the northwestern mutual life insurance company – milwaukee, wi estate planning for retirement...

Download The Northwestern Mutual Life Insurance Company – Milwaukee, WI Estate Planning for Retirement Benefits April Caudill, J.D., CLU, ChFC, AEP Senior Advanced

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  • Slide 1
  • The Northwestern Mutual Life Insurance Company Milwaukee, WI Estate Planning for Retirement Benefits April Caudill, J.D., CLU, ChFC, AEP Senior Advanced Planning Attorney Advanced Financial Security Planning Northwestern Mutual
  • Slide 2
  • Overview Estate Planning Making certain property is distributed after death according to the owners wishes Minimizing estate and income taxes Taking into account Specific needs of beneficiaries Need for flexibility to adjust to changing circumstances Return of estate tax in 2011
  • Slide 3
  • Overview Special issues specific to qualified assets: Income in respect of a decedent (IRD): Impact of both income and estate tax Minimum distribution requirements and potential conflicts with planning objectives Retirement assets pass by beneficiary designation; many other assets pass by will Retirement assets can offer long-term income tax deferred growth (or tax-free growth for Roth assets)
  • Slide 4
  • Stretch Concept Stretch IRA Qualified assets subject to income tax, but not until distributed! What happens until they are distributed? Continued tax-deferred growth Or, tax-free in a Roth account Logical conclusion: let the assets grow! IRS says not so fast you have to at least take a little bit out each year.
  • Slide 5
  • Stretch Concept Stretch = make the IRA last as long as possible, take out only the minimum Youngest beneficiaries receive the most dramatic benefit amount received over their lifetime can be several times the initial account value inherited, depending on growth rate (assuming life expectancy fraction payout method is used) Use of trust can help assure the IRA remains intact, continues tax-deferred growth
  • Slide 6
  • Stretch Concept Stretch requirements Designated beneficiary status Named as beneficiary Taking under ERISA plan terms, such as spouse Trust special requirements Individual beneficiary: not estate or charity Big picture: long-term tax deferred growth can be a powerful wealth transfer tool Liquidity provided by an income tax free death benefit can help families optimize the tax advantages of qualified assets
  • Slide 7
  • Required Minimum Distributions Individual beneficiaries Nonspouse Single life payout Deadline for election 5-year rule or ghost life expectancy Spouse Rollover option Uniform lifetime table Maximum permitted delay Multiple individuals and separate accounts
  • Slide 8
  • Required Minimum Distributions Charitable beneficiaries Tax efficient planning Impact of charitable beneficiary on designated beneficiary status of other beneficiaries September 30 beneficiary determination date Estate beneficiaries No look-through No life expectancy Some PLRs allow spousal rollover
  • Slide 9
  • Required Minimum Distributions Planning objectives Make beneficiary designations that optimize achievement of clients goals Use the longest permitted measuring life so that income tax deferral or income tax-free growth is maximized Avoid potential exposure to 50% penalty Recognize the interaction (conflicts) between RMDs and other trust requirements or objectives
  • Slide 10
  • Marital Planning Number one IRA or QP beneficiary: spouse Objective: qualify for the unlimited marital deduction Four ways (if U.S. citizen) Leave assets to spouse outright by naming spouse as beneficiary Name a general power marital trust as beneficiary Name a QTIP trust as beneficiary Joint and survivor annuity
  • Slide 11
  • Marital planning Easiest: assets to surviving spouse outright by naming spouse as beneficiary Income tax advantages (versus trust) Simplicity Rollover dilemma for younger spouse Decision of whether to maximize stretch by rolling over to spouses own IRA Alternative 1: leave funds in inherited IRA, start taking RMDs until age 59 Alternative 2: roll over; hope funds are not needed Alternative 3: prevent dilemma with life insurance If its already too late
  • Slide 12
  • Marital planning General power marital trust as beneficiary General power marital trust requirements: Surviving spouse must be entitled to all the income from the trust The spouse must be entitled to appoint the property to the himself or herself, or his or her estate, and No other person can have the power to appoint the property to someone other than the spouse Note these are broad powers, tantamount to outright ownership. Leaving benefits to spouse outright is simpler and avoids disadvantages of using a trust
  • Slide 13
  • Marital Planning General Power Marital Trust as beneficiary Note that certain plans require spousal consent to name beneficiary other than spouse Disadvantages of naming marital trust as beneficiary No ability to delay distributions until decedent would have reached age 70 Unless benefit is rolled over to surviving spouses own IRA (outside of trust), payouts use single life table (less deferral) Surviving spouse might not lose ability to make rollover of withdrawals in excess of RMDs; Depends on extent to which withdrawals are subject to a trustees discretion, or otherwise restricted.
  • Slide 14
  • Marital Planning Qualified terminable interest property (QTIP) trust as beneficiary Allows account owner/participant to limit surviving spouses access to principal, direct it to children or other heirs Spouse can be given any degree of access to principal or no access Spouse can be given limited power to appoint principal at death, or not Typically used to assure that children from a previous marriage receive principal after death of surviving spouse
  • Slide 15
  • Marital Planning Requirements for QTIP treatment: Spouse must be entitled to all the income from the trust, payable at least annually, No other person can have the power to appoint the property to anyone other than the spouse during the spouses lifetime, and Executor must irrevocably elect QTIP treatment on the decedent's estate return for both the trust and the IRA
  • Slide 16
  • Marital Planning QTIP trust requirement: Entitled to All Income Trust terms should entitle the spouse to both the trust's and the plan's income annually Easiest way to satisfy is for trustee to calculate the "income" of the both trust and the IRA Trustee then withdraws from the IRA the greater of its income or the RMD amount Disadvantageous if RMD would have been much lower than income (e.g., young spouse)
  • Slide 17
  • Marital Planning QTIP trust requirement: Entitled to All Income Determination of income under state law varies IRS has approved use of unitrust amount (generally 3% to 5%) IRS approves of traditional method IRS disapproves of 10% rule where 90% of RMD amount is allocated to principal/10% to income. Note that some trusts/state statutes define income in this manner. Might not qualify for marital deduction. (See Revenue Ruling 2006-26, 2006-22 IRB 939 )
  • Slide 18
  • Marital Planning QTIP Trust as beneficiary: Disadvantages Complexity: defining income, reconciling income with RMDs Might not accomplish goals if surviving spouse is near age of children. Perhaps acquire life insurance instead for surviving spouse and leave qualified assets to kids (or vice versa).
  • Slide 19
  • Marital planning Pecuniary Formula Marital Bequests What is this? Participants will designates a specific dollar amount to go to the marital and credit shelter trust Executor allocates IRA to the trust in satisfaction of the bequest Potential taxation at the estate level on the IRA or plan proceeds Some PLRs have allowed spousal rollover in these circumstances Alternative is use of a fractional formula: e.g., of my estate to each trust
  • Slide 20
  • Marital planning Noncitizen Spouse Deferred estate tax treatment available only for assets passing to qualified domestic trust (QDOT), unless modified by estate tax treaty Designed to prevent noncitizen surviving spouse from taking assets outside the U.S., escaping transfer taxes QDOT must meet other requirements for marital or QTIP trust plus additional ones
  • Slide 21
  • Marital Planning Additional requirements for QDOT trusts: Trustee should be a U.S. domestic corporation; No distributions of principal permitted without withholding of estate tax Trust must be maintained and administered under the laws of a state or the District of Columbia. Bonding requirements and limitations on the amount of foreign real property the trust can hold.
  • Slide 22
  • Marital Planning QDOT practical issues: QDOT can be named as beneficiary, or nonspouse beneficiary can have one created and roll over assets to it QDOT can also be structured as an IRA if maintained at a financial institution Requirement that no principal be distributed; deferred estate tax owed if RMD amount exceeds trust income Determination of income subject to same state law variations as with QTIP trust
  • Slide 23
  • Marital Planning Dealing With the QDOT requirements: Participant could leave the retirement assets to other beneficiaries and purchase life insurance in an ILIT to benefit the noncitizen spouse; Participant could forego the marital deduction and have executor pay the estate tax at the first death; Roth conversion could allow surviving spouse to avoid RMDs
  • Slide 24
  • Marital Planning Rollovers by Noncitizen Rollover to a plan in another country is a taxable distribution (10% penalty m


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