IRA Seminar for Advisors

What Every Attorney, Accountant and Financial Advisor Must Know About IRAs and 401ks

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

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

Determining MRD During Participant’s Lifetime
At age 70 ½
Except Roth’s
By December 31 st 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+

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?

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

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

Multiple Beneficiaries
All individuals
Life expectancy of oldest beneficiary
Unless Separate Shares are created
By December 31 st of the year following death
Some Individuals, some non-Designated Beneficiaries
5-Year rule
Unless Separate Shares are created

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

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

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

Conversions post-2009
No Income Limits
Anyone can convert
This is huge for Stretch IRAs
Distributions will not be taxed!
RMDs still required

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

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

Triple Taxes
Three Types of Taxes
Estate-55% after 2011
Federal Income-35%
State Income-9.3%

Estate Tax 55% $1,000,000 2011 n/a Unlimited 2010 45% $3,500,000 2009 45% $2,000,000 2008 45% $2,000,000 2007 Top Rate Exemption Year

Example
Bob in 2007 age 74
$1m real estate
$500k illiquid business
$500k IRA
Dies in 2013 age 80
IRA worth $765,298.16

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

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

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

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

$157,919.00 v. $10,895,441.81

NO BRAINER!!!

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

Problems for Prudent Beneficiaries
Creditors
Divorce
Lawsuits

Living Trust Will Not Work
Limited Creditor Protection
Mandatory Distributions
Non-Designated Beneficiaries
Oldest Beneficiary is Spouse
No Stretch (Conduit) Language

Solution
STAND ALONE
STRETCH IRA TRUST

Stretch IRA Trust
Forces Stretch
Provides Creditor Protection
Stand Alone
Revocable
Beneficiary of IRA upon death
Surviving Spouse still receives Benefit
Independent Trustee

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?

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

Accumulation v. Conduit
Accumulation
Amounts held in trust
Conduit
RMDs distributed every year
Trust Protector can switch to Accumulation (1 time)

Conclusion
MRD Requirements
Problem: Triple Tax
Solution: Stretch
Roadblock: Stretch is not Automatic
Solution: Stretch IRA Trust

IRA Seminar for Advisors

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