Providing Creditor Protection for Inherited IRAs After the Clark Decision Continuing Education Conference August 14, 2015 Presented by Richard L. Randall Attorney & Counsellor at Law, Randall Law Offices, P.C. (Chairman and CEO, National Network of Estate Planning Attorneys)

Inherited IRA Creditor Protection

Program Overview General Outline uHistorically, Why Pay Distributions to Trust? uA Contrarian Approach: The Trust as Primary Beneficiary uImpact of the Clark v. Rameker Decision uPayment to Trust Can Be Done Without Negative Impact on Tax Deferral

Retirement Plan Distributions Why Pay Distributions to a Trust? u Provide Instructions to Beneficiaries (Applies to Everyone) u Provide Protections to Beneficiaries (Applies to Everyone) u Death Tax Planning for Married Couples

Key Stories to Master u School Bus u Trip to the IRS Supermarket u Hit Parade

Limited Power of Appointment The “Hit Parade” u Kid Hits the School Bus u School Bus Hits the Kid u Marriage Hits the Rocks u Kid Hits the Bottle u Kid Hits the Books u Kid Hits the Lottery u Kid Hits the Skids

Retirement Plan Distributions Why Pay Distributions to a Trust? Hit Parade u Many Clients Want Flexibility Provided by Limited Power of Appointment u Order of Beneficiaries Affects Whether Power of Appointment Can be Retained by Surviving Spouse

Retirement Plan Distributions Why Pay Distributions to a Trust? Hit Parade u To Make this Work, We Must Name the Trust as Primary Beneficiary and Disclaim to the Spouse if Rollover is Desired u The Trust Must be Drafted to Qualify for Life Expectancy Distributions

Limited Power of Appointment Naming the Trust Primary and the Spouse Contingent Beneficiary u A Spouse Can Disclaim and Still Receive Benefits In Trust (No One Else Can!) BUT NO ONE (Not Even a Spouse!) May Disclaim and Retain a Right to Direct Property

Limited Power of Appointment Naming the Trust Primary and the Spouse Contingent Beneficiary u Spouse as Primary Beneficiary Must Disclaim the IRA and the Power of Appointment to Add Proceeds to Trust u Our Clients Say They Want Flexibility (“the Hit Parade” Power) u TRUSTEE Can Keep Property AND the “Hit Parade” Power OR Can Disclaim to Spouse

Limited Power of Appointment Naming the Trust Primary and the Spouse Contingent Beneficiary u The “Shirley Memo” u Available to You on Request!

Let’s Begin With How We Introduce Retirement Distribution/Estate Planning Integration Concepts to Clients

The Truth About Estate Planning™ for Clients With Large Retirement Plan Balances

Estate Planning Overview Most Estate Plans Just Don’t Work!

Estate Planning Overview “The Snapshot Test”

Estate Planning Overview Definition of Estate Planning I Want to Control My Property While I’m Alive and Well Plan for Me and My Loved Ones if I Become Disabled

Estate Planning Overview Definition of Estate Planning Give What I Have To Whom I Want When I Want The Way I Want All While Assuring My Wisdom is Transferred Along with the Rest of My Wealth

SAVE TAXES EXPAND WEALTH PRESERVE WEALTH FAMILY ME “I want to control my property while alive and well, plan for me and my loved ones if I become mentally disabled, and then give what I have to whom I want, when I want and the way I want-- all while assuring my wisdom is transferred along with the rest of my wealth.” THE PLANNING PYRAMID ™

Estate Planning Overview The Planning Pyramid ™ uFocuses on Client Goals uSolutions Make Planning Easier uExposes Traditional Planning as “Upside Down”

Estate Planning Overview Three Step Strategy ™ DEVELOP Your Plan with Counselling Oriented Planning Partners COMMIT Yourself and Your Family to a Formal Continuing Maintenance and Education Program SECURE Appropriate Assistance for You and Your Family to Transfer Your Wisdom along With the Rest of Your Wealth

Retirement Plan Minimum Distribution Rules Under the IRS Final Regulations

Minimum Distribution Rules The MYTH of Immediate Taxation! (The Mistaken Belief that the Entire Retirement Plan Must Be Taxed at Participant’s Death)

Retirement Plan Distributions You Know More Than You Think! u Who Owns Account? u When Do You Pay Income Tax? u Penalty for Early Distribution u When You HAVE to Withdraw

Retirement Plan Distributions A Simple Illustration: Inherit the Money vs. Inherit the Account!

Retirement Plan Distributions Why is all this so important? u Income Tax Deferral

Retirement Plan Distributions The Advantage of Tax Deferral Dollar Doubled Every Year for 20 Years u Taxed at 28% u Tax Deferred

Retirement Plan Distributions The Advantage of Tax Deferral Dollar Doubled Every Year for 20 Years u Taxed at 28%$51, u Tax Deferred

Retirement Plan Distributions The Advantage of Tax Deferral Dollar Doubled Every Year for 20 Years u Taxed at 28%$51, u Tax Deferred$1,048,576

Retirement Plan Distributions Why Pay Distributions to a Trust? u Provide Instructions to Beneficiaries (Applies to Everyone) u Provide Protections to Beneficiaries (Applies to Everyone) u Death Tax Planning for Married Couples

Retirement Plan Distribtions Remember, Minimums are Minimums! u For You u For Your Beneficiaries!

Retirement Plan Distributions Why Pay Distributions to a Trust? Financial Instructions u Teach Potential Income Tax Deferral u Control/Direct the Deferral u Investment Philosophy u Investment Policy

Retirement Plan Distributions Why Pay Distributions to a Trust? u Provide Instructions to Beneficiaries (Applies to Everyone) u Provide Protections to Beneficiaries (Applies to Everyone) u Death Tax Planning for Married Couples

Retirement Plan Distributions So Why Pay Distributions to a Trust? To Provide Potential “School Bus” Protections! u Potential Creditor Protection u Potential Divorce Protection u Potential Illness Protection

Wealth Reception Planning™ Our Experience u Initial Mindset is Normally a Barrier u With Education, Client’s “Snapshot” Changes u Need for Active Family Involvement Is Clear

Trust Design Access and Control Mindset (Client’s) u “Don’t Want to ‘Pull Strings’ From the Grave” u “They’re Independent” u “It’s Their Job to Take Care of the Kids”

Trust Design Trust Protections Mindset When is it OK for: u Ex-Spouse to get the inheritance you leave in a divorce proceeding? u Medicaid to require “spend down” of the inheritance you leave? u Catastrophic Creditor to get inheritance you leave?

Trust Design Access and Control Mindset (Beneficiary) u How Much Do I Get? u When Do I Get It?

Trust Design Strength of Personal Protections Is Affected By Beneficiary’s Access and Control:  Demand  Ask

Trust Design Dual Planning Goals u Protection Against Outsiders u Practical Control by Beneficiary

Retirement Plan Creditor Protection  Plans at Work Protected By Supreme Court Decision  Protection Extended to IRAs  Inherited IRAs Under Attack

Retirement Plan Creditor Protection Inherited IRAs Under Attack  Split Decisions  Two States Had Negative Decisions  Indiana (Klipsch) and Florida (Robertson)

Retirement Plan Creditor Protection Inherited IRAs Under Attack The Clark Decision

Estate Planning Overview Clark v. Rameker June 2014 U.S. Supreme Court Case

Retirement Plan Creditor Protection u “Retirement Funds” Receive Protection u Mom’s funds were in an IRA u Question: is an INHERITED IRA a “Retirement Fund” as to an Inheritor?

Retirement Plan Creditor Protection The Court’s Rationale: u The holder of an inherited IRA: –may never invest additional money in the account. –is required to withdraw money from the account, no matter how many years they may be from retirement –may withdraw the entire balance of the account at any time-and for any purpose- without penalty

Retirement Plan Creditor Protection Inherited IRAs Under Attack  Solution is to Pay Distributions Into Trust  IRA Can Still Be Attacked  “School Bus” Trust Protects IRA Like Any Other Asset!

Federal Estate Tax Reduction Other Planning Goals  Potential State Inheritance Tax Planning  Estate Growth in Survivor’s Estate Could Cause Estate Tax  Disability Planning  Creditor and Predator Planning  Remarriage Protection  Planning for Blended Families  etc., etc.

Retirement Plan Distributions For All These Reasons, We Find Clients Would Like to Pay Distributions Into Trust. What They Don’t Want to do is Lose Income Tax Deferral!!

Retirement Plan Distributions Ten Minute “Technical” Review

Retirement Plan Distributions Just Three Things to Remember: “As Easy as Blue, Yellow, Green”

Retirement Plan Distributions “TRUE BLUE” Uniform Table for Withdrawals During Lifetime

Retirement Plan Distributions YELLOW MEANS CAUTION!! If you name a Trust as Your Beneficiary, You Must Take a Test to Determine How Fast Distributions Are Required

Retirement Plan Distributions If you meet the test, GREEN MEANS GO!: Use your beneficiary’s life expectancy!

Retirement Plan Distributions If you fail the test, GREEN MEANS GO!: Use your own life expectancy!

Retirement Plan Distributions Remember why is all this so important to us? u Income Tax Deferral

Retirement Plan Distributions Impact of life expectancy Distributions! Year 11/33.33% Year 81/254% Year 131/205% Year 171/166% Year 191/147%

Retirement Plan Distributions Impact of life expectancy Distributions! u The account is still growing two decades after original owner’s death! u Even though the beneficiary has enjoyed use of all the minimum distributions u The account’s actual after tax value is roughly double the value on date of death! u This is true IF only minimums are withdrawn!

Minimum Distribution Rules Designated Beneficiary Test Five Part Test To Qualify Trust as Designated Beneficiary (The “Heartbeat Test” )

Minimum Distribution Rules Designated Beneficiary Test (aka “The Heartbeat Test”) Corporation? Charity? Estate? Individual? Trust?

Minimum Distribution Rules Designated Beneficiary Test (aka “The Heartbeat Test”) u No, a Trust Does NOT have a Heartbeat u The General Rule is NO, It Won’t Qualify as a Designated Beneficiary u But there’s an EXCEPTION!

Minimum Distribution Rules DESIGNATED BENEFICIARY EXCEPTION FOR TRUSTS 1.Valid Under State Law 2.Individual Beneficiaries 3.Identifiable Beneficiaries 4.Trust Delivered to Administrator 5.Trust Irrevocable Upon Death

Minimum Distribution Rules Designated Beneficiary Test u If Trust Meets the Test, We “Look Through” the Trust To Determine Which Heart Is Used u All Beneficiaries Are Considered u If All are Designated Beneficiaries the Oldest Must be Used (“Oldest Heart” Rule) u If Any Beneficiary is non-designated, the Trust Fails the Test (“No Heart” Problem)

Minimum Distribution Rules Designated Beneficiary Test The Determination Date for the Designated Beneficiary Test is September 30 of Year Following Participant’s Death

Retirement Plan Distributions Three Ways to Qualify Revocable Trust as Designated Beneficiary u Conduit Trust u “Retention” or “Accumulation” Trust (through Protective Language) u Standalone Trusts for Beneficiaries

Retirement Plan Distributions The Three Doors™ Of Retirement Plan Distributions Client Counselling Tool That Explains Balance Between Protections and Three Life Expectancy Distribution Drafting Strategies

Unique Counseling and Integration Tools

Minimum Distribution Rules Common Obstacles Naming Non-Designated Beneficiary (“No Heart” Problem) Naming the Wrong Designated Beneficiary Older Beneficiary (“Bad Heart” Problem) Multiple Beneficiaries (“Oldest Heart” Problem)

Retirement Plan Distributions Passing The Test “No Heart”:Distribution Strategy “Bad Heart”: Disclaimer Strategy “Oldest Heart”: Division Strategy

Retirement Plan Distributions Passing The Test “Oldest Heart”: Division Strategy u 2002 Regulations Interpreted to Mean Any Distribution to Any Part of a Trust Results in Oldest Heart Calculation u This Means Sub-Trusts Named on Beneficiary Form Will Not Avoid Oldest Heart Treatment

Retirement Plan Distributions Passing The Test “Oldest Heart”: Division Strategy Standalone Trusts with Single Beneficiaries Will Allow for Use of Individual Life Expectancies

Retirement Plan Distributions Passing The Test “Oldest Heart”: Division Strategy 2005 PLR Approves Use of Individual Life Expectancies for Distributions Payable Directly to Sub-Trusts

Retirement Plan Distributions Passing The Test “Oldest Heart”: Division Strategy Standalone Trusts Still Useful for Administrative Clarity and Isolation of Retirement Planning Issues Standalone Trusts can now be designed for Multiple Beneficiaries

Retirement Plan Distributions Conclusion: Three Ways to Qualify Revocable Trust as Designated Beneficiary  Conduit Trust  “Retention” or “Accumulation” Trust (through Protective Language)  Standalone Trusts for Beneficiaries

Unique Counseling and Integration Tools

Retirement Plan Distributions Remaining Challenge: u Compressed Income Tax Rate Levels (Pay Higher Rate on Less Income) u We’ve Developed Approach to Allow Funds to Stay in Trust (Protected) While Being Taxed at Individual Rates (And Financial Advisors are Key!) To Be continued…