DRAFTING TO INTEGRATE RETIREMENT PLANS AND IRAs INTO THE ESTATE PLAN

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1 DRAFTING TO INTEGRATE RETIREMENT PLANS AND IRAs INTO THE ESTATE PLAN KAREN S. GERSTNER Karen S. Gerstner & Associates, P.C Kirby Drive, Suite 306 Houston, Texas Telephone: (713) Fax: (713) State Bar of Texas 25 TH ANNUAL ESTATE PLANNING & PROBATE DRAFTING October 9-10, 2014 Dallas CHAPTER 3.2

2 TABLE OF CONTENTS I. OVERVIEW OF FINAL REGULATIONS... 1 A. Disclaimer And Scope Of Outline... 1 B. Minimum Distribution Rules Purpose Of Minimum Distribution Rules... 1 a. To Provide Retirement Benefits Primarily To The Employee (And His Spouse) b. To Prevent Indefinite Postponement Of Income Taxes When Are Minimum Distributions Required To Commence? a. Required Beginning Date b. Lifetime Distributions To Participant Must Commence By Required Beginning Date Distribution Periods During Participant's Life Under The New Rules a. Participant's "Young Spouse" Is Not Sole Beneficiary... 2 b. Participant's Young Spouse Is Sole Beneficiary... 2 c. IRS Tables Key To Distribution Periods After Participant's Death: Designated Beneficiary a. Who Is A Designated Beneficiary?... 2 b. New Applicable Date For Determining Designated Beneficiary c. Which Designated Beneficiary "Problems" Can Be Fixed After The Participant's Death? Required Distributions On Or After Death Of Participant a. Participant's Death Before RBD... 4 b. Participant's Death After RBD Creation Of Separate Accounts After Participant's Death a. Separate Accounts: Issues Relating To Beneficiary Designation Wording b. Method For Division Into Separate Accounts After Participant's Death c. Ambiguities In Final Regulations Regarding Separate Accounts Effective Dates a. Transitional Rules b. Relief From 5 Year Rule c. Relief For Failure To Provide Trust Documentation Reporting Requirements C. Taxation Overview Income Taxation a. Special Income Tax Rules b. Rollovers c. Inherited Retirement Plans d. $5,000 Death Benefit Exclusion Estate Taxation a. General Rule b. Two Transitional Rules May Still Provide Exclusion From Participant's Estate For Qualified Plans Benefits c. Estate Tax Transitional Rules Not Applicable To IRAs d. Caution Advised D. Penalty Taxes Premature Distributions Late Or Insufficient Distributions Elimination Of Penalty Taxes On Excess Accumulations And Distributions E. Spousal Rights Two Required Spousal Benefits For Certain Plans a. QJSA b. QPSA Spousal Benefit Requirements For Other Plans a. Spouse Must Be Beneficiary b. No Annuity Rule c. Not A Transferee Plan Additional Technical Rules i-

3 4. Waivers And Consents a. Participant's Waiver b. Spousal Consent To Waiver c. Sample Language d. Consideration To Spousal Rights F. Community Property Laws Devisability Issue a. Qualified Plans - No Right Of Disposition b. IRAs - Boggs Not Applicable c. Status Of IRA Rollovers From Qualified Plans Drafting Issues a. How Does The Interest Pass? b. To Whom Should The Interest Pass? c. Documentation Of Disclaimer By Participant Planning Ideas To Assist NPS In Her Estate Planning II. OPTIMAL BENEFICIARY DESIGNATIONS A. Married Participant: Designate Spouse As Primary Beneficiary Qualifies for Estate Tax Marital Deduction a. Automatic QTIP Treatment For Survivor Annuities b. Periodic Payment Issues No Gift Tax Issue Spouse Qualifies As Sole Designated Beneficiary Spouse's Options Upon Death Of Participant a. Spouse's IRA Rollover Option b. Spouse's Assumption Of Participant's IRA c. Disadvantages Of Spousal IRA Rollover d. Taking Distributions As Participant's Beneficiary e. Disclaimer Option B. Single Participant With Children: Designate Adult Children As Outright Beneficiaries Multiple Beneficiary Rule a. Separate Accounts/Segregated Shares Caveat: Restrictive Qualified Plan Provisions C. Single Participant, No Children, Charitable Intent: Designate Charity As Direct Beneficiary Charity Is Not A Designated Beneficiary But No Longer Adversely Affects Participant Charity As One Of Multiple Beneficiaries: Use Separate Accounts Estate Tax Result: Charitable Deduction Income Tax Result For Charity III. REASONS FOR DESIGNATING A TRUST AS THE BENEFICIARY OF RETIREMENT PLANS A. Non-Tax Reasons B. Tax Reasons IV. OBTAINING DESIGNATED BENEFICIARY TREATMENT IF A TRUST IS NAMED AS BENEFICIARY OF RETIREMENT PLANS A. History Of The Trust Regulatory Requirements B. Trust Itself Is Not A Designated Beneficiary C. Trust Regulatory Requirements Under The Final Regulations Overview Of The Four Trust Requirements a. First Requirement b. Second Requirement c. Third Requirement d. Fourth Requirement Trust Documentation No Longer Required At RBD a. Exception: Trust For Young Spouse b. Post-Death Trust Documentation ii-

4 3. What Types Of Trusts Created For The Spouse Will Qualify For Sole DB Treatment? a. Conduit Trust b. Grantor Trust Identification Of All Trust Beneficiaries Having An Interest In Participant's Plan a. Contingent Beneficiaries b. Successor Beneficiary c. Specific Examples In The Regulations D. Unanswered Questions Regarding Trusts Named As Beneficiaries Beneficiaries Of Powers Of Appointment a. General Powers And Broad Special Powers b. Limited Powers Remainder Beneficiaries a. Is The Life Expectancy Theory Still Viable? V. SPECIAL CONCERNS IN NAMING A QTIP TRUST AS BENEFICIARY A. Complete Distribution To QTIP Trust Estate Tax Marital Deduction Income Tax Issues IRD a. No IRD Deduction Allocation Between Principal And Income a. Texas Uniform Principal And Income Act Allocation Rules b. Comparison to "National" UPIA Observation Regarding Reduction In Value Of Retirement Plan Due To IRD B. Periodic Payments To QTIP Trust Estate Tax Marital Deduction Issues a. Satisfying The "Qualifying Income Interest For Life" Requirement b. Two Alternatives For Meeting The Qualifying Income Interest Requirement c. Conflict Between Minimum Distribution Rules And "All Income" Requirement Under The Estate Tax Marital Deduction Rules d. Solution: Two Choices Now For Meeting "All Income" Requirement e. Principal And Income Allocation Issues f. Post-death Administrative Requirement: Two QTIP Elections g. Plan Distribution Options Must Be Satisfactory Designated Beneficiary Issues a. The Trust Regulatory Requirements IRD Issues a. Specific Bequest Approach b. Fractional Share Approach c. Residuary Trust Tax Payment Issues a. Estate Taxes b. Income Taxes And Expenses Instructive Rulings Will Contests And Other Litigation VI. SPECIAL CONCERNS IN NAMING A QDOT TRUST AS BENEFICIARY A. Spouse Not U.S. Citizen B. Creation of QDOT C. Rollover to QDOT by Non-Citizen Spouse Three Illustrative Rulings a. PLR b. PLR c. PLR D. Annuity As QDOT E. Final QDOT Regulations iii-

5 VII. SPECIAL CONCERNS IN NAMING A BYPASS TRUST AS BENEFICIARY A. Complete Distribution To Bypass Trust IRD Deduction Principal And Income Allocation Issues B. Minimum Distribution Payments To Bypass Trust Principal And Income Allocation Issues IRD Reduces Estate Tax Effectiveness Strategies For The Participant During Life a. Not Waiting Until Age 70 ½ To Take Distributions From His Retirement Plans b. Not Taking Merely The Minimum Required Distributions Upon Reaching RBD c. Rolling Over Qualified Plan Benefits To An IRA d. Converting To A Roth IRA Complicating Factors a. Multiple Beneficiaries Drafting Strategies a. Beneficiary Designations b. Bypass Trust Provisions C. New Approaches Elect Portability a. Better Income Tax Situation For Surviving Spouse b. Better Income Tax Situation For Children After Death Of Surviving Spouse c. Disadvantages Of Portability Election Non Pro Rata Distributions a. What Is The Plan? b. What Are the Risks Of This Plan? c. Federal Income Tax Support d. Texas Statutory Provisions VIII. SPECIAL CONCERNS IN NAMING A CHARITABLE REMAINDER TRUST AS BENEFICIARY OF RETIREMENT PLANS A. Distinguish From Naming A Charity As The Beneficiary B. Distinguish Naming A Charitable Remainder Trust And Naming a QTIP Trust With Remainder To Charity As The Beneficiary Marital Deduction Issue Income Tax Issues Benefits To Spouse Benefits To Charity C. Disadvantage Of Naming A Charitable Trust As Beneficiary No Designated Beneficiary-But No Longer Hurts Participant Other Beneficiaries May Suffer Because Of The Multiple Beneficiary Rule a. Percentage Or Fractional Share Designation b. Post-death Creation Of Separate Accounts/Cashing Out Charity Loss Of IRD Deduction Avoid Naming A Charitable Beneficiary Of Roth IRA D. Direct Rollover Of IRA To Charity IX. SPECIAL CONCERNS IN NAMING A GST TRUST AS BENEFICIARY A. No GST Exemption Allocation Until Participant's Death B. GST Exemption Allocation At Death IRD Issue Various Problems Advantages Potential Problems iv-

6 X. TRUST (OR ESTATE) WAS NAMED AS BENEFICIARY BUT THERE IS A SURVIVING SPOUSE AND SPOUSE DESIRES IRA ROLLOVER A. Not A Planning Technique: Trying To Salvage Spousal IRA Rollover B. Illustrative Rulings Some Favorable Rulings: Spousal IRA Rollover Permitted a. Factors Leading To Favorable Ruling Unfavorable Rulings: No Spousal IRA Rollover Permitted a. Reasons For Unfavorable Ruling XI. CONCLUSION A. Rules For Allocating Plans/IRAs to Trusts Are Complex B. Consider Obtaining A Private Letter Ruling C. Consider Other Alternatives To Trust as Beneficiary LIST OF EXHIBITS Exhibit 1 Exhibit 2 Exhibit 3 Exhibits 4-16 Exhibit 17 Uniform Lifetime Table Joint and Last Survivor Table Single Life Table Sample Beneficiary Designation Wording and Sample "Schedule A" Beneficiary Designation Attachments ( for a split of benefits between charity and individuals, see Exhibits 15 and 16) Beneficiary Designation Considerations -v-

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