Asset Protecting IRAs - Particularly Inherited IRAs

1. Asset Protecting IRAs - Particularly Inherited IRAs Presented by:Jonathan A. Mintz, J.D.The Advisors Forum WealthCounsel, LLC The Advisors Forum Interdisciplinary Series Teleconference November 12, 2009

2. What We’ll Cover Today • The Need - and the Problems • Rules You Must Know • A Unique Solution

4. Retirement Planning Assets • Account for 34% of all household financial assets - up from 14% in 1978! • IRAs alone account for more than 10% - and 47 million US households have IRAs * According to 2009 (2nd qtr.) Investment Company Institute study 4

5. Impact of Taxes

6. IRA Value $1 million Decedent’s Age 60 Spouse’s Age 54 Oldest Child’s Age 28 Youngest Child 25

7. The Problem? Different Levels of Protection for IRAs and Inherited IRAs • State law exemption for IRAs (& Roths?) • Review state statutes and case law • Unlimited protection or specified dollar amount? • Or amount reasonably necessary for the debtor and any dependents (e.g., CA)? • $1 million bankruptcy protection

8. The Problem? Inherited IRAs • Apparently no asset protection! • See Robertson v. Deeb (FL 2nd Dist. Ct of Appeal 2009) • See In re Jarboe, 2007 WL 987314 (Bkrtcy S.D. Tex. 2007)

9. Another Problem? Do beneficiaries take only the required minimum distributions (RMD)? • Accounts left outright are “found money” for the beneficiary • How long does it take a beneficiary to spend or consume found money?

10. Can We Provide Asset Protection and Ensure Maximum Stretch Out?

11. Basic Concepts • Generally, Participant must commence Required Minimum Distributions (RMDs) by Required Beginning Date (RBD)

12. Required Beginning Date • RBD = April 1st in the year following the calendar year in which the participant reaches age 70½ • or the calendar year in which the employee retires from employment • Exception for Less Than 5% Owners

13. Required Minimum Distributions (RMDs) Applies to all: • Qualified plans • IRAs (including Roth IRAs held by beneficiaries) • Deferred compensation plans under IRC §457 • IRC §403(b) annuity contracts 13

14. Prior Year 12/31 BalanceLife Expectancy Factor RMD = Calculating RMDs RMDs are calculated based upon prior year ending account balance divided by life expectancy factor

15. Life Expectancy Factor • Uniform Table for participant’s lifetime distributions • Exception if spouse is actually more than 10 years younger than participant - then use Joint & Last Survivor Table • Single Life Table for use by “qualified beneficiary” after participant’s death • Determines “Stretch Out” for “Inherited IRAs”

16. Uniform Table

17. Single Life Table

18. Required Minimum Distributions Caveats: • No Required Minimum Distributions in 2009 • Under Notice 2009-82, Participants have until 11/30 or 60 days (whichever is later) to rollover 2009 “RMDs” • The qualified plan provides otherwise • Beware of optional plan provisions!

19. Spousal Rollovers • Only a surviving spouse can rollover an IRA (or qualified plan) to his or her own IRA • Once rolled over, spouse uses Uniform Table to determine RMDs • RMDs from rolled over IRA or qualified plan must commence by spouse’s RBD

20. Rollovers by Non-Spouse Beneficiaries Pension Protection Act of 2006 • As of 1/1/07, a non-spouse beneficiary may be able to do a trustee-to-trustee rollover of a qualified plan to his or her own Inherited IRA • Once rolled over, beneficiary uses Single Life Table to determine RMDs • RMDs from rolled over IRA or qualified plan must commence by 12/31 of year following year of participant’s death 20

21. Rollovers by Non-Spouse Beneficiaries • Under WRERA, plans must amend as of 1/1/10 to permit non-spouse “rollovers” • Account must be titled in participant's name (e.g., the 401(k) owner) for the benefit of the beneficiary (e.g. "Mary Smith, Deceased IRA f/b/o Jim Smith”) 21

22. Critical Questions? Two Critical Questions: • Did the participant reach his or her Required Beginning Date (RBD)? • Is there a “designated beneficiary” (DB)?

23. Required Minimum Distributions (RMDs) Death Before Required Beginning Date Death On or After Required Beginning Date • Life Expectancy • Rule Life Expectancy Rule Designated Beneficiary “Ghost” Life Expectancy Rule Non-Designated Beneficiary Five-Year Rule

24. Death After Required Beginning Date Planning Tip: • Consider continuing with the participant’s hypothetical life expectancy if spouse wishes to access funds but is younger than 59 ½ • To avoid 10% penalty 24

25. What is a Designated Beneficiary? Treas. Reg §1.401(a)(9)-4 • Must be named a DB under the terms of the plan or by an affirmative election by the employee • DB need not be specified by name but must be identifiable on the date of death • May be a class of beneficiaries capable of expansion or contraction (e.g., my children or grandchildren) • DB must be an individual alive on the date of death • DB may also be individuals named as beneficiaries of a qualifying trust 25

26. What is a Designated? Beneficiary? These are NOT a “designated beneficiary” • Estate • Charity • Non-qualifying trust • Any non-individual other than a qualifying trust • Individual born after the date of the participant’s death 26

27. The Retirement Trust

28. Advantages of Using Trusts Generally • Spendthrift protection • Creditor protection • Divorce (“Predator”) protection • Special needs • Consistent investment management • Estate planning • “Dead-hand” control

29. Disadvantages of Using Trusts Generally • Trust tax rates • Legal and trustee fees • Income tax returns • Greater complexity

30. IRAs Payable to Trusts Four Requirements of All IRA 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 30

31. IRA Payable to Family Trust under RLT Irrevocable Family Trust Joint RLT Survivor Trust Irrevocable Requirement Joint RLT does not get DB Status, because Survivor’s Trust is not Irrevocable IRS views trust as one trust (See PLRs 200317041, 200317043 & 200317044)

32. Two Types of Trusts • Conduit Trusts • Accumulation Trusts *RMD Requirements apply to both types

33. Conduit Trust • Trust in which ALL distributions from the IRA are immediately distributed to the trust beneficiary/beneficiaries Allows for easier identification of countable beneficiaries - but at a cost

34. Accumulation Trust Trust in which distributions from the IRA are allowed to accumulate within the trust

35. Conduit Trusts - Example 1

36. Conduit Trusts - Example 2

37. Accumulation Trusts • The key issue is to determine which beneficiaries are “countable.” • All beneficiaries are countable unless such beneficiary is deemed to be a “mere potential successor” beneficiary.

38. Accumulation Trust - Example 1

39. Accumulation Trust - Example 2

40. Retirement Trusts • Separate Retirement Trust or a trust in the client’s revocable trust or will? • Separate Retirement Trust gives the trust maker more control over the downstream beneficiaries • This is particularly important if the trust is an accumulation trust rather than a conduit trust

41. Issues with RLTs and Trusts in Wills • Formula funding clause • Pecuniary clauses and recognition of income (IRC § 661) • Powers of appointment • Adoption • Payment of debts, taxes and expenses • Apportionment language / Firewall provision • Older or unidentifiable contingent beneficiary or beneficiaries • Ultimate beneficiary or beneficiaries

42. Hybrid Option IRS has permitted a one-time“Toggle” from Conduit to Accumulation Trust • See PLR 200537044 – Gives Trust Protector the power to toggle ab initio • Note that we must convert GPOAs to LPOAs, creating potential GSTT issues • Can addresses other issues within RLT or will

43. IRAs Payable to Trusts Separate Shares Payable to single trust No separate shares identified in the beneficiary designation form IRA paid over oldest life expectancy

44. IRAs Payable to Trusts Separate Shares IRA payable to multiple sub-trusts Each trust named inbeneficiary designation form IRA paid trust beneficiary’s life expectancy 44

45. Summary: The IRA “Legacy” Trust • Naming a separate trust as designated beneficiary is preferable to naming beneficiaries outright • Ensures that the client’s goals are carried out, including maximum stretch out • Provides only level of asset protection against beneficiaries creditors or upon divorce • Keeps the assets under current advisor’s management! • Examine on a case-by-case basis with input from all advisors 45

46. Questions?

47. Feel free to contact me at Jonathan.Mintz@AdvisorsForum.com or (888) 659-4069 ext 800 Thank You!