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


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



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



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)



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



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)



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)



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



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



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.



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



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



Relief from 50% Penalty “Reasonable Cause”

Relief from 50% Penalty “Reasonable Cause”



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


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)


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


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



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



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


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


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.


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


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


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


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



Using Aggregate Community Property AgreementUsing Aggregate Community Property Agreement

H IRA$1 million


Bypass Trust

$1.5 million

Survivor’sTrust

$500,000

W Rollover$1 million

PLRs 199912040; 199925033



Using PLR 200101021 TrustUsing PLR 200101021 Trust

H IRA$1 million


Bypass Trust

$1.5 million

Survivor’sTrust

$500,000

W Rollover$1 million



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



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



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



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



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



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



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

educational session seminar conducted by dennis sandoval

Documents

retirement plan

ird assets

taxed assets

tax law

plan slide

individual retirement

qualified plan benefits

qualified plans joint