Glossary of Terms. Beneficiary Finalization Date: September 30 th of calendar year following the calendar year of the employee s death.

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1 Glossary of Terms Accumulation Trust: A trust in which distributions from the IRA are allowed to accumulate within the trust.. See Treas. Reg (a)(9)-4, Q&A 5 Beneficiary Finalization Date: September 30 th of calendar year following the calendar year of the employee s death. Conduit Trust: A trust in which all distributions from the IRA are immediately distributed to the trust beneficiary/beneficiaries. See Treas. Reg (a)(9)-4, Q&A 5 Designated Beneficiary (DB): Any individual designated as a beneficiary by the employee, or under the plan (i.e., either designated under the terms of the plan, or by the affirmative election by the employee). Fixed-term method: Applies only after the participant s death to determine MRDs to the beneficiary, but not for the MRD for the year of the participant s death, or for MRDs during the surviving spouse s life, if she is the participant s sole beneficiary. To calculate, simply take the prior year s divisor reduced by one. Minimum Required Distributions (MRD): The amount that must be distributed under the MRD rules in a particular year. Qualified Retirement Plans (QRP): A Retirement Plan that meets the requirements of 401(a), i.e., that it is qualified under 401(a). Types of QRPs include the 401(k) defined benefit plan, ESOP, Keogh plan, money purchase plan, and profit sharing requirements. Recalculation method: Applies for computing all lifetime MRDs. Under this method, the participant s age is predetermined each year, and the ADP used is the divisor applicable to the new age, instead of just deducting one from last year s divisor. Required Beginning Date (RBD): The participant must start taking MRDs by that date to avoid penalty. The starting point for determining the RBD is the attainment of age 70 ½, which is the date six calendar months after the 70 th anniversary of the employee s birth. Separate Accounts Rule: The no-db rule for multiple beneficiaries can be avoided if separate accounts are established by the end of the year after the year of the participant s death. In order to satisfy this requirement, the participant s benefit under the plan must be divided into separate accounts; the beneficiaries of each account must differ; and there must be no aggregation of the separate accounts during any year subsequent to the calendar year containing the date as of which the separate accounts were establish, or the date of death if later. See-through trust: A trust that qualifies as a designated beneficiaries because it meets the IRS four minimum distribution trust rules : (1) The trust is valid under state law; (2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the participant; (3) the beneficiaries of the trust who are the beneficiaries with respect to the trust s interest in the employee s benefit are identifiable from the trust instrument; (4) document is timely provided to the plan administrator. Menlo Park, Calfornia

2 Example No. 1 Kenny turns 73 on his 2010 birthday. Under the Uniform Lifetime Table, the ADP (divisor) for age 73 is On 12/31/09, the value of his IRA was $750,000; assume no adjustments are required. Divide $750,000 by 24.7; the result ($30,364) is Kenny s MRD for Kenny must withdraw $30,364 from his IRA sometime in 2010 (i.e., after December 31, 2009, and before January 1, 2011). In 2011, Kenny will reach age 74. To compute his 2011 MRD, he will use the age 74 factor from the Uniform Lifetime Table. This will be divided into the 2010 year-end account balance to produce the 2011 MRD. This is the recalculation method of determining life expectancy. Query: what is the difference between the recalculation method and the fixed-term method? (See Glossary) Example No. 2 (Estate before participant s RBD) Maude dies in 2010, before her required beginning date (RBD), leaving her IRA to her estate. Because an estate is not a Designated Beneficiary (see glossary), the 5-year rule applies. All amounts must be distributed out of the IRA no later than 12/31/2015. Note: possible ability for spouse to roll over from estate or trust in the event that the spouse is the sole beneficiary of the estate or trust. Note: a plan may be more penalizing than IRS rules. Example No. 3 Bonnie died in 2004, leaving her IRA to Diane as a Designated Beneficiary. Assume that the ADP is Diane s life expectancy. Diane s life expectancy is determined as of 2005 (the year after the year of Bonnie s death). Diane turns 46 on her birthday in 2005, so her life expectancy (ADP) from the Signle Life Table is For calculating her MRDs for 2006 (and later years), Diane deducts one from the prior year s ADP, so her 2006 divisor is 36.9, 2007 is 35.9, and so on. She never looks at the table again after the first distribution year. Note: It does not matter whether Bonnie died before or after her RBD provided that, if Bonnie died before her RBD, Diane either elects or is defaulted into the life expectancy payout methord, or if Bonnie died after her RBD, Diane is younger than Bonnie. Example No. 4 Menlo Park, Calfornia

3 Same facts as Example No. 3, except that Bonnie leaves her benefits to a trust that qualifies as a see through trust under the minimum distribution rules (see glossary), of which Diane is the individual beneficiary. In this case, Diane is treated as the individual beneficiary of the trust and the MRD calculations are identical. Note: If the trust is not a see-through trust, then the 5-year rule may apply if Bonnie died before her RBD. In the event of mutliple individual trust beneficiaries of a see-through trust, calculation of the MRD depends on whether the trust is a conduit or accumulation trust, and the ages of the individual beneficiaries. Example No. 5 (estate after participant s RBD) Cookie dies in July, 2006, at age 73, leaving her IRA to her estate. She had already taken her MRD for The estate s ADP is computed as follows. Cookie was born in November, 1932, so she would have turned age 74 on her 2006 birthday had she lived. The life expectancy factor for age 74 from the Single Life Table is Therefore, the estate s divisor for 2007 is 13.1 (14,1 minus one). The first MRD to the estate (paable in 2007) is the account balance as of December 31, 2006, divided by 13/1. This MRD must be taken by 12/31/07. In 2008, the MRD will be the 12/31/07 account balance divided by In 2009 (which would have been the 11.1 year) there is no MRD. In 2010, the MRD will be the 12/31/09 account balance divided by 10.1) Example No. 6 Same as example No. 1, except Maude names the Red Cross as her sole beneficiary. Because a charity is not a designated beneficiary, the plan must come out within 5 years. Because a charity does not pay income tax, there is no tax reason not to distribute the entire plan immediately. Query: If a client is charitably minded, should charitable gifs be made from non-retirement assets or retirement assets, if a choice between the two must be made? Example No. 7 Percy dies in Year 1, leaving his $1 million IRA equally to his daughters Daisy and Lily. They immediately divide the inherited IRA into separate accounts (two $500,000 inherited IRAs), one payable to each of them. Assume Percy s MRD for Year 1 is $40,000, which he had not yet taken at the year of his death. Daisy withdraws $40,000 from her share of the inherited IRA in Year 1. This distribution satisfies the distribution requirement for Year 1, and accordingly Lily does not have to take any MRD from her share of the IRA until Year 2. Thereafter, the MRDs are determined based upon each of their life expectancies (rather than the oldest s life expectancy) using the single life table, the fixed-term method. Menlo Park, Calfornia

4 Note: Only the year-of death MRD is not required to be distributed proportionately to all of the multiple beneficiaries. Note however that some plan administrators require each beneficiary to take a proportionate share of the year-of-death MRD despite this rule. Note: The benefit of the separate acocunts rule is increased when one beneficiary is significantly older than the other, because it is not required to distribute all of the account based upon the shorter life expectancy of the older beneficiary only that portion that is separated out to the older beneficiary. Example No. 8: Shelly died in Year 1 at age 82, leaving her $1 million IRA to a see-through trust. The trust is to terminate at her death and be distributed in five equal shares to her sister (age 78), her nephew (age 52), and the three children (X, Y, and Z, ages 20, 24, and 25) of her deceased niece. The trustee transfers equal portions of the IRA to five separate inherited IRAs, one for each beneficiary. These are separate accounts for most minimum distribution purposes, but not for purposes of determining the ADP, because the IRA was left to a single funding trust and the division into separate shares / accounts occurred at the trust level not at the beneficiary designation form level. Accordingly, the ADP for all of the beneficiaries will be the life expectancy of the oldest beneficiary who remains a beneficiary as of the Beneficiary Finalization Date. As of the date of death, the oldest beneficiay is Shelly s sister, but she cashes out her entire inherited IRA prior to September 30, Year 2; accordingly, she is no longer a beneficiary as of the Beneficiary Finalization Date. Shelly s nephew, who was the second oldest beneficiary as of the date of death, now becomes the oldest beneficiary. X, Y, and Z wish the nephew would cash out his share prior to the Beneficiary Finalization Date, so they could use the 50+ year life expectancy of the oldest one of them as their ADP. Hoever, the nephew wants a payout over his 30-something year life expectancy, so he does not cash out his share. As of the Beneficiary Finalization Date, the oldest beneficiary is Shelly s nephew and his life expectancy becomes the ADP for all of the remaining beneficiaries. Query: How can the estate plan be modified to avoid using the age of the oldest beneficiary for the ADP? Example No. 9 Axel dies leaving his IRA to a trust which provides that, until his daughter Rose reaches age 35, the trustee will use income and principal for Rose s benefit. When Rose reaches age 35, the trust will terminate and all trust property will pass outright to Rose. If Rose dies before reaching age 35, the trust will terminate and all property will pass to a charity. On the date of Axel s death, Menlo Park, Calfornia

5 Rose is age 34 ½. Based on the terms of the trust as they exist at Axel s death, the trust has two beneficiaries, Rose and the charity, and flunks the MRD trust rules because one beneficiary is not an individual. Six months after Axel s death, Rose turns age 35 and becomes the sole beneficiary of the trust. Since this is before the Beneficiary finalization date, the trust qualifies as a see-through trust; the nonindividual beneficiary does not remain as a beneficiary as of September 30 of the year after the year of Axel s death. Menlo Park, Calfornia

6 Checklist: Drafting the Beneficiary Designation 1 Here is a checklist of "DO'S and DON'T'S" to consider when drafting a beneficiary designation form for a client's retirement plan benefits. 1. DO impress on the client that the Beneficiary Designation Form is just as important a legal document as a will or trust. Often, more of the client's assets are controlled by this form than by his will. An improperly drafted (or missing) beneficiary designation form could cost the client's family dearly in taxes and increased settlement costs. 2. DO read the applicable sections of the account or plan documents, to make sure the beneficiary designation and payout method the client desires are permitted. In the case of unqualified retirement plan (QRP) benefit, read the Summary Plan Description or the description of available benefit payout options in the employer-provided beneficiary designation form, then check your conclusions with the plan administrator. In case of doubt read the actual plan documents. Consider, when you quote a fee for a "standard" estate plan, including in the quote the cost of beneficiary designations (including reading plan documents) for up to two retirement plan accounts per client. If the client chooses to have (or for some reason is stuck with) multiple accounts, advise the client of your fee to review the documents and prepare a beneficiary designation form for each additional plan. If tempted to skip this step, ask yourself with respect to each plan, how bad would it be if this plan does NOT go to the right beneficiary in the right way? You will quickly realize that plans worth hundreds of thousands (or millions) of dollars must be thoroughly taken care of, even if that means reviewing plan documents and multiple communications with the plan administrator, while the client will probably agree that it is not cost effective to have you apply the full court press to a $1,000 IRA. Bombs Hidden in Plan Documents Natalie Choate notes an IRA beneficiary designation form that contains the statement "I understand that if I become married in the future, this form ceases to apply and I must file a new beneficiary designation." The client may not be aware that marriage has that effect. Some IRA providers require spousal consent to the beneficiary designation even if the spouse has no rights under applicable state law. Also, many lawyers build an estate plan around the expectation that the primary beneficiary (e.g. the surviving spouse) may disclaim the benefits and allow them to pass to the contingent beneficiary (e.g. a credit shelter trust). But some qualified retirement plans do not recognize disclaimers the plan will pay the benefits to a named beneficiary who survives the participant regardless of whether the named beneficiary disclaims the benefits. 3. Can the IRA beneficiary transfer the benefits to another inherited IRA? Most IRA providers routinely allow this, but if your client's IRA provider does not it would be nice to know about that policy up front. (This is not a concern with respect to qualified plans. QRPs are required to allow a direct rollover to an IRA for any "Designated Beneficiary," and forbidden to allow it for any other beneficiary. 1 Source: Choate, Natalie, Life and Death Planning for Retirement Benefits, (2011) at Appendix B.

7 4. Problems arise when practitioners submit beneficiary designation forms that place unsuitable duties on the plan administrator or IRA provider ("administrator"). Most IRAs are custodial accounts, under which the IRA provider's duties are limited to custodial and tax reporting services, and the provider's fees are nominal. Most administrators cannot be expected to do much more than send out benefit checks requested by beneficiaries whose names and addresses are listed in the beneficiary designation form. Here are some "do's and don't's" to avert problems with the administrator: A. DON'T require the administrator to make legal judgments. A form that says "I leave the benefits to X unless he disclaims the benefits by means of a qualified disclaimer within the meaning of 2518 of the tax code," appears to require the plan administrator to determine whether the disclaimer is qualified under 2518 before it can decide who to pay the benefits to. B. DON'T require the administrator to carry out functions of an executor or trustee. For example, if you say "I designate my son as beneficiary, to receive only the minimum required distribution each year," you are requiring the administrator to control the beneficiary's withdrawals. Most IRAs and plans have no mechanism for restricting the beneficiary's withdrawals. If you want to restrict the beneficiary's withdrawals or make them conditional in any way you generally must either (1) leave the benefits to a trust (so your chosen trustee can enforce the conditions); or (2) use a "Trusteed IRA" (IRT) rather than a "custodial" IRA C. DON'T require the administrator to determine amounts dependent on external facts. If it is necessary to include, in your beneficiary designation form, a formula that is dependent on external facts (for example, "I leave to the marital trust the minimum amount necessary to eliminate federal estate taxes"), do this in a way that does not make the administrator responsible to apply the formula. Provide that the participant's executor or a trustee will certify the facts to the administrator, who can rely absolutely on such certification, then be sure the will or trust appointing such fiduciary requires him to carry out this duty.. D. DO avoid redundant or contradictory lists of definitions and payout options. If the plan document already has suitable and clear definitions of "primary beneficiary," "death benefit," "the account," and other terms, using a different set of definitions may just create confusion. 5. Consider whether to alter applicable presumptions in case of simultaneous or close-in-time deaths. 6. If the participant is married, and is designating someone other than his spouse as beneficiary, obtain spousal consent if required. 7. Consider the extent to which you need to define any terms such as "issue per stirpes," "spouse," or "income"; and/or specify which state's law will be used to interpret terms you use in the form. It is highly likely that the QRP or IRA agreement specifies that the law of the sponsor's state of incorporation will be used. Since that may well not be the state in which your client lives (or dies), there is a potential for problems if the client's chosen disposition depends on a definition that varies from state to state. Although you cannot change the governing law of the "plan," a statement that the beneficiary designation will be interpreted according to the laws of a particular state should be accepted in the sense that it will lead to the correct determination of the client's intent. 8. DO name a contingent as well as a primary beneficiary. DO consider whether different

8 contingent beneficiaries should be named depending on whether the primary beneficiary actually dies before the participant, or merely disclaims the benefits. When choosing among competing considerations in naming a primary beneficiary (such as "financial security of spouse" versus "saving estate taxes for children"), name the primary beneficiary based on the relative priorities the client assigns to the choices. For maximum flexibility after the client's death, name the second choice as contingent beneficiary. 9. Some beneficiary designation forms in which benefits are left to a trust describe the trust as "the [TRUST NAME] Trust [optional:, a copy of which is attached hereto]." The phrase "a copy of which is attached hereto" is optional, and would be used solely to identify the trust that is named as beneficiary. You could choose to identify the trust by other means (e.g., "under agreement dated 9/2/10") instead of attaching a copy of the trust to the beneficiary designation form. No matter how you choose to identify the trust, you ALSO must comply with the documentation requirement. 10. DO include contact information (address and phone) for the beneficiaries, or they and the administrator may never find each other; for reasons of space. Confirm the administrator's policy regarding whether it will notify the beneficiary; if the administrator declines any responsibility to notify the beneficiary, arrange an alternative mechanism to notify them (or they may never know they have inherited the benefits)do require the administrator to provide information to the participant's executor. 11. DON'T focus on taxes and minimum distributions to the exclusion of basic drafting issues. For example, if a beneficiary predeceases the participant, does his share pass instead to the surviving beneficiaries, or to his own issue, or to someone else? Finally, DO gel a receipt or other written acknowledgment from the administrator confirming that they have received and accepted the beneficiary designation form. Confirm that the administrator has the beneficiary designation form each time you update the client's estate plan (even if the beneficiary designation is not to change; administrators have a way of losing these documents, especially when there is a corporate acquisition). Admonish the client to see you regarding a new beneficiary designation form, even in between estate plan-update visits, whenever the benefits are moved to a different plan or account (for example, when an IRA is converted to a Roth IRA)

9 YOUR CLIENTS' 12 RETIREMENT TRUST PLANNING "RED FLAGS" Prerequisite for Retirement Plan Trust Candidates: Total husband and wife qualified plan assets exceed $200,000 No. Red Flag Problem Solution 1 Desire to build family wealth Income tax on plan distributions will slash wealth IRA Trust assures the stretch-out 2 Large retirement plan balance Huge dissapation of IRA wealth upon death IRA Trust precludes withdrawing all principal at once 3 Parents' second marriage Step-children wind up with inheritance QTIP the IRA Trust 4 Children with unstable marriage Legacy escapes bloodline Keep IRA wealth in family via trust 5 Minor children Squander big lump sums on reaching adulthood Forced discipline via regular trust distributions 6 Special needs children/grandchildren Disqualification of government benefits IRA trust not "countable" toward disqualification 7 Troubled children Kids with subsance abuse or criminal problems Lump sum inheritance could destroy them 8 Businessmen, professionals IRAs exposed to lawsuits and creditors IRA Trust protected from judgments 9 Single parents No surviving spouse to manage children's money Trust provides for health, education and maintenance 10 Spendthrift children/grandchildren IRA assets will be ravaged by withdrawals/taxes Independent IRA trustee "forces" discipline 11 Naïve beneficiaries Funds withdrawn, no awareness of consequences Trust administration attorney educates beneficiary 12 Beneficiaries in financial trouble Bankruptcy, creditors, lawsuits jeopardize IRA Trust protects assets from collectoin efforts "YES" ANSWERS TO ONE OR MORE OF THESE QUESTIONS MAKE YOUR CLIENT A GOOD CANDIDATE FOR A RETIREMENT TRUST. For more information, contact: Menlo Park, CA 94025

10 Ow ner Dies Before RBD Ow ner Dies After RBD Death Before RBD Death After RBD Inherited Spousal Beneficiary Spouse may defer required distributions until the year the ow ner w ould have reached age 70 1/2. Thereafter, RMDs are calculated based upon spouse's life expectancy by referencing her attained age for the year of distribution based on the Single Life Table in A-1 of Treas. Reg (a)(9)-9. For each succeeding year, this process is repeated. (RECA LC'D) A-2 of Treas. Reg 1.401(a)(9)-9 Single Life Table A ge M ultiple A ge M ultiple A ge M ultiple RMD for year of death must be taken based upon decedent's life expectancy factor under the Uniform Lifetime Table. Thereafter, the applicable distribution period is longer of: (1) the surviving spouse s life expectancy based on the Single Life Table using the surviving spouse s birthday for each distribution calendar year after the calendar year of the employee's death up through the calendar year of the spouse s death. For each succeeding year, this process is repeated (RECA LC'D); or (2) the life expectancy of the deceased spouse under the Single Life Table using the age of the deceased spouse as of his or her birthday in the year of death, w hereby in subsequent years, this factor is reduced by one Non-Designated Beneficiary Entire balance must be distributed no later than December 31st of the fifth anniversary year of the decedent's death. How ever, consider (if possible) the potential to cash out non-individual beneficiaries, or segregate interests. PLR required RMD must be taken for year of decedent's death based upon decedent's age in year of death based on the Uniform Lifetime Table in A-2 of Treas. Reg (a)(9)-9. For the first distribution year, determine factor by referencing the ow ner's age in year of death and reduce by one. This factor is then reduced by one for each succeeding year. or UNIFORM LIFETIM E TABLE FOR DETERM INING FACTOR LIFETIM E DISTRIBUTIONS A pplicable Divisor under Attained A ge in year of A pplicable Diviso r under Final Regulatio ns distribution Final Regulatio ns This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work and o ld er 19 Attained A ge in year of distribution 2004 Robert S. Keebler, CPA, MST rkeebler@virchowkrause.com (920)

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