Educational Session Seminar Conducted by Dennis Sandoval.
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Transcript of Educational Session Seminar Conducted by Dennis Sandoval.
Educational
SessionSeminar Conducted by
Dennis Sandoval
Educational
SessionSeminar Conducted by
Dennis Sandoval
The Interaction of RetirementAssets With Trusts:
A Magical Mystery Tour
The Interaction of RetirementAssets With Trusts:
A Magical Mystery Tour
Dennis M. SandovalDirector of Education
American Academy of Estate Planning Attorneys
Dennis M. SandovalDirector of Education
American Academy of Estate Planning Attorneys
Copyright 2004 American Academy of Estate Planning Attorneys
Dennis M. SandovalDennis 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
Our Ground RulesOur Ground Rules
We’ve got lots of ground to cover, so … We’ll handle questions after the seminar… Write down questions
that occur to you, soyou can ask us later!
We’ve got lots of ground to cover, so … We’ll handle questions after the seminar… Write down questions
that occur to you, soyou can ask us later!
Our Seminar GoalsOur 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
Overview of Retirement Assets
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
Overview of Retirement Assets
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
Overview of Retirement Assets
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)
Overview of Retirement Assets
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
Overview of Retirement Assets
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 participant’s 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 participant’s life Modification allowed with consent of spouse after
participant reaches age 35. IRC §§ 401(a)(11); 417(a)(6)(B)
Overview of Retirement Assets
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)
Overview of Retirement Assets
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
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
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
Overview of Retirement Assets
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.
Overview of Retirement Assets
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
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
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
Overview of Retirement Assets
Relief from 50% Penalty “Reasonable Cause”
Relief from 50% Penalty “Reasonable Cause”
Overview of Retirement Assets
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)
Distributions at DeathDistributions 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, 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 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, 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 DeathDistributions at Death
Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can “roll-over” the decedent’s
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. 2003-16; IRC § 408(d)(3)(I)
Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can “roll-over” the decedent’s
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. 2003-16; IRC § 408(d)(3)(I)
Distributions at DeathDistributions 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
Distributions at DeathDistributions 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
Overview of Retirement Assets
Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAsAge 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
Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAsAge 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 DeathDistributions at Death
Inherited IRA (Beneficiary Other Than Spouse) 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
Inherited IRA (Beneficiary Other Than Spouse) 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 DeathDistributions 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.
Distributions at DeathDistributions 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
Distributions at DeathDistributions 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
Distributions at DeathDistributions 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
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
Reasons to Name a Trust as Beneficiary of Retirement
Assets
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Underfunded Credit Shelter or Bypass TrustUnderfunded Credit Shelter or Bypass Trust
H IRA$1 million
Living Trust$2 million
Bypass Trust
$1 million +$500,000
Survivor’sTrust
$1 million
W Rollover$500,000Disclaim$500,000
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Using Aggregate Community Property AgreementUsing Aggregate Community Property Agreement
H IRA$1 million
Living Trust$2 million
Bypass Trust
$1.5 million
Survivor’sTrust
$500,000
W Rollover$1 million
PLRs 199912040; 199925033
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Using PLR 200101021 TrustUsing PLR 200101021 Trust
H IRA$1 million
Living Trust$2 million
Bypass Trust
$1.5 million
Survivor’sTrust
$500,000
W Rollover$1 million
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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 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
participant’s 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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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
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 DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Who is the oldest look through beneficiary? CAUTION: “Accumulation” Trusts
PLR 200228025 Solution:
Limit potential beneficiaries “Conduit” Trust
Who is the oldest look through beneficiary? CAUTION: “Accumulation” Trusts
PLR 200228025 Solution:
Limit potential beneficiaries “Conduit” Trust
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Look through beneficiaries CAUTION: Using retirement assets to pay trustor’s
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 trustor’s
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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
Separate Share RuleSeparate 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
Separate Share RuleSeparate 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