IRA Seminar for Advisors

Slide 1: What Every Attorney, Accountant and Financial Advisor Must Know About IRAs and 401ks The Wilsey Law Firm www.wilseylaw.com

Slide 2: What We Will Cover Minimum Distribution Rules  Disclaimers  Roth IRA Conversions  Beneficiary Designations  IRA Triple-Tax Trap  Use of Life Insurance with IRAs  Stretch IRAs  Stretch IRA Trusts  The Wilsey Law Firm www.wilseylaw.com

Slide 3: Minimum Distribution Rules Mandatory withdrawals upon reaching 70 ½  Plans grow on tax deferred basis  Keeps funds from growing tax deferred forever  Distributions made according to Uniform Life  Table Divide Account Balance on Dec. 31 of previous year  by Divisor  Recalculation v. Fixed Method The Wilsey Law Firm www.wilseylaw.com

Slide 4: Determining MRD During Participant’s Lifetime At age 70 ½  Except Roth’s  By December 31st of each year  MRD determined by Life Expectancy Divisor  Assuming MRDs only taken out  Account Balance will not start fall until participant is  well into 90’s  Account Balance will not be reduced to pre-70 ½ size until 110+ The Wilsey Law Firm www.wilseylaw.com

Slide 5: Determining MRD’s after death Ask Four Questions  Did the participant die before or after his RBD?  Are there Multiple Beneficiaries?  Do the benefits pass to a Designated Beneficiary?  What distribution option does the plan permit?  The Wilsey Law Firm www.wilseylaw.com

Slide 6: If Death Before RBD Surviving Spouse  Surviving Spouse’s Life Expectancy   Uniform Table Individual Non-Spouse Beneficiary  Individual Beneficiaries Life Expectancy   Single Life Table Estate, non-Stretch IRA Trust, or other non-DB  5-Year Rule   BAD,BAD, BAD The Wilsey Law Firm www.wilseylaw.com

Slide 7: If Death After RBD Surviving Spouse  Surviving Spouse’s or Participant’s Life Expectancy  Use Uniform Table or Single Life Respectively  Note: Recalculation Method v. Fixed Life Method  Individual Non-Spouse Beneficiary  Individual Beneficiary’s or Participant’s Life Expectancy  Single Life Table  Estate, non-Stretch IRA Trust, or other DB  Participant’s Life Expectancy  Better that 5-Year, but still BAD,BAD, BAD  The Wilsey Law Firm www.wilseylaw.com

Slide 8: Multiple Beneficiaries All individuals  Life expectancy of oldest beneficiary   Unless Separate Shares are created By December 31st of the year following death  Some Individuals, some non-Designated  Beneficiaries 5-Year rule   Unless Separate Shares are created The Wilsey Law Firm www.wilseylaw.com

Slide 9: Disclaimer Refusal to Accept a gift or inheritance  Basis for placing Spouse as Primary Beneficiary  Must meet standards of IRC 2518  Irrevocable, Unqualified, in Writing   Cannot have accepted and interest in the disclaimed  Made by 9 months after date of death  Must be delivered to correct parties  Disclaimant cannot say to whom property passes The Wilsey Law Firm www.wilseylaw.com

Slide 10: Roth Retirement Plans Treated like regular IRAs, unless otherwise  specified Tax-free distributions  No MRDs (except when inherited)  Can contribute same amount as regular IRA  Income must be below certain level to  contribute $95K single and $150k married   Contributions reduced if above these amounts The Wilsey Law Firm www.wilseylaw.com

Slide 11: Conversion Traditional IRAs converted to Roths  Tax must be paid as distribution  Must meet income requirements  Modified AGI cannot exceed $100,000   Conversion income does not count The Wilsey Law Firm www.wilseylaw.com

Slide 12: Conversions post-2009 No Income Limits  Anyone can convert  This is huge for Stretch IRAs  Distributions will not be taxed!   RMDs still required The Wilsey Law Firm www.wilseylaw.com

Slide 13: Why Convert? If income taxes are the same, net neutral  If income taxes rise, good move.  If income taxes fall, bad move  Always a good move for inherited IRAs  Taxes should be paid by outside funds  The Wilsey Law Firm www.wilseylaw.com

Slide 14: Beneficiary Designations Source of Client Problems, Advisor Liability  Generally should be  Primary: Spouse   Contingent: Kids, per stirpes If Stretch IRA Trust used, must be done  differently The Wilsey Law Firm www.wilseylaw.com

Slide 15: Triple Taxes Three Types of Taxes  Estate-55% after 2011   Federal Income-35%  State Income-9.3% The Wilsey Law Firm www.wilseylaw.com

Slide 16: Estate Tax Year Exemption Top Rate 2007 $2,000,000 45% 2008 $2,000,000 45% 2009 $3,500,000 45% 2010 Unlimited n/a 2011 $1,000,000 55% The Wilsey Law Firm www.wilseylaw.com

Slide 17: Example Bob in 2007 age 74  $1m real estate   $500k illiquid business  $500k IRA Dies in 2013 age 80  IRA worth $765,298.16  The Wilsey Law Firm www.wilseylaw.com

Slide 18: Result Estate Tax-55%-$420,913.00  Income Tax-35%-$147,319  State Income Tax-9.3%-$39,145  Taxes-$607,378-79% of IRA  Probably closer to 70% in reality (thanks CPAs!)  $157,919 to beneficiaries  This assumes beneficiary leaves the remainder in  IRA The Wilsey Law Firm www.wilseylaw.com

Slide 19: The Triple Tax in Action Estate Tax Federal income Tax State income Tax Amount to Beneficiary The Wilsey Law Firm www.wilseylaw.com

Slide 20: Stretching an IRA 2 Steps  Estate Tax paid from other assets  Life Insurance Policy   ILIT RMDs only taken out by beneficiary  “Stretch” according to Beneficiaries life expectancy  The Wilsey Law Firm www.wilseylaw.com

Slide 21: Example 2 Bob  $1m real estate   $500k business  $500k IRA  $500k ILIT Dies in 2013  IRA worth $765,298.16  IRA is properly stretched at death  The Wilsey Law Firm www.wilseylaw.com

Slide 22: Stretch Results Jack (Bob’s son) inherits IRA at age 50  Jack dies at age 80  $7,299,862.71 in distributions  Still $3,146,894.13 in IRA  $10,895,441.81 in family wealth created  The Wilsey Law Firm www.wilseylaw.com

Slide 23: Ef f e c t of t h e S t r e t c h on D i st r i bu t i o n s t o F a mi l y $ 12,000,000 $ 10,000,000 $ 8,000,000 $ 6,000,000 $ 4,000,000 $ 2,000,000 $0 No Str etch Str etch $157,919.00 v. $10,895,441.81 The Wilsey Law Firm www.wilseylaw.com

Slide 24: NO BRAINER!!! The Wilsey Law Firm www.wilseylaw.com

Slide 25: Stretch is NOT Automatic Blow-Outs are the norm, not the exception  Why  Not understanding rules and choices   Asking advice of Custodian  Corporate Plan requires withdrawal  Beneficiary Rollover  Poor Money Management  Spending The Wilsey Law Firm www.wilseylaw.com

Slide 26: Problems for Prudent Beneficiaries  Creditors  Divorce  Lawsuits The Wilsey Law Firm www.wilseylaw.com

Slide 27: Living Trust Will Not Work Limited Creditor Protection  Mandatory Distributions  Non-Designated Beneficiaries  Oldest Beneficiary is Spouse  No Stretch (Conduit) Language  The Wilsey Law Firm www.wilseylaw.com

Slide 28: Solution STAND ALONE STRETCH IRA TRUST The Wilsey Law Firm www.wilseylaw.com

Slide 29: Stretch IRA Trust Forces Stretch  Provides Creditor Protection  Stand Alone  Revocable  Beneficiary of IRA upon death  Surviving Spouse still receives Benefit  Independent Trustee  The Wilsey Law Firm www.wilseylaw.com

Slide 30: Spouse Spouse should receive trust outright  Beneficiaries  Primary: Spouse   Contingent: Each child’s share of the Stretch IRA Trust Spouse can disclaim if sufficient other assets  ILIT paying spouse income?  The Wilsey Law Firm www.wilseylaw.com

Slide 31: Example Bob’s son Jack receives Bob’s IRA in a Stretch  IRA Trust Jack gets sued, $2million judgment  Jack’s IRA is protected, not lost  Stretch is preserved  If no Stretch IRA trust, IRA is probably lost  The Wilsey Law Firm www.wilseylaw.com

Slide 32: Accumulation v. Conduit Accumulation  Amounts held in trust  Conduit  RMDs distributed every year   Trust Protector can switch to Accumulation (1 time) The Wilsey Law Firm www.wilseylaw.com

Slide 33: Conclusion MRD Requirements  Problem: Triple Tax  Solution: Stretch  Roadblock: Stretch is not Automatic  Solution: Stretch IRA Trust  The Wilsey Law Firm www.wilseylaw.com