By: John P. Dedon, Esquire Odin, Feldman & Pittleman, P.C Lee Highway, Suite 1100 Fairfax, Virginia (703)

ESTATE PLANNING AND IRA DISTRIBUTIONS 1

Income Tax Advantages v. Estate Planning Objectives n n IRA’s are a large portion of clients’ balance sheet n n Income Tax Advantages - Tax Free Rollover for Spouses - Tax Free Growth for Children and Grandchildren v. Estate Planning Concerns - Spouses: Second Marriages and Control - Children: Spendthrift Issues and Divorce n n Role of Trusts in Estate Planning n n Do Trusts for Estate Planning Preclude IRA Income Tax Advantages 2

Distribution Options n n Assuming Participant dies before distributions begin* – –5-year Default Rule (unless) – –“Designated Beneficiary” * Distributions begin during participant’s lifetime – –Generally, participant’s life expectancy 3

A Few Basic Rules n n Designated Beneficiary: General Rule Must Be An Individual And Must Be Named As IRA Beneficiary n n Designated Beneficiary – –Cannot be a charity, one’s estate, or a trust (with Important Exceptions) n n Multiple Designated Beneficiaries – –Use the life expectancy of the oldest beneficiary (unless separate accounts are established) 4

Spouse as Designated Beneficiary n n Benefits – –Uses spouse’s life expectancy n n Distributions begin on the later of: – –12/31 of year after participant died, or – –When participant would have turned 70 ½ – –Rollover n n Pitfalls – –Spouse remarries after participant’s death – –Children from previous marriage 5

Children as Designated Beneficiaries n n Benefits – –Create separate shares and use each child’s life expectancy – –Maximize stretch distributions n n Pitfalls – –Child elects lump sum distribution – –No asset protection 6

Trusts Solve Spouse And Children Estate Planning Concerns n n Benefits – –Estate tax planning – –Grantor has control – –Spendthrift beneficiaries – –Creditor protection – –Blended families 7

But Can Trusts Be Designated Beneficiaries n Best of Estate Planning and Income Tax Planning Worlds 8

Trust as Designated Beneficiary Two types: n n “Qualifying Trust” – –Trust is valid under state law – –Trust is irrevocable or becomes irrevocable upon participant’s death – –Trust beneficiaries are identifiable from trust agreement – –Trust agreement or list of beneficiaries given to IRA custodian by 10/31 of the year following the participant’s death – –All trust beneficiaries must be individuals whose ages can be identified 9

Trust as Designated Beneficiary n n “Conduit Trust” – –Meets all of the requirements of a Qualifying Trust – –Requires that all distributions from the IRA to the trust be paid out directly to the income beneficiary upon receipt by the trustee 10

Qualifying Trusts vs. Conduit Trusts n n Qualifying Trusts – –Allows for the accumulation of IRA distributions in the trust – –All beneficiaries considered when determining life expectancy n n Conduit Trusts – –All IRS distributions must be paid out to the income beneficiary or beneficiaries – –Only the income beneficiaries are considered when determining life expectancy 11

Case Study n Wife 12

Case Study n Children 13

In Summary n n Must name the beneficiary on the IRA beneficiary designation form (cannot be done in a Will, Trust, etc.) n n If using a trust, then ensure that it meets all of the IRS requirements n n Designation of beneficiaries should be coordinated with your estate planning n n Q&A 14