can “rollover” the decedent’s
IRA to his or her own IRA
 No RMDs until age 70 ½
 Use Uniform Table
 Can name new beneficiaries to take at death
Distributions at Death
 Spousal Inherited IRA
 Death Before RBD
 Surviving spouse can take distributions based on his
or her life expectancy, but can delay taking
distributions until the deceased spouse would have
reached age 70 ½
 Use Single Life Expectancy Table
 Recalculate each year
 Can name new beneficiaries to take at death
Distributions at Death
 Spousal Inherited IRA
 Death After RBD
 Distributions based on the longer of spouse’s or
participant’s life expectancy
 Can can delay taking distributions until the deceased
spouse would have reached age 70 ½
 Use Single Life Expectancy Table
 If using spouse’s life expectancy, recalculate each year.
If using participant’s life expectancy, then find age at
date of death, then subtract one each year
 Can name new beneficiaries to take at death
Distributions at Death
 Inherited IRA (Beneficiary Other Than Spouse)
 Death Before RBD
 Option 1:
 Distributions based on beneficiary’s life expectancy
 Must take first distribution by December 31st of year after
participant’s death
 Use Single Life Expectancy Table
 Find age at date of death, then subtract one each year
 Can name new beneficiaries to take at death, or
 Option 2
 Five-Year Rule
Distributions at Death
 Inherited IRA (Beneficiary Other Than Spouse)
 Death After RBD
 Option 1:
 Distributions based on longer of beneficiary’s life expectancy
or the life expectancy of the participant as of the year of
death
 Must take first distribution by December 31st of year after
participant’s death
 Use Single Life Expectancy Table, or
 Option 2
 Five-Year Rule
Distributions at Death
 Five Year Rule
 No set schedule of distributions, but the Retirement
Asset must be fully distributed to beneficiaries no later
than December 31 of the year five years from the date
of the participant’s death.
Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAs
Age
RMD
Age
RMD
Age
RMD
Age
RMD
Age
RMD
20
63.0
29
54.3
38
45.6
47
37.0
56
28.7
21
62.1
30
53.3
39
44.6
48
36.0
57
27.9
22
61.1
31
52.4
40
43.6
49
35.1
58
27.0
23
60.1
32
51.4
41
42.7
50
34.2
59
26.1
24
59.1
33
50.4
42
41.7
51
33.3
60
25.2
25
58.2
34
49.4
43
40.7
52
32.3
61
24.4
26
57.2
35
48.5
44
39.8
53
31.4
62
23.5
27
56.2
36
47.5
45
38.8
54
30.5
63
22.7
28
55.3
37
46.5
46
37.9
55
29.6
64+
21.8
Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAs
Age
RMD
Age
RMD
Age
RMD
Age
RMD
Age
RMD
65
21.0
74
14.1
83
8.6
92
4.9
101
2.7
66
20.2
75
13.4
84
8.1
93
4.6
102
2.5
67
19.4
76
12.7
85
7.6
94
4.3
103
2.3
68
18.6
77
12.1
86
7.1
95
4.1
104
2.1
69
17.8
78
11.4
87
6.7
96
3.8
105
1.9
70
17.0
79
10.8
88
6.3
97
3.6
106
1.7
71
16.3
80
10.2
89
5.9
98
3.4
107
1.5
72
15.5
81
9.7
90
5.5
99
3.1
108
1.4
73
14.8
82
9.1
91
5.2
100
2.9
111+
1.0
Distributions at Death
 No Designated Beneficiary Named?
 No beneficiary designated by participant
 Estate
 Charity
 Non-Qualified Trust
Distributions at Death
 Participant Dies Before RBD
 Five-Year Rule
 Participant Dies After RBD
 Option 1
 Remainder of participant’s life expectancy, or
 Option 2
 Five-Year Rule
Distributions at Death
Death Before RBD
Death On or After RBD
Spouse
Rollover – Uniform Table
Otherwise, Spouse’s Life
Expectancy Recalculated
Rollover- Uniform Table
Otherwise, Greater of Spouse’s
or Participant’s Life Expectancy
Non-Spouse
Beneficiary’s Life Expectancy
Greater of Beneficiary’s or
Participant’s Life Expectancy
NonQualified
5-Year Rule
Life Expectancy of Participant or
5-Year Rule
Distributions at Death
 Proper Titling for Inherited IRA
 John Doe (Deceased) IRA fbo Mary Doe
 John Doe (Deceased) IRA fbo Mary Doe, Trustee
under the John Doe Trust dated January 1, 1985
 John Doe (Deceased) IRA fbo Mary Doe, Trustee of
the Jane Doe Trust created under the John Doe Trust
dated January 1, 1985
 NOT “Mary Doe” (unless spousal rollover)
Reasons to Name a Trust as
Beneficiary of Retirement Assets
 Protect Retirement Assets
 Minor beneficiaries
 Special needs beneficiaries
 Spendthrift beneficiaries
 Asset Protection
 Children from a Previous Marriage
 Under-funded Credit Shelter or Bypass Trust
Qualified Designated
Beneficiary Trust
Funding Bypass Trust Using Disclaimed IRA
H IRA
$1 million
W Rollover
$500,000
Disclaim
$500,000
Living Trust
$3 million
Bypass
Trust
$1.5 million +
$500,000
Survivor’s
Trust
$1.5 million
Qualified Designated
Beneficiary Trust
Funding Bypass Using Spousal GPOA – PLR 200101021
H IRA
$1 million
W Rollover
$1 million
Living Trust
$3 million
Bypass
Trust
$2 million
Survivor’s
Trust
$1 million
Qualified Designated
Beneficiary Trust
Funding Bypass Using Aggregate Community Property Agreement
H IRA
$1 million
W Rollover
$1 million
Living Trust
$3 million
Bypass
Trust
$2 million
Survivor’s
Trust
$1 million
Qualified Designated
Beneficiary Trust
 Look through to trust beneficiaries, if:
 Trust is valid under state law
 Trust is irrevocable or becomes irrevocable by
participant’s date of death
 All beneficiaries are identifiable under the terms of the
trust
 A copy of the trust document is provided to the plan
administrator or IRA custodian by no later than
October 31 of the calendar year after the death of the
participant
Qualified Designated
Beneficiary Trust
 Look through beneficiaries
 Use the life expectancy of oldest beneficiary to
determine RMDs
 Treas. Reg. § 1.401(a)(9)-4 Q&A-5(c)
 The separate account rules under A-2 of § 1.401(a)(9)-8 are
not available to beneficiaries of a trust with respect to the
trust’s interest in the employee’s benefit
 Contra – PLR 200234074
Qualified Designated
Beneficiary Trust
 Who is the oldest look through beneficiary?
 CAUTION: “Accumulation” Trusts
 PLR 200228025
 Solution:
 Limit potential beneficiaries
 “Conduit” Trust
Qualified Designated
Beneficiary Trust
 Look through beneficiaries
 CAUTION: “Atom Bomb” Beneficiaries
 Solution – Limit to younger beneficiaries for purposes of
distributing retirement assets
 CAUTION: Powers of Appointment
 Solution – Limit powers of appoint to younger beneficiaries
for purposes of appointing retirement assets
Qualified Designated
Beneficiary Trust
 Look through beneficiaries
 CAUTION: Using retirement assets to pay trustor’s
debts, estate taxes or administration expenses = paying
to estate of the trustor, i.e., no designated beneficiary
 Solution:
 Prohibit use of retirement assets to pay for debts, estate taxes
or administration expenses, unless these payments can be
made prior to September 30 of year after the trustor dies
Qualified Designated
Beneficiary Trust
 Funding Bypass Trust
 Pecuniary Funding Formula
 ILM 200644020 (December 15, 2005)
 Contra finding in PLRs 9524020, 9608036, 9623056 and
9808043
Qualified Designated
Beneficiary Trust
 Funding Bypass Trust
 Fractional Formula Allocation
 If retirement assets paid to trust to fund under-funded
Bypass Trust, require that non-retirement assets be
allocated first
 Preserve rollover option for surviving spouse
 Get “better” assets (w/o income tax liability) into Bypass
 Any excess retirement assets be distributed outright to
surviving spouse
Any Questions?
Where’s
the
bathroom?