1. 1 Coordinating Income and Estate Planning for IRAs and Qualified Plans Presented by: Robert S. Keebler, CPA, MST 1400 Lombardi Ave., Ste 200 P.O. Box 11997 Green Bay, WI 54307-1997 Ph: (920) 490-5626 Fax: (920) 499-1050 E-mail: rkeebler@virchowkrause.com

2. 2 Potential tax exposure to IRA without planning Why Retirement Distribution Planning is Important

3. 3 IRAs Payable to Trusts

4. 4 IRA distributions over the life expectancy of the oldest beneficiary Trust IRA Beneficiary Designation Form Spouse Children IRAs Payable to Trusts How an IRA is Payable to a Trust How an IRA is Payable to a Trust

5. 5 Spendthrift protection Spendthrift protection Creditor protection Creditor protection Divorce protection Divorce protection Special needs Special needs Investment management Investment management Estate planning Estate planning “Dead-hand” control “Dead-hand” control IRAs Payable to Trusts Benefits of Using a Trust Benefits of Using a Trust

6. 6 Trust tax rates Trust tax rates Legal and trustee fees Legal and trustee fees Income tax returns Income tax returns Greater complexity Greater complexity IRAs Payable to Trusts Disadvantages of Using a Trust Disadvantages of Using a Trust

7. 7 Older or unidentifiable contingent beneficiary Older or unidentifiable contingent beneficiary Estate as contingent beneficiary Estate as contingent beneficiary Powers of appointment Powers of appointment Failure of beneficiaries clause Failure of beneficiaries clause Failure to provide trust document to custodian by October 31 of year following year of death Failure to provide trust document to custodian by October 31 of year following year of death Making lump sum distribution to trust Making lump sum distribution to trust IRAs Payable to Trusts Other Considerations Other Considerations

8. 8 IRAs Payable to Trusts Four Requirements of All IRA Trusts Four Requirements of All IRA Trusts Trust is valid under state law Trust is valid under state law Trust is irrevocable upon death of owner Trust is irrevocable upon death of owner Beneficiaries of the trust are identifiable from the trust instrument Beneficiaries of the trust are identifiable from the trust instrument Documentation requirement is satisfied Documentation requirement is satisfied

9. 9 IRAs Payable to Trusts Types of IRA Trusts Types of IRA Trusts Accumulation Trusts Accumulation Trusts Conduit Trusts Conduit Trusts

10. 10 IRAs Payable to Trusts Conduit Trusts Conduit Trusts A trust in which all distributions from the IRA are immediately distributed to the trust beneficiary/beneficiaries

11. 11 Mother Age 80 Trust Discretionary Distributions, but no less than total withdrawals from IRA Entire Trust outright upon Grandchildren reaching age 30 If Grandchildren die before reaching age 40 Mother is not “countable” for determining applicable life expectancy Child – age 30 IRA IRAs Payable to Trusts Conduit Trusts – Example #1 Conduit Trusts – Example #1

12. 12 Trust To Red Cross Child #1 All distributions from IRA At Child #1’s death IRA IRAs Payable to Trusts Conduit Trusts – Example #2 Conduit Trusts – Example #2

13. 13 A trust in which distributions from the IRA are allowed to accumulate within the trust IRAs Payable to Trusts Accumulation Trusts Accumulation Trusts

14. 14 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. IRAs Payable to Trusts Accumulation Trusts Accumulation Trusts

15. 15 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 Child – age 30 IRA IRAs Payable to Trusts Accumulation Trusts – Example #1 Accumulation Trusts – Example #1

16. 16 IRA Sister Age 67 Grandchildren Trust Discretionary Distributions Grandchildren Entire Trust outright upon Grandchildren reaching age 30 If Grandchildren die before reaching age 30 Accumulation Trust Sister measuring life for determining required minimum distributions IRAs Payable to Trusts Accumulation Trusts – Example #2 Accumulation Trusts – Example #2

17. 17 In proper circumstances, the IRS allows the division of the IRA into separate shares per beneficiary In proper circumstances, the IRS allows the division of the IRA into separate shares per beneficiary In the case of an individual beneficiary, this must be determined by December 31 of the year following the year of death 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 No separate shares available for estates Disclaimer rule Disclaimer rule Death by September 30 Death by September 30 IRAs Payable to Trusts Separate Shares Separate Shares

18. 18 Payable to single trust No separate shares identified in the beneficiary designation form IRA paid over oldest life expectancy IRAs Payable to Trusts Separate Shares Separate Shares

19. 19 IRA payable to multiple sub-trusts Each trust named in beneficiary designation form IRA paid trust beneficiary’s life expectancy IRAs Payable to Trusts Separate Shares Separate Shares

20. 20 Ruling 1: Each Beneficiary’s Trust Share Qualified for Maximum Stretch-out. Ruling 1: Each Beneficiary’s Trust Share Qualified for Maximum Stretch-out. –Upon the death of the Settlor, the IRA stand-alone trust creates separate shares for each beneficiary (in this case, separate shares for 9 beneficiaries), each trust share “treated effective ab initio to the date of the Decedent’s death” and each share functioned as a “separate and distinct trust” for the beneficiary. –The beneficiary designation form named each separate share as a primary beneficiary of the IRA. –Before the December 31 st deadline, the IRA was divided into separate accounts for each share. –Held: Separate account treatment permitted; MRD of the IRA for each separate trust share measured by the lifetime of its sole beneficiary for whom the share was created. IRAs Payable to Trusts Separate Shares – PLR 200537044 Separate Shares – PLR 200537044

21. 21 Ruling 2: Allowance of One-Time “Toggle” Between Accumulation and Conduit Trust. Ruling 2: Allowance of One-Time “Toggle” Between Accumulation and Conduit Trust. –Each separate share in the IRA stand-alone trust had language structuring the separate share as a conduit trust. –The trust provided for an independent 3 rd party, as “trust protector” to transform each sub-trust to an accumulation trust in the protector’s sole discretion by voiding the conduit provisions ab initio. –Trust Protector had the authority to limit the initial trust beneficiary ab initio. –After Participant’s date of death, Trust Protector exercised “toggle” and converted one share to an accumulation trust. –Held: Each share can use that the life expectancy of its initial beneficiary to measure the MRD for that share. IRAs Payable to Trusts Separate Shares – PLR 200537044 Separate Shares – PLR 200537044

22. 22 Ruling 3: Payment of Expenses from IRA not considered an accumulation. Ruling 3: Payment of Expenses from IRA not considered an accumulation. –The trust provided that “Trust expenses may be deducted prior to any such payment to or for the benefit of the beneficiary of the trust share if the deduction does not disqualify the status of the trust as a conduit trust. This paragraph may be rendered void, ab initio, by the Trust Protector...” –Held: Each share can use that the life expectancy of its initial beneficiary to measure the MRD for that share. Why? Even with the deduction for payment of trust expenses, no amounts distributed to the trust during the beneficiary’s lifetime would be accumulated in the trust, and thus would not be kept in the trust for the benefit of any future beneficiaries. Treas. Reg. § 1.401(a)(9)-5 Q&A 7(c)(3), Example 2. Separate Shares – PLR 200537044 Separate Shares – PLR 200537044 IRAs Payable to Trusts

23. 23 Ruling 4: The trust assets will not be included in the estate of the primary beneficiary of a share upon that beneficiary’s death. Ruling 4: The trust assets will not be included in the estate of the primary beneficiary of a share upon that beneficiary’s death. –Each trust share would accumulate the net income of the trust, and distributions of income and principal could distribute accumulated income and principal to the primary beneficiary for his or her health, education, maintenance and support only. –The document did not grant any beneficiary a general power of appointment over his or her share. –Held: The provisions of the trust could not result in estate inclusion for the estate of a primary beneficiary upon his death. Separate Shares – PLR 200537044 Separate Shares – PLR 200537044 IRAs Payable to Trusts

24. 24 Proper apportionment language regarding payment of debts, expenses and taxes of estate (See PLR 9820021) 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 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) 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” Solution – stand-alone IRA trust such as “IRA Legacy Trust” IRAs Payable to Trusts Naming a Revocable Trust as Beneficiary Naming a Revocable Trust as Beneficiary

25. 25 Fractional v. Pecuniary clauses Fractional v. Pecuniary clauses –Recognition of income Entire trust irrevocable at death of IRA owner Entire trust irrevocable at death of IRA owner No separate share treatment No separate share treatment Payment of debts, taxes, and expenses Payment of debts, taxes, and expenses –Apportionment language –Firewall provision Powers of appointment Powers of appointment Stand alone trust – highly recommended Stand alone trust – highly recommended Adoption of older individuals Adoption of older individuals IRAs Payable to Trusts Naming a Revocable Trust as Beneficiary Naming a Revocable Trust as Beneficiary

26. 26 Revocable trust should use a fractional funding clause to determine the marital and bypass shares Revocable trust should use a fractional funding clause to determine the marital and bypass shares –PLRs in which pecuniary funding clause utilized and no IRD acceleration issue (PLRs 199912040, 9808043, 9744024) IRAs Payable to Trusts Naming a Revocable Trust as Beneficiary Naming a Revocable Trust as Beneficiary

27. 27 The Marital Share shall consist of assets in a pecuniary amount which, after taking into account all other property included in the Settlor’s gross estate for federal estate tax purposes which qualified 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 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 possible, the amount which will result in the least 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 into account, provided that the federal credit for state death taxes 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 taxes. Pecuniary Clause - Sample IRAs Payable to Trusts Naming a Revocable Trust as Beneficiary Naming a Revocable Trust as Beneficiary

28. 28 The Marital Share shall consist of that fractional share of the trust estate which shall be determined as follows: (a) The numeration of the fraction shall be the smallest amount which, after taking into account all other property included in the Settlor’s gross estate for federal estate tax purposes which qualifies 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 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 least 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 into account, provided that the federal 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 federal credit for state taxes. (b)The denominator of the fraction shall be the value of the trust estate Fractional Clause - Sample IRAs Payable to Trusts Naming a Revocable Trust as Beneficiary Naming a Revocable Trust as Beneficiary

29. 29 Disclaimers

30. 30 Disclaimers Disclaimer must be “qualified.” I n writing I n writing Within 9 months Within 9 months No acceptance of the interest or any of its benefits, No acceptance of the interest or any of its benefits, Interest passes without any direction on the part of the person making the disclaimer Interest passes without any direction on the part of the person making the disclaimer

31. 31 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 to the IRA custodian – Disclaimer must be fractional to avoid immediate income taxation Disclaimers Example Example

32. 32 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. Disclaimers Revenue Ruling 2005-36 Revenue Ruling 2005-36

33. 33 SCENARIO 1 – Pecuniary Disclaimer by Spouse IRA Spouse Child A Primary Beneficiary First Contingent Beneficiary – If spouse disclaimed IRA as 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 Disclaimers Revenue Ruling 2005-36 Revenue Ruling 2005-36

34. 34 SCENARIO 2 – Fractional Disclaimer by Spouse Primary Beneficiary First Contingent Beneficiary – If spouse disclaimed IRA as 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” Disclaimers Revenue Ruling 2005-36 Revenue Ruling 2005-36 IRA Spouse Child A Key assumptions: IRA Balance (date of death) - $2,000,000 IRA Balance (date of disclaimer) - $2,040,000 Required Minimum Distribution - $100,000

35. 35 SCENARIO 3 – Full Disclaimer by Child A 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 “ Disclaimers Revenue Ruling 2005-36 Revenue Ruling 2005-36 IRA Spouse Child A Key assumptions: IRA Balance (date of death) - $2,000,000 IRA Balance (date of disclaimer) - $2,040,000 Required Minimum Distribution - $100,000

36. 36 QTIP-IRA

37. 37 Qualifying for the marital deduction Qualifying for the marital deduction Definition of “income” Definition of “income” Qualifying as a “designated beneficiary” trust Qualifying as a “designated beneficiary” trust QTIP-IRA

38. 38 In general, in order for a QTIP trust to qualify for the marital deduction under IRC §2056(b)(7), it must meet all of the following requirements: All the property in the trust was received from the deceased spouse and was included in that spouse’s taxable estate. All the property in the trust was received from the deceased spouse and was included in that spouse’s taxable estate. The trust provides that during the lifetime of the surviving spouse, all income is paid to that spouse at least annually. The trust provides that during the lifetime of the surviving spouse, all income is paid to that spouse at least annually. No other person has any right or can receive any benefit from the trust while the during the surviving spouse’s lifetime. No other person has any right or can receive any benefit from the trust while the during the surviving spouse’s lifetime. A valid election must be made on the deceased spouse’s estate tax return. A valid election must be made on the deceased spouse’s estate tax return. Qualifying for the Marital Deduction QTIP-IRA

39. 39 Fiduciary accounting income is governed by state law and the trust instrument Fiduciary accounting income is governed by state law and the trust instrument Tax accounting income is governed by the federal income tax law Tax accounting income is governed by the federal income tax law QTIP-IRA Fiduciary vs. Tax Accounting Income

40. 40 Interest Interest –Taxable –Tax-exempt Dividends Dividends Rents (net of expenses) Rents (net of expenses) Royalties Royalties QTIP-IRA Traditional Types of “Income”

41. 41 IRA value as of date of death IRA value as of date of death Increases in asset value (i.e. growth) Increases in asset value (i.e. growth) Realized long-term capital gain Realized long-term capital gain Realized short-term capital gain Realized short-term capital gain Proceeds from covered call writing Proceeds from covered call writing Traditional Types of “Principal” QTIP-IRA

42. 42 Traditional fiduciary accounting income Traditional fiduciary accounting income Equitable adjustments under UPIA §104(a) Equitable adjustments under UPIA §104(a) Unitrust payments Unitrust payments “10% rule” under UPIA §409(c) “10% rule” under UPIA §409(c) “Savings clause” under UPIA §409(d) “Savings clause” under UPIA §409(d) QTIP-IRA Revenue Ruling 2006-26

43. 43 UPIA §104(a) provides trustees the power to adjust between income and principal if a trust cannot be administered fairly between the income and remainder beneficiaries UPIA §104(a) provides trustees the power to adjust between income and principal if a trust cannot be administered fairly between the income and remainder beneficiaries NOTE: Revenue Ruling 2006-26 holds that, notwithstanding a trustee’s application of UPIA §104(a), a trust will qualify the marital deduction NOTE: Revenue Ruling 2006-26 holds that, notwithstanding a trustee’s application of UPIA §104(a), a trust will qualify the marital deduction QTIP-IRA Revenue Ruling 2006-26 Equitable Adjustment

44. 44 Revenue Ruling 2006-26 approves unitrust trust payments paid pursuant to UPIA §409(c) under applicable state law Revenue Ruling 2006-26 approves unitrust trust payments paid pursuant to UPIA §409(c) under applicable state law Example: IRA is valued at $1,000,000. Pursuant to state law, the trust is makes a unitrust distribution of 4% ($40,000). In this case, the $40,000 is a qualified “income” interest. Example: IRA is valued at $1,000,000. Pursuant to state law, the trust is makes a unitrust distribution of 4% ($40,000). In this case, the $40,000 is a qualified “income” interest. Unitrust Payment QTIP-IRA Revenue Ruling 2006-26

45. 45 UPIA §409(c) provides that 10% of IRA (and other qualified plan) distributions are considered to be “income” UPIA §409(c) provides that 10% of IRA (and other qualified plan) distributions are considered to be “income” Example: RMD from IRA is $40,000. Pursuant to UPIA §409(c), $4,000 ($40,000 x 10%) is considered to be “income”. Example: RMD from IRA is $40,000. Pursuant to UPIA §409(c), $4,000 ($40,000 x 10%) is considered to be “income”. WARNING: This type of clause may not qualify as “income” under Rev. Rul. 2006-26. WARNING: This type of clause may not qualify as “income” under Rev. Rul. 2006-26. UPIA “10% Rule” QTIP-IRA Revenue Ruling 2006-26

46. 46 IRA has a current value of $1,000,000 and interest and dividend income of $60,000. RMD is $50,000. Fiduciary Accounting Income 4% Unitrust 10% Rule Under UPIA §409(c) Distributable Income $60,000$40,000$5,000 $50,000 RMD x 10% Distributable QTIP-IRA “Income” QTIP-IRA

47. 47 UPIA §409(d) provides trustees the discretion to make additional payments in order to qualify the payments as “income” for purposes of the marital deduction. UPIA §409(d) provides trustees the discretion to make additional payments in order to qualify the payments as “income” for purposes of the marital deduction. WARNING: This type of clause may not save the QTIP election under Rev. Rul. 2006-26. WARNING: This type of clause may not save the QTIP election under Rev. Rul. 2006-26. QTIP-IRA Savings Clause

48. 48 Other IRA Planning Issues

49. 49 Income in respect of a decedent (IRD) – is all items of gross income in respect of a decedent which were not properly included as taxable income in a tax period falling on or before a taxpayer’s death and are payable to his/her estate and/or another beneficiary Other IRA Planning Issues Income in Respect to a Decedent (IRD)

50. 50 Specific Items of IRD IRAs and other qualified retirement plans IRAs and other qualified retirement plans Unpaid salaries/wages at the time of death Unpaid salaries/wages at the time of death Dividends and interest earned, but not taxed, prior to death Dividends and interest earned, but not taxed, prior to death Unrecognized capital gain on an installment note at the time of the seller’s death Unrecognized capital gain on an installment note at the time of the seller’s death Net Unrealized Appreciation (NUA) on employer securities (see later discussion) Net Unrealized Appreciation (NUA) on employer securities (see later discussion) Other IRA Planning Issues Income in Respect to a Decedent (IRD)

51. 51 To the extent that a decedent’s taxable estate includes items of IRD and a federal estate tax is assessed, the estate and/or its beneficiaries are entitled to an income tax deduction for the estate tax attributable to IRD To the extent that a decedent’s taxable estate includes items of IRD and a federal estate tax is assessed, the estate and/or its beneficiaries are entitled to an income tax deduction for the estate tax attributable to IRD –This deduction is a miscellaneous itemized deduction NOT subject to the 2% AGI limitation Other IRA Planning Issues IRC §691(c) Deduction

52. 52 The income tax deduction computation for estate taxed paid on IRD is determined on a “with and without” basis The income tax deduction computation for estate taxed paid on IRD is determined on a “with and without” basis –In essence, the total deduction allowed is the difference between: (a) the estate tax liability with all items of IRD included in the taxable estate and (b) the estate tax liability without the IRD included in the taxable estate Other IRA Planning Issues IRC §691(c) Deduction

53. 53 Example On July 1, 2007, Jackie passed away leaving the following assets: IRC §691(c) Deduction Other IRA Planning Issues

54. 54 Subsequent to her death, the personal representative withdrew $50,000 from Jackie’s IRA. Accordingly, the IRC §691(c) attributable to the $50,000 distribution would be as follows: Example (cont.) IRC §691(c) Deduction Other IRA Planning Issues

55. 55 Other IRA Planning Issues Example (cont.) IRC §691(c) Deduction

56. 56 A 50% penalty is assessed to the extent that a taxpayer has not taken his/her RMD for the tax year. Example Assume Peter was required to take out $30,000 from his IRA in 2007, but only withdrew $20,000. In this case, Peter would be subject to a $5,000 [($30,000 - $20,000) x 50%] excess accumulations penalty. Further, Peter would still be required to withdraw the $10,000 deficiency from his IRA. Excess Accumulations Penalty Other IRA Planning Issues

57. 57 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. 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 Complete Form 5329 Attach letter requesting waiver Attach letter requesting waiver Other IRA Planning Issues Excess Accumulations Penalty Requesting a Waiver

58. 58 Roth IRAs

59. 59 Roth IRAs 100% of growth is tax-exempt 100% of growth is tax-exempt No required minimum distributions at age 70½ No required minimum distributions at age 70½ –NOTE: Distributions from Roth IRAs cannot be used to fulfill the RMD from a traditional IRA $100,000 Modified Adjusted Gross Income (MAGI) limitation $100,000 Modified Adjusted Gross Income (MAGI) limitation RMDs on Inherited Roth IRAs RMDs on Inherited Roth IRAs Roth 401(k) plans Roth 401(k) plans

60. 60 Starting in 2010, the $100,000 Adjusted Gross Income (AGI) limitation no longer applies 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 Married Filing Separately taxpayers can convert to a Roth IRA Roth IRAs

61. 61 Convertible accounts Convertible accounts – Traditional IRAs – 401(k) plans (Starting in 2008) – Profit sharing plans (Starting in 2008) – 403(b) annuity plans (Starting in 2008) – 457 plans (Starting in 2008) Non-Convertible accounts Non-Convertible accounts –“Inherited” IRAs –Education IRAs Roth IRAs

62. 62 Basis Can be Withdrawn Tax-Free (FIFO Method) Basis Can be Withdrawn Tax-Free (FIFO Method) Distributions are not subject to income tax if they do not exceed aggregate contributions and/or conversions to the Roth IRA Distributions are not subject to income tax if they do not exceed aggregate contributions and/or conversions to the Roth IRA Withdrawals made within five years of conversion if owner under age 59½ and no other exception applies Withdrawals made within five years of conversion if owner under age 59½ and no other exception applies Five-year period independent of five-year period for qualified distribution Five-year period independent of five-year period for qualified distribution Taxation of Distributions Roth IRAs

63. 63 (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. Roth IRAs Seven Reasons to Convert to Roth IRAs

64. 64 (5) Taxpayers who need to use IRA assets to fund their 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. Roth IRAs Seven Reasons to Convert to Roth IRAs

65. 65 The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket –However, there are times when it may make sense to convert more and go into higher tax brackets Roth IRAs Understanding the Mechanics

66. 66 In simplest terms, a traditional IRA will produce the same after-tax result as a Roth IRA provided that: –The annual growth rates are the same –The tax rate in the conversion year is the same as the tax rate during the withdrawal years (i.e. A x B x C = D; A x C x B = D) Roth IRAs Understanding the Mechanics

67. 67 Roth IRAs Understanding the Mechanics Example

68. 68 Critical decision factors Critical decision factors – Tax rate differential Year of conversion vs. withdrawal years Year of conversion vs. withdrawal years – Use of “outside funds” (i.e. non-qualifiedretirement accounts) to pay the income tax liability – Time horizon – IRC §691(c) “affect” Roth IRAs Understanding the Mechanics

69. 69 The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket The key to successful Roth IRA conversions is to keep as much of the conversion income as possible in the current marginal tax bracket –However, there are times when it may make sense to convert more and go into higher tax brackets Roth IRAs Understanding the Mechanics

70. 70 Single Married Filing Jointly Head of Household 10%$7,825$15,650$10,750 15%$31,850$63,700$42,650 25%$77,100$128,500$110,100 28%$160,850$195,850$178,350 33%$349,700 35%> $349,700 Roth IRAs Tax Brackets (2007) Understanding the Mechanics

71. 71 10% tax bracket 15% tax bracket 25% tax bracket 28% tax bracket 33% tax bracket 35% tax bracket Current taxable income Target Roth IRA conversion amount Optimum Roth IRA conversion amount? Roth IRAs Understanding the Mechanics

72. 72 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 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 Taxpayers may choose to “reconvert” their recharacterization –Reconversion may only take place at the later of the following two dates: The tax year following the original conversion OR The tax year following the original conversion OR 30 days after the recharacterization 30 days after the recharacterization Roth IRAs Understanding the Mechanics

73. 73 Conversion PeriodRecharacterization Period 1/1/2007 – First day conversion can take place 2007 12/31/2007 – Last day conversion can take place 4/15/2008 – Normal filing date for 2007 tax return 10/15/2008 – Latest filing date for 2007 tax return / last day to recharacterize 2007 Roth IRA conversion 12/31/2008 2008 Roth IRAs Roth IRA Conversion Timetable

74. 74 Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value (IRS Notice 2000-39) (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 All gains and losses to the entire Roth IRA, regardless of the actual stock or fund re- characterized, must be pro-rated Roth IRAs Anti “Cherry-Picking” Rule

75. 75 Traditional IRA ABC Fund: $250,000 YYZ Fund: $250,000 STEP 1 – Convert Traditional IRA Into Two Separate Roth IRAs Roth IRA #1 ABC Fund: $250,000 Roth IRA #2 YYZ Fund: $250,000 Roth IRAs Roth IRA Segregation Conversion Strategy

76. 76 STEP 2 – Payment of Income Taxes on Roth IRA Conversion IRS Taxpayer Income tax liability due on $500,000 conversion amount April 15, 2008* * NOTE: Either a tax return or an extension must be filed by this date. Regardless of what is chosen, the tax liability due on the Roth IRA conversion must be remitted by this date in order to avoid late payment penalties and interest. Roth IRA Segregation Conversion Strategy Roth IRAs

77. 77 STEP 3 – Recharacterization of Roth IRA Conversion Roth IRA #1 ABC Fund: $125,000 (Current Value) Roth IRA #2 YYZ Fund: $275,000 (Current Value) Traditional IRA #1 ABC Fund: $125,000 (Current Value) Recharacterization of IRA using the value at the date of conversion (e.g. $250,000) October 15, 2008* * NOTE: October 15, 2008 is the latest date for which a 2007 recharacterization can take place (either by filing extensions or by filing an amended return). Roth IRA Segregation Conversion Strategy Roth IRAs

78. 78 STEP 4 – Refund on Overpayment of Income Taxes Paid on Roth IRA Conversion IRS Taxpayer October 15, 2008 Refund of overpayment on recharacterization of Roth IRA conversion Roth IRA Segregation Conversion Strategy Roth IRAs

79. 79 Additional IRA Resources  Books: − “Life and Death Planning for Retirement Benefits” by Natalie Choate − “The Retirement Savings Time Bomb … and How to Defuse It” by Ed Slott − “Individual Retirement Account Answer Book” by Fleisher, Lippe and Levy  Websites: − www.ataxplan.com (Natalie Choate’s website) − www.wealthcounsel.com − www.IRAhelp.com  Training / CLE: − “Practice Building Bootcamp” (presented by Phil Kavesh) − WealthCounsel’s Two-Day IRA Seminar

80. 80  Training CDs: − “IRAs Payable to Trusts” (offered through WealthCounsel)  Software: − WealthDocs TM by WealthCounsel − Inherited IRA Analysis by Robert S. Keebler  Newsletters: − “Ed Slott’s IRA Advisor” − “Choate’s Notes” by Natalie Choate − “Employee Benefits and Retirement Planner Newsletter” by Leimberg Information Services Inc. (e-mail only) Additional IRA Resources