Asset Protecting IRAs Particularly Inherited IRAs
The Advisors Forum
Interdisciplinary Series Teleconference
November 12, 2009
Presented by:
Jonathan A. Mintz, J.D.
The Advisors Forum
WealthCounsel, LLC
1
What We’ll Cover Today
• The Need - and the Problems
• Rules You Must Know
• A Unique Solution
2
3
Retirement Planning Assets
• Account for 34% of all household financial
assets - up from 14% in 1978!
• IRAs alone account for more than 10% and 47 million US households have IRAs
* According to 2009 (2nd qtr.) Investment Company
Institute study
4
Impact of Taxes
5
IRA Value
Decedent’s Age
Spouse’s Age
Oldest Child’s Age
Youngest Child
25
6
$1 million
60
54
28
The Problem?
Different Levels of Protection for
IRAs and Inherited IRAs
• State law exemption for IRAs (&
Roths?)
• Review state statutes and case law
• Unlimited protection or specified dollar
amount?
• Or amount reasonably necessary for the debtor
and any dependents (e.g., CA)?
• $1 million bankruptcy protection
7
The Problem?
Inherited IRAs
• Apparently no asset protection!
• See Robertson v. Deeb (FL 2nd Dist. Ct
of Appeal 2009)
• See In re Jarboe, 2007 WL 987314
(Bkrtcy S.D. Tex. 2007)
8
Another Problem?
Do beneficiaries take only the required
minimum distributions (RMD)?
• Accounts left outright are “found
money” for the beneficiary
• How long does it take a beneficiary to
spend or consume found money?
9
Can We Provide Asset
Protection and Ensure
Maximum Stretch Out?
10
Basic Concepts
• Generally, Participant must commence
Required Minimum Distributions (RMDs)
by Required Beginning Date (RBD)
11
Required Beginning Date
• RBD = April 1st in the year following the
calendar year in which the participant
reaches age 70½
• or the calendar year in which the
employee retires from employment
• Exception for Less Than 5% Owners
12
Required Minimum
Distributions (RMDs)
Applies to all:
• Qualified plans
• IRAs (including Roth IRAs held by
beneficiaries)
• Deferred compensation plans under IRC
§457
• IRC §403(b) annuity contracts
13
Calculating RMDs
RMDs are calculated based upon prior year
ending account balance divided by life
expectancy factor
Prior Year 12/31 Balance
RMD =
Life Expectancy Factor
14
Life Expectancy Factor
• Uniform Table for participant’s lifetime
distributions
• Exception if spouse is actually more than
10 years younger than participant - then
use Joint & Last Survivor Table
• Single Life Table for use by “qualified
beneficiary” after participant’s death
• Determines “Stretch Out” for “Inherited
IRAs”
15
Uniform Table
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
70
27.4
86
14.1
102
5.5
71
26.5
87
13.4
103
5.2
72
73
25.6
24.7
88
89
12.7
12.0
104
105
4.9
4.5
74
23.8
90
11.4
106
4.2
75
76
22.9
22.0
91
92
10.8
10.2
107
108
3.9
3.7
77
21.2
93
9.6
109
3.4
78
79
20.3
19.5
94
95
9.1
8.6
110
111
3.1
2.9
80
18.7
96
8.1
112
2.6
81
17.9
97
7.6
113
2.4
82
83
17.1
16.3
98
99
7.1
6.7
114
115 and older
2.1
1.9
84
85
15.5
14.8
100
101
6.3
5.9
16
Single Life Table
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
A ge
Diviso r
0
82.4
16
66.9
32
51.4
48
36.0
64
21.8
80
10.2
96
3.8
1
81.6
17
66.0
33
50.4
49
35.1
65
21.0
81
9.7
97
3.6
2
80.6
18
65.0
34
49.4
50
34.2
66
20.2
82
9.1
98
3.4
3
79.7
19
64.0
35
48.5
51
33.3
67
19.4
83
8.6
99
3.1
4
78.7
20
63.0
36
47.5
52
32.3
68
18.6
84
8.1
100
2.9
5
77.7
21
62.1
37
46.5
53
31.4
69
17.8
85
7.6
101
2.7
6
76.7
22
61.1
38
45.6
54
30.5
70
17.0
86
7.1
102
2.5
7
75.8
23
60.1
39
44.6
55
29.6
71
16.3
87
6.7
103
2.3
8
74.8
24
59.1
40
43.6
56
28.7
72
15.5
88
6.3
104
2.1
9
73.8
25
58.2
41
42.7
57
27.9
73
14.8
89
5.9
105
1.9
10
72.8
26
57.2
42
41.7
58
27.0
74
14.1
90
5.5
106
1.7
11
71.8
27
56.2
43
40.7
59
26.1
75
13.4
91
5.2
107
1.5
12
70.8
28
55.3
44
39.8
60
25.2
76
12.7
92
4.9
108
1.4
13
69.9
29
54.3
45
38.8
61
24.4
77
12.1
93
4.6
109
1.2
14
68.9
30
53.3
46
37.9
62
23.5
78
11.4
94
4.3
110
1.1
15
67.9
31
52.4
47
37.0
63
22.7
79
10.8
95
4.1
111
1.0
17
Required Minimum Distributions
Caveats:
 No Required Minimum Distributions in
2009
– Under Notice 2009-82, Participants have
until 11/30 or 60 days (whichever is later)
to rollover 2009 “RMDs”
 The qualified plan provides otherwise
•
Beware of optional plan provisions!
18
Spousal Rollovers
• Only a surviving spouse can rollover an
IRA (or qualified plan) to his or her own
IRA
• Once rolled over, spouse uses Uniform
Table to determine RMDs
• RMDs from rolled over IRA or qualified
plan must commence by spouse’s RBD
19
Rollovers by Non-Spouse
Beneficiaries
Pension Protection Act of 2006
• As of 1/1/07, a non-spouse beneficiary may be
able to do a trustee-to-trustee rollover of a
qualified plan to his or her own Inherited IRA
• Once rolled over, beneficiary uses Single Life Table to
determine RMDs
• RMDs from rolled over IRA or qualified plan must
commence by 12/31 of year following year of
participant’s death
20
Rollovers by Non-Spouse
Beneficiaries
• Under WRERA, plans must amend as of 1/1/10
to permit non-spouse “rollovers”
• Account must be titled in participant's name
(e.g., the 401(k) owner) for the benefit of the
beneficiary (e.g. "Mary Smith, Deceased IRA
f/b/o Jim Smith”)
21
Critical Questions?
Two Critical Questions:
1. Did the participant reach his or her
Required Beginning Date (RBD)?
2. Is there a “designated beneficiary” (DB)?
22
Required Minimum Distributions (RMDs)
Designated
Beneficiary
NonDesignated
Beneficiary
Death Before Required
Beginning Date
Death On or After Required
Beginning Date
Life Expectancy
Rule
Life Expectancy
Rule
“Ghost” Life
Expectancy
Rule
Five-Year Rule
23
Death After Required
Beginning Date
Planning Tip:
• Consider continuing with the
participant’s hypothetical life expectancy
if spouse wishes to access funds but is
younger than 59 ½
• To avoid 10% penalty
24
What is a Designated
Beneficiary?
Treas. Reg §1.401(a)(9)-4
• Must be named a DB under the terms of the plan or by an
affirmative election by the employee
• DB need not be specified by name but must be
identifiable on the date of death
• May be a class of beneficiaries capable of expansion or
contraction (e.g., my children or grandchildren)
• DB must be an individual alive on the date of death
• DB may also be individuals named as beneficiaries of a
qualifying trust
25
What is a Designated?
Beneficiary?
These are NOT a “designated beneficiary”
• Estate
• Charity
• Non-qualifying trust
• Any non-individual other than a qualifying trust
• Individual born after the date of the participant’s
death
26
The Retirement Trust
27
Advantages of Using
Trusts Generally
• Spendthrift protection
• Creditor protection
• Divorce (“Predator”) protection
• Special needs
• Consistent investment management
• Estate planning
• “Dead-hand” control
28
Disadvantages of Using
Trusts Generally
• Trust tax rates
• Legal and trustee fees
• Income tax returns
• Greater complexity
29
IRAs Payable to Trusts
Four Requirements of All IRA Trusts
1. Trust is valid under state law
2. Trust is irrevocable upon death of owner
3. Beneficiaries of the trust are identifiable
from the trust instrument
4. Documentation requirement is satisfied
30
Irrevocable Requirement
IRA
Payable to Family
Trust under RLT
Joint RLT does not get DB
Status, because Survivor’s
Trust is not Irrevocable
IRS views trust as one trust
(See PLRs 200317041,
200317043 & 200317044)
Joint RLT
Survivor Trust
31
Irrevocable
Family Trust
Two Types of Trusts
1. Conduit Trusts
2. Accumulation Trusts
*RMD Requirements apply to
both types
32
Conduit Trust
• Trust in which ALL distributions from the
IRA are immediately distributed to the trust
beneficiary/beneficiaries
Allows for easier identification of countable
beneficiaries - but at a cost
33
Accumulation Trust
Trust in which distributions from the IRA are
allowed to accumulate within the trust
34
Conduit Trusts - Example 1
35
Conduit Trusts - Example 2
36
Accumulation Trusts
• The key issue is to determine which
beneficiaries are “countable.”
• All beneficiaries are countable unless such
beneficiary is deemed to be a “mere potentia
successor” beneficiary.
37
Accumulation Trust - Example 1
38
Accumulation Trust - Example 2
39
Retirement Trusts
• Separate Retirement Trust or a trust in the
client’s revocable trust or will?
• Separate Retirement Trust gives the trust
maker more control over the downstream
beneficiaries
• This is particularly important if the trust is
an accumulation trust rather than a conduit
trust
40
Issues with RLTs and Trusts in
Wills
• Formula funding clause
•Pecuniary clauses and recognition of income (IRC
§ 661)
• Powers of appointment
• Adoption
• Payment of debts, taxes and expenses
•Apportionment language / Firewall provision
• Older or unidentifiable contingent
beneficiary or beneficiaries
• Ultimate beneficiary or beneficiaries
41
Hybrid Option
IRS has permitted a one-time“Toggle”
from Conduit to Accumulation Trust
• See PLR 200537044 – Gives Trust
Protector the power to toggle ab initio
• Note that we must convert GPOAs to
LPOAs, creating potential GSTT issues
• Can addresses other issues within RLT or
will
42
IRAs Payable to Trusts
Separate Shares
Payable to single trust
No separate shares identified
in the beneficiary designation form
IRA paid over oldest life expectancy
43
IRAs Payable to Trusts
Separate Shares
IRA payable to multiple sub-trusts
Each trust named in
beneficiary designation form
IRA paid trust beneficiary’s life expectancy
44
Summary:
The IRA “Legacy” Trust
• Naming a separate trust as designated beneficiary
is preferable to naming beneficiaries outright
• Ensures that the client’s goals are carried out, including
maximum stretch out
• Provides only level of asset protection against
beneficiaries creditors or upon divorce
• Keeps the assets under current advisor’s management!
• Examine on a case-by-case basis with input from
all advisors
45
Questions?
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Feel free to contact me at
Jonathan.Mintz@AdvisorsForum.com
or (888) 659-4069 ext 800
Thank You!
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