Planning Opportunities Created by Roth IRA Conversions ________________________________________________________________________________________________________ Presented by : Robert S. Keebler, CPA, MST, AEP (Distinguished) Baker Tilly Virchow Krause, LLP Phone: (920) Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax- related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us. 1

Income Tax Planning Issues 2

Taxpayers may “recharacterize” (i.e., undo) the Roth IRA conversion in current year or by the filing date of the current year’s tax return >Recharacterization can take place as late as 10/15 in the year following the year of conversion Taxpayers may choose to “reconvert” their recharacterization >Reconversion may only take place at the later of the following two dates: (1) The tax year following the original conversion OR (2) 30 days after the recharacterization Recharacterizations Tactical Considerations 3

> Taxpayers cannot recharacterize a portion of a Roth conversion by “cherry picking” only those stocks that decline in value (IRS Notice ) > All gains and losses to the entire Roth IRA, regardless of the actual stock or fund recharacterized, must be pro-rated Recharacterizations Tactical Considerations – “Anti-Cherry Picking” Rule 4

Traditional IRA ABC Fund: $250,000 XYZ Fund: $250,000 Traditional IRA #1 ABC Fund: $250,000 Traditional IRA #2 XYZ Fund: $250,000 STEP 1: Create separate IRAs for each asset, asset class or investment sector Recharacterizations Tactical Considerations – Roth Segregation Conversion Strategy 5

Traditional IRA #1 ABC Fund: $250,000 Roth IRA #2 XYZ Fund: $250,000 STEP 2: Convert IRAs to separate Roth IRAs Roth IRA #1 ABC Fund: $250,000 Traditional IRA #2 XYZ Fund: $250,000 Recharacterizations Tactical Considerations – Roth Segregation Conversion Strategy 6

IRS Taxpayer Income tax liability due on $500,000 conversion amount April 15, 2011* * NOTE: Either a tax return or an extension must be filed by this date. Regardless of what is chosen, the tax liability due on the Roth IRA conversion must be remitted by this date in order to avoid late payment penalties and interest (unless the two-year spread option is elected on a 2010 conversion). STEP 3: Pay income tax on Roth IRA conversion Recharacterizations Tactical Considerations – Roth Segregation Conversion Strategy 7

Roth IRA #1 ABC Fund: $100,000 (Current Value) Roth IRA #2 XYZ Fund: $300,000 (Current Value) Traditional IRA #1 ABC Fund: $100,000 (Current Value) Recharacterization of IRA using the value at the date of conversion (e.g. $250,000) October 17, 2011* * NOTE: October 17, 2011 is the latest date for which a 2010 recharacterization can take place (either by filing extensions or by filing an amended return). STEP 4: Recharacterize Roth IRA conversion Recharacterizations Tactical Considerations – Roth Segregation Conversion Strategy 8

October 15, 2011 Refund of overpayment on recharacterization of Roth IRA conversion STEP 5: File (or amend) income tax return claiming refund for recharacterization Taxpayer IRS Recharacterizations Tactical Considerations – Roth Segregation Conversion Strategy 9

Charitable Remainder Trust (CRT) A Charitable Remainder Trust (CRT) is a split interest trust consisting of a lead interest and a remainder interest. During the term of the trust, the lead interest is usually paid out to the donor (or some other named beneficiary). At the end of the trust term, the remainder (whatever is left in the trust) is paid to the charity or charities that have been designated in the trust document. 10

Charitable Remainder Trust (CRT) 11 Donor (Lead Beneficiary) Charity (Remainder Beneficiary) Transfer of highly appreciated assets Donor receives an immediate income tax deduction for present value of the remainder interest (must be at least 10% of the value of the assets originally contributed) At the donor’s death (or at the end of the trust term), the charity receives the residual assets held in the trust Annual (or more frequent) payments for life (or a term of years) CRT

Charitable Remainder Trust (CRT) Two Main Types of CRTs Charitable Remainder Annuity Trust (CRAT) >The beneficiaries receive a stated amount of the initial trust assets each year >The amount received is established at the beginning of the trust and will not change during the term of the trust regardless of investment performance (unless inadequate investment performance causes the trust to run out of assets) Charitable Remainder Unitrust (CRUT) >Income beneficiaries receive a stated percentage of the trust’s assets each year. >The distribution will vary from year to year depending on the investment performance of the trust assets and the amount withdrawn 12

Charitable Remainder Trust (CRT) Special Considerations >Annual payout can neither be less than 5% nor more than 50%. >The present value of the remainder interest must be at least 10% of the value of the assets contributed to the trust. >The trust term cannot be more than 20 years (if a term interest is used) 13

Charitable Lead Trust (CLT) A Charitable Lead Trust (CLT) is a split interest trust consisting of a lead interest and a remainder interest. During the term of the trust, the lead interest is paid out to a named charity. At the end of the trust term, the remainder (whatever is left in the trust) is paid to non-charitable beneficiaries (e.g., children of the donor) that have been designated in the trust document. 14

Charitable Lead Trust (CLT) 15 Donor Charity (Lead Beneficiary) Transfer of cash, stock and/or other assets At the donor’s death (or at the end of the trust term), the remainder beneficiaries receive the residual assets held in the trust Annual (or more frequent) payments for life (or a term of years) CLT Donor’s Children (Remainder Beneficiary)

Charitable Lead Trust (CLT) Two Main Types of CLTs Charitable Lead Annuity Trust (CLAT) >The charitable beneficiary receives a stated amount of the initial trust assets each year > The amount received is established at the beginning of the trust and will not change during the term of the trust regardless of investment performance (unless inadequate investment performance causes the trust to run out of assets) Charitable Lead Unitrust (CLUT) >The charitable beneficiary receives a stated percentage of the trust’s assets each year. > The distribution will vary from year to year depending on the investment performance of the trust assets and the amount withdrawn 16

Charitable Lead Trust (CLT) Income Tax Comparison “Grantor” CLT >Donor receives an immediate income tax deduction for the present value for the lead interest passing to charity > Donor must pay income tax on the trust’s income each year “Non-Grantor” CLT >Trust receives annual income tax deduction for the distributions made to charity > Trust pays income tax on the trust’s income each year (to the extent that income exceeds distributions to charity) 17

Estate Planning Issues 18

Post-death critical questions: >Did the participant die before his RBD? >Is the spouse the sole beneficiary? >Are there multiple beneficiaries? >Are all beneficiaries “designated beneficiaries”? >What does the IRA/qualified plan allow? 19 RMD Rules

Post-death RMDs based on whether “designated beneficiary” exists >Only “individuals” with quantifiable life expectancies can be “designated beneficiaries” >If trust qualifies, look through to underlying trust beneficiaries – Distribution out of trust to beneficiary does not make the beneficiary the “designated beneficiary” 20

RMD Rules Qualifying “designated beneficiaries” > Individuals (e.g., child, grandchild, parent, sibling, niece/nephew, friend, etc.) > Certain trusts (e.g., “IRA Legacy Trust”) 21 Non-Qualifying “designated beneficiaries” > Estate > Charities > Most trusts > Partnerships, LLCs and corporations

RMD Rules 22 > Death before age 70½ – Life expectancy distributions if you have a designated beneficiary – If no designated beneficiary, five-year rule – Delayed distributions – spousal beneficiary – Distributions must begin by December 31 of the year after death »Failure to do so does not automatically cause the five-year rule to apply > Death after age 70½ – Life expectancy distributions if you have a designated beneficiary – Distributions must begin by December 31 of the year after death – Year of death distributions – life expectancy of IRA owner

Life Expectancy Rule Life Expectancy Rule Five-Year Rule Death Before Required Beginning Date Death On or After Required Beginning Date Designated Beneficiary Non- Designated Beneficiary “Ghost” Life Expectancy Rule RMD Rules 23

RMD Rules 24 > Generally, if individual beneficiaries exist, post-death RMDs are based upon oldest designated beneficiary’s life expectancy under the Single Life Table > If separate shares are created by 12/31 of the year following the year of death, then each beneficiary’s life is used

25 RMD Calculation > RMDs are calculated based upon prior year ending account balance divided by life expectancy factor RMD = Prior Year 12/31 Balance Life Expectancy Factor

26 Single-Life Table

27 RMD Rules – Important Dates Critical dates: > September 30 of the year following the year of death – Date at which the beneficiaries are identified > October 31 of the year following the year of death – Date at which trust documentation (in the case where as trust is named as a designated beneficiary) must be filed > December 31 of the year following the year of death – Date at which the first distribution must be made by each IRA beneficiary – Date at which separate shares must be created

28 September 30 Determination Date > “Designated beneficiary” is not determined until September 30 of the year following the year of the IRA owner’s death – Allows for disclaimer planning > If a beneficiary dies before the September 30 date without disclaiming, such beneficiary continues to be treated as a beneficiary in determining the designated beneficiary

“Inherited IRA” Child/Grandchild Beneficiary >Utilizes the exemption to the five-year rule. >Avoids IRA assets being subject to estate tax in spouse’s estate. >Achieves “Inherited IRA” to the degree that distributions occur over life expectancy of the designated beneficiary. >The life expectancy factor of beneficiary is determined by reference to the Single Life Table beginning in the year following the year of death. Each year thereafter the life expectancy divisor is reduced by one. 29

>Life expectancy of child and/or grandchild determined in year after year of the IRA owner’s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year. 30 “Inherited IRA” Child/Grandchild Beneficiary

“Inherited IRA” Pension Protection Act of 2006 >Beginning in tax years after 12/31/2006 non-spousal beneficiaries (e.g., children, grandchildren, friends, etc.) are permitted to roll over a qualified retirement plan (e.g., 401(k)), via a trustee-to-trustee transfer, into an “inherited” IRA >“Designated beneficiary” trusts are also permitted to roll over qualified retirement plans to “inherited” IRAs 31

“Inherited IRA” Common Mistakes to Avoid > Incorrect titling > Failure to take RMDs > Failure to utilize disclaimers when appropriate > Failure to analyze contingent beneficiaries when utilizing disclaimers > Spousal rollover before age 59 ½ > Taking a lump-sum distribution 32

Inherited IRA Title For non-spousal beneficiaries, it is critical to keep inherited IRA in the name of the deceased IRA owner. Example: “John Smith, deceased, IRA, for the benefit of James Smith” 33

>The key to transferring a greater amount of wealth to heirs is to ensure that little to no estate tax, or other estate expenses, are apportioned to IRAs (either traditional or Roth IRAs) >In many states, estate taxes and other estate expenses are deemed to be apportioned pro-rata between probate assets and non-probate assets (i.e., IRAs) 34 Tax Apportionment

>Thus, in order to prevent estate taxes and other expenses being apportioned to IRAs, make sure that: ̶ The IRAs are payable to someone other than the probate estate (e.g., children), and ̶ The will/revocable trust language provides that such taxes and expenses are apportioned only to the probate estate 35

W/O APPORTIONMENTWITH APPORTIONMENT Other AssetsRoth IRATOTALOther AssetsRoth IRATOTALDIFFERENCE Gross Estate $ 5,000,000 $ 2,000,000 $ 7,000,000 $ 5,000,000 $ 2,000,000 $ 7,000,000 $ - Less: Estate Taxes (2,250,000) (900,000) (3,150,000) - - Net Estate $ 2,750,000 $ 1,100,000 $ 3,850,000 $ 1,850,000 $ 2,000,000 $ 3,850,000 $ - FMV of Net Estate in 10 Years $ 5,346,676 $ 1,472,784 $ 6,819,460 $ 4,340,575 $ 2,677,789 $ 7,018,364 $ 198,904 FMV of Net Estate in 20 Years $ 10,455,882 $ 1,489,336 $ 11,945,218 $ 9,819,759 $ 2,707,884 $ 12,527,642 $ 582,424 FMV of Net Estate in 30 Years $ 20,611,469 $ - $ 20,611,469 $ 21,775,951 $ - $ 21,775,951 $ 1,164,482 Key Assumptions Pre-Tax Rate of Return = 7.00% After-Tax Rate of Return = 5.50% Age of Roth IRA Beneficiary = 55 Tax Apportionment

>Perhaps the best asset to use to fund a Unified Credit/GST trust is a Roth IRA >If executed properly, distributions can be stretched-out over each IRA beneficiary’s life expectancy, transferring significantly more wealth to heirs than if “other” assets (e.g., non-qualified investments) are used 37 Unified Credit Trust/GST Trust Planning

38 Unified Credit Trust/GST Trust Planning FUND W/"OTHER" ASSETSFUND W/ROTH IRA Other AssetsRoth IRATOTALOther AssetsRoth IRATOTALDIFFERENCE FMV of Net Estate in 10 Years $ 5,978,506 $ - $ 5,978,506 $ 2,065,888 $ 4,686,131 $ 6,752,019 $ 773,514 FMV of Net Estate in 20 Years $ 10,212,151 $ - $ 10,212,151 $ 7,738,338 $ 4,738,796 $ 12,477,134 $ 2,264,983 FMV of Net Estate in 30 Years $ 17,443,830 $ - $ 17,443,830 $ 21,972,372 $ - $ 21,972,372 $ 4,528,542 Key Assumptions Initial Trust Funding Amount = $3,500,000 Pre-Tax Rate of Return = 7.00% After-Tax Rate of Return = 5.50% Age of Roth IRA Beneficiary = 55

Asset Protection Issues 39

11 U.S.C. §522 > Retirement asset protection – IRA and Roth IRA limitations – $1 Million > Rollover IRA protection – Separate Accounts > Protection for Business Owners Asset Protection Bankruptcy/Creditor Protection 2005 Bankruptcy Act 40

Qualified Plan Traditional IRA Roth IRA Bankruptcy and creditor protection may be lost as a result of the following series of transactions Asset Protection Bankruptcy/Creditor Protection 41

Asset Protection Bankruptcy & IRAs >Rollover and contributory IRAs should not be commingled − Keep rollover IRAs pristine >Roth IRAs and traditional IRAs protection are afforded the same protection − Analyze conversions before bankruptcy 42

Asset Protection An IRA where the beneficiary is limited on the amount of distributions that can be taken based on the restrictions placed on the account by the IRA owner. 43 “Trusteed IRA” At Death “Trusteed IRA” During Life An IRA held in a trust not a custodial agreement. > Asset protection under state tax law.

Asset Protection Recent Developments >Revocable trust named as beneficiary of IRA. >Trust became irrevocable at death of IRA owner. >Ruling: IRA subject to deceased IRA owner’s creditor claims because trust was revocable before death. 44 Commerce Bank, N.A. v. Bolander (2007 WL (Kan. App. 2007))

NO YES NO Parent’s Exempt IRA Subject to claims of beneficiary’s creditors Subject to claims of parent’s creditors YES NO 11 1 Depends upon state law, however, see Commerce Bank v. Bolander, 2007 WL (Kan. App. 2007) unpublished. Child Parent’s Exempt IRA Estate YES Parent’s Exempt IRA Typical Revocable Trust Parent’s Exempt IRA Stand Alone Revocable IRA Trust Parent’s Exempt IRA Subtrusts Under Stand Alone Trust Parent’s Exempt IRA Irrevocable Trust NO Possibly NO 2 2 By naming a SubTrust that is irrevocable you may avoid the reach of the Commerce Bank Doctrine. 3 If the Estate is the Beneficiary and an outright distribution follows, then the IRA is subject to the claims of both sets of creditors. 3 Asset Protection IRA Creditor Protection Against Claims of Parent’s Creditors and Beneficiary’s Creditors 45

Beneficiary’s Level of Asset Protection Spendthrift Protection Measuring Period for RMDs Direct BeneficiaryVery lowNoneLife Expectancy “Trusteed IRA”LowGoodLife Expectancy Non Designated TrustSomeGoodFive-year rule or “ghost” life expectancy rule Conduit TrustLowGoodLife Expectancy Accumulation Trust – Restatement IIISomeExcellentLife Expectancy Accumulation Trust – Restatement IIExcellent Life Expectancy Asset Protection Post-Mortem IRA Asset Protection 46

Benefits of Utilizing a Trust >Spendthrift protection >Creditor protection >Divorce protection >Special needs >Investment management >Estate planning >“Dead-hand” control 47 IRAs Payable to Trusts

48 Disadvantages of utilizing a trust >Compressed income tax brackets >Legal and trustee fees >Annual income tax returns – 1041 – 1099 – K-1 > Greater complexity IRAs Payable to Trusts

Naming a Trust as a “Designated Beneficiary” 49 IRA Beneficiary Designation Form Trust Spouse Children IRA distributions over the life expectancy of the oldest beneficiary IRAs Payable to Trusts

50 Four Requirements for ALL Trusts > Trust is valid under state law > Trust is irrevocable upon death of owner > Beneficiaries of the trust are identifiable from the trust instrument > Documentation requirement is satisfied

51 Two Types of Trusts > Conduit Trust – A trust in which all distributions from the IRA are immediately distributed to the trust beneficiary(ies) > Accumulation trust – A trust in which distributions from the IRA are allowed to accumulate within the trust

Mother Age 80 Trust Discretionary Distributions, but no less than total withdrawals from IRA Entire Trust outright upon Grandchildren reaching age 30 If Grandchildren die before reaching age 30 Mother is not “countable” for determining applicable life expectancy Child – age 30 IRA 52 Conduit Trust

IRA Sister Age 67 Grandchildren Trust Discretionary Distributions Grandchildren Entire G Trust outright upon grandchildren reaching age 30 If Grandchildren die before reaching age 30 Sister measuring life for determining required minimum distributions 53 Accumulation Trust

54 Accumulation Trust > The key issue in analyzing an accumulation trust is to determine which beneficiaries are “countable” > All beneficiaries are countable unless such beneficiary is deemed to be a “mere potential successor” beneficiary

Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. Although effort was taken to ensure the accuracy of these materials, Robert S. Keebler and Baker Tilly Virchow Krause, LLP assume no responsibility or liability for an individual’s reliance on these materials. These materials are being provided for educational and informational purposes only and are in no way to be construed as accounting, financial, tax, legal or other advice. Individual readers must consult their own professional tax and legal advisors. 55

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