1. Planning With Retirement Assets

2. Joshua S. Rogers Partner Family Wealth Planning Group
215 Don Knotts Blvd., Ste. 310
Morgantown, WV
Phone:

3. Basic Retirement Accounts for Discussion
Individual Retirement Arrangements (IRAs)
Roth IRAs
401(k) – private employers
403(b) – offered by public schools and certain 501(c)(3) organizations
457 – state and local government and 501 organizations
This is a general text slide for most applications.
DINSMORE & SHOHL LLP • LEGAL COUNSEL

4. Why Is this Planning So Important?
Shift in Estate Planning from Transfer Tax to Income Tax for most families
$11.400,000 federal estate tax exemption in 2019; no WV estate or inheritance tax
Record Savings – Americans had approximately $27.1 trillion in retirement accounts as of 12/31/18 (32% of all household financial assets)
Source – Investment Company Institute
Clark v. Rameker, 134 S. Ct (2014) – inherited IRAs are not “retirement funds” exempt from bankruptcy creditors
In many cases, retirement accounts are the client’s largest asset
This is a general text slide for most applications.
DINSMORE & SHOHL LLP • LEGAL COUNSEL

5. Why is Planning So Important?
Retirement Accounts are Often the Client’s Largest Asset
Record numbers of assets are being stored in retirement accounts
Decreasing beneficiary responsibility
More second+ marriages and blended families
The tax implications for retirement account planning can be significant under current law
DINSMORE & SHOHL LLP • LEGAL COUNSEL • DINSMORE.COM
© ALL RIGHTS RESERVED

6. The Basic Rules
2 main questions when determining the tax consequences of an inherited retirement account:
Who is the beneficiary?
Was the original account owner past his/her required beginning date?
Required Beginning Date – generally April 1 of the calendar year in which the account owner will turn 70 ½ - 26 U.S.C. § 401(a)(9)(C)
DINSMORE & SHOHL LLP • LEGAL COUNSEL • DINSMORE.COM
© ALL RIGHTS RESERVED

7. Four Important Dates December 31 of the Year of Account Owner’s Death
September 30 of the Year After Account Owner’s Death
October 31 of the Year After Account Owner’s Death
December 31 of the Year After Account Owner’s Death

8. The Basic Rules
For the year of the account owner’s death, must take the RMD the account owner would have received by December 31 (to the extent it was not already taken before death)
- Failure to take the RMD can result in excise tax
The identity of the beneficiary is determined on September 30 of the calendar year following the calendar year of the account owner’s death

9. Beneficiary Options – Spouse
Surviving Spouse is Beneficiary
May elect to treat the asset as his/her own by designating himself/herself as account owner or rolling it over into his/her own IRA
May elect to himself/herself as a beneficiary of the asset rather than the owner and subject to the normal inherited retirement asset rules
26 U.S.C. § 401(a)(9)(B)(iv)
This option is the most flexible from a tax standpoint, but not always what the client wants

10. Beneficiary Options – Non-Spouse Individual
Non-Spouse individual beneficiary
Cannot treat it as his/her own or roll it over into his/her own account
Maintained in the name of the deceased owner “fbo” of the beneficiary
Will not owe tax on the assets until they are withdrawn from the plan. But the beneficiary must start taking RMD’s by December 31 of the calendar year following the calendar year of the deceased account owner’s death
If owner died after required beginning date, longer of:
Life expectancy method or owner’s life expectancy – 26 U.S.C. § 401(a)(9)(B)(i)
If owner died before required beginning date:
Generally life expectancy method for the beneficiary – 26 U.S.C. § 401(a)(9)(B)(iii)

11. Beneficiary Options – Multiple Individuals
If as of Sept. 30 of the year following the account owner’s death the account has more than one beneficiary, the beneficiary with the shortest life expectancy will determine the RMD if both of the following rules apply:
All of the beneficiaries are individuals; and
The account has not been divided into separate shares for the individuals.
Separate Accounts – a single account can be divided into separate accounts for each beneficiary if accomplished by December 31 of the year following the year of the account owner’s death
26 CFR § 1.401(a)(9)-8 A-2
NOTE: The separate account rule cannot be used by beneficiaries of trust

12. Beneficiary Options – Non-Individual
If account owner died after required beginning date, use account owner’s life expectancy method
If account owner died before his/her required beginning date, the “5-year rule” applies in all cases where there is no individual designated beneficiary by September 30 of the year following the account owner’s death or where any beneficiary is not an individual (for example, the beneficiary is the estate) – 26 U.S.C. § 401(a)(9)(B)(ii)
The “5-year rule” requires the IR beneficiaries to withdraw 100% of the account by December 31 of the year containing the fifth anniversary of the account holder’s death

13. Beneficiary Options - Trusts
General rule – a trust is not treated as a “designated beneficiary” of an account and get the favorable “life expectancy method”
EXCEPTION - the beneficiaries of the trust will be treated as the “designated beneficiaries” if ALL of the following apply:
The trust is a valid trust under state law
The trust is irrevocable or became irrevocable at the account owner’s death
The beneficiaries of the trust are identifiable from the trust instrument
The trustee of the trust provides the account custodian with required documentation by October 31 of the year following the year of the account owner’s death
26 CFR § 1.401(a)(9)-4 A-5

14. Conduit v. Accumulation Trusts
If the trust otherwise qualifies as a “designated beneficiary,” a couple options are available
Conduit or “see-through” trust – allows the trust beneficiary to maximize flexibility to “stretch” withdrawals from the retirement plan over his/her individual life expectancy, but requires the RMD to be distributed to the beneficiary each year
26 CFR § 1.401(a)(9)-5 A-7
Accumulation trust – allows the trustee to accumulate RMD’s inside the trust, but the life expectancy of the oldest potential beneficiary of the trust will be used

15. Illustration #1
Mother, single, wants to leave traditional retirement account to her two adult children upon death
Retirement account is worth approximately $1,000,000, so no estate tax issues under current law but sizeable account
But Child 1 is going through divorce and has some spendthrift habits, and Child 2 is a business owner with his own creditor issues, so protection of the assets is a big concern

16. Potential Solution for Mom
Create revocable living trust(s) for the benefit of children
Trust provides Mom is sole trustee and sole beneficiary during her lifetime
Upon Mom’s death, two separate share trusts are created, one for each child
Property held in trust for remainder of children’s lives, and could then distributed to Mom’s grandchildren or further descendants (or held in further trust)
Illustrative Dispositive Provisions – Can be used for health, education, maintenance, and support of children during their lifetimes
Trust contains “conduit” language requiring RMD to be distributed to each child upon trust’s receipt of such amount

17. Illustration #2
Relatively young couple in their 30’s have net worth in the $1,000,000 range consisting mainly of retirement accounts, high duel income potential, and large life insurance policies, but still no estate tax issues at this point in their lives
The couple has four minor children
Want to make sure children are protected if something happens to both of them (both from the outside world and from themselves)

18. Potential Solution for the Couple
Could create simple, “sweetheart” wills where all property is left to each other upon death of first spouse, and everything is left to a revocable trust if spouse does not survive decedent (or, alternatively, will leaves assets directly to revocable trust for spouse’s benefit)
Clients are trustees of their own revocable trust(s) during their lifetimes
Dispositive provisions can vary (i.e., in trust for children’s lifetimes, outright at age 30, etc.)
While held in trust, assets can be used for children’s health, education, maintenance, support, maintain accustomed standard of living, etc.
Trust named as contingent (or primary depending on the plan) beneficiary on nonprobate assets including the retirement accounts
Trust may contain conduit language, depending on the circumstances
Clients with young children often want to appoint bank or other neutral third party as trustee of larger trusts to provide a “checks and balances” system with the guardian of their minor children (who should be appointed in the will)

19. Illustration #3
Older couple in their 70’s have net worth in the $2,000,000 range consisting mainly of retirement accounts. They are taking RMD’s but thanks to sound investment advice their account is “outpacing” the RMD’s
Couple also has a house and life insurance
The couple has two children and four grandchildren
Couple has no problem leaving assets outright to children, but also want to do something for their grandkids

20. Potential Solution for the Couple
Create simple, “sweetheart” wills where all property is left to each other upon death of first spouse, and the probate assets are left to the children if no surviving spouse
Clients could name the children beneficiaries of the life insurance
Can also consider creating revocable trust(s) for their grandchildren, and naming the trust(s) as contingent beneficiaries (behind the spouse) of the retirement accounts (LONGER MEASURING LIVES)
Dispositive provisions can vary (i.e., in trust for children’s lifetimes, outright at age 30, etc.)
While held in trust, assets can be used for grandchildren’s health, education, maintenance, support, maintain accustomed standard of living, etc.
Trust named as contingent (or primary depending on the plan) beneficiary on nonprobate assets including the retirement accounts
Trust may contain conduit language, depending on the circumstances

21. Common Trust Planning Scenarios
Young Beneficiaries
Second Marriages
Irresponsible Beneficiary Behavior
Secures Retirement Assets for Beneficiaries
Creditor Protection (protection of inherited IRA’s uncertain after Clark v. Rameker)
But see W. Va. Code § (a)(5)
Special Needs Planning
Trusteed IRA’s

22. Beneficiary Designations
The best trust planning does the client no good without a proper beneficiary designation
When trust planning with retirement accounts, must change the beneficiary designation
Consider separate trusts if multiple children or other beneficiaries
If using one trust, consider a special attachment to the trust beneficiary
The process varies depending on the company
REMEMBER: the separate account rule does not apply to trust beneficiaries

23. RMD’s for Inherited Retirement Assets
26 U.S.C. § 401(a)(9) and regulations promulgated thereunder provide the RMD rules for 401(k) plans
Generally, the 401(k) plan RMD rules apply to most of the other popular retirement vehicles by incorporation, with some exceptions
26 U.S.C. § 403(b)(10) and 26 CFR § 1.403(b)-6(e) for 403(b) plans
26 U.S.C. § 408(a)(6) and 26 CFR § for IRA’s
26 CFR §§ 1.401(a)(9)-1, et seq. – applicable regulations
Roth IRA’s – the mandatory distribution rules do not apply before death – 26 U.S.C. § 408A(c)(5), but the same general rules apply after death

24. Important Legislation to Watch
On March 29, the House Ways and Means Committee unveiled the “Setting Every Community Up for Retirement Enhancement Act” – HR 1994
On April 1, the Senate introduced a companion bill, the Retirement Enhancement and Savings Act
Both have bi-partisan support, and both would have far reaching effects on retirement assets
Propose to increase the required beginning date (House Version Would Increase to 72)

25. New Proposed Legislation
Both the House and the Senate Version would significantly change the “stretch” options available to non-spouse beneficiaries of a retirement account
House Version would apply a “10 year rule”
Senate Version would allow stretch for first $400,000 of accumulated IRA’s, and exceeding balance would be subject to a “5 year rule”
Both versions have exceptions for minor children, disabled or chronically-ill beneficiaries, or beneficiaries not more than 10 years younger than the original account owner
Would apply to IRA’s inherited after 12/31/19

26. Joshua Rogers
Partner
Questions?

27. This presentation is intended for educational purposes only and not as legal or tax advice. Nonetheless, treasury regulations and rules of professional conduct may require the following statements. This information was compiled by the speaker for basic educational purposes based upon his knowledge, training, and experience with estate planning concepts, but the information cannot be used as the basis for legal or tax advice. It also cannot be used to avoid any penalties imposed on a taxpayer as a result of tax positions taken by the taxpayer. Individuals should seek independent advice based on their particular circumstances from a licensed and trained legal and/or tax advisor. Tax and other planning developments after the date of this presentation may affect these discussions.