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Educational Session Seminar Conducted by Dennis Sandoval.

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Presentation on theme: "Educational Session Seminar Conducted by Dennis Sandoval."— Presentation transcript:

1 Educational Session Seminar Conducted by Dennis Sandoval

2 The Interaction of Retirement Assets With Trusts: A Magical Mystery Tour Dennis M. Sandoval Director of Education American Academy of Estate Planning Attorneys Dennis M. Sandoval Director of Education American Academy of Estate Planning Attorneys Copyright 2004 American Academy of Estate Planning Attorneys

3 Dennis M. Sandoval J.D. cum laude, Western State University College of Law LL.M. (Masters in Tax Law), cum laude Golden Gate University College of Law Certified Estate Planning, Trust and Probate Law Specialist Certified Taxation Law Specialist Certified Elder Law Attorney Director of Education, American Academy of Estate Planning Attorneys J.D. cum laude, Western State University College of Law LL.M. (Masters in Tax Law), cum laude Golden Gate University College of Law Certified Estate Planning, Trust and Probate Law Specialist Certified Taxation Law Specialist Certified Elder Law Attorney Director of Education, American Academy of Estate Planning Attorneys

4 Our Ground Rules Weve got lots of ground to cover, so … Well handle questions after the seminar… Write down questions that occur to you, so you can ask us later! Weve got lots of ground to cover, so … Well handle questions after the seminar… Write down questions that occur to you, so you can ask us later!

5 Our Seminar Goals Overview of Retirement Asset Rules Rules for Distributions at Death Reasons to Name a Trust as Beneficiary of Retirement Assets Overview of Qualified Designated Beneficiary Trust Rules Separate Share Rule Overview of Retirement Asset Rules Rules for Distributions at Death Reasons to Name a Trust as Beneficiary of Retirement Assets Overview of Qualified Designated Beneficiary Trust Rules Separate Share Rule

6 Overview of Retirement Assets What are Retirement Assets? Individual Retirement Accounts SEP-IRAs / Simple Plans / Keoghs Qualified Plans Money Purchase Profit Sharing 401(k) Plan 403(b) Plan 451 Plan What are Retirement Assets? Individual Retirement Accounts SEP-IRAs / Simple Plans / Keoghs Qualified Plans Money Purchase Profit Sharing 401(k) Plan 403(b) Plan 451 Plan

7 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 – depending on the size of the estate, the year of death and the designated beneficiary, IRD Assets can also be subject to estate tax and generation-skipping transfer taxes 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 – depending on the size of the estate, the year of death and the designated beneficiary, IRD Assets can also be subject to estate tax and generation-skipping transfer taxes

8 Overview of Retirement Assets IRD Deduction Income tax deduction allowed for federal estate taxes attributable to the Retirement Assets. IRC § 691(c) Deduction is calculated by determining federal estate tax with Retirement Assets included in estate and with Retirement Assets excluded from the estate. The IRD Deduction is the difference between the two tax amounts. Treas. Reg. § 1.691(c)-1(a) IRD Deduction Income tax deduction allowed for federal estate taxes attributable to the Retirement Assets. IRC § 691(c) Deduction is calculated by determining federal estate tax with Retirement Assets included in estate and with Retirement Assets excluded from the estate. The IRD Deduction is the difference between the two tax amounts. Treas. Reg. § 1.691(c)-1(a)

9 Overview of Retirement Assets Options for Distributions from Qualified Plans Joint and Survivor Annuity Single Life Annuity Period Certain Annuity Lump Sum Options for Distributions from Qualified Plans Joint and Survivor Annuity Single Life Annuity Period Certain Annuity Lump Sum

10 Overview of Retirement Assets Options for Distributions from Qualified Plans Retirement Equity Act (REA) requires most qualified plan benefits of a married person to be paid as a joint and survivor annuity with payments to the spouse equal to 50% of the benefits paid during the participants life Modification allowed with consent of spouse after participant reaches age 35. IRC §§ 401(a)(11); 417(a)(6)(B) Options for Distributions from Qualified Plans Retirement Equity Act (REA) requires most qualified plan benefits of a married person to be paid as a joint and survivor annuity with payments to the spouse equal to 50% of the benefits paid during the participants life Modification allowed with consent of spouse after participant reaches age 35. IRC §§ 401(a)(11); 417(a)(6)(B)

11 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) 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)

12 Overview of Retirement Assets Required Beginning Date (RBD) April 1 st 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 Required Beginning Date (RBD) April 1 st 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

13 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 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

14 Overview of Retirement Assets Required Minimum Distributions (RMD) Once participant has reached RBD, then he or she most begin taking annual Required Minimum Distributions based on the Uniform Distribution Table provided by the IRS. Only exception to lifetime RMDs being based on Uniform tables is where spouse is more than ten years younger than the participant, in which the joint tables may be used. Required Minimum Distributions (RMD) Once participant has reached RBD, then he or she most begin taking annual Required Minimum Distributions based on the Uniform Distribution Table provided by the IRS. Only exception to lifetime RMDs being based on Uniform tables is where spouse is more than ten years younger than the participant, in which the joint tables may be used.

15 Overview of Retirement Assets Uniform Table AgeRMDAgeRMDAgeRMDAgeRMDAgeRMD

16 Overview of Retirement Assets Penalties 50% penalty for failure to take RMD IRC § % penalty for taking a distribution before age 59½ IRC § 72 Penalties 50% penalty for failure to take RMD IRC § % penalty for taking a distribution before age 59½ IRC § 72

17 Overview of Retirement Assets Relief from 50% Penalty Reasonable Cause Relief from 50% Penalty Reasonable Cause

18 Overview of Retirement Assets Exceptions to 10% Penalty Paid to estate or beneficiary Disability Substantially equal periodic payments Medical care, but not in excess of medical expense deductions for the year 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) Exceptions to 10% Penalty Paid to estate or beneficiary Disability Substantially equal periodic payments Medical care, but not in excess of medical expense deductions for the year 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)

19 Distributions at Death Determination of Beneficiary Beneficiary to be determined by September 30 th of year after participants death Allows participant to change designated beneficiaries after RBD without increasing RMDs Allows beneficiaries to be changed after death, 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 Determination of Beneficiary Beneficiary to be determined by September 30 th of year after participants death Allows participant to change designated beneficiaries after RBD without increasing RMDs Allows beneficiaries to be changed after death, 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

20 Distributions at Death Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can roll-over the decedents IRA to his or her own IRA Rules Sixty days from receipt Mandatory 20% withholding unless a trustee to trustee transfer IRS may waive sixty day rule under certain circumstances. Rev. Rul ; IRC § 408(d)(3)(I) Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can roll-over the decedents IRA to his or her own IRA Rules Sixty days from receipt Mandatory 20% withholding unless a trustee to trustee transfer IRS may waive sixty day rule under certain circumstances. Rev. Rul ; IRC § 408(d)(3)(I)

21 Distributions at Death Spousal Rollover No RMDs until age 70 ½ Use Uniform Table Can name new beneficiaries to take at death Spousal Rollover No RMDs until age 70 ½ Use Uniform Table Can name new beneficiaries to take at death

22 Distributions at Death Spousal Inherited IRA Surviving spouse can take distributions based on his or her life expectancy, but can delay taking distributions until he or she reaches age 70 ½ Use Single Life Expectancy Table Find age at date of death, then subtract one each year Can name new beneficiaries to take at death Spousal Inherited IRA Surviving spouse can take distributions based on his or her life expectancy, but can delay taking distributions until he or she reaches age 70 ½ Use Single Life Expectancy Table Find age at date of death, then subtract one each year Can name new beneficiaries to take at death

23 Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs AgeRMDAgeRMDAgeRMDAgeRMDAgeRMD

24 Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs AgeRMDAgeRMDAgeRMDAgeRMDAgeRMD

25 Distributions at Death Inherited IRA (Beneficiary Other Than Spouse) Option 1: Distributions based on beneficiarys life expectancy Must take first distribution by December 31st of year after participants 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 Inherited IRA (Beneficiary Other Than Spouse) Option 1: Distributions based on beneficiarys life expectancy Must take first distribution by December 31st of year after participants 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

26 Distributions at Death Five Year Rule No set schedule of distributions, but the Retirement Asset must be fully distributed to beneficiaries n later than December 31 of the year five years from the date of death of the particpant. Five Year Rule No set schedule of distributions, but the Retirement Asset must be fully distributed to beneficiaries n later than December 31 of the year five years from the date of death of the particpant.

27 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 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

28 Distributions at Death No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust

29 Distributions at Death Participant Dies Before RBD Five Year Rule Participant Dies After RBD Option 1 Remainder of participants life expectancy, or Option 2 Five Year Rule Participant Dies Before RBD Five Year Rule Participant Dies After RBD Option 1 Remainder of participants life expectancy, or Option 2 Five Year Rule

30 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 Underfunded Credit Shelter or Bypass Trust Protect Retirement Assets Minor beneficiaries Special needs beneficiaries Spendthrift beneficiaries Asset Protection Children from a Previous Marriage Underfunded Credit Shelter or Bypass Trust

31 Qualified Designated Beneficiary Trust Underfunded Credit Shelter or Bypass Trust H IRA $1 million Living Trust $2 million Bypass Trust $1 million + $500,000 Survivors Trust $1 million W Rollover $500,000 Disclaim $500,000

32 Qualified Designated Beneficiary Trust Using Aggregate Community Property Agreement H IRA $1 million Living Trust $2 million Bypass Trust $1.5 million Survivors Trust $500,000 W Rollover $1 million PLRs ;

33 Qualified Designated Beneficiary Trust Using PLR Trust H IRA $1 million Living Trust $2 million Bypass Trust $1.5 million Survivors Trust $500,000 W Rollover $1 million

34 Qualified Designated Beneficiary Trust Look through to trust beneficiaries, if: Trust is valid under state law Trust is irrevocable or becomes irrevocable by participants date of death There are beneficiaries that 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 Look through to trust beneficiaries, if: Trust is valid under state law Trust is irrevocable or becomes irrevocable by participants date of death There are beneficiaries that 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

35 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 trusts interest in the employees benefit Contra – PLR 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 trusts interest in the employees benefit Contra – PLR

36 Qualified Designated Beneficiary Trust Who is the oldest look through beneficiary? CAUTION: Accumulation Trusts PLR Solution: Limit potential beneficiaries Conduit Trust Who is the oldest look through beneficiary? CAUTION: Accumulation Trusts PLR Solution: Limit potential beneficiaries Conduit Trust

37 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 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

38 Qualified Designated Beneficiary Trust Look through beneficiaries CAUTION: Using retirement assets to pay trustors debts, estate taxes or administration expenses same as paying to estate of the trustor Solution: To the extent possible, 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 Look through beneficiaries CAUTION: Using retirement assets to pay trustors debts, estate taxes or administration expenses same as paying to estate of the trustor Solution: To the extent possible, 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

39 Qualified Designated Beneficiary Trust Funding Bypass Trust Fractional Formula Allocation Preserve rollover option for spouse – if retirement assets paid to trust to fund underfunded Bypass Trust, require that non-retirement assets be allocated first, and any excess retirement assets be distributed outright to surviving spouse Funding Bypass Trust Fractional Formula Allocation Preserve rollover option for spouse – if retirement assets paid to trust to fund underfunded Bypass Trust, require that non-retirement assets be allocated first, and any excess retirement assets be distributed outright to surviving spouse

40 Qualified Designated Beneficiary Trust Uniform Principal and Income Act Defines distributions from retirement assets as allocated 10% to income and 90% principal – California Probate Code § 16361(c) Options: Accept UPIAI definition Override UPIAI – Define income with regard to retirement assets in trust document Uniform Principal and Income Act Defines distributions from retirement assets as allocated 10% to income and 90% principal – California Probate Code § 16361(c) Options: Accept UPIAI definition Override UPIAI – Define income with regard to retirement assets in trust document

41 Separate Share Rule Separate Share Can use life expectancy of each retirement plan beneficiary in determining RMDs for that beneficiary Treas. Reg. § 1.301(a)(9)-8 Q&A-2 Separate Share Can use life expectancy of each retirement plan beneficiary in determining RMDs for that beneficiary Treas. Reg. § 1.301(a)(9)-8 Q&A-2

42 Separate Share Rule Beneficiary Must be Determinable on Face of Beneficiary Designation Form without Reference to Other Documents Solutions Name each beneficiary individually Create a separate qualified designated beneficiary trust for each beneficiary and make a fraction of retirement asset payable to each trust Use a Retirement Assets Will Name each beneficiary but further designate how share is to be administered by referencing trust share for that beneficiary Beneficiary Must be Determinable on Face of Beneficiary Designation Form without Reference to Other Documents Solutions Name each beneficiary individually Create a separate qualified designated beneficiary trust for each beneficiary and make a fraction of retirement asset payable to each trust Use a Retirement Assets Will Name each beneficiary but further designate how share is to be administered by referencing trust share for that beneficiary


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