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 ½ Use Uniform Table except where spouse is more than 10 years younger than participant, in which case Joint Life Expectancy Table is Used Inherited IRA Must begin by December 30 of year after participant s death Use Single Life Expectancy Table (subtract 1 each year)
Penalty for Failure to Make RMD 50% penalty if RMD nor made on timely basis! Reasonable cause exception applies
Overview of Retirement Assets Uniform Table Age RMD Age RMD Age RMD Age RMD Age RMD 70 27.4 79 19.5 88 12.7 97 7.6 106 4.2 71 26.5 80 18.7 89 12.0 98 7.1 107 3.9 72 25.6 81 17.9 90 11.4 99 6.7 108 3.7 73 24.7 82 17.1 91 10.8 100 6.3 109 3.4 74 23.8 83 16.3 92 10.2 101 5.9 110 3.1 75 22.9 84 15.5 93 9.6 102 5.5 111 2.9 76 22.0 85 14.8 94 9.1 103 5.2 112 2.6 77 21.2 86 14.1 95 8.6 104 4.9 113 2.4 78 20.3 87 13.4 96 8.1 105 4.5 114+ 2.1
Overview of Retirement Assets Selected Excerpt from Joint Table Ages 68 67 66 65 64 63 62 61 60 70 22.7 23.2 23.7 24.3 24.8 25.4 26.1 26.7 27.4 71 22.3 22.8 23.4 23.9 24.5 25.2 25.8 26.5 27.2 72 22.0 22.5 23.1 23.7 24.3 24.9 25.6 26.3 27.0 73 21.6 22.2 22.8 23.4 24.0 24.7 25.4 26.1 26.8 74 21.3 21.9 22.5 23.1 23.8 24.5 25.2 25.9 26.6 75 21.0 21.6 22.3 22.9 23.6 24.3 25.0 25.7 26.5 76 20.8 21.4 22.0 22.7 23.4 24.1 24.8 25.6 26.3 77 20.6 21.2 21.8 22.5 23.2 23.9 24.7 25.4 26.2 78 20.3 21.0 21.7 22.4 23.1 23.8 24.6 25.3 26.1
Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs Age RMD Age RMD Age RMD Age RMD Age RMD 20 63.0 29 54.3 38 45.6 47 37.0 56 28.7 21 62.1 30 53.3 39 44.6 48 36.0 57 27.9 22 61.1 31 52.4 40 43.6 49 35.1 58 27.0 23 60.1 32 51.4 41 42.7 50 34.2 59 26.1 24 59.1 33 50.4 42 41.7 51 33.3 60 25.2 25 58.2 34 49.4 43 40.7 52 32.3 61 24.4 26 57.2 35 48.5 44 39.8 53 31.4 62 23.5 27 56.2 36 47.5 45 38.8 54 30.5 63 22.7 28 55.3 37 46.5 46 37.9 55 29.6 64+ 21.8
Overview of Retirement Assets Single Life Expectancy Table for Inherited IRAs Age RMD Age RMD Age RMD Age RMD Age RMD 65 21.0 74 14.1 83 8.6 92 4.9 101 2.7 66 20.2 75 13.4 84 8.1 93 4.6 102 2.5 67 19.4 76 12.7 85 7.6 94 4.3 103 2.3 68 18.6 77 12.1 86 7.1 95 4.1 104 2.1 69 17.8 78 11.4 87 6.7 96 3.8 105 1.9 70 17.0 79 10.8 88 6.3 97 3.6 106 1.7 71 16.3 80 10.2 89 5.9 98 3.4 107 1.5 72 15.5 81 9.7 90 5.5 99 3.1 108 1.4 73 14.8 82 9.1 91 5.2 100 2.9 111+ 1.0
Determination of Beneficiary Determination of Beneficiary Beneficiary to be determined by September 30th of year after participant s death Allows participant to change designated beneficiaries after RBD without increasing RMDs Allows beneficiaries to be changed after death of participant, such as by disclaimer or by distribution in satisfaction prior to September 30 Useful where trust is named as beneficiary and stretch-out for some trust beneficiaries is desired or where a charity is named as a trust beneficiary
Distributions at Death 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 Can name new beneficiaries to take at death, or Option 2 Five-Year Rule
Distributions at Death 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
Distributions at Death Five Year Rule No set schedule of distributions, but the Retirement Asset must be fully distributed to beneficiaries no later than December 31 of the year five years from the date of the participant s death.
Distributions at Death No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust
No Designated Beneficiary Participant Dies Before RBD Five-Year Rule Participant Dies After RBD Option 1 Remainder of participant s life expectancy, or Option 2 Five-Year Rule
Distributions at Death Death Before RBD Death On or After RBD Spouse Rollover Uniform Table Otherwise, Spouse s Life Expectancy Recalculated Rollover- Uniform Table Otherwise, Greater of Spouse s or Participant s Life Expectancy Non-Spouse Beneficiary s Life Expectancy Greater of Beneficiary s or Participant s Life Expectancy NonQualified 5-Year Rule Life Expectancy of Participant or 5-Year Rule
Proper Titling of Inherited IRA Proper Titling for Inherited IRA John Doe (Deceased) IRA fbo Mary Doe John Doe (Deceased) IRA fbo Mary Doe, Trustee under the John Doe special Needs Trust created under the John Doe Trust dated January 1, 1985 NOT Mary Doe (unless spousal rollover)
Requirements for Qualified Designated Beneficiary Trust Look through to trust beneficiaries, if: Trust is valid under state law Trust is irrevocable or becomes irrevocable by participant s date of death 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
General Rule Look through beneficiaries Use the life expectancy of oldest beneficiary to determine RMDs General Rule is contingent beneficiaries are included in determining oldest beneficiary
PLR 200228025 Upon death, distributed to shares for nephews Shares held in trust until nephew attains age 35 If nephew dies before age 35, paid to contingent beneficiaries; oldest is age 67 at death of trustor All nephews under age 20 at date of death
PLR 200228025 IRS rules that it is possible a nephew could die before age 35 and the share becomes vested Therefore, the oldest beneficiary under the terms of the trust is age 67 and distributions to nephews must be based on life expectancy of 67 year old This is an example of an Accumulation Trust Third Party Special Needs Trusts are always accumulation trusts, since the assets are held in trust for the life of the special needs person
Accumulation Trust versus Conduit Trust Conduit Trust requires that any distributions from the retirement asset that are received by the trustee must be distributed out to the beneficiary In this case, no retirement assets are accumulated in the trust and it is merely a flow through vehicle Since nothing is accumulated in a conduit trust, contingent beneficiaries are disregarded in determining oldest beneficiary of trust
Accumulation Trust versus Conduit Trust A Special Needs Trust should NEVER be drafted as an conduit trust If drafted as a conduit trust, the income and assets of the trust would be considered available resources for SSI and Medicaid purposes
Drafting a Special Needs Accumulation Trust No contingent beneficiary receiving retirement assets should be older than the special needs beneficiary Descendants Named younger beneficiaries
Drafting a Special Needs Accumulation Trust Siblings No problems if all siblings are younger If there is older sibling(s), may not be a problem if age difference in not significant If large difference in ages of siblings, there may be a problem in naming sibling as contingent beneficiary $250,000 IRA 40 year old RMD is $5,734 $250,000 IRA 60 year old RMD is $9,921
Traps to Avoid Beneficiary Power of Appointment Limit power of appointment to beneficiaries younger than the special needs person
Traps to Avoid Payment of Debt and Administration Expenses of Trustor Equivalent to payment to the estate therefore no beneficiary with a life expectancy Limit payment from retirement assets to payments made prior to September 30 of year after death of trustor
Traps to Avoid Payment of Estate Taxes of Trustor Equivalent to payment to the estate therefore no beneficiary with a life expectancy Limit payment from retirement assets to payment of estate tax made prior to September 30 of year after death of trustor
Traps to Avoid Ultimate Beneficiaries Also known as atom bomb or exploding turkey beneficiaries Often designated as heirs at law of the trustor or a charity Limit distributions from retirement assets to those heirs at law younger than special needs beneficiary With regard to charity, have bequest settled from trust assets other than retirement assets or abated, if necessary
Separate Share Rule Treas. Reg. 1.401(a)(9)-4 Q&A-5(c) The separate account rules under A-2 of 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust s interest in the employee s benefit Potential significant difference between naming living trust as beneficiary and special needs trust created under the living trust as beneficiary
Separate Share Rule If living trust is designated as beneficiary, all beneficiaries under the trust are examined in order to determine oldest beneficiary If special needs sub-trust is designated as beneficiary, only beneficiaries of sub-trust are considered when determining oldest beneficiary
Separate Share Rule Primary beneficiary: My Spouse, Sally Jones Contingent Beneficiary: Jeff Jones Revocable Trust dated September 15, 2012 Primary beneficiary: My Spouse, Sally Jones Contingent Beneficiary: Sally Jones Special Needs Trust created under the Jeff Jones Revocable Trust dated September 15, 2012
Charitable Remainder Trust as Beneficiary CRAT or CRUT named as beneficiary of retirement assets Annuity or Uni-Trust beneficiary is SNT CRT is drafted for period not to exceed 20 years Retirement assets paid to CRT for 20 years No need to worry about beneficiaries of special needs trust, as special needs trust is not the beneficiary of a retirement asset
Retirement Assets and First Party SNT (d)(4)(a) Trust as beneficiary of Inherited IRA (d)(4)(a) Trust is grantor trust Treated as alter-ego of special needs beneficiary and anticipated that benefits paid out over life of special needs person PLR 200620025, 2008260008, 201116005
Retirement Assets and First Party SNT (d)(4)(a) Trust as owner of special needs person s own IRA IRS rules trust, even if grantor trust, cannot be OWNER of IRA Many commentators believe IRS analysis is faulty PLR 201117042
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