What Every Attorney, Accountant and Financial Advisor Must Know About IRAs and 401ks
What We Will Cover <ul><li>Minimum Distribution Rules </li></ul><ul><li>Disclaimers </li></ul><ul><li>Roth IRA Conversions...
Minimum Distribution Rules <ul><li>Mandatory withdrawals upon reaching 70 ½ </li></ul><ul><li>Plans grow on tax deferred b...
Determining MRD During Participant’s Lifetime <ul><li>At age 70 ½ </li></ul><ul><ul><li>Except Roth’s </li></ul></ul><ul><...
Determining MRD’s after death <ul><li>Ask Four Questions </li></ul><ul><ul><li>Did the participant die before or after his...
If Death Before RBD <ul><li>Surviving Spouse </li></ul><ul><ul><li>Surviving Spouse’s Life Expectancy  </li></ul></ul><ul>...
If Death After RBD <ul><li>Surviving Spouse </li></ul><ul><ul><li>Surviving Spouse’s or Participant’s Life Expectancy </li...
Multiple Beneficiaries <ul><li>All individuals </li></ul><ul><ul><li>Life expectancy of oldest beneficiary </li></ul></ul>...
Disclaimer <ul><li>Refusal to Accept a gift or inheritance </li></ul><ul><li>Basis for placing Spouse as Primary Beneficia...
Roth Retirement Plans <ul><li>Treated like regular IRAs, unless otherwise specified </li></ul><ul><li>Tax-free distributio...
Conversion <ul><li>Traditional IRAs converted to Roths </li></ul><ul><li>Tax must be paid as distribution </li></ul><ul><l...
Conversions post-2009 <ul><li>No Income Limits </li></ul><ul><li>Anyone can convert </li></ul><ul><li>This is huge for Str...
Why Convert? <ul><li>If income taxes are the same, net neutral </li></ul><ul><li>If income taxes rise, good move. </li></u...
Beneficiary Designations <ul><li>Source of Client Problems, Advisor Liability </li></ul><ul><li>Generally should be </li><...
Triple Taxes <ul><li>Three Types of Taxes  </li></ul><ul><ul><li>Estate-55% after 2011 </li></ul></ul><ul><ul><li>Federal ...
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 Exe...
Example <ul><li>Bob in 2007 age 74 </li></ul><ul><ul><li>$1m real estate </li></ul></ul><ul><ul><li>$500k illiquid busines...
Result <ul><li>Estate Tax-55%-$420,913.00 </li></ul><ul><li>Income Tax-35%-$147,319 </li></ul><ul><li>State Income Tax-9.3...
 
Stretching an IRA <ul><li>2 Steps </li></ul><ul><ul><li>Estate Tax paid from other assets </li></ul></ul><ul><ul><ul><li>L...
Example 2 <ul><li>Bob </li></ul><ul><ul><li>$1m real estate </li></ul></ul><ul><ul><li>$500k business </li></ul></ul><ul><...
Stretch Results <ul><li>Jack (Bob’s son) inherits IRA at age 50 </li></ul><ul><li>Jack dies at age 80 </li></ul><ul><li>$7...
$157,919.00 v. $10,895,441.81
NO BRAINER!!!
Stretch is NOT Automatic <ul><li>Blow-Outs are the norm, not the exception </li></ul><ul><li>Why </li></ul><ul><ul><li>Not...
Problems for Prudent Beneficiaries <ul><li>Creditors </li></ul><ul><li>Divorce </li></ul><ul><li>Lawsuits </li></ul>
Living Trust Will Not Work <ul><li>Limited Creditor Protection </li></ul><ul><li>Mandatory Distributions </li></ul><ul><li...
Solution <ul><li>STAND ALONE  </li></ul><ul><li>STRETCH IRA TRUST </li></ul>
Stretch IRA Trust <ul><li>Forces Stretch </li></ul><ul><li>Provides Creditor Protection </li></ul><ul><li>Stand Alone </li...
Spouse <ul><li>Spouse should receive trust outright </li></ul><ul><li>Beneficiaries </li></ul><ul><ul><li>Primary: Spouse ...
Example <ul><li>Bob’s son Jack receives Bob’s IRA in a Stretch IRA Trust </li></ul><ul><li>Jack gets sued, $2million judgm...
Accumulation v. Conduit <ul><li>Accumulation </li></ul><ul><ul><li>Amounts held in trust </li></ul></ul><ul><li>Conduit </...
Conclusion <ul><li>MRD Requirements </li></ul><ul><li>Problem: Triple Tax </li></ul><ul><li>Solution: Stretch </li></ul><u...
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IRA Seminar for Advisors

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A presentation on Stretch IRAs and Stretch IRA Trusts to assist advisors with helping the client with IRAs and 401k. Go to www.wilseylaw.com for more information

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IRA Seminar for Advisors

  1. 1. What Every Attorney, Accountant and Financial Advisor Must Know About IRAs and 401ks
  2. 2. What We Will Cover <ul><li>Minimum Distribution Rules </li></ul><ul><li>Disclaimers </li></ul><ul><li>Roth IRA Conversions </li></ul><ul><li>Beneficiary Designations </li></ul><ul><li>IRA Triple-Tax Trap </li></ul><ul><li>Use of Life Insurance with IRAs </li></ul><ul><li>Stretch IRAs </li></ul><ul><li>Stretch IRA Trusts </li></ul>
  3. 3. Minimum Distribution Rules <ul><li>Mandatory withdrawals upon reaching 70 ½ </li></ul><ul><li>Plans grow on tax deferred basis </li></ul><ul><li>Keeps funds from growing tax deferred forever </li></ul><ul><li>Distributions made according to Uniform Life Table </li></ul><ul><ul><li>Divide Account Balance on Dec. 31 of previous year by Divisor </li></ul></ul><ul><ul><li>Recalculation v. Fixed Method </li></ul></ul>
  4. 4. Determining MRD During Participant’s Lifetime <ul><li>At age 70 ½ </li></ul><ul><ul><li>Except Roth’s </li></ul></ul><ul><li>By December 31 st of each year </li></ul><ul><li>MRD determined by Life Expectancy Divisor </li></ul><ul><li>Assuming MRDs only taken out </li></ul><ul><ul><li>Account Balance will not start fall until participant is well into 90’s </li></ul></ul><ul><ul><li>Account Balance will not be reduced to pre-70 ½ size until 110+ </li></ul></ul>
  5. 5. Determining MRD’s after death <ul><li>Ask Four Questions </li></ul><ul><ul><li>Did the participant die before or after his RBD? </li></ul></ul><ul><ul><li>Are there Multiple Beneficiaries? </li></ul></ul><ul><ul><li>Do the benefits pass to a Designated Beneficiary? </li></ul></ul><ul><ul><li>What distribution option does the plan permit? </li></ul></ul>
  6. 6. If Death Before RBD <ul><li>Surviving Spouse </li></ul><ul><ul><li>Surviving Spouse’s Life Expectancy </li></ul></ul><ul><ul><li>Uniform Table </li></ul></ul><ul><li>Individual Non-Spouse Beneficiary </li></ul><ul><ul><li>Individual Beneficiaries Life Expectancy </li></ul></ul><ul><ul><li>Single Life Table </li></ul></ul><ul><li>Estate, non-Stretch IRA Trust, or other non-DB </li></ul><ul><ul><li>5-Year Rule </li></ul></ul><ul><ul><li>BAD,BAD, BAD </li></ul></ul>
  7. 7. If Death After RBD <ul><li>Surviving Spouse </li></ul><ul><ul><li>Surviving Spouse’s or Participant’s Life Expectancy </li></ul></ul><ul><ul><li>Use Uniform Table or Single Life Respectively </li></ul></ul><ul><ul><li>Note: Recalculation Method v. Fixed Life Method </li></ul></ul><ul><li>Individual Non-Spouse Beneficiary </li></ul><ul><ul><li>Individual Beneficiary’s or Participant’s Life Expectancy </li></ul></ul><ul><ul><li>Single Life Table </li></ul></ul><ul><li>Estate, non-Stretch IRA Trust, or other DB </li></ul><ul><ul><li>Participant’s Life Expectancy </li></ul></ul><ul><ul><li>Better that 5-Year, but still BAD,BAD, BAD </li></ul></ul>
  8. 8. Multiple Beneficiaries <ul><li>All individuals </li></ul><ul><ul><li>Life expectancy of oldest beneficiary </li></ul></ul><ul><ul><li>Unless Separate Shares are created </li></ul></ul><ul><ul><ul><li>By December 31 st of the year following death </li></ul></ul></ul><ul><li>Some Individuals, some non-Designated Beneficiaries </li></ul><ul><ul><li>5-Year rule </li></ul></ul><ul><ul><li>Unless Separate Shares are created </li></ul></ul>
  9. 9. Disclaimer <ul><li>Refusal to Accept a gift or inheritance </li></ul><ul><li>Basis for placing Spouse as Primary Beneficiary </li></ul><ul><li>Must meet standards of IRC 2518 </li></ul><ul><ul><li>Irrevocable, Unqualified, in Writing </li></ul></ul><ul><ul><li>Cannot have accepted and interest in the disclaimed </li></ul></ul><ul><ul><li>Made by 9 months after date of death </li></ul></ul><ul><ul><li>Must be delivered to correct parties </li></ul></ul><ul><ul><li>Disclaimant cannot say to whom property passes </li></ul></ul>
  10. 10. Roth Retirement Plans <ul><li>Treated like regular IRAs, unless otherwise specified </li></ul><ul><li>Tax-free distributions </li></ul><ul><li>No MRDs (except when inherited) </li></ul><ul><li>Can contribute same amount as regular IRA </li></ul><ul><li>Income must be below certain level to contribute </li></ul><ul><ul><li>$95K single and $150k married </li></ul></ul><ul><ul><li>Contributions reduced if above these amounts </li></ul></ul>
  11. 11. Conversion <ul><li>Traditional IRAs converted to Roths </li></ul><ul><li>Tax must be paid as distribution </li></ul><ul><li>Must meet income requirements </li></ul><ul><ul><li>Modified AGI cannot exceed $100,000 </li></ul></ul><ul><ul><li>Conversion income does not count </li></ul></ul>
  12. 12. Conversions post-2009 <ul><li>No Income Limits </li></ul><ul><li>Anyone can convert </li></ul><ul><li>This is huge for Stretch IRAs </li></ul><ul><ul><li>Distributions will not be taxed! </li></ul></ul><ul><ul><li>RMDs still required </li></ul></ul>
  13. 13. Why Convert? <ul><li>If income taxes are the same, net neutral </li></ul><ul><li>If income taxes rise, good move. </li></ul><ul><ul><li>If income taxes fall, bad move </li></ul></ul><ul><li>Always a good move for inherited IRAs </li></ul><ul><li>Taxes should be paid by outside funds </li></ul>
  14. 14. Beneficiary Designations <ul><li>Source of Client Problems, Advisor Liability </li></ul><ul><li>Generally should be </li></ul><ul><ul><li>Primary: Spouse </li></ul></ul><ul><ul><li>Contingent: Kids, per stirpes </li></ul></ul><ul><li>If Stretch IRA Trust used, must be done differently </li></ul>
  15. 15. Triple Taxes <ul><li>Three Types of Taxes </li></ul><ul><ul><li>Estate-55% after 2011 </li></ul></ul><ul><ul><li>Federal Income-35% </li></ul></ul><ul><ul><li>State Income-9.3% </li></ul></ul>
  16. 16. 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
  17. 17. Example <ul><li>Bob in 2007 age 74 </li></ul><ul><ul><li>$1m real estate </li></ul></ul><ul><ul><li>$500k illiquid business </li></ul></ul><ul><ul><li>$500k IRA </li></ul></ul><ul><li>Dies in 2013 age 80 </li></ul><ul><ul><li>IRA worth $765,298.16 </li></ul></ul>
  18. 18. Result <ul><li>Estate Tax-55%-$420,913.00 </li></ul><ul><li>Income Tax-35%-$147,319 </li></ul><ul><li>State Income Tax-9.3%-$39,145 </li></ul><ul><li>Taxes-$607,378-79% of IRA </li></ul><ul><li>Probably closer to 70% in reality (thanks CPAs!) </li></ul><ul><li>$157,919 to beneficiaries </li></ul><ul><li>This assumes beneficiary leaves the remainder in IRA </li></ul>
  19. 20. Stretching an IRA <ul><li>2 Steps </li></ul><ul><ul><li>Estate Tax paid from other assets </li></ul></ul><ul><ul><ul><li>Life Insurance Policy </li></ul></ul></ul><ul><ul><ul><li>ILIT </li></ul></ul></ul><ul><ul><li>RMDs only taken out by beneficiary </li></ul></ul><ul><ul><ul><li>“Stretch” according to Beneficiaries life expectancy </li></ul></ul></ul>
  20. 21. Example 2 <ul><li>Bob </li></ul><ul><ul><li>$1m real estate </li></ul></ul><ul><ul><li>$500k business </li></ul></ul><ul><ul><li>$500k IRA </li></ul></ul><ul><ul><li>$500k ILIT </li></ul></ul><ul><li>Dies in 2013 </li></ul><ul><ul><li>IRA worth $765,298.16 </li></ul></ul><ul><li>IRA is properly stretched at death </li></ul>
  21. 22. Stretch Results <ul><li>Jack (Bob’s son) inherits IRA at age 50 </li></ul><ul><li>Jack dies at age 80 </li></ul><ul><li>$7,299,862.71 in distributions </li></ul><ul><li>Still $3,146,894.13 in IRA </li></ul><ul><li>$10,895,441.81 in family wealth created </li></ul>
  22. 23. $157,919.00 v. $10,895,441.81
  23. 24. NO BRAINER!!!
  24. 25. Stretch is NOT Automatic <ul><li>Blow-Outs are the norm, not the exception </li></ul><ul><li>Why </li></ul><ul><ul><li>Not understanding rules and choices </li></ul></ul><ul><ul><li>Asking advice of Custodian </li></ul></ul><ul><ul><li>Corporate Plan requires withdrawal </li></ul></ul><ul><ul><li>Beneficiary Rollover </li></ul></ul><ul><ul><li>Poor Money Management </li></ul></ul><ul><ul><li>Spending </li></ul></ul>
  25. 26. Problems for Prudent Beneficiaries <ul><li>Creditors </li></ul><ul><li>Divorce </li></ul><ul><li>Lawsuits </li></ul>
  26. 27. Living Trust Will Not Work <ul><li>Limited Creditor Protection </li></ul><ul><li>Mandatory Distributions </li></ul><ul><li>Non-Designated Beneficiaries </li></ul><ul><li>Oldest Beneficiary is Spouse </li></ul><ul><li>No Stretch (Conduit) Language </li></ul>
  27. 28. Solution <ul><li>STAND ALONE </li></ul><ul><li>STRETCH IRA TRUST </li></ul>
  28. 29. Stretch IRA Trust <ul><li>Forces Stretch </li></ul><ul><li>Provides Creditor Protection </li></ul><ul><li>Stand Alone </li></ul><ul><li>Revocable </li></ul><ul><li>Beneficiary of IRA upon death </li></ul><ul><li>Surviving Spouse still receives Benefit </li></ul><ul><li>Independent Trustee </li></ul>
  29. 30. Spouse <ul><li>Spouse should receive trust outright </li></ul><ul><li>Beneficiaries </li></ul><ul><ul><li>Primary: Spouse </li></ul></ul><ul><ul><li>Contingent: Each child’s share of the Stretch IRA Trust </li></ul></ul><ul><li>Spouse can disclaim if sufficient other assets </li></ul><ul><ul><li>ILIT paying spouse income? </li></ul></ul>
  30. 31. Example <ul><li>Bob’s son Jack receives Bob’s IRA in a Stretch IRA Trust </li></ul><ul><li>Jack gets sued, $2million judgment </li></ul><ul><li>Jack’s IRA is protected, not lost </li></ul><ul><li>Stretch is preserved </li></ul><ul><li>If no Stretch IRA trust, IRA is probably lost </li></ul>
  31. 32. Accumulation v. Conduit <ul><li>Accumulation </li></ul><ul><ul><li>Amounts held in trust </li></ul></ul><ul><li>Conduit </li></ul><ul><ul><li>RMDs distributed every year </li></ul></ul><ul><ul><li>Trust Protector can switch to Accumulation (1 time) </li></ul></ul>
  32. 33. Conclusion <ul><li>MRD Requirements </li></ul><ul><li>Problem: Triple Tax </li></ul><ul><li>Solution: Stretch </li></ul><ul><li>Roadblock: Stretch is not Automatic </li></ul><ul><li>Solution: Stretch IRA Trust </li></ul>

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