1. ABA RPTE professors corner
Retirement Accounts:
Planning for a Lifetime ... and More!
PROF. JONATHAN FORMAN
University of Oklahoma College of Law
PROF. CHRISTOPHER HOYT
University of Missouri (Kansas City) School of Law
MODERATOR: PROF. AMY MORRIS HESS
University of Tennessee College of Law

2. Planning FOR Retirement

3. Longevity Risk Risk of outliving your retirement savings
Life expectancy varies with such demographic factors as gender, income, educational level & race
− 65-year-old American man: 50% chance of living to 82; 20% chance of living to 89
− 65-year-old American woman: 50% chance of living to 85; 20% chance of living to 92
− 65-year-old American couple: 50% chance that at least one will live to age 88; 30% chance that at least one will live to 92
Retirements can last for 30 years or more

4. Demographics of Life Expectancy
Life expectancy varies with such demographic factors as gender, income, educational level & race
− Women live longer than men
− Rich live longer than poor

5. Retirement Income in the U.S.
48.6 million retirees in 2014
− 66.4 million in 2025
− 82.1 million in 2040
Sources of Retirement Income
− Social Security
− Pensions
− Individual Retirement Accounts (IRAs)
− Annuities
− Individual savings & a savings withdrawal plan

6. Social Security Social Security
− Inflation-adjusted pension benefits
− 40.2 million retirees
− $1,344 per month, average benefit
Supplemental Security Income for the poor
− 2.1 million elderly beneficiaries
− $435 per month, average benefit

7. THREE STAGES OF A RETIREMENT ACCOUNT
Accumulate Wealth
Retirement Withdrawals
Distributions After Death

8. THREE STAGES OF A RETIREMENT ACCOUNT
Accumulate Wealth
Retirement Withdrawals
Distributions After Death

9. Pensions, IRAs & Annuities
$27.3 Trillion Retirement Savings
− $11.3 trillion in defined benefit plans
− $6.3 trillion in defined contribution plans
− $7.4 trillion in IRAs
− $2.3 trillion in annuities

10. A Voluntary Retirement Savings System
At any point in time, only about half of American workers have a pension
− 66% of private-sector workers have access
− 49% participated
− Greater coverage among older workers, whites, highly educated workers, full-time workers, higher-income workers & workers at larger firms
Participation in IRAs is even lower
Individuals rarely buy annuities

11. Pensions: Favorable Tax Treatment
Employer contributions to a pension are not taxable to the employee
The pension fund’s earnings on those contributions are tax-exempt
Employees pay tax only when they receive distributions of their pension benefits in retirement

12. Defined Benefit (DB) Plans
In a defined benefit plan, an employer promises employees a specific benefit at retirement
− e.g., a worker who retires after 30 years of service with final pay of $50,000 could receive a pension of $30,000 = 2% × 30 years × $50,000 final pay

13. Defined Benefit Plans
Traditional DB plans pay out as lifetime annuities
− Qualified joint-and-survivor annuity (QJSA) for married couples
− Lump sums are often available

14. Defined Contribution (DC) Plans
In a DC plan, the employer & employee can contribute to an individual investment account for the worker
− e.g., a worker who earned $50,000 in a given year might have $5,000 contributed to an individual investment account for her ($5,000 = 10 percent × $50,000).
− Her benefit at retirement would be based on all such contributions plus investment earnings.

15. Defined Contribution Plans
Major shift from DB plans to DC plans
401(k) plans are the most popular
− Allow individuals to tax-shelter up to $18,000/year in 2017
Workers over the age of 50 can contribute another $6,000
DC plans usually make distributions as lump sums or periodic distributions, but lifetime annuities are possible

16. Individual Retirement Accounts (IRAs)
In 2017, individuals can contribute and deduct up to $5,500 to an IRA (plus $1,000 if over age 50)
− Spouses can do the same
Like private pensions, IRA earnings are tax-exempt, & distributions are taxable

17. Roths Since 1998, individuals have been permitted to set up Roth IRAs.
− Unlike regular IRAs, contributions to Roth IRAs are not deductible. Instead, withdrawals are tax-free. Like regular IRAs, however, Roth IRA earnings are tax-exempt.
Roth 401(k)s and Roth 403(b)s have similar tax features:
− No exclusion for contributions, but account earnings & withdrawals are tax-free

18. Annuities
Also, annuities get somewhat favorable tax treatment (IRC § 72)
− No tax until distributions begin, and then only a portion of each annuity payment is taxable
The original investment is recovered tax-free
Today, a $100,000 would buy a 65-year-old man a lifetime annuity that paid $6,540 a year (6.54%)

19. Retirement Withdrawals
THREE STAGES
Accumulate Wealth
Retirement Withdrawals
Distributions After Death

20. TAXATION OF DISTRIBUTIONS
General Rule
– Ordinary income
– 100% exempt from 3.8% NIIT
Special Rules:
-- Tax-free return of capital
-- NUA for appreciated employer stock
-- Roth distributions are tax-free

21. Objective of Tax Laws: Provide Retirement Income
Consequently, there are laws to:
Discourage distributions before age 59½
Force distributions after
age 70½

22. USUAL OBJECTIVE: Defer paying income taxes in order to get greater cash flow
Principal 10% Yield
Pre-Tax Amount $ 100,000 $ 10,000
Income Tax
on Distribution (40%) ,000
Amount Left to Invest $ 60,000 $ 6,000

23. REQUIRED MINIMUM DISTRIBUTION (“RMD”)
BACKGROUND: 50% penalty if not
receive distribution from IRA, 401(k), etc:
#1 – lifetime distributions from own IRA:
beginning after age 70½
#2 – an inherited IRA, 401(k), etc –
 beginning year after death

24. REQUIRED MINIMUM DISTRIBUTIONS *LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/ % % % % % % %

25. ADVANTAGES OF ROTH IRAs
Unlike a regular IRA,
no mandatory lifetime distributions from a
Roth IRA after age 70½
Yes, there are mandatory distributions after death

26. Distributions After Death
THREE STAGES
Accumulate Wealth
Retirement Withdrawals
Distributions After Death

27. Distributions After Death
Income taxation
Mandatory ERISA distributions
Estate taxation
Asset Protection (Clark v. Ramaker)
Collision of four legal worlds at death

28. Distributions After Death
>Income taxation
Mandatory ERISA distributions

29. INCOME IN RESPECT OF A DECEDENT - “IRD” – Sec. 691
No stepped up basis for retirement assets
After death, payments are income in respect of a decedent (“IRD”) to the beneficiaries
Common mistake in the past: children liquidate inherited retirement accounts.

30. Distributions After Death
>Income taxation
> Mandatory ERISA distributions

31. Distributions After Death
After death, must start liquidating the account
Federal tax law provides that the maximum time period to liquidate an inherited account is either:
Five years
-- or --
Remaining life expectancy of the beneficiary

32. Distributions After Death
Company policy may require faster liquidation
Employer might require account of deceased employee to liquidated in just one year
No such problem with IRAs
Beneficiary of employer plan account can compel transfer to an inherited IRA

33. Distributions After Death
Tax planning for inherited accounts:
* DEFER distributions as long as possible
– greater tax savings
* Make payments over the beneficiary’s life
expectancy - “Stretch IRA”

34. Distributions After Death
“ life expectancy“
Oversimplified: Half of population will die before that age, and half will die after

35. REQUIRED MINIMUM DISTRIBUTIONS *LIFE EXPECTANCY TABLE*
Age of Beneficiary Life Expectancy
more years

36. REQUIRED MIN. DISTRIBUTIONS *LIFE EXPECTANCY TABLE* “STRETCH IRAS”
Age of Beneficiary Life Expectancy
more years

37. REQUIRED MIN. DISTRIBUTIONS *LIFE EXPECTANCY TABLE* “STRETCH IRAS”
Age of Beneficiary Life Expectancy
% more years % % % % % %

38. REQUIRED MINIMUM DISTRIBUTIONS * DEFINITIONS *
Required Beginning Date (“RBD”)
April 1 in year after attain age 70½
Designated Beneficiary (“DB”)
A human being. An estate or charity
can be a beneficiary of an account,
but not a DB.
Determination Date
September 30 in year after death.

39. HOW TO ELIMINATE BENEFICIARIES BEFORE DETERMINATION DATE
Disclaimers
Full distribution of share
Divide into separate accounts

40. REQUIRED DISTRIBUTIONS IF NO DESIGNATED BENEFICIARY
Death Before RBD Death After RBD
Remaining life
FIVE expectancy of
YEARS someone who is
decedent’s age at
death

41. REQUIRED DISTRIBUTIONS IF ALL BENEFICIARIES ARE DESIGNATED BENEFICIARIES
Death Before RBD Death After RBD
Maximum term is the life expectancy of the oldest beneficiary of the account.
Exception if DB is older than decedent
If establish separate account for each beneficiary, then each beneficiary can use own life expectancy.

42. MARRIED COUPLES: RETIREMENT ASSETS
Surviving spouse has an option that no other beneficiary has:
a rollover of deceased spouse’s retirement assets to her or his own new IRA (creditor protection, too!)
Other beneficiaries only option: an inherited IRA

43. REQUIRED DISTRIBUTIONS IF SOLE BENEFICIARY IS SURVIVING SPOUSE
Spouse can recalculate life expectancy
IRAs only: Spouse can elect to treat IRA as her own
Decedent die before 70½?
Can wait for distribution

44. MEDIAN AGE AT DEATH ON FEDERAL ESTATE TAX RETURNS:
Age 80 – Men
Age 84 - Women

45. MARRIED COUPLES: RETIREMENT ASSETS
Should the estate plan provide:
-- a rollover of deceased spouse’s retirement assets to a new IRA?
-- or --
-- the deceased spouse’s retirement assets are payable to a trust for the surviving spouse?

46. Exception: “Look-through” trust if four conditions
FUNDING TRUSTS
General Rule: Trust is not DB
Exception: “Look-through” trust if four conditions
Types: -- “accumulation trusts”
-- “conduit trusts”

47. USUAL OBJECTIVE: Defer paying income taxes in order to get greater cash flow
Principal 10% Yield
Pre-Tax Amount $ 100,000 $ 10,000
Income Tax
on Distribution (40%) ,000
Amount Left to Invest $ 60,000 $ 6,000

48. REQUIRED MINIMUM DISTRIBUTIONS *LIFE EXPECTANCY TABLE*
Age of Beneficiary Life Expectancy
more years
more years
more years

49. MANDATORY DISTRIBUTIONS [Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER Trust Trust .
% % %
% % %
% % %
% empty %
% empty %

50. MANDATORY DISTRIBUTIONS [Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER Trust Trust .
% % %
% % %
% % %
% empty %
% empty %

51. MANDATORY DISTRIBUTIONS [Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER Trust Trust .
% % %
% % %
% % %
% empty %
% empty %

52. MANDATORY DISTRIBUTIONS [Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER Trust Trust .
% % %
% % %
% % %
% empty %
% empty %

53. IRS PLRs: Surviving Spouse Rollover
10 IRS Private Letter Rulings &2014
Surviving spouse can rollover deceased spouse’s IRA, even when the account is payable to:
Trust for the spouse
The estate, with estate pour-over into a trust for the spouse
The estate, where the spouse is the sole or residuary beneficiary of the estate

54. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS
2012 – Highway Bill – not enacted
President Obama budget proposal
June, 2014 – Sen. Wyden adds to Highway Bill
Sept, 2016 – Senate finance committee action
EXCEPTIONS
-- Spouse -- minor child -- disabled
-- Person not more than ten years younger .

55. Age of Beneficiary Life Expectancy 40 2.3% 43.6 50 2.9% 34.2
REQUIRED MINIMUM DISTRIBUTIONS Example: Death at age 80? CURRENT LAW: *Life Expectancy Table*
Age of Beneficiary Life Expectancy
% more years % % % % %
% * [10.2 yrs]

56. Age of Beneficiary Life Expectancy 40 5 50 5 60 5 70 5.9% 17.0
REQUIRED MINIMUM DISTRIBUTIONS Example: Death at age 80? PROPOSED: FIVE YEARS if >10 yrs younger
Age of Beneficiary Life Expectancy
years % %
% * [10.2 yrs]

57. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS
EXCEPTIONS
-- Spouse -- minor child -- disabled
-- Person not more than ten years younger
TAX TRAP: Does naming a trust for a spouse (e.g., QTIP trust; credit shelter trust) as an IRA beneficiary mean required liquidation in 5 years?

58. SENATE PROPOSAL: LIQUIDATE ALL INHERITED IRAs IN FIVE YEARS
IMPLICATIONS FOR CHARITIES
Donors more likely to consider
Outright bequests
Retirement assets to tax-exempt CRT
Child: income more than 5 years; then charity
Spouse only (marital estate tax deduction)
Spouse & children (no marital deduction)

59. ABA RPTE professors corner
Retirement Accounts:
Planning for a Lifetime ... and More!
PROF. JONATHAN FORMAN
University of Oklahoma College of Law
PROF. CHRISTOPHER HOYT
University of Missouri (Kansas City) School of Law
MODERATOR: PROF. AMY MORRIS HESS
University of Tennessee College of Law