RETIREMENT BENEFITS: SOPHISTICATED ESTATE PLANNING

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Scott Phillip Lucas
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1 RETIREMENT BENEFITS SOPHISTICATED ESTATE PLANNING TABLE OF CONTENTS I. Limitations on Transactions and Permissible Investments....1 A. The High Net Worth Investor B. Wash Sale Rule Extended to IRAs and Roth IRAs C D. Prohibited Transaction Rules E. Family Limited Partnerships.... 3! " # $ % II.... A. Custodial and Trusteed IRAs.... B. The Differences Between Custodial and Trusteed IRA & III. Case Study Mr. Jones Stretch-Out With Separate Accounts....1 A. Fact Pattern B. Planning Strategies Evaluated C. Case Study Results & IV. Case Study Mr. Jones Best Way to Pay Death Tax A. Fact Pattern B. Planning Strategies Evaluated C. Case Study Results & V. Case Study Mr. Jones Short of Funds to Pay Death Tax A. Fact Pattern B. Planning Strategies Evaluated C. Use of Life Insurance D. Case Study Results VI. DB Designations & Post-Mortem Planning Under the New Rules A. The Pressure to Designate By RBD Is Off B. Post-Mortem Planning Period Under Final Regulations C. Beneficiary Drops Out Due to Qualified Disclaimer D. Death of Beneficiary E. Revocable Trust Designated F. Estate Designated G. Cash Out of Beneficiary H. Reformations I. Final Regulations Apply Regardless of Date of Death J. Beneficiary Designations Should Include the What-Ifs K. Dealing With Financial Institutions VII. ' ( ) *! + ' + ), - ( ). - /. 0 ) ) - Children as DBs....2 A. Fact Pattern i

2 9 H ; 7 B. SAMPLE FORM IRA Death Beneficiary Form C. Sample Provisions to Include in Revocable Trust VIII. See-Through Trusts Under the MRD Rules A. Step One Qualifying As a See-Through Trust B. Step Two Identifying the See-Through Trust Beneficiaries.... 3? 7 9 ; 7 > IX. The Conduit Trust....1 A. Pros and Cons of the Conduit Trust B. Case Study Jane Reynolds C. Conduit Trust Drafting Considerations D.... E. SAMPLE FORM IRA or Retirement Plan Death Beneficiary Form Designating Subtrusts ) ( ( -.! A - " # 0 2 * ). - B C? D E F G 7 9 ; 7 > X A. Background B. Case Study John Taylor C. Drafting Considerations D XI. Variations on Conduit Trusts.... B I? I J K L I A. H... B I? B B. H rawal Rights Do Not Qualify.... M M N? B M? C.... D. Limited Usefulness of Conduits for Remainder and Contingent Beneficiaries E. Limited Usefulness of Trust That Converts to Conduit Trust for M ) O. P ) ) -, Q ) /. 2 *. - )! M B R S L I 7 9 ; 7 > XII. Non-0 Beneficiaries A. Background B. Case Study Madeleine Freeman C. Drafting Considerations D. Subtrust XIII. Non-Conduit Trust Providing Age Restriction....7 A. Background B. Case Study George Young C. Drafting Considerations D. SAMPLE FORM Trusts for Remaindermen; Age Restriction XIV. Non-0. - ) O. P ) ) -, /. + * - ( - T $ U U. V ( Q - 2 ( - ) -, %!...2 XV. Dynasty Trusts....3 A. Background ii

3 C C > > H M 9 M B. Case Study Blake and Alexis Carrington.... C. Drafting Considerations.... D. SAMPLE FORM Conduit Dynasty Trust E. SAMPLE FORM Non-Conduit Dynasty Trust F. SAMPLE FORM Non-Conduit Dynasty Trust XVI. How a See-Through Trust Can Save Income Tax XVII. IRD Deduction & A Shave and a Haircut W - ( - X. Y ) " # + O ( Q!. ' - / ) * ) ( ) % XVIII A. Four Types of Trusts B. IRD Received By A Grantor Trust C. IRD Received By A Simple Trust D. IRD Received By A Complex Trust E. IRD Received By A Charitable Remainder Trust B L B Z M?? B J \ L [? C B \ L [ XIX. Putting the Dispositive Plan Together for the High Net Worth Client A B. Planning for Non-Retirement Assets Is Mapped Out First C. Threshold Issues D. Provisions For Spouse; Unified Credits E F G. Specific Strategy Use Retirement Plan to Fund Modest Gifts to Grandchildren H. Business to Some Children; Other Assets to Other Children I. Charitable Giving L B Z L M ] XX. Drafting Under the 1997 Principal and Income Act A B. Leave Determination of Income and Principal to Trustee C. Provide a Specific Rule for the Trustee XXI. MRD Trade Off Lost Deferral When Designating QTIP and Bypass Trusts XXII. Case Study Mr. and Mrs. Brady - MRD Trade-Off XXIII. Case Study Unitrust Alternative for the Brady Family A. Fact Pattern B. Strategies for Funding Bypass and/or QTIP Trusts C. Projection Results XXIV. Preserving Marital Deduction for Estate Tax When QTIP Trust is DB A. Rev. Rul IRS Addresses UPIA B. Rev. Rul IRS Relaxes Its Position iii

4 ] ] ] 9 L S K C. What Does the New IRS Position Mean D. Watch Out for Additional Restrictions Unique to Plan E. Be Sure to Designate Subtrust F. Increased Importance of Allocation Between Income and Principal G. Tax Consequences of Income Withdrawal Power H. Ownership Under Grantor Trust Provisions I J K. Recovery Rights Under Sections 2207A and 2207B L. Planning Ideas for Second Marriage Estate Plans XXV. Rollovers By Surviving Spouse A. Terminology B. Two Different Tax Benefits C. How the Surviving Spouse Elects to Treat IRA as His or Her Own D. Timing of Minimum Distributions E. Salvaging the Rollover Election When Estate or Trust Designated XXVI. PPA of 200 Allows Direct Rollover to Charity XXVII. ^ Case Study Ms. Wellington & $ " # $ ( - 0 ( ) ) O / * ( * _!...1 A. The Facts B. Charitable Gift Strategies Considered B S L L? B L Z L C. Case Study Results - H Period D. Analysis - What Is This Case Study Telling Us? E. Conclusion XXVIII. SAMPLE FORM - Charitable Gift of IRA to List of Charities...1 A. Fact Pattern B. Whether to List Charities on DB Form or in Trust C. Avoiding Payment of Income Tax D. Trust Language - Specific Gift Approach E. Trust Language - Residuary Gift Approach F. Beneficiary Designation - Specific or Residuary Gift Approach... 1 G. Beneficiary Designation Directing Pecuniary Gifts XXIX. Drafting for Mr. Collins....1 A. Fact Pattern B. Revocable Trust - IRA to CRT C. Beneficiary Designation Directing IRA to CRT XXX. REVIEW Completing the DB Designation for a Single Participant A. Name Individuals or Subtrusts B. IRA Death Beneficiary Form Children Designated as Individuals C. IRA Death Beneficiary Form Subtrusts Designated D. Sample Provisions to Include in Revocable Trust iv

5 Z 7 E. Document the Designation F. Plan for Payment of Death Taxes L \ \ B > XXXI. REVIEW Completing the DB Designation for a Married Participant A B. Spousal Consents C. IRA Death Beneficiary Form - Children Designated as Individuals D. IRA Death Beneficiary Form - Subtrusts Designated E. Other Nonprobate Assets F. Add Clarifying Language to Wills XXXII. Planning to Avoid Waste of the Unified Credit....1 A. Redistribute Assets Among Spouses B. Designation of Bypass Trust; Disclaimer C. Life Insurance Not A Solution D. Designate Revocable Trust E. Aggregate Theory Agreement XXXIII. How to Obtain A Spousal Rollover And Still Fund the Bypass Trust....1 XXXIV. Aggregate Divisions Inside and Outside of Revocable Trust....1 A. Inside the Revocable Trust - Participant Dies First B. Inside the Revocable Trust - Spouse Dies First C. Inside and Outside the Revocable Trust XXXV. Income Tax Risks of Aggregate Division A. Not a Disposition Under IRC Section B. Assignment of Income Doctrine C. Not a Plan Distribution Under IRC Section D. Not a Transfer Under IRC Section 91(a)(2) E. Two Favorable Private Rulings F. The Dark Horse The Roth IRA XXXVI. Impact of ERISA on Aggregate Division XXXVII. Other Benefits of Aggregate Division A. Second Marriages, Rollovers, and QTIPs \ \ \ L C L L ` a a b B XXXVIII. Sample Forms A. Aggregate Theory Agreement B. Language To Be Included in Joint Revocable Trust C. Language To Be Included in Wills XXXIX. Additional Comments On Aggregate Theory Agreements in California A. California Applies Item Theory At Death B. California Allows Written Aggregate Theory Agreement C. Non-Pro-Rata Distribution Clause Distinguished v

6 7 7 > > 9 [ N N M B c d c M c d c XL. Designating the QTIP Trust A B C. Honor System D. Designating QTIP as Beneficiary E. Excerpt from QTIP Trust F. Rough Justice G. Aggregate Theory Approach XLI. Portability XLII. Trade-Offs to Discuss With Clients XLIII. Common Estate Plan Designs in Light of Portability XLIV. Issues to Discuss With Clients XLV. Specialized Planning Situations A. Large Retirement Plans B. Second Marriages XLVI. Planning for Trusts In Light of Higher Income Taxes and Surtax vi

TABLE OF CONTENTS. Simple will with residue pouring over to inter vivos trust

TABLE OF CONTENTS. Simple will with residue pouring over to inter vivos trust TABLE OF CONTENTS Preface Form I Form II Form III Form IIIA Form IV Form V Form VI Form VII Form VIII Form IX Form IXA Form X Form XI Form XII Form XIII Form XIV Form XV Form XVI Form XVII Form XVIII Form