ALI-ABA Course of Study Fundamentals of Estate Planning June 11-12, 2009 Boston, Massachusetts. Estate Planning With Qualified Plans and IRAs

Transcription

1 325 ALI-ABA Course of Study Fundamentals of Estate Planning June 11-12, 2009 Boston, Massachusetts Estate Planning With Qualified Plans and IRAs By Gayle Evans Chinnery Evans & Nail PC Lee's Summit Missouri Also a member of Doster Gunn LLC Kansas City, Missouri

2 326 ESTATE PLANNING WITH QUALIFIED PLANS AND IRAs by Gayle Evans TABLE OF CONTENTS Page I. INTRODUCTION II. ESTATE TAXATION OF ANNUITIES, QUALIFIED PLANS and IRAs III. INCOME TAXATION OF QUALIFIED PLANS, ANNUITIES and IRAs IV. MINIMUM DISTRIBUTION RULES AND PENALTY TAXES B OVERVIEW V. MINIMUM DISTRIBUTION RULES B A CLOSER LOOK VI. WHO TO NAME AS BENEFICIARY? VII. WHAT DO I DO WITH THIS INHERITED IRA? VIII. WHAT FORM OF DISTRIBUTION TO TAKE? IX. IRA PLANNING: REGULAR OR ROTH? X. HOW DO THE SPOUSAL CONSENT RULES WORK? XI. PLANNING WITH RETIREMENT BENEFITS UPON DIVORCE APPENDIX A B Uniform Lifetime Table

3 327 ESTATE PLANNING WITH QUALIFIED PLANS AND IRAs Gayle Evans Doster Guin LLC Chinnery, Evans & Nail, P.C Madison, Suite NE Vanderbilt Lane Kansas City, Missouri Lee s Summit, Missouri Tel. (816) Tel. (816) Fax (816) Tax (816) I. INTRODUCTION Qualified Plans 1 and IRAs 2 are a source of significant wealth in this country. Congressional tax incentives, the miracle of tax-free compounding, and stock market successes (Oh, for the good old days) have combined to enable individuals to build sizeable retirement account balances. Estate planning with retirement benefits poses a challenge due to the complex web of rules and regulations spun by the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Retirement Equity Act of 1984 (REA). This outline frames a series of issues the client and advisor may face in estate planning with Qualified Plans and IRAs: 1. Taxation of Qualified Plans, IRAs and Annuities 2. When To Begin Taking Distributions? 3. What Form of Distribution To Take? 4. Who Should Be Named as Beneficiary? 5. What Do I Do With this Inherited IRA? 6. IRA Planning: Regular IRA or Roth? 7. How Do the Spousal Consent Rules Work? 8. Dealing With Retirement Benefits in the Event of Divorce. '401(a). 1 A stock bonus, pension or profit sharing plan qualified under the Internal Revenue Code of 1986 as amended (AIRC@) 2 An Individual Retirement Account qualified under IRC '408(a)

4 328 II. ESTATE TAXATION OF ANNUITIES, QUALIFIED PLANS and IRAs. A. IRC ' 2039 GENERALLY. The primary estate tax provision governing Qualified Plan benefits, IRAs and annuities is '2039. Section 2039(a) generally provides that a decedent=s gross estate includes the value of any annuity or other payment receivable by a beneficiary by reason of having survived the decedent if: 1. The survivor=s annuity arises under a contract (other than an insurance policy on the decedent=s life); and 2. The contract also made provision for an annuity or other payment to the decedent geared to his or her life or life expectancy. Section 2039(b) provides that the amount included in the decedent=s gross estate is proportionate to the amount of purchase price contributed by the decedent (or by the decedent=s employer on decedent=s behalf). B. INCLUDIBLE INTERESTS. Section 2039 uses the phrase Aannuity or other payment.@ The statute covers not only the typical commercial annuity, but also Qualified Plans, IRAs, and a number of employer-sponsored survivor benefit plans. For example: 1. The self and survivor annuity. A contract providing for payments for the decedent=s life, and thereafter to a designated beneficiary. 2. The joint and survivor annuity, providing for payments for the joint lives of decedent and another person, with payments to continue to the survivor after the death of either. 3. Deferred compensation agreements entered into by the decedent and his employer for payments made to decedent for his life and thereafter to a designated beneficiary. C. AMOUNT INCLUDIBLE. 1. Generally. Section 2039(b) provides that the amount of an annuity payment includible in the decedent=s gross estate is the value proportionate to the amount of the purchase price contributed by the decedent. For this purpose, contributions made by the decedent=s employer are treated as having been made by the decedent himself. For example, assume the decedent and spouse each contributed $15,000 to the purchase price of an annuity contract under the terms of which the issuing company agreed to pay an annuity to the decedent and spouse for their joint - 2 -

5 329 lives, and to continue the annuity for the survivor=s life. Assume the value of the survivor=s annuity at decedent=s death is $20,000 (computed under ' ). Since the decedent contributed one-half of the cost of the contract, the amount included in the decedent=s gross estate is $10, Computation of Value. For most purposes, the computation of a timerelated interest (annuity, estate for life or term of years, remainder or reversion) is made under the prescribed tables of ' Commercial annuities, however, are valued based on the commuted value of the future payments. Regs. ' (a). D. OTHER RELEVANT ESTATE TAX PROVISIONS. If the death benefits are payable to the annuitant=s estate rather than to a named beneficiary, the value is included in the decedent=s gross estate under ' If the decedent reserved or retained an interest in the contract described under '' 2036, 2037, or 2038, i.e., a power to cash in the contract or to designate a different annuitant, inclusion would be under the applicable section. E. GIFT TAX. Unlike other assets, retirement benefits cannot be gifted away during lifetime. Qualified Retirement Plans are not assignable, and IRAs cannot be assigned without losing their status as IRAs. Annuity rights can be gifted, such as by an irrevocable designation of a survivor annuitant, which is a transfer under '2511. F. GST TAX. A discussion of the generation-skipping transfer (GST) tax is beyond the scope of this outline, except to state that the GST tax is applicable to distributions from Qualified Plans and IRAs. The estate planner should attempt to avoid the GST tax and make use of the GST exemption if possible. III. INCOME TAXATION of QUALIFIED PLANS, ANNUITIES and IRAs. A. GENERALLY. Distributions from annuities, Qualified Plans and traditional IRAs are taxed as ordinary income under IRC ' 72 at the time they are actually received. The participant=s basis in the retirement benefit or investment in the contract is recovered ratably over the expected period of the distribution. Qualified distributions from Roth IRAs are not taxed. B. WITHHOLDING. Distributions from Qualified Plans and IRAs are subject to withholding unless the recipient elects not to have tax withheld. An eligible rollover distribution is subject to a mandatory 20% withholding unless transferred directly to an IRA or another Qualified Plan. C. BASIS. A participant=s basis in a Qualified Plan is made up of nondeductible contributions, amounts includible in income attributable to life insurance coverage, and repayment of any loan that was treated as a taxable distribution. The IRS has - 3 -