TRUST AS A BENEFICIARY OF AN IRA?

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1 TRUST AS A BENEFICIARY OF AN IRA? BRADLEY J. FRIGON, JD, LLM, CELA CERTIFIED ELDER LAW ATTORNEY 6500 S. QUEBEC ST., STE. 330 ENGLEWOOD, CO (720)

2 TABLE OF CONTENTS I. INTRODUCTION... 4 II. RETIREMENT PLAN BASICS - HOW TO TALK THE TALK... 4 A. What are Retirement Assets?... 4 B. Retirement Assets Are Income in Respect of a Decedent... 4 C. Required Beginning Date (RBD)... 5 D. Required Minium Distributions (RMDs)... 5 E. Distributions at Death F. Inherited IRA -Death Before Required Beginning Date Spouse as Designated Beneficiary Non Spouse Designated Beneficiary G. Inherited IRA- Death After the Required Beginning Date Spouse as Designated Beneficiary Non Spouse Designated Beneficiary... 7 H. No Designated Beneficiary... 8 I. Five-Year Rule... 8 J. Multiple Beneficiaries..8 K. Titling an Inherited IRA. 9 L. Clark v. Rameker 9 III. NAMING A TRUST AS A BENEFICIARY OF A RETIREMENT ACCOUNT A. Determination Date 11 B. Conduit Trusts C. Accumulation Trusts Power to Appoint to "issue" Power to Appoint to a Charity 13 IV. TRUST PLANNING CHOICES FOR BENEFICIARIES A. Accumulation Trust 14 B. Charitable Remainder Trust Planning C. Disclaimers of Retirement Benefits D. Decanting E. Reformation..20

3 V. First Party (D)(4)(A) Trusts and Inherited IRAs A. Private Letter Ruling Private Letter Ruling 1: Transfer of IRA to Trust Private Letter Ruling 2: Life Expectancy for Annual Distributions Key Facts in this Case What You should take away from Private Letter Ruling B. Private Letter Ruling C. Private Letter Ruling D. Retirement Accounts, Payback Claim, and Taxes... 27

4 4 I. INTRODUCTION As lawyers doing special needs trusts planning, the majority of our attention is directed at securing or protecting our client s eligibility for public benefits and providing for their special needs. Retirement plans can be a useful tool in achieving these goals, but only if a thorough analysis of the applicable rules is undertaken to ensure that the outcome is the one that is intended. This article will review the applicable retirement plan rules and how they work with third party and first party special needs trusts. II. RETIREMENT PLAN BASICS - HOW TO TALK THE TALK A. What are Retirement Assets? Individual Retirement Accounts (IRAs) SEP-IRAs Simple Plans Keoghs 403(b) Plans Defined Contribution Plans Money Purchase Profit Sharing 401(k) Plans Defined Benefit Plans B. Retirement Assets Are Income in Respect of a Decedent Income in Respect of a Decedent (IRD) refers to all items of taxable income of a decedent that are not properly taxable to the decedent on his or her last or prior income tax return. 1 IRD is not entitled to a step-up basis under I.R.C As a result, IRD is always subject to income tax and may be subject to estate and generation skipping taxes. The beneficiary of the retirement asset is responsible for the income tax. 2 1 I.R.C. 691(a). 2 If the estate is subject to federal estate tax, the recipient of the IRD asset may be eligible for an offsetting income tax deduction under I.R.C. 691(c). The IRD recipient claims the IRD deduction as a Schedule A itemized deduction.

5 5 C. Required Beginning Date (RBD) A participant must begin taking required minimum distributions (RMDs) from his or her retirement account by the required beginning date (RBD). 3 The RBD is April 1 st of the calendar year AFTER the calendar year in which the beneficiary turns 70 ½. 4 Example: Bob is born on 6/30/1942 Bob turns 70 on 6/30/2012 Bob turns 70 ½ on 12/30/2012 Bob s RBD is 4/01/2013 Jane is born 7/1/1942 Jane turns 70 on 7/1/2012 Jane turns age 70 ½ on 1/1/2013 RBD is 4/1/2014 D. Required Minimum Distributions (RMDs) RMDs must begin once a participant reaches his or her RBD. RMDs are calculated based upon the Uniform Table. 5 A participant s RMD is calculated under the Uniform Table by dividing the factor into the balance of the participant s retirement account as of December 31 as of the previous calendar year. Example: In 2013, Bob will be 75 years old. The balance of his retirement account as of December 31, 2012 is $287, Bob s RMD is $12, ($287,500 divided by 22.9). 3 RMD does not apply to Roth IRA accounts. 4 For qualified plans only, RBD rules do not apply to participants who are five percent or greater owner of the business and are not retired at age 70 ½.. 5 See Exhibit A.

TRUST AS A BENEFICIARY OF AN IRA?

TRUST AS A BENEFICIARY OF AN IRA? BRADLEY J. FRIGON, JD, LLM, CELA CERTIFIED ELDER LAW ATTORNEY 6500 S. QUEBEC ST., STE. 330 ENGLEWOOD, CO 80111 (720) 200-4025 TABLE OF CONTENTS I. INTRODUCTION... 4 II.