Spousal Rollover (con t)

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Elaine McCarthy
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1 Spousal Rollover (con t) If the beneficiary of the retirement asset was a trust whose sole beneficiary was the spouse and where spouse is the trustee or has withdrawal power over the trust assets, then spouse could roll over the retirement assets to an IRA in her name. If however, the trust named spouse as income beneficiary and spouse and descendants as discretionary beneficiaries of principal for health, education, maintenance and support then spousal rollover would not be available.

2 Distributions at Death Spousal Inherited IRA Death Before RBD Surviving spouse can take distributions based on his or her life expectancy, but can delay taking distributions until the deceased spouse would have reached age 70 ½. Use Single Life Expectancy Table. Recalculate each year.

3 Distributions at Death (con t) Spousal Inherited IRA Death After RBD Distributions based on the longer of spouse s or participant s life expectancy. Can delay taking distributions until the deceased spouse would have reached age 70 ½. Use Single Life Expectancy Table. If using spouse s life expectancy, recalculate each year. If using participant s life expectancy, then find age at date of death, then subtract one each year.

4 Distributions at Death (con t) Inherited IRA (Beneficiary Other Than Spouse) Death Before RBD Option 1: Distributions based on beneficiary s life expectancy; Must take first distribution by December 31st of year after participant s death; Use Single Life Expectancy Table; Find age at date of death, then subtract one each year, or Option 2 Five-Year Rule.

5 Distributions at Death (con t) Inherited IRA (Beneficiary Other Than Spouse) Death After RBD Option 1: Distributions based on longer of beneficiary s life expectancy or the life expectancy of the participant as of the year of death; Must take first distribution by December 31st of year after participant s death; Use Single Life Expectancy Table, or Option 2 Five-Year Rule.

6 Calculating RMDs for a Beneficiary If the beneficiary is 58 when the participant dies, the factor to determine the beneficiary s RMD is 27. The following year, the beneficiary factor to calculate RMD is 26 (27-1). If the participant was 50 when he died, the beneficiary could use a factor of 34.2 (the participant s factor) for calculating RMDs.

7 Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs Age RMD Age RMD Age RMD Age RMD Age RMD

8 Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs Age RMD Age RMD Age RMD Age RMD Age RMD

9 Distributions at Death No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Distributions at Death Non-Qualified Trust

10 No Designated Beneficiary Five year rule applies: Under the five year rule, the entire balance of the retirement plan must be distributed to the beneficiary no later than December 31 of the calendar year five years from the participant s death. Not required to make distributions equally over the five year period.

11 Multiple Beneficiaries and the Separate Account Rule If you can divide each beneficiary s share into a separate account then each beneficiary can use own life expectancy. You must contact the custodian and physically divide the accounts. Must be completed by December 31 of the year following the participant s death.

12 Separate Account Rule and Trusts Note the separate account rule does NOT apply to multiple beneficiaries who take their interest through a trust. Several PLRs ruled that if a trust was to be divided into sub-trusts for each beneficiary after the settlor s death, every sub-trust must calculate RMDs based upon oldest beneficiary of the original trust.

13 DB and RMD Rules for Trusts First Step: If a participant names a qualified trust as the beneficiary of an eligible retirement plan, then the trust beneficiary will be treated as the beneficiary of the account for purposes of determining whether there is a designated beneficiary and who it is. Second Step: Once the trust qualifies as a qualified trust and a beneficiary is identified as a designated beneficiary, then you must determine the applicable measuring life.

14 Qualified Designated Beneficiary Trust To be a Qualified Trust, the Trust must - Trust is valid under state law. Trust is irrevocable or becomes irrevocable by participant s date of death. (Third party stand alone SNT Problem) All beneficiaries are identifiable under the terms of the trust. A copy of the trust document is provided to the plan administrator or IRA custodian by no later than October 31 of the calendar year after the death of the participant.

15 Deadlines Deadline for meeting requirement is October 31 st of the year following the plan participant s death. Deadline for providing plan documentation is September 30 th of the year following the plan participant s death. Documents required to be furnished: Either a copy of trust documents and all amendments, or A list of all trust beneficiaries, including contingent and remainder beneficiaries and a statement as to the circumstances under which they will take.

16 Conduit Trust With a conduit trust the trustee is required, by the terms of the trust, to pass all plan distributions out to the individual trust beneficiary. The IRS considers the conduit beneficiary as the sole beneficiary of the trust. Remainder beneficiaries are disregarded for purposes of calculating RMDs even if reminder beneficiaries are not DBs.

17 IRA Conduit Language

18 Conduit Trust (con t) Example: A creates a trust for the benefit of his wife. The terms of the trust provide that wife must receive all income. Trustee has discretion to distribute principal for wife s health, education and support. Upon wife s death all property passes to A s siblings. If a sibling predeceases then passes to charity. Since Conduit trust only look at wife s life expectancy to determine RMD s. Do not need to look at A s siblings or charity.

19 Accumulation Trust With an accumulation trust, the trustee has the discretion to distribute income and principal to the beneficiary. With an accumulation trust, must look at life expectancy of all remainder beneficiaries to determine measuring life for RMD purposes. A special needs, or a discretionary support trust would be examples of an accumulation trust.

20 Discretionary Distribution

21 Calculating RMDs for an Accumulation Trust Father establishes a SNT for his special needs son A and designates the SNT as the primary beneficiary of his IRA. The father s IRA has a $1,000,000 balance at the time of his death. Upon A s death, the balance of the assets of the SNT go to A s siblings, B and C. A is 20, B is 40, and C is 45 at their father s death. In this case, the RMD rules require A, B, and C to be considered as beneficiaries. C s life expectancy is used to determine RMDs because C is the oldest.

22 Calculating RMDs for an Accumulation Trust (con t) The factor for C at age 45 is Using a factor of 38.8 creates a RMD for the initial year of the trust of $25, ($1,000, ). If RMDs are based on A s life expectancy, a factor of 63 is used. A factor of 63 decreases RMDs to $15, ($1,000,000 63). By naming C as a remainder beneficiary, the RMD increased by $9,

23 Accumulation Trust Power to Appoint to Charity A creates a trust that provides discretionary income and principal to son B. Upon B s death, the remaining principal and income is paid to a class of beneficiaries consisting of B s issue and any charity as appointed by B in his will. Since B s power to appoint includes a power to appoint to a non-individual, the trust would not have a DB for RMD purposes. If the terms of the trust did not provide a power of appointment to charity, then B s life expectancy would be used because all of B s issue must be younger in age.

24 Qualified Designated Beneficiary Trust Look through beneficiaries CAUTION: Atom Bomb Beneficiaries Solution Limit to younger beneficiaries for purposes of distributing retirement assets CAUTION: Powers of Appointment Solution Limit powers of appoint to younger beneficiaries for purposes of appointing retirement assets

25 Qualified Designated Beneficiary Trust (con t) Look through beneficiaries CAUTION: Using retirement assets to pay trustor s debts, estate taxes or administration expenses = paying to estate of the trustor, i.e., no designated beneficiary Solution: Prohibit use of retirement assets to pay for debts, estate taxes or administration expenses, unless these payments can be made prior to September 30 of year after the trustor dies

26 Payments to a Trust Accumulation Conduit CRT Another option that should be considered is a lumpsum distribution of all or a portion of a taxable retirement account to a charitable remainder trust (CRT) that first benefits the surviving spouse, then other beneficiaries (such as children), and then a charity. The principal income tax advantage is that a CRT is a tax-exempt trust, so there will be no income tax liability when it receives the income from the retirement plan account. Private Letter Rulings (Oct. 8, 1998), (May 24, 1996), (Oct. 5, 1992) and (June 12, 1992).

27 CRUT Example Mary, age 80, has a son, John, age 55, who has serious disabilities. Mary funds a charitable remainder unitrust(crut) with $500,000 that directs the CRUT to pay 5% of the fair market value of the trust property as valued on the first day of each year to a Third Party SNT she established for John s life. The SNT will receive the majority of its funding at Mary s death. Growth and income rates are both projected at 5 percent. The first annual payment from the CRUT tothesntwill be5percentof thecrut,or$25,000.

28 CRUT Example (con t) If the donor wants the certainty of a specific annual annuity, a charitable remainder annuity trust should be considered. This unitrust amount will provide for John s anticipated supplemental needs, such as his recreation, therapists, dental services and clothing. Neither the SNT nor the income payable from the CRUT are considered a countable resource for purposes of John s eligibility for means-tested benefits.

29 Revenue Ruling An IRS Gift to SNTs In Revenue Ruling , the IRS issued significant guidance to more easily facilitate distributions from a charitable remainder trusttoansnt. The General rule concerning distributions from a charitable remainder trust (CRT) to another trust limits distributions to a term of 20 years. However, a CRT may make distributions to an individual for his or her life. Both of these general rules are a problem for persons with disabilities. A direct distribution from a CRT to an individual on SSI or Medicaid will likely cause those benefits to be lost because the distributions would create excess income or resources above means-tested program limits. But, if the CRT distributed directly to an SNT for the individual, then the payments could not continue past 20 years.

30 The Value of Charitable Trusts as SNT Replenishment Funding Streams Revenue Ruling provides that CRT distributions can be made to a second trust, such as an SNT, for the life of an individual who is financially disabled. The individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment which can be expected to result in death, or which has lasted or can be expected to last for a continuance period of not less than 12 months. An individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the secretary may require.

Magical Mystery Tour: Naming a Special Needs Trust as Beneficiary of a Retirement Account. Presented by: Dennis M. Sandoval, J.D., LL.M.

Magical Mystery Tour: Naming a Special Needs Trust as Beneficiary of a Retirement Account Presented by: Dennis M. Sandoval, J.D., LL.M., CELA Required Minimum Distributions Lifetime Distributions Age 70