Magical Mystery Tour: An Introduction to IRA and Retirement Plan Basics

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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

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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

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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

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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)

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Overview of Retirement Assets

• Options for Distributions from Qualified Plans
• Joint and Survivor Annuity
• Single Life Annuity
• Period Certain Annuity
• Lump Sum

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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 participants life
• Modification allowed after participant is 35 or
  over, but only with consent of spouse
• IRC 401(a)(11) 417(a)(6)(B)

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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)

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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

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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

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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

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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

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Overview of Retirement Assets
Uniform Table Uniform Table Uniform Table Uniform Table Uniform Table Uniform Table Uniform Table Uniform Table Uniform Table 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
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Overview of Retirement Assets
Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table Selected Excerpt from Joint Table 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
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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

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Overview of Retirement Assets

• Relief from 50 Penalty
• Reasonable Cause

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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

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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)

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Distributions at Death

• Determination of Beneficiary
• Beneficiary to be determined by September 30th of
  year after participants 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

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Distributions at Death

• Spouse as Beneficiary
• Spouse must be sole beneficiary of IRA
• Only beneficiary that can rollover the
  decedents IRA to his or her own IRA
• No RMDs until age 70 ½
• Use Uniform Table
• Can name new beneficiaries to take at death

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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

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Distributions at Death

• Spousal Inherited IRA
• Death After RBD
• Distributions based on the longer of spouses or
  participants life expectancy
• Can can delay taking distributions until the
  deceased spouse would have reached age 70 ½
• Use Single Life Expectancy Table
• If using spouses life expectancy, recalculate
  each year. If using participants life
  expectancy, then find age at date of death, then
  subtract one each year
• Can name new beneficiaries to take at death

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Distributions at Death

• Inherited IRA (Beneficiary Other Than Spouse)
• Death Before RBD
• 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

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Distributions at Death

• Inherited IRA (Beneficiary Other Than Spouse)
• Death After RBD
• Option 1
• Distributions based on longer of beneficiarys
  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 participants death
• Use Single Life Expectancy Table, or
• Option 2
• Five-Year Rule

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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
  participants death.

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Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs 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
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Overview of Retirement Assets
Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs Single Life Expectancy Table for Inherited IRAs 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
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Distributions at Death

• No Designated Beneficiary Named?
• No beneficiary designated by participant
• Estate
• Charity
• Non-Qualified Trust

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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

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Distributions at Death
Death Before RBD Death On or After RBD
Spouse Rollover Uniform Table Otherwise, Spouses Life Expectancy Recalculated Rollover- Uniform Table Otherwise, Greater of Spouses or Participants Life Expectancy
Non-Spouse Beneficiarys Life Expectancy Greater of Beneficiarys or Participants Life Expectancy
Non-Qualified 5-Year Rule Life Expectancy of Participant or 5-Year Rule
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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)

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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

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Qualified DesignatedBeneficiary Trust

• Funding Bypass Trust Using Disclaimed IRA

H IRA 1 million
Living Trust 3 million
Bypass Trust 1.5 million 500,000
Survivors Trust 1.5 million
W Rollover 500,000 Disclaim 500,000
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Qualified DesignatedBeneficiary Trust

• Funding Bypass Using Spousal GPOA PLR 200101021

H IRA 1 million
Living Trust 3 million
Bypass Trust 2 million
Survivors Trust 1 million
W Rollover 1 million
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Qualified DesignatedBeneficiary Trust

• Funding Bypass Using Aggregate Community Property
  Agreement

H IRA 1 million
Living Trust 3 million
Bypass Trust 2 million
Survivors Trust 1 million
W Rollover 1 million
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Qualified DesignatedBeneficiary Trust

• Look through to trust beneficiaries, if
• Trust is valid under state law
• Trust is irrevocable or becomes irrevocable by
  participants 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

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Qualified DesignatedBeneficiary Trust

• Look through beneficiaries
• Use the life expectancy of oldest beneficiary to
  determine RMDs
• Treas. Reg. 1.401(a)(9)-4 QA-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 200234074

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Qualified DesignatedBeneficiary Trust

• Who is the oldest look through beneficiary?
• CAUTION Accumulation Trusts
• PLR 200228025
• Solution
• Limit potential beneficiaries
• Conduit Trust

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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

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Qualified DesignatedBeneficiary Trust

• Look through beneficiaries
• CAUTION Using retirement assets to pay trustors
  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

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Qualified DesignatedBeneficiary Trust

• Funding Bypass Trust
• Pecuniary Funding Formula
• ILM 200644020 (December 15, 2005)
• Contra finding in PLRs 9524020, 9608036, 9623056
  and 9808043

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Qualified DesignatedBeneficiary 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

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Any Questions?
Wheresthe bathroom?