Estate Planning for Your IRA JEREMIAH W. DOYLE IV, ESQ. SENIOR VICE PRESIDENT

Estate Planning for Your IRA JEREMIAH W. DOYLE IV, ESQ. SENIOR VICE PRESIDENT

Ten (+) Topics for Discussion HAVE YOU PLANNED FOR TAXES ON YOUR IRA? HAVE YOU CONSIDERED A CHARITABLE GIFT OF YOUR IRA? NET UNREALIZED APPRECIATION ON EMPLOYER STOCK RETIREMENT PLAN TO CHARITY LIFETIME GIFT NAMING A BENEFICIARY OF YOUR IRA IRAS AND DIVORCE NAMING BENEFICIARY AFTER DIVORCE IRAs AND CREDITOR S CLAIMS IRA WILL - CUSTOM DRAFTED BENEFICIARY FORM IRAs LOANS AND PLEDGES

Topic 1 HAVE YOU PLANNED FOR TAXES ON YOUR IRA?

IRA May Be Subject To: ESTATE TAX INCOME TAX GENERATION-SKIPPING TAX

Facts JOHN, A WIDOWER, DIES IN 2006 AT AGE 65 HAS $2 MILLION IRA ESTATE IS BENEFICIARY OF IRA JOHN IN HIGHEST INCOME AND ESTATE TAX BRACKET EXECUTOR LIQUIDATES IRA

Hey - Where Did My IRA Go??? (NO GST) VALUE OF IRA $ 2,000,000 FEDERAL ESTATE TAX (46% BRACKET) ($ 791,016) MASSACHUSETTS ESTATE TAX ($ 180,800) FEDERAL AND MASSACHUSETTS INCOME TAXES: Federal Income Tax: 35% x $1,102,984 ($ 386,044) Massachusetts Income Tax: 5.30% x $2,000,000 ($ 106,000) BALANCE $ 536,140 AMOUNT RECEIVED BY CHILDREN: $ 536,140 AMOUNT RECEIVED BY CHILDRED: $536,140 I.E. LESS THAN 27 CENTS ON THE DOLLAR!!!

Hey - Where Did My IRA Go??? ( GST) VALUE OF IRA $ 2,000,000 FEDERAL ESTATE TAX @ 47% ($ 791,016) MASSACHUSETTS ESTATE TAX ($ 180,800) GENERATION SKIPPING TAX ($ 323,948) FEDERAL AND MASSACHUSETTS INCOME TAXES: Federal Income Tax: 35% x $779,036 ($ 272,663) Massachusetts Income Tax: 5.30% x $2,000,000 ($ 106,000) BALANCE $ 325,573 AMOUNT RECEIVED BY GRANDCHILD: $325,573 I.E. LESS THAN 17 CENTS ON THE DOLLAR!!!

Topic 2 HAVE YOU CONSIDERED A CHARITABLE GIFT OF YOUR IRA?

Tax Consequences of Leaving IRA to Charity 9 PLRs NO ESTATE TAX Qualifies for FET Charitable Deduction NO INCOME TAX To donor or donor s estate Charity not taxed on proceeds TAX EFFICIENT GIFT - FOR A COST OF ROUGHLY 25% TO THE HEIRS, 100% OF IRA CAN BE DEVOTED TO A CHARITABLE PURPOSE

Topic 3 NET UNREALIZED APPRECIATION DISTRIBUTION OF EMPLOYER STOCK

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK REQUIREMENTS Taxpayer receives lump sum distribution (LSD) of qualified plan Distribution includes employer stock that has a significant amount of net unrealized appreciation (NUA)

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK HOW IT WORKS Distribution of employer stock results in income taxation to the recipient equal to the cost basis (not the FMV) of the employer stock The NUA is not taxed on distribution When sold the NUA is LTCG, regardless of how long the stock is held

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK HOW IT WORKS Donor takes LSD of qualified plan Retains the employer stock Pays income tax on cost basis of employer stock Rolls over the balance of the LSD tax-free to an IRA NUA taxed as LTCG when sold Balance of gain in excess of NUA taxed as STCG or LTCG depending in how long the employer stock was held

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK ED GETS LSD FROM QUALIFIED PLAN Includes 1000 sh of employer stock FMV $50/sh, Cost Basis $9/sh Retains stock, pays ordinary income tax on $9/sh NUA of $41/sh ($50 FMV less $9 cost basis) is LTCG when Ed ultimately sells the stock Appreciation over $50/sh is STCG or LTCG depending on how long Ed holds the stock Ed s holding period begins when he gets the stock

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK $9 $50 NUA Taxed as LTCG Taxed as Ordinary Income LTCG or STCG

Net Unrealized Appreciation DISTRIBUTION OF EMPLOYER STOCK RESULT: Cost basis of stock taxed as ordinary income Converts potential ordinary income to capital gain 10% penalty applies to cost basis of stock Omitted from Minimum Required Distribution Requirements Can hold stock and rollover balance to IRA Gives up tax deferral and tax-free buildup in an IRA

Topic 4 RETIREMENT PLAN TO CHARITY LIFETIME GIFT

Retirement Plan to Charity LIFETIME GIFT HOW IT WORKS Donor takes LSD of qualified plan Retains the employer stock Pays income tax on cost basis of employer stock Contributes employer stock to CRUT Gets charitable deduction for FMV of employer stock less the value of the retained interest CRUT sells stock and pays no capital gains tax Proceeds equal to NUA are LTCG under CRUT tier system

Retirement Plan to Charity LIFETIME GIFT RESULT: Donor takes distribution from qualified plan during life Contributes stock to CRUT for his benefit At a cost to him of ordinary income tax on the cost basis of the employer securities Gets assets out of his qualified plan at a low tax cost and gives them to charity This is merely a version of contributing appreciated stock to a CRUT

Retirement Plan to Charity WHAT IT LOOKS LIKE Qualified Plan DONOR CRUT Employer Stock Employer Stock CRUT Payments (Taxed on cost basis) Contribution to CRUT based on FMV of Stock

Retirement Plan to Charity WILL THIS WORK??? Yes!!! See PLRs 199919039, 200038050, 200202078, 200215032, 200302048 and 200335017

Topic 5 NAMING A BENEFICIARY OF YOUR IRA

Estate of McIntosh 773 A.2d 649 (N.H., 2001) Decedent, Roy McIntosh, names youngest son, David, as sole IRA beneficiary Will leaves estate equally to 3 sons Names 3 sons as equal beneficiaries of life insurance Sold coin collection before death, dividing proceeds equally between 3 sons David appointed executor of Roy s will David won t share IRA with brother, Scott Scott sues claiming his father intended to divide everything equally

Estate of McIntosh 773 A.2d 649 (N.H., 2001) RESULT David gets the IRA Court says the beneficiary designation form CONTROLS

Who Takes Your IRA? THE WILL DOESN T CONTROL THE DESIGNATED BENEFICIARY FORM CONTROLS

Beneficiary Of IRA NAMED IN BENEFICIARY FORM DEFAULT: SEE IRA AGREEMENT Estate? Spouse?

Beneficiary of IRA SPOUSE Rollover potential Estate Tax Marital Deduction CHILD No Rollover Estate Tax Liability TRUST - COMPLICATIONS CHARITY - NO ESTATE OR INCOME TAX DIVORCE - CHANGE THE BENEFICIARY

Topic 6 IRAS AND DIVORCE

IRAs and Divorce SECTION 408(D)(6) TRANSFER OF IRA ON DIVORCE NOT TAXABLE IF: Pursuant to valid divorce decree, or Under written instrument incident to the divorce

IRAs and Divorce ALTERNATIVE WAYS TO TRANSFER IRA IN DIVORCE Change the name of the IRA owner IRA owner sets up new IRA rollover in IRA owner s name, then assigns to spouse in name of spouse Ex-spouse sets up own IRA and IRA owner transfers to exspouse s IRA

IRAs and Divorce ONCE TRANSFERRED, THE IRA IS TREATED AS OWNED BY THE EX-SPOUSE AS OF THE DATE OF TRANSFER Ex-spouse is taxed on distributions 10% penalty applies if ex-spouse is under 59 ½ Ex-spouse must take MRD when he/she is 70 ½ Ex-spouse names own IRA beneficiary

Topic 7 NAMING BENEFICIARY AFTER DIVORCE

Naming Beneficiary After Divorce CASE #1 - FACTS WIFE NAMED AS BENEFICIARY ON HUSBAND S IRA COUPLE GETS DIVORCED WIFE AGREES SHE S NOT ENTITLED TO HUSBAND S ASSETS ALSO WAIVES ANY RIGHT SHE HAS IN HUSBAND S ASSETS HUSBAND REMARRIES COMPLETES NEW PAPERWORK FOR IRA BUT NAMES NO BENEFICIARY HUSBAND DIES - EX-WIFE AND NEW WIFE CLAIM THE IRA Who Gets the IRA???

And the Answer is... EX-WIFE

Beneficiary After Divorce REASONING WIFE #1 S RIGHT IN IRA WAS REVOCABLE PRIOR TO DEATH AT TIME OF DIVORCE SHE HAD NO PROPERTY INTEREST IN IRA AT TIME OF DIVORCE, WIFE #1 HAD NO RIGHTS TO SURRENDER AT DEATH, IRA BENEFICIARY BECAME IRREVOCABLE Wife #1 was beneficiary PaineWebber Inc. v. East, Maryland Court of Appeals (March, 2001)

Naming Beneficiary After Divorce Case #2 - Facts WIFE NAMED AS BENEFICIARY OF HUSBAND S PENSION COUPLE GETS DIVORCED HUSBAND NEGLECTS TO CHANGE PENSION BENEFICIARY HUSBAND DIES 2 MONTHS AFTER DIVORCE STATE STATUTE SAYS DIVORCE REVOKES BENEFICIARY DESIGNATION OF EX-SPOUSE EX-WIFE AND KIDS BY PREVIOUS MARRIAGE CLAIM PENSION Who Gets the IRA???

And the Answer is... EX-WIFE

Beneficiary After Divorce REASONING ERISA PREEMPTS STATE LAW THAT REVOKES BENEFICIARY DESIGNATIONS ERISA SAYS BENEFICIARY IS DETERMINED BY STATE LAW UNDER STATE LAW (WASHINGTON), EX-WIFE WAS NAMED THE BENEFICIARY Egelhoff v. Egelhoff, United States Supreme Court, March 21, 2001

Beneficiary After Divorce MESSAGE AFTER DIVORCE, CHANGE THE BENEFICIARY!!!

Topic 8 IRAS AND CREDITOR S CLAIMS

IRAs and Creditor s Claims THREE TYPES OF CREDITORS: Judgment Creditor Bankruptcy Internal Revenue Service

IRAs and Creditor s Claims GENERALLY, QUALIFIED PLANS NOT SUBJECT TO CREDITOR S CLAIMS ERISA protects qualified plans (with exceptions) IRA ARE GOVERNED BY STATE, NOT FEDERAL, LAW IRA creditor protection differs from state to state Massachusetts protects part/all (???) of traditional IRAs See M.G.L. c. 235 34A GR: Exempts IRAs from creditor s claims Exception: sums deposited within 5 yr Exemption is 7% of last 5 year s income Rollover and transfer not sums deposited

Topic 9 IRA WILL - CUSTOM DRAFTED BENEFICIARY FORM

IRA Will - Custom Drafted Beneficiary Form DON T RELY ON IRA TRUSTEE/CUSTODIAN S BD FORM THEY DON T COVER: Beneficiary s right to accelerate distributions IRAs payable to minors Who names trustee or UTMA custodian? Right of Atty-in-Fact to deal with IRA Beneficiary dies before complete distribution of IRA Can beneficiary transfer IRA to new institution? Where do estate taxes attributable to IRA come from? Beneficiary s right to name new beneficiary Beneficiary s right to change investments

Topic 10 IRAs LOANS AND PLEDGES

IRAs Loans and Pledges BORROWING TREATED AS CONSTRUCTIVE DISTRIBUTION OF FMV OF IRA AS OF THE FIRST DAY OF THE TAXABLE YEAR PLEDGE TREATED AS CONSTRUCTIVE DISTRIBUTION OF THE PORTION PLEDGED Appears to be a distribution as of the date pledged, not the first day of the taxable year

Thank You!