providing creditor protection for inherited iras after the clark decision continuing education...
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Providing Creditor Protection for Inherited IRAs After the Clark Decision
Continuing Education ConferenceAugust 14, 2015
Presented by Richard L. RandallAttorney & Counsellor at Law,
Randall Law Offices, P.C.(Chairman and CEO,
National Network of Estate Planning Attorneys)
Program OverviewGeneral Outline
Historically, Why Pay Distributions to Trust?A Contrarian Approach: The Trust as Primary BeneficiaryImpact of the Clark v. Rameker DecisionPayment to Trust Can Be Done Without Negative Impact on Tax Deferral
Retirement Plan Distributions
Why Pay Distributions to a Trust?
Provide Instructions to Beneficiaries (Applies to Everyone)
Provide Protections to Beneficiaries (Applies to Everyone)
Death Tax Planning for Married Couples
Limited Power of Appointment
The “Hit Parade”
Kid Hits the School Bus School Bus Hits the Kid Marriage Hits the Rocks Kid Hits the Bottle Kid Hits the Books Kid Hits the Lottery Kid Hits the Skids
Retirement Plan Distributions
Why Pay Distributions to a Trust?
Hit Parade Many Clients Want Flexibility Provided by Limited
Power of Appointment Order of Beneficiaries Affects Whether Power of
Appointment Can be Retained by Surviving Spouse
Retirement Plan Distributions
Why Pay Distributions to a Trust?
Hit Parade To Make this Work, We Must Name the Trust
as Primary Beneficiary and Disclaim to the Spouse if Rollover is Desired
The Trust Must be Drafted to Qualify for Life Expectancy Distributions
Limited Power of Appointment
Naming the Trust Primary and the Spouse Contingent Beneficiary
A Spouse Can Disclaim and Still Receive Benefits In Trust (No One Else Can!)
BUT NO ONE (Not Even a Spouse!) May Disclaim and Retain a Right to Direct Property
Limited Power of Appointment
Naming the Trust Primary and the Spouse Contingent Beneficiary
Spouse as Primary Beneficiary Must Disclaim the IRA and the Power of Appointment to Add Proceeds to TrustOur Clients Say They Want Flexibility (“the Hit Parade” Power) TRUSTEE Can Keep Property AND the “Hit Parade” Power OR Can Disclaim to Spouse
Limited Power of Appointment
Naming the Trust Primary and the Spouse Contingent Beneficiary
The “Shirley Memo”
Available to You on Request!
Let’s Begin With How We Introduce Retirement Distribution/Estate Planning
Integration Concepts to Clients
Estate Planning Overview
Definition of Estate Planning
I Want to Control My Property While I’m Alive and Well
Plan for Me and My Loved Ones if I Become Disabled
Estate Planning Overview
Definition of Estate Planning
• Give What I Have• To Whom I Want• When I Want• The Way I Want
All While Assuring My Wisdom is Transferred Along with the Rest of My Wealth
SAVE TAXES
EXPAND WEALTHPRESERVEWEALTH
FAMILY
ME
“I want to control my property while alive and well, plan for me and my loved ones if I become mentally disabled,
and then give what I have to whom I want, when I want and the way I want--
all while assuring my wisdom is transferred along with the rest of my wealth.”
THE PLANNING PYRAMID™
Estate Planning Overview
The Planning Pyramid™
Focuses on Client Goals
Solutions Make Planning Easier
Exposes Traditional Planning as “Upside Down”
Estate Planning Overview
Three Step Strategy™
• DEVELOP Your Plan with Counselling Oriented Planning Partners• COMMIT Yourself and Your Family to a Formal Continuing Maintenance and Education Program • SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom along With the Rest of Your Wealth
Minimum Distribution Rules
The MYTH of Immediate Taxation!
(The Mistaken Belief that the Entire Retirement Plan Must Be
Taxed at Participant’s Death)
Retirement Plan Distributions
You Know More Than You Think!
Who Owns Account? When Do You Pay Income Tax? Penalty for Early Distribution When You HAVE to Withdraw
Retirement Plan Distributions
Why is all this so important?
Income Tax Deferral Income Tax Deferral Income Tax Deferral
Retirement Plan Distributions
The Advantage of Tax Deferral
Dollar Doubled Every Year for 20 Years
Taxed at 28% Tax Deferred
Retirement Plan Distributions
The Advantage of Tax Deferral
Dollar Doubled Every Year for 20 Years
Taxed at 28% $51,353.37 Tax Deferred
Retirement Plan Distributions
The Advantage of Tax Deferral
Dollar Doubled Every Year for 20 Years
Taxed at 28% $51,353.37 Tax Deferred $1,048,576
Retirement Plan Distributions
Why Pay Distributions to a Trust?
Provide Instructions to Beneficiaries (Applies to Everyone)
Provide Protections to Beneficiaries (Applies to Everyone)
Death Tax Planning for Married Couples
Retirement Plan Distributions
Why Pay Distributions to a Trust?Financial Instructions
Teach Potential Income Tax Deferral
Control/Direct the Deferral Investment Philosophy Investment Policy
Retirement Plan Distributions
Why Pay Distributions to a Trust?
Provide Instructions to Beneficiaries (Applies to Everyone)
Provide Protections to Beneficiaries (Applies to Everyone)
Death Tax Planning for Married Couples
Retirement Plan Distributions
So Why Pay Distributions to a Trust? To Provide Potential
“School Bus” Protections!
Potential Creditor Protection Potential Divorce Protection Potential Illness Protection
Wealth Reception Planning™
Our Experience
Initial Mindset is Normally a Barrier With Education, Client’s “Snapshot”
Changes Need for Active Family Involvement Is
Clear
Trust Design
Access and Control Mindset (Client’s)
“Don’t Want to ‘Pull Strings’ From the Grave” “They’re Independent” “It’s Their Job to Take Care of the Kids”
Trust Design
Trust Protections Mindset
When is it OK for:
Ex-Spouse to get the inheritance you leave in a divorce proceeding?
Medicaid to require “spend down” of the inheritance you leave?
Catastrophic Creditor to get inheritance you leave?
Trust Design
Strength of Personal Protections Is Affected By Beneficiary’s
Access and Control:
Demand
Ask
Retirement Plan Creditor Protection
Plans at Work Protected By Supreme Court Decision
Protection Extended to IRAs
Inherited IRAs Under Attack
Retirement Plan Creditor Protection
Inherited IRAs Under Attack
Split Decisions Two States Had Negative Decisions Indiana (Klipsch) and Florida
(Robertson)
Retirement Plan Creditor Protection
“Retirement Funds” Receive Protection
Mom’s funds were in an IRA
Question: is an INHERITED IRA a “Retirement Fund” as to an Inheritor?
Retirement Plan Creditor Protection
The Court’s Rationale:
The holder of an inherited IRA:– may never invest additional money in the
account.– is required to withdraw money from the account,
no matter how many years they may be from retirement
– may withdraw the entire balance of the account at any time-and for any purpose-without penalty
Retirement Plan Creditor Protection
Inherited IRAs Under Attack
Solution is to Pay Distributions Into Trust
IRA Can Still Be Attacked “School Bus” Trust Protects IRA Like
Any Other Asset!
Federal Estate Tax Reduction
Other Planning Goals Potential State Inheritance Tax PlanningEstate Growth in Survivor’s Estate
Could Cause Estate TaxDisability PlanningCreditor and Predator PlanningRemarriage ProtectionPlanning for Blended Familiesetc., etc.
Retirement Plan Distributions
For All These Reasons, We Find Clients Would Like to Pay Distributions Into Trust. What They Don’t Want to do is Lose Income Tax Deferral!!
Retirement Plan Distributions
YELLOW MEANS
CAUTION!!
If you name a Trust as Your Beneficiary, You Must Take a Test to Determine
How Fast Distributions Are Required
Retirement Plan Distributions
If you meet the test,
GREEN MEANS GO!:
Use your beneficiary’s
life expectancy!
Retirement Plan Distributions
Remember why is all this so important to us?
Income Tax Deferral Income Tax Deferral Income Tax Deferral
Retirement Plan Distributions
Impact of life expectancy Distributions!
Year 1 1/33.3 3%
Year 8 1/25 4%
Year 13 1/20 5%
Year 17 1/16 6%
Year 19 1/14 7%
Retirement Plan DistributionsImpact of life expectancy Distributions!
The account is still growing two decades after original owner’s death! Even though the beneficiary has enjoyed use of all the minimum
distributions The account’s actual after tax value is roughly double the value on date
of death! This is true IF only minimums are withdrawn!
Minimum Distribution Rules
Designated Beneficiary Test
Five Part Test To Qualify Trust as Designated Beneficiary
(The “Heartbeat Test” )
Minimum Distribution Rules
Designated Beneficiary Test
(aka “The Heartbeat Test”)
Corporation?
Charity?
Estate?
Individual?
Trust?
Minimum Distribution Rules
Designated Beneficiary Test
(aka “The Heartbeat Test”) No, a Trust Does NOT have a Heartbeat The General Rule is NO, It Won’t Qualify as
a Designated Beneficiary But there’s an EXCEPTION!
Minimum Distribution Rules
DESIGNATED BENEFICIARY EXCEPTION FOR TRUSTS
1. Valid Under State Law
2. Individual Beneficiaries
3. Identifiable Beneficiaries
4. Trust Delivered to Administrator
5. Trust Irrevocable Upon Death
Minimum Distribution RulesDesignated Beneficiary Test
If Trust Meets the Test, We “Look Through” the Trust To Determine Which Heart Is Used
All Beneficiaries Are Considered If All are Designated Beneficiaries the Oldest
Must be Used (“Oldest Heart” Rule) If Any Beneficiary is non-designated, the
Trust Fails the Test (“No Heart” Problem)
Minimum Distribution Rules
Designated Beneficiary Test
The Determination Date for the Designated Beneficiary Test is September 30 of Year Following Participant’s Death
Retirement Plan Distributions
Three Ways to Qualify Revocable Trust as Designated Beneficiary
Conduit Trust “Retention” or “Accumulation” Trust
(through Protective Language) Standalone Trusts for Beneficiaries
Retirement Plan Distributions
The Three Doors™
Of Retirement Plan Distributions
Client Counselling Tool That Explains Balance Between Protections and Three Life Expectancy Distribution Drafting Strategies
Unique Counseling and Integration Tools
TM
TM
™ & © 2005 LifeSpan, L.L.C. All Rights Reserved. This integral concept of LifeSpan, L.L.C., may not be reproduced in any form or by any means without written permission from the publisher. Made in U.S.A. 3/23/2005. Used with permission.
The Three Doors™
1 CONDUIT
BASE TRUST with SPECIAL RP LANGUAGE
STANDALONE RP TRUST
RP distributions on beneficiary’s L.E. (oldest)
RP distributions on desired beneficiary’s life expectancy
RP distributions on beneficiary’s OWN LE
Protections &
Instructions
Protections &
Instructions
RP= Retirement Plan LE = Life Expectancy
FOR RETIREMENT PLAN DISTRIBUTIONS
2
3
Minimum Distribution Rules
Common Obstacles• Naming Non-Designated Beneficiary (“No
Heart” Problem)• Naming the Wrong Designated Beneficiary
• Older Beneficiary (“Bad Heart” Problem)
• Multiple Beneficiaries (“Oldest Heart” Problem)
Retirement Plan Distributions
Passing The Test
• “No Heart”: Distribution Strategy• “Bad Heart”: Disclaimer Strategy• “Oldest Heart”: Division Strategy
Retirement Plan Distributions
Passing The Test
“Oldest Heart”: Division Strategy 2002 Regulations Interpreted to Mean Any
Distribution to Any Part of a Trust Results in Oldest Heart Calculation
This Means Sub-Trusts Named on Beneficiary Form Will Not Avoid Oldest Heart Treatment
Retirement Plan Distributions
Passing The Test
“Oldest Heart”: Division Strategy
Standalone Trusts with Single Beneficiaries Will Allow for Use of Individual Life Expectancies
Retirement Plan Distributions
Passing The Test
“Oldest Heart”: Division Strategy
2005 PLR Approves Use of Individual Life Expectancies for Distributions Payable Directly to Sub-Trusts
Retirement Plan Distributions
Passing The Test
“Oldest Heart”: Division Strategy
• Standalone Trusts Still Useful for Administrative Clarity and Isolation of Retirement Planning Issues
• Standalone Trusts can now be designed for Multiple Beneficiaries
Retirement Plan Distributions
Conclusion:
Three Ways to Qualify Revocable Trust as Designated Beneficiary
Conduit Trust “Retention” or “Accumulation” Trust
(through Protective Language) Standalone Trusts for Beneficiaries
Unique Counseling and Integration Tools
TM
TM
™ & © 2005 LifeSpan, L.L.C. All Rights Reserved. This integral concept of LifeSpan, L.L.C., may not be reproduced in any form or by any means without written permission from the publisher. Made in U.S.A. 3/23/2005. Used with permission.
The Three Doors™
1 CONDUIT
BASE TRUST with SPECIAL RP LANGUAGE
STANDALONE RP TRUST
RP distributions on beneficiary’s L.E. (oldest)
RP distributions on desired beneficiary’s life expectancy
RP distributions on beneficiary’s OWN LE
Protections &
Instructions
Protections &
Instructions
RP= Retirement Plan LE = Life Expectancy
FOR RETIREMENT PLAN DISTRIBUTIONS
2
3
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