Estate Planning for Retirement Assets: A Case Study Approach Amy N. Morrissey Westerman & Morrissey PC Ann Arbor Nancy H. Welber Nancy H. Welber PC West Bloomfield Exhibits Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Exhibit H Exhibit I

Fact Pattern 1 - Samantha and Sam Spartan . . . . . . . . . . . . . . . . . . . . . . 1-3 Fact Pattern 2 - Wendy and Will Wolverine . . . . . . . . . . . . . . . . . . . . . . 1-7 Fact Pattern 3 - Wendy and Will Wolverine - Special Needs Child . . . 1-13 Fact Pattern 4 - Golda Grizzly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-19 Fact Pattern 5 - Gregory and Glenda Grizzly . . . . . . . . . . . . . . . . . . . . 1-23 Fact Pattern 6 - Wendy and Will Wolverine #2 . . . . . . . . . . . . . . . . . . 1-31 Fact Pattern 7 - Wendy and Will Wolverine #3 . . . . . . . . . . . . . . . . . . 1-37 Fact Pattern 8 - Wendy and Will Wolverine #4 . . . . . . . . . . . . . . . . . . 1-39 Welber Outline - Estate Planning and the Required Minimum Distribution Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-43 Exhibit J Morrissey Outline - Post-Death Administration Issues . . . . . . . . . . . . 1-91

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Estate Planning for Retirement Assets: A Case Study Approach

Exhibit A Fact Pattern 1 - Samantha and Sam Spartan

Estate Planning with Retirement Benefits September 25, 2012 Estate Planning Case Studies SAMANTHA AND SAM SPARTAN Fact Pattern #1 Samantha and Sam Spartan are in their mid-30ಬs and have two young children. They live in a modest home and they have a few investments. They have just started to save for retirement after paying off student loans and cutting up their credit cards. Samantha and Sam have decided they should do some estate planning ಯjust in case.ರ Their assets are as follows: House (entireties, net of mortgage)

$50,000.00

Cash and Investments (JTWROS)

35,000.00

Samanthaಬs IRA

12,000.00

Samಬs Roth IRA

10,000.00

Samanthaಬs Life Insurance

150,000.00

Samಬs Life Insurance

100,000.00

Total Assets

$357,000.00

Who should be the beneficiary of the IRAs? After the death of the first spouse, how do we name the beneficiaries? Should the IRAs be payable to a trust or are their alternatives that might be cost-effective? (UTMA, trusteed IRA, a back-up trust for minors). Suggested Planning Techniques Samantha and Sam have a relatively modest estate at this time in their lives and estate taxes will not be a concern for some time, even if the estate tax exemption returns to $1,000,000 in 2013. They will likely have simple wills leaving everything to one another. In fact, even with simple wills, it is likely that there will be no probate estate since all of their assets are either owned jointly or name a beneficiary. Each of them should name their spouse as the beneficiary of the IRA, assuming the IRA custodian is a large mutual fund manager, rather than an insurance company, where the IRA might be held as an annuity. The beneficiary designation should name the children as

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

contingent beneficiaries. Before deciding exactly how the beneficiary designation will be designed, I would counsel the Spartans to be sure that their IRA custodian will allow inherited IRAs to be set up for each of the children so that the required minimum distributions can be paid to an UTMA account, rather than to a trust for each child. The trust may not be cost effective in this case. If, for example, Sam dies, Samantha might consider a couple of alternatives with regard to the beneficiary designations for the retirement benefits. She may decide to establish a revocable living trust, in which case, the trust can be designed as a see-through trust and a conduit trust so that all of the required minimum distributions will flow through to the trust beneficiaries. The trustee can establish the IRAs as inherited IRAs in the name of the trust (see the post-mortem case studies, below). The conduit trust might even be a pot trust in this case if the children are relatively close in age so that they can use the life expectancy of the older child to determine the applicable distribution period for the required minimum distributions. By using one trust, rather than a trust for each child, the administrative costs might be lower. The trust must require that each year, the required minimum distributions from the IRAs and any additional withdrawals be distributed to or for the benefit of the conduit trust beneficiaries. The additional withdrawals can be tied to an ascertainable standard or can be used at the trusteeಬs discretion, just as long as the trustee must distribute all withdrawals to or for the benefit of the beneficiary or beneficiaries every year. Presumably, you would not want the trustee to invade the IRA unless the trustee has a need to do so, except, of course, for the required minimum distributions. The IRS understands that if the beneficiary is a minor that the IRA withdrawals might have to be paid to an UTMA or used to pay expenses directly on the beneficiaryಬs behalf. The idea is to be sure that the IRA withdrawals will end up on the beneficiaryಬs K-1 for the trust each year. The rest of the trust for the children that will govern the non-retirement assets can accumulate the assets and have the usual restrictions you would place on trust distributions, like an ascertainable standard. If Samantha does not want a revocable trust, her will can have a back-up testamentary trust for a beneficiary who is under age 21. It, too, should have conduit language in it. The minimum distribution regulations specifically allow a testamentary trust to qualify as a seethrough trust. In the alternative, if the IRA is large enough, Samantha could establish a trusteed IRA. This is an IRA that has a corporate trustee and allows the IRA owner to place additional limitations on the IRA withdrawals by the trustee. Because it is an IRA, all required minimum distributions must be paid from the trusteed IRA, just as in a conduit trust, but the additional withdrawals may be subject to restrictions. They can even be accumulated. The trusteed IRA isnಬt for everyone and it probably wonಬt work for a very small balance IRA. In addition, there are only a few IRA custodians who understand and do trusteed IRAs. They can be a good tool when you want professional management of the IRA.

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If there is a possibility that the retirement benefits might be distributed to the trust in a manner not using the life expectancy of the beneficiary of the trust, for example, because the conduit trust is the successor beneficiary of an inherited IRA that Samantha inherited from her grandparents, you would not want the conduit language to apply to these distributions because the applicable distribution period will be fixed at the grandparent’s death. Moreover, there have been some negotiations in the Senate that would restrict non-spouse beneficiaries to the fiveyear rule for all distributions from retirement accounts as a means to raise revenue. If that comes to pass, and it remains to be seen whether it will, a conduit trust in that instance would defeat the purpose of having the trust. The conduit trust should include language restricting the application of the conduit language. Steven Gorin, an ACTEC fellow and a member at Thompson Coburn LLP in St. Louis, recommends starting your conduit trust with language similar to the following (used with his permission):

If and to the extent necessary to enable the retirement account(s) payable to the trust to use the beneficiary’s life expectancy for purposes of applying the Minimum Distribution Rules without considering the identity or life expectancy of any other beneficiary (whether current or future, vested or contingent) of the trust, .. The balance of the conduit trust language would read as follows:

then each calendar year, including the year of the Settlor's death, if applicable, the trustee shall (i) withdraw the required minimum distributions from the retirement account(s) payable to the trust; (ii) withdraw such additional amounts as the trustee deems advisable, in accordance with the standard for the distribution of principal set forth previously in this Paragraph; and (iii) distribute to or for the benefit of such beneficiary all amounts (net of expenses properly chargeable to the trust) which are withdrawn from any retirement account(s) payable to the trust, regardless of whether such amounts are classified as income or principal. (With thanks, also, to Natalie Choate, whose language is the basis for the latter part of this conduit trust provision). The referenced standard for distribution in most instances would be health, education, support and maintenance, i.e., an ascertainable standard.

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Exhibit B Fact Pattern 2 - Wendy and Will Wolverine

WENDY AND WILL WOLVERINE Fact Pattern #2 Wendy and Will Wolverine are both age 45. They met in Ann Arbor and never left. They have three children, ages 19, 15, and 12. Wendy is a physician in private practice who works part-time but still has generous benefits. Will is a professor of economics at the University of Michigan (heಬs a Wolverine, after all) and he has participated in the Universityಬs 403(b) program by maximizing his contributions which are generously matched by the University. They have some after-tax money but primarily they are interested in saving in their respective retirement plans. Their assets are as follows: House (entireties, net of mortgage)

$350,000.00

Cash and Investments (JTWROS)

225,000.00

Wendyಬs 401(k)/Profit-Sharing Plan

350,000.00

Willಬs 403(b) Plan

475,000.00

Wendyಬs Life Insurance

500,000.00

Willಬs Life Insurance

250,000.00

Total Assets

$2,150,000.00

Who should be the beneficiaries of the IRAs? Do we need a credit shelter trust if the estate tax exemption reverts to $1,000,000 in 2013? What about trusts for the children? How should they be structured for maximum tax deferral for each child? Suggested Planning Techniques Wendy and Will are both young and in their prime earning years. However, if one of them dies, they still have three kids to get through college so the spouse should be the primary beneficiary of the retirement accounts. Since we must assume that the estate tax exemption will be $1,000,000 in 2013, barring action by Congress to the contrary, we should set up trusts and beneficiary designations that reflect these issues. The trusts can either be revocable living trusts with a fractional share formula clause to allocate between the marital share or trust and the credit shelter trust or outright distributions to the surviving spouse with the option of having the spouse disclaim assets into the credit shelter

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trust if needed for estate tax planning. Perhaps Wendyಬs trust can allocate the marital portion outright to Will, if she is unconcerned about Will getting remarried. He can then disclaim aftertax assets, such as Wendyಬs life insurance which should name her trust as the beneficiary, into the credit shelter trust. Given all of the retirement benefits in their estate, it is unlikely that the marital share will even be funded, since less than $1,000,000 of assets will flow into the trust at Wendyಬs death. Because Wendy is a practicing physician, consider drafting Willಬs trust to include a QTIP trust to protect against Wendyಬs possible creditors, assuming she is in a high-risk medical field. However, we might not want to fund the QTIP with retirement benefits: 1.

Wendy will have to start taking minimum distributions the year after the year of Willಬs death as well as the income from the account, if it is greater than the required minimum distribution. She could have a continuing right to withdraw the greater of the income or the required minimum distribution, but then she has a general power of appointment over those assets which might be available to her potential creditors.

2.

If Wendy has a conduit QTIP she would be the sole beneficiary of the trust. She wouldnಬt have to start taking required minimum distributions until Will would have attained age 70  when she will likely be retired from practicing medicine. This might be a workable solution.

3.

If Wendy keeps the retirement account intact or in a rollover or inherited IRA, it will be protected from creditors in bankruptcy under federal bankruptcy law. So maybe we donಬt even need the QTIP trust except to account for growth in the investments. And Wendy wonಬt have to start required minimum distributions until she is age 70 .

The credit shelter trust can be the garden-variety family trust, but the surviving spouse should not have a testamentary special power of appointment because the surviving spouse may be disclaiming either after-tax assets and/or retirement benefits into the trust. (If there will be enough after-tax assets in the credit shelter trust in Willಬs credit shelter trust through the formula clause, you might consider keeping the special power of appointment. But, if Amy disclaims any assets to fund the credit shelter trust, Amy would either have to disclaim the special power of appointment or the trust would have to be drafted to be inapplicable to any assets that become part of the credit shelter trust through a disclaimer.) The mechanics of the disclaimer are covered in the post-mortem case studies. The credit shelter trust can also be designed under the Michigan Trust Code to provide creditor protection for Wendy. The credit shelter trust can provide that the surviving spouse will receive all of the income or it can be sprinkled between the spouse and the kids (by an independent trustee, or by the

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spouse as the trustee once the kids are no longer minors and subject to an ascertainable standard). Likewise, the principal can be used for the spouse or the kids for their support, health, maintenance and education, as long as the principal cannot be used to satisfy the spouseಬs support obligations while the children are minors. The spouse could also have a 5 and 5 power. On the one hand, having a 5 and 5 power in the trust carries out income to the spouse that would otherwise be trapped in the trust, because it turns that portion of the trust subject to the power into a grantor trust for the spouse, even if spouse does not exercise it. However, the portion of the trust subject to the 5 and 5 power requires separate accounting and many CPAs and attorneys do not understand how the accounting works for the 5 and 5 portion and do not report it correctly. In drafting the trust, we have to be careful about who will be the remainder beneficiaries. Since the children are relatively young, if their shares are held in trust and they are receiving them as the remainder beneficiaries of the credit shelter trust, whether in an accumulation trust or a conduit trust, we will have to look further down the trust include all of the possible default beneficiaries until we find someone who will take the benefits outright. You need to be careful about the remainder beneficiaries because the garden variety credit shelter trust is not a conduit trust during spouseಬs lifetime. You cannot change the applicable distribution period by turning an accumulation trust (the credit shelter trust) into a conduit trust (the trust(s) for the children), so in this garden-variety credit shelter trust situation, passing out the RMDs to the children after spouseಬs death, even by using a conduit trust for the children, does not change the applicable distribution period, although it may make the income tax result more favorable. For this reason, it is a good idea to name default beneficiaries who are very close in age to the surviving spouse. Perhaps the spousesಬ siblings will be named. The eldest from among the spouse and all of the siblings will be the measuring life for determining the applicable distribution period in this example. If the spouse disclaims retirement benefits to fund part of the credit shelter trust, the disclaimed benefits will only be able to be stretched over the oldest beneficiaryಬs life expectancy. There will be no further stretch-out after the surviving spouseಬs death for the disclaimed benefits. Also, under all scenarios, we will limit the payment of debts, expenses of administration and taxes to the period between the grantorಬs death and September 30 of the year following the year of the grantorಬs death. Just in case the trust we are drafting is the surviving spouseಬs trust, we also have to design the trusts for the children so they can maximize the stretch out of the retirement benefits. Because of the age disparity among the Wolverine children, it might not make sense to use a conduit pot trust for the retirement benefits, although a pot trust would certainly work for the non-retirement assets. Instead, Wendy and Will should decide whether to establish conduit or accumulation trusts for their children. If they choose accumulation trusts, because they may be skittish about their children receiving the required minimum distributions, they will naturally

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choose their childrenಬs issue as the remainder beneficiaries. However, since Will and Wendy donಬt likely have any grandchildren yet, be sure that there are default remainder beneficiaries of the accumulation trusts who will be close in age to the children, such as Wendyಬs and Willಬs nieces and nephews. On the other hand, if you show Wendy and Will how small the required minimum distributions will be each year and you point out that the trustee will find enough expenses for each child that the trustee can pay directly, like tuition or health insurance premiums, you may be able to sell the Wolverines on the idea of a conduit trust. In that case, Will can name the Econ department at U of M as the conduit trust default beneficiary (but not the default beneficiary if Wendy disclaims to the credit shelter trust because then they will not have a designated beneficiary unless the Regents of the University of Michigan can be persuaded to disclaim the benefits). Note that if the children were old enough to take the benefits outright at the death of the surviving spouse, the remainder beneficiary would again be irrelevant since we can stop counting beneficiaries, absent all of the children predeceasing the account owner. So, how do we draft the beneficiary designations? Assuming Wendyಬs 401(k) plan is a pretty standard profit-sharing plan, the plan is likely to pay the benefits in a lump sum. Under REA, Will is required to be the primary beneficiary. We should not make the beneficiary designation too fancy because under every scenario, even with a disclaimer, assuming we have a see-through trust, Will will either do a spousal rollover or, if he disclaims, the trustee will do a non-spouse beneficiary rollover to an IRA after the disclaimer to get the stretch out. Likewise, if the childrenಬs trusts are the beneficiaries because Wendy has survived Will, the trustee will do a non-spouse beneficiary rollover to an inherited IRA since the trust will be a see-through trust. The beneficiary designation should be designed as follows: 1. To my husband, Will Wolverine, as my primary beneficiary, if he survives me. 2. If my husband disclaims all or any part of his interest in my benefits, then the secondary beneficiary for the portion disclaimed shall be the then-serving trustee of the Family Trust (i.e., the credit shelter trust) established in Article X of the Wendy Wolverine Revocable Living Trust (under agreement dated February 2, 2012, as may be amended (ಯFamily Trustರ). 3. If my spouse does not survive me, I hereby designate as my Contingent Beneficiaries, in equal shares, the then-acting Trustee(s) of the separate trusts for my children who survive me as set forth in Paragraph D of the Family Trust. 4. If neither my spouse nor any of my children or their issue survive me, then my remaining account balance shall be allocated among the siblings of my husband and me who survive me in equal shares, with the issue of deceased sibling taking the share his her parent would have taken had he or she survived me, per stirpes.

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Willಬs beneficiary designation from the University of Michigan plan does not require him to name Wendy as the beneficiary because it is not an ERISA plan. However, as practical matter, it would be structured similarly to Wendyಬs beneficiary designation. Because this 403(b) plan allows the beneficiary to retain the plan as an inherited 403(b) plan, the beneficiary designation might give more direction to the trustee and U of M about setting up separate accounts for the trusts and providing the trust documentation by the October 31 deadline. Note that the trusts for the children must be separate trusts each with its own taxpayer ID number, not merely a separate share, in order to qualify to use each child's life expectancy to determine the applicable distribution period for each child's trust's share 0of the retirement account. It also might address the issue of simultaneous death and the ability of an individual beneficiary to name a successor beneficiary if he or she dies before the complete distribution of the account. It might alert the beneficiary that he or she may be able to roll over the account balance to an inherited IRA, or that the spouse can roll over to any type of account he or she has. Finally, it might also address the interactions with the plan administrator by directing the plan administrator to honor a durable power of attorney or to give information to the trustee or personal representative. Should Will move to another university, say Harvard, you would have to read the Harvard plan and take ERISA issues into account in drafting the beneficiary designation because Harvard is a private university. For example, Wendy would then have to be the beneficiary of Willಬs 403(b) Harvard account and if she waives her right to the qualified pre-retirement survivor annuity under ERISA, she probably cannot disclaim any interest in the Harvard plan unless Will rolls it over to an IRA upon his retirement because she has exercised too much control over the benefits and is no longer eligible to disclaim under IRC Section 2518.

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Exhibit C Fact Pattern 3 - Wendy and Will Wolverine - Special Needs Child

WENDY AND WILL WOLVERINE ದ SPECIAL NEEDS CHILD Fact Pattern #3 Wendy and Will Wolverine have come back to you for some follow-up planning. They recently learned that their middle child, Winona, age 15, has been diagnosed with multiple sclerosis, and they are unsure about the severity of her illness. Wendy and Will do not plan to change their estate plans at the death of the first spouse. However, they would like to so some special planning in case Winonaಬs condition deteriorates and she needs special services. They have contacted Winonaಬs school so that she can get special assistance. They were also advised to set up a special needs trust in case she needs Medicaid in the future. Wendy and Will want to be fair to their three children: Walter, age 19, Winona, and Willa, age 12. They also realize that fair may not be equal under the circumstances. Their assets, unchanged, are as follows: House (entireties, net of mortgage)

$350,000.00

Cash and Investments (JTWROS)

225,000.00

Wendyಬs 401(k)/Profit-Sharing Plan

350,000.00

Willಬs 403(b) Plan

475,000.00

Wendyಬs Life Insurance

500,000.00

Willಬs Life Insurance

250,000.00

Total Assets

$2,150,000.00

How should the trusts for their children be structured? How should the beneficiary designations for their retirement accounts be designed? Suggested Planning Techniques The planning for this example assumes that the surviving spouse will be the primary beneficiary of the retirement account as discussed in the original fact pattern for Wendy and Will. This fact pattern pertains to planning for the children, who will be the contingent beneficiaries of the retirement accounts, either outright or as trust beneficiaries.

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When planning an estate where a large portion of the assets are retirement benefits and a special needs beneficiary is involved, it often makes sense to fund the special needs trust with non-retirement assets. In the case of the Wolverines, we might suggest that the trusts for their other two children be the contingent beneficiaries of the retirement benefits and that Winonaಬs trust would be the beneficiary of the life insurance or some other combination of assets, perhaps the surviving spouseಬs life insurance and the investment account (or a percentage of the investment account which would be a transfer on death account or held in the surviving spouseಬs trust). When retirement benefits are payable to a special needs trust, the income tax planning issues become a focal point of the planning because the retirement benefits are taxed as IRD at the high trust ordinary income tax rates. If Winona is not drawing down much of the trust income each year to meet her needs, if, for example, her condition stabilizes and she necessarily has limited access to the trust assets, a large percentage of the trust income may be spent each year to pay income taxes. On the other hand, at least in the early years of the trust, the required distributions will be small and may not cause much concern since the tax on the distributions will be negligible, especially if the trustee is able to keep the taxable income that is not distributed relatively low to use the graduated rate schedule. However, if Winona lives to a normal life expectancy and starts having large required minimum distributions, then the income tax issues may become problematic, especially if her needs donಬt increase dramatically so that the distributions are accumulated in the trust and are subject to the trust income tax rate schedule. Another way to avoid the income tax issue is for Wendy and Will to start a program of converting retirement assets from traditional pre-tax assets into after-tax assets by doing Roth conversions. A Roth IRA or Roth 401(k) account will allow for tax-free required distributions into the SNT. This is another way to get around the inherent trust income tax issues when the retirement account is payable to a SNT. Unfortunately, since Wendy and Will do not have IRAs at this time, and they are too young for in-service distributions (under age 59-1/2) if their employers offer them, their only possibility for using the Roth idea is if one or both employers offers Roth accounts within their respective employer plans. If so, they can make part of their annual employee deferral into the Roth portion of their plans. Once they leave their employer, they can roll the Roth benefits into a Roth IRA to continue the tax-free build-up and avoid minimum distributions during their lifetimes. Their adjusted gross income is likely too high to start a Roth IRA by doing non-deductible contributions to Roth IRAs. Wendy and Will may prefer a more equal distribution of their assets and want to include some of the retirement benefits in the mix for Winonaಬs trust, without doing a Roth conversion, which isnಬt in the cards for them right now. The trust for Winona will be a third party special needs trust. It will be a 100% discretionary trust designed so that should Winona need government benefits such as Medicaid and SSI, the trust assets will not be countable. The special needs trust and the usual provisions contained in a special needs trust generally poses no special problems with regard to the retirement planning. However, if the trust allows the

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trustee to pay for Winonaಬs funeral expenses at her death, the trust should preclude the use of retirement benefits for that purpose. The trust should not allow the trustee to pay her expenses of last illness to avoid a claim by Medicaid for reimbursement and to avoid her estate being deemed a beneficiary since this will be an accumulation trust and the estate as her beneficiary would result in the trust not having a designated beneficiary. In order for Winona to get the best possible applicable distribution period for this trust, the remainder beneficiaries should be the Wolverinesಬ eldest child, Walter, outright (he is already 19) and the youngest child, Willa, outright or in trust, assuming Walter would also would also be the outright remainder beneficiary if Willa does not survive and does not have any children of her own. By naming their eldest child as an outright beneficiary, there is no need to look further "down" the trust to more contingent remainder beneficiaries to find the identifiable beneficiary. We have found an individual who is likely to be living at the death of the account owner who will take outright at the death of the trust income beneficiary. Thus, Winona and her siblings would be the only possible beneficiaries of this trust. Note, however, that unlike the conduit trusts in the prior fact pattern, we do care about the remainder beneficiaries of this special needs trust. That is why we have to be sure that all roads lead to Walter, if there are no living grandchildren, so that we can identify at least one living beneficiary who will take the benefits outright after the death of Winona, who is fairly close in age to Winona, preferably her age or younger, or only slightly older. Walter, although a few years older, may be a good enough candidate if Wendy and Will feel comfortable having him take outright. The trusts for Wendy and Willಬs two other children, Walter and Willa, should be drafted as accumulation or conduit trusts for them, as planned. The remainder beneficiary for the trusts can include Winonaಬs trust and the other siblingಬs trust, or the other sibling outright, if he or she has attained the age specified in the trust, but Winonaಬs share should be held in her special needs trust for her lifetime. If all of the Wolverineಬs children will take their interests in the retirement benefits in trust, and the trusts are all accumulation trusts, then the default remainder beneficiaries should be the Wolverinesಬ issue either per stirpes or by right of representation, or since grandchildren seem a long way off, the nieces and nephews of the Wolverines so that the remainder beneficiaries will be about the same ages as the Wolverine children. The nieces and nephews should receive their distributions outright to assure that the age of the eldest niece or nephew can be used to determine the applicable distribution period. If Walter and Willa will have conduit trusts, then their shares can name each otherಬs trust and Winonaಬs trust as the remainder beneficiaries and, at least as to the conduit trusts, the identity of the remainder beneficiaries will be irrelevant. Note that the conduit trusts, or the trust agreement, should include language that limits the conduit provisions to the retirement benefits inherited directly from the retirement account at the time of the death of the account owner or through the surviving spouseಬs rollover IRA.

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Conduit provisions are unnecessary and undesirable for distributions that are inherited as the secondary beneficiary of the retirement assets once the primary beneficiary has died. In other words, if the primary beneficiary either names the conduit trust as the primary beneficiaryಬs successor beneficiary or the primary beneficiary inherits the retirement benefits through a trust and the conduit trust (or an accumulation trust) is the successor beneficiary of those retirement assets, the trustee will withdraw the benefits from the newly inherited retirement account using the applicable distribution period established by the now deceased primary beneficiary. Conduit language will not help in any way to change the distribution period. Moreover, a conduit trust that is the successor beneficiary to an accumulation trust does not allow you to ignore the remainder beneficiaries of the conduit trust when trying to determine whether the accumulation trust has an identifiable beneficiary and to determine the applicable distribution period for the conduit trust. A conduit trust only works to allow its remainder beneficiary to be ignored if it is the first trust to receive the retirement benefits after the death of the account owner (i.e., as the primary beneficiary of the retirement account or as a contingent beneficiary because the primary beneficiary has died). There are a couple of instances when a conduit trust may be useful for the special needs beneficiary. If the family is very well off and Medicaid is not needed immediately, then a conduit trust for the retirement benefits, i.e., requiring all of the required minimum distributions to be paid to or for the benefit of the special needs beneficiary drafted using standard trust language like health, education, support and maintenance for additional withdrawals from the retirement account in excess of the required minimum distribution (but still payable to rollover for the beneficiary) may be an option when coupled with a standby special needs trust funded with after-tax assets. This dual trust approach may allow the special needs beneficiary to enjoy a better quality of life depending on his or her needs and circumstances. The conduit trust should include a provision allowing the trustee to spend down the conduit trust should the situation change and it becomes necessary for the beneficiary to receive Medicaid. A conduit trust could also be drafted as a discretionary special needs trust but the trustee would only be allowed to make payments of the retirement account withdrawals “for the benefit” of the special needs beneficiary. While this technique may work in the early years of the conduit trust for a young beneficiary, it can be very problematic if the beneficiary lives to a normal life expectancy. The beneficiary simply may not have enough expenses for the trustee to use all of the required minimum distributions each year as the beneficiary ages and the minimum distributions get very large. This “for the benefit of only” conduit trust would, sadly, work best for those beneficiaries who are expected to have a shortened life expectancy or great needs that will spend down the retirement account payable to the conduit special needs trust. As an alternative, the conduit trust could be a discretionary pot trust naming Walter, Winona, and Willa as potential conduit trust beneficiaries. The required minimum distribution would have to be paid each year among Walter, Winona and Willa, in proportions as the trustee, in the trustee's discretion, determines; with the balance of the trust being for the benefit of Winona in the Trustee's discretion. You would have to use Walter's life expectancy for computation of the required minimum distribution, but the rest can be discretionary for Winona. The required minimum distribution can be used for Winona when it's appropriate. Drafting the

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trust in this format allows us to ignore the remainder beneficiaries and doesn't impede Winona’s government benefits. In fact, if Winona has a shortened life expectancy, the trust could terminate at her death, and if she has no issue, it can be paid outright to Walter and Willa. The trustee can establish inherited IRAs (assuming the retirement accounts are IRAs by the time they get to the trustee) for Walter and Willa who will continue the required minimum distributions based on Walter’s life expectancy. A portion of the trust could even be left to charity for multiple sclerosis research without any adverse effects on the required minimum distribution.

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Exhibit D Fact Pattern 4 - Golda Grizzly

GOLDA GRIZZLY Fact Pattern #4 Samantha Spartanಬs mother, Golda Grizzly, heard how much Samantha liked you as her estate planning attorney, so she has come to you for estate planning. Golda is divorced from Samanthaಬs father, Gregory. At the time of her divorce, Golda, who is now 67, received a very nice settlement from Gregory and she is a good investor. Golda has substantial assets and she received a portion of Gregoryಬs former 401(k) plan through a qualified domestic relations order which she rolled over into her IRA. As someone who has devoted a lot of time to volunteering, she would like to leave a substantial portion of her estate to charity, figuring that Gregory will take care of their children, Samantha and Gillian, for the most part. She would also like to leave some money to her five grandchildren who range in age from 3 to 14. Goldaಬs assets are as follows: Condo (no mortgage)

$500,000.00

Cash and Investments

1,200,000.00

Goldaಬs IRA

2,000,000.00

Goldaಬs Roth IRA

150,000.00

Goldaಬs Life Insurance

250,000.00

Total Assets

$4,100,000.00

Which assets should Golda leave to charity? Should they be left directly to the charity or in trust? Should the Roth IRA be left to her grandchildren? How would we set up a trust or trusts for the grandchildren? Suggested Planning Techniques Since Golda isnಬt married, it makes a lot of sense for her to leave her Roth IRA to her grandchildren so they can maximize the tax-free distributions over their respective lifetimes. Because the Roth IRA is only $150,000 and there are five grandchildren, they will each inherit only $30,000 of the Roth IRA at its current value. It might make sense for Golda to choose a custodian for the Roth IRA that will allow the Roth IRA required minimum distributions to be paid to an UTMA account for each grandchild. However, since Golda would also like to leave some other assets to her grandchildren, it might make even more sense for Golda to set up conduit

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

trusts for her grandchildren that could receive not only the Roth IRA proceeds but also some of the proceeds from the traditional IRA. Most planners conclude that it is wise to pay the traditional IRA directly to charity and leave the after-tax money to her children and grandchildren. The IRA is taxable to individuals at ordinary income tax rates, assuming there is no after-tax money in there from a rollover of aftertax plan money in the divorce or old after-tax contributions by Golda from the days before Roth IRAs. Therefore, all of the income in the IRA will be income in respect of a decedent and will be taxable to the beneficiary, unless the beneficiary is a charity. Because the grandchildren are relatively young, some projections should clarify for Golda whether it really is better to leave at least part of the IRA to her grandchildren and part to charity. Of course, we wouldnಬt leave the Roth IRA to charity since that would squander the tax-free character of the Roth IRA. Assuming she will divide her traditional IRA between a charity and her grandchildren, how should Golda set up her beneficiary designation, or for that matter, her IRAs? As far as Golda is concerned, her children, Samantha and Gillian, can get all of the after-tax assets outright, after the estate taxes are paid from those assets, if there are any estate taxes. Golda has to be mindful that leaving the part of her traditional IRA to her grandchildren in addition to the Roth IRA could trigger the generation-skipping tax. In 2012, when the GST exemption is $5,120,000, GST is not an issue for Golda barring growth in her IRA. But, in 2013, the GST exemption will ratchet back to close to $1,000,000 if Congress does not act. Therefore, we should assume, until we know otherwise, that the GST is a concern and we should limit what the grandchildren receive to the Roth IRA and the portion of the traditional IRA that will be less than the potential GST exemption for 2013 and beyond. The best way to approach this dilemma would be to draft a beneficiary designation for her traditional IRA with a formula clause. The formula would allocate Goldaಬs remaining GST exemption at her death to the grandchildrenಬs conduit trusts, after taking into account any direct skips that occur at her death outside of the traditional IRA (i.e., the Roth IRA and any lifetime direct skips that reduced her GST exemption) to the account balance in her traditional IRA. The numerator of the fraction would be her remaining GST exemption less the direct skip(s) and the denominator would be the account balance. That fraction would be multiplied against the account balance to determine the share to be allocated to the grandchildrenಬs conduit trusts. The remaining account balance, if any, would be allocated to the charity. Golda might cap the share going to the grandchildrenಬs conduit trusts so that the charity gets a certain minimum amount. The cap would preferably be drafted as a percentage of the account balance to avoid a possible pecuniary amount being used to fund the conduit trusts, although the requirement in the beneficiary designation that the conduit trusts be funded with the retirement accounts should avoid an acceleration of the income when the conduit trusts are funded with their respective shares of the IRA because it is a specific bequest.

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Estate Planning for Retirement Assets: A Case Study Approach

Golda will have to find a custodian willing to accept the formula beneficiary designation. In addition, the beneficiary designation will probably have to designate that Goldaಬs personal representative or trustee of her revocable living trust will supply the custodian with the numbers and apply the formula. The custodian will then likely have to be exonerated from liability from allocating the separate accounts in accordance with the formula. Golda could take a different approach. She could decide how much she would like to allocate to the charity and how much to the grandchildren. She could then split her traditional IRA into two IRAs, naming the charity as the beneficiary on one IRA and her grandchildrenಬs conduit trusts as the beneficiaries of the other IRA. You would want to monitor the GST exemption and the size of the Roth IRA and traditional IRA for the grandchildren to be sure that the total in both accounts is less than her available GST exemption. You could do this in part by having Golda roll over funds from one traditional IRA to another as the value of each IRA changed and as the tax laws change. Once required minimum distributions begin, Golda can also take the total of her required minimum distributions from one IRA or the other (or from both) so that each IRA stays close to her targets for the IRA payable to charity and the IRA payable to her grandchildren through the conduit trusts. The Roth IRA must always remain as a separate Roth IRA and there are no lifetime required minimum distributions for a Roth IRA account owner. Finally, no matter which path Golda chooses, Golda would probably establish separate conduit trusts for each grandchild. The trust agreement can establish generic conduit trusts for each grandchild. The beneficiary designation must specifically state that the share for the grandchildren will be divided into equal shares for Goldaಬs grandchildren who survive her, with each share to be allocated to the grandchildಬs separate conduit trust. It would be helpful to name the grandchildren in the beneficiary designation, but if there may be after-born grandchildren, it is not a necessity. Note that there must be a separate trust for each grandchild, not merely a separate share. Each conduit trust must have its own tax ID number. The trust agreement should state this somewhere in the trust document, either in the conduit trust itself or in a general provision governing the treatment of retirement benefits payable to the trust. As for the terms of the conduit trust, those are up to Golda, so long as the required minimum distributions and any additional withdrawals from the grandchildಬs trustಬs share of the IRA are paid to or for the benefit of the grandchild and do not remain in the trust, net of expenses properly chargeable to the grandchildಬs conduit trust.

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach

Exhibit E Fact Pattern 5 - Gregory and Glenda Grizzly

GREGORY AND GLENDA GRIZZLY Fact Pattern #5 Samantha Spartanಬs father, Gregory Grizzly, also heard how much Samantha liked you as her estate planning attorney, so he has also come to you for his estate planning. Gregory is 72 and his second wife, Glenda, is 55. Gregory has a successful business and he is still active in the business, but it does not have a lot of intrinsic value since it is a service business and Gregory is the source of all of the businessಬ goodwill. Glenda was also married before and she has two children from her previous marriage who are in their 20ಬs. Gregory wants to provide for Glenda during her lifetime but he also wants to be sure that his children, Samantha and Gillian, are taken care of and that Glenda does not leave his assets to her children, other than their house, since she has some of her own assets that she can leave to her children. Gregory has no need for any of Glendaಬs assets, except for their primary residence which they own by the entireties. Finally, Gregory wants to be sure that he is computing his required minimum distributions correctly from his plan and he asks you to show him how required minimum distributions are computed. Their assets are as follows: Residence (entireties, no mortgage) $1,000,000.00 Gregoryಬs Cash and Investments

1,200,000.00

Gregoryಬs SEP-IRA IRA Plan as of 12/31/113,000,000.00 Gregoryಬs Roth IRA Gregory's Life Insurance

250,000.00 1,000,000.00

Glendaಬs Cash and Investments

400,000.00

Glendaಬs IRA

250,000.00

Gregoryಬs Business (C Corporation)

400,000.00

Gregoryಬs Vacation Home

550,000.00

Total Assets

$8,050,000.00

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

Their assets breakdown as follows: Gregoryಬs Non-Retirement Assets Gregoryಬs Retirement Assets Glendaಬs Assets

$3,150,000.00 3,250,000.00 650,000.00

Joint Assets

1,000,000.00

Total Assets

$8,050,000.00

How should Gregoryಬs revocable living trust be structured? Should the 401(k) benefits go into a QTIP trust for Glenda? What if Gregory wants to leave all of his assets other than his house in trust for Glenda and his children? He wants to be sure that his children receive something at his death, even if Glenda survives him. He also wants to be sure that his grandchildren will have trusts in case either Samantha or Gillian do not survive him. Finally, he is supporting his 94-year-old mother and he wants to include her in his plan in case she survives him. How is Gregoryಬs required minimum distribution computed from his plan? Variations 1. Suppose Gregory is age 72 and Glenda is age 69, how would that change the required minimum distributions? 2. What if Gregory is age 65 and Glenda is age 55, how might that change the trust structure?

Suggested Planning Techniques Required Minimum Distribution Calculation Letಬs start with the 2012 required minimum distribution. Since Gregory is a 5% owner of his business, his first distribution calendar year would be the year he turned age 70, regardless of the type of plan his company has. However, because he decided to simplify and he switched his plan to a SEP-IRA, his required beginning date is age 70 since the plan is an IRA sponsored by an employer. Because Glenda is more than 10 years younger than Gregory, we will use both Gregory and Glendaಬs actual life expectancies recalculated each year to determine his required minimum distributions, assuming she is the sole beneficiary of his SEPIRA. The joint life expectancy factor is found in Reg. Sec. 1.401(a)(9)-9, A-3. The factor for a

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© 2012 The Institute of Continuing Legal Education

Estate Planning for Retirement Assets: A Case Study Approach

person age 72 and a person age 55 is 30.8. If Gregoryಬs SEP-IRA account balance at December 31, 2011 was $3,000,000, his required minimum distribution for 2012 is: $3,000,000/30.8 = $97,403.00 (rounded up to the nearest dollar) Each year during Gregoryಬs lifetime he would consult the same table using their ages at their respective birthdays every year. As stated in variation no. 1., suppose Glenda is actually 69 years old. How does that change the calculation of the required minimum distribution? Because Glenda is within 10 years of Gregoryಬs age, we use the Uniform Lifetime Table found in Reg. Sec. 1.401(a)(9)-9, A-2. The factor for someone who is 72 (who is presumed to have a beneficiary who is 10 years younger than he is by the regulations) is 25.6. So if Glenda were age 62 or older, even if she is older than Gregory, we would use the Uniform Lifetime Table to compute the required minimum distributions. In that case, Gregoryಬs SEP-IRA account balance at December 31, 2011 was $3,000,000, his required minimum distribution for 2012 is: $3,000,000/25.8 = $116,280.00 (rounded up to the nearest dollar) Each year during Gregoryಬs lifetime he would consult the Uniform Lifetime Table, find his age at his birthday in that year and use that factor to compute his required minimum distribution for the year. This is a SEP-IRA so it is not subject to the ERISA requirements that Glenda be named as the sole beneficiary of his retirement account. If Glenda were named as the beneficiary along with Gregoryಬs children, even though back in the original set of facts Glenda is age 55 so she is more than 10 years younger than Gregory, Gregory would use the Uniform Lifetime Table to determine his required minimum distributions and his required minimum distribution for 2012 would be the same as in variation no. 1, i.e., the required minimum distribution would be $116,280.00. Gregoryಬs Roth IRA does not require required minimum distributions during his lifetime. He does not want to take any distributions from his Roth IRA unless he absolutely needs the money, which is unlikely. Revocable Trust Structure and Beneficiary Designations Gregory would like to take care of Glenda but he also wants his children, Gillian and Samantha, to benefit. He does not want to benefit Glendaಬs children any more than necessary. For example, he wants Glenda to feel secure and will keep the house by the entireties, realizing that her children may eventually inherit their home.

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

It is Gregoryಬs preference that the rest of his assets go into his revocable trust. Glenda should benefit during her lifetime, but at her death, Samantha and Gillian should receive the balance of the trust assets outright. The trust would continue to be structured using a formula clause to fund the marital and credit shelter trusts. (There would probably also be GST planning involved, just in case, because of the size of the estate). Preferably, the formula will be a fractional formula, although with his business, we may not want to have to value it at his death and, again, at the date the trust is funded, so in this instance, a pecuniary formula may be used, with the pecuniary trust being the marital trust. Given that the credit shelter trust should be funded with non-retirement assets, his SEP-IRA beneficiary designation might require that his entire SEP-IRA goes into the QTIP marital trust, which sidesteps the pecuniary formula clause in the trust. As a specific bequest from his beneficiary designation, there is no longer an issue with funding the marital trust using a pecuniary bequest and accelerating the income when the QTIP is funded. However, by leaving his entire SEP-IRA to the QTIP trust, he may be overfunding the marital trust and underfunding the credit shelter trust. He also doesnಬt want to give Glenda the chance to disclaim funds into the credit shelter trust, since he doubts she would disclaim into the trust if he left the SEP-IRA to her outright. He realizes that leaving the SEP-IRA outright to Glenda would give her the ability to wait to take required minimum distributions until she is age 70, but he is concerned that she wonಬt name Samantha and Gillian as the remainder beneficiaries. Rather than leave the entire SEP-IRA to the QTIP trust, it is possible that he may be able to use a fractional formula in the beneficiary designation to fund the credit shelter trust. The formula in the trust and the formula in the beneficiary designation would have to be worded so that the formula in the trust would take precedence over the formula in the beneficiary designation allowing the after-tax assets held in his trust to be allocated to his credit shelter trust. Itಬs pretty tricky stuff. The credit shelter trust would be an accumulation trust with Glenda as the lifetime income beneficiary and distributions of principal to her subject to an ascertainable standard. Gregoryಬs children would be the outright remainder beneficiaries of the trust. If Gregoryಬs mother survives him, the credit shelter trust (or a specific bequest in the trust prior to the division of the trust estate by the formula) will distribute $250,000 to his very elderly mother. However, the trust specifically states that no retirement benefits may be used to satisfy this bequest. Therefore, Glendaಬs life expectancy will be used to determine the required minimum distributions payable to the credit shelter trust, because the only ಯcountableರ beneficiaries are Glenda, and Samantha and Gillian, i.e., those beneficiaries who might at some point receive some of the retirement benefits, with Gillian and Samantha receiving their remainder interest in the retirement benefits outright. It should be pointed out that Samantha and Gillian are younger than Glenda, though not by much. The QTIP trust is best structured as a garden-variety QTIP with the additional requirement that the trustee must withdraw from the SEP-IRA the greater of the (i) income from

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Estate Planning for Retirement Assets: A Case Study Approach

the SEP-IRA; or (ii) the required minimum distribution from the SEP-IRA each year, and the income will be distributed to Glenda. Glenda will have a right to force the trustee to take that distribution. The SEP-IRA does not have any prohibitions against her getting more than the required minimum distribution so that the income provision can be satisfied. If the required minimum distribution is greater than the income earned, the required minimum distribution may be distributed to Glenda as trust principal subject to an ascertainable standard or it may be accumulated. Therefore, the QTIP trust is an accumulation trust. Again, Gregoryಬs children would be the outright remainder beneficiaries of the QTIP trust. Therefore, Glendaಬs life expectancy will be used to determine the required minimum distributions payable to the QTIP trust, because the only ಯcountableರ beneficiaries are Glenda, Samantha and Gillian. Because Gregory is age 72, the QTIP is best structured as an accumulation trust. Required minimum distributions would have already begun for Gregory and they will be determined in both the credit shelter trust and the QTIP trust based on Glendaಬs life expectancy because she is younger than Gregory. If she were age 75, then we would use Gregoryಬs remaining life expectancy to determine the applicable distribution period because the required minimum distribution for a designated beneficiary when the account owner dies after his or her required beginning date is the longer of: (i) the account ownerಬs theoretical remaining life expectancy determined in the year of death; and (ii) the beneficiaryಬs remaining life expectancy. If, as in variation number two, Gregory were only 65, we might structure the trust as a conduit QTIP trust. That would still require the withdrawal of (or Glendaಬs right to) the greater of the income or the required minimum distribution from the SEP-IRA each year, but required minimum distributions would not start until the year Gregory would have attained age 70 because Glenda would be treated as the sole beneficiary of the trust. Required minimum distributions and additional withdrawals would have to be paid each year to Glenda so that the QTIP would qualify as a conduit trust. The trust does not rise to the level where she can roll over the SEP-IRA to her own IRA but being the sole beneficiary does allow her to use her own life expectancy and to defer the required minimum distributions until Gregory would have attained age 70. The problem with the conduit QTIP trust is that if Glenda dies before Gregory would have been age 70 , she will likely be treated as the account owner and the five-year rule will apply. Priv Ltr Rul 200644022 (Nov 3, 2006) provides a caveat for a young spouse who is named as the beneficiary of a conduit marital trust. In the ruling, the account owner died before his required beginning date, and the young surviving spouse also died before distributions were required to commence (i.e., before the account owner would have attained age 70). The spouse was the sole beneficiary of the trust, the remainder beneficiary was disregarded, and the five-year rule applied because the spouse did not name her own designated beneficiary. Given this ruling, it would be wise to include a special power of appointment in a conduit marital trust allowing the spouse to name a successor beneficiary of the retirement benefits and to avoid the

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

application of the five-year rule if the young spouse dies before distributions are required to begin. If the power is a limited power, it should be designed to allow the spouse to name the intended beneficiary of the conduit marital trust, in this case, Samantha and Gillian. In effect, the power of appointment and its exercise are additional steps that must be taken when planning the surviving spouseಬs estate to be sure that the design of the account ownerಬs plan is carried out. However, there is a real risk with Glenda that she will remarry and not exercise the power. Thatಬs fine if she lives past the required beginning date for the trust, since she will start required minimum distributions based on her life expectancy and the applicable distribution period will be locked in for Samantha and Gillian. Itಬs no so fine if she dies before the required beginning date, which is unlikely since it is only 5 or 6 years away in this scenario, but if it happens, it could mean a five-year pay-out for Samantha and Gillian, absent a change of heart by the IRS. Even going back to our original assumption that Gregory is age 72, there is another problem. The IRS has begun to ignore the rule using the (younger) spouseಬs life expectancy following the participantಬs death after the participantಬs required beginning date if the spouse has not attained age 70. See Priv Ltr Rul 200945011 (Nov 6, 2009). Instead, the IRS is treating the spouse as the participant, which can lead to disastrous results if the spouse dies shortly after the participant and has not had time to name his or her own beneficiary, which was the case in this ruling. The IRS has applied the five-year rule in this ruling, which seems to contravene Treas Reg 1.401(a)(9)-5, A-5(a) and (c). Commentators disagree about whether this is a proper reading of the rules governing the treatment of the surviving spouse. Finally, the last issue concerning the QTIP trust is the payment of the marginal estate taxes in Glendaಬs estate as a consequence of the QTIP trust being included in her estate. Theoretically, the QTIP trust will not be a see-through trust if Glendaಬs estate taxes can be paid from an accumulation QTIP trust, unless it is a conduit trust. In addition, it could also disqualify the credit shelter trust if retirement benefits are allocated to the credit shelter trust through the trust formula, although perhaps not if the allocation is accomplished through the beneficiary designation by specifically designating the shares for the credit shelter trust and the QTIP trust in the beneficiary designation. When the formula clause is used and the trustee has discretion to fund either trust with the retirement benefits, the provisions and beneficiaries of both trusts will be looked at to determine when the trusts are see-through trusts. If Glenda files an estate tax return at Gregoryಬs death and elects portability, then maybe there wonಬt be any estate taxes to worry about. It would be ideal if Glendaಬs estate could pay the taxes but that would not be equitable to Glendaಬs children. But that ignores the fact that portability might not be around after 2012, and if it is, the estate tax exemption might be a lot smaller. It also ignores the fact that the mere fact that the trust allows the taxes to be paid from the QTIP, could cause the whole trust not to be to see-through trust even if no estate taxes are ever actually paid from the QTIP trust, unless it is impossible for any portion of the QTIP trust to be funded with retirement benefits,

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Estate Planning for Retirement Assets: A Case Study Approach

either because the trust assets are only sufficient to fund the credit shelter trust or the trust document prohibits the trustee from using retirement benefits to fund the marital trust. The IRS has indicated that they may not raise the issue in the QTIP context since they want to be sure the taxes are paid. Again, the issue is not relevant if the QTIP trust is a conduit QTIP trust. Now that Gregory has heard the whole story, he is leery of all this complexity. You have a simpler idea. Gregory should determine what percentage of his SEP-IRA he could be comfortable with if he leaves it outright to Glenda and it eventually passes to her children. The balance should go outright to Gregoryಬs children at his death. It might be necessary to do this by formula depending on the value of his SEP-IRA at his death, what he wants to get to Samantha and Gillian, and the estate tax exemption amount at the time. Using this scenario, his revocable living trust will not receive any retirement benefits. Depending on the estate tax laws in 2013, and beyond, the QTIP trust may not be funded at all. His children get a percentage right away instead of waiting until Glenda dies. Gregoryಬs children and Glenda get their respective shares of the SEP-IRA with no strings attached (except the need to create separate accounts for the rollover IRA for Glenda and the inherited IRAs for Samantha and Gillian by December 31 of the year after the year of Gregoryಬs death). They all get the maximum stretch-out at his death. And this might be the one time when the kids get the Roth IRA instead of the spouse. Thatಬs Gregoryಬs call. The plan can be made even more straightforward if Gregory rolls his SEP-IRA into two IRAs, one that will name only Glenda as the beneficiary and the other that will be divided between Gillian and Samantha at Gregoryಬs death. It might make sense to do some projections to see if itಬs possible to figure out what percentage his children would receive if the SEP-IRA were paid to the QTIP trust (or the credit shelter trust) if Glenda dies at a specified age. That might help Gregory decide how much of his SEP-IRA he will leave to Glenda and how much to his children. Then he can do the rollovers in those proportions (or leave the SEP-IRA intact and split off a rollover IRA for his children). There is no problem with the rollover since the SEP-IRA is an IRA and not subject to REA and the spousal consent rules. What makes Gregory like this plan even more than using a formula beneficiary designation, besides its simplicity, is that he is able to use Glendaಬs actual life expectancy to determine the required minimum distributions payable from the SEP-IRA or rollover IRA for which she is, again, the sole beneficiary, thus reducing his lifetime required minimum distributions. Even with this simpler plan, we can only hope that Gregory and Glenda, Samantha and Gillian will live happily ever-after.

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach

Exhibit F Fact Pattern 6 - Wendy and Will Wolverine #2

tEzEt/>>tK>sZ/E &ĂĐƚWĂƚƚĞƌŶηϲ ƐƐƵŵĞƚŚĞtĞŶĚLJĂŶĚtŝůůtŽůǀĞƌŝŶĞĨĂĐƚƉĂƚƚĞƌŶ͘tŝůůtŽůǀĞƌŝŶĞĚŝĞƐĂƚĂŐĞϰϱ͕ůĞĂǀŝŶŐŚŝƐϰϬϯ;ďͿ ƉůĂŶ ƚŽ ŚŝƐ ƐƉŽƵƐĞ͕ tĞŶĚLJ͕ ǁŚŽ ŝƐ ĂůƐŽ ĂŐĞ ϰϱ ĂŶĚ ƚŚĞ ƐŽůĞ ƉƌŝŵĂƌLJ ďĞŶĞĨŝĐŝĂƌLJ ŽĨ ƚŚĞ ĂĐĐŽƵŶƚ͘ ŽŶĚƵŝƚ ƚƌƵƐƚƐ ĨŽƌ ƚŚĞ ďĞŶĞĨŝƚ ŽĨ tŝůů ĂŶĚ tĞŶĚLJ͛Ɛ ƚŚƌĞĞ ĐŚŝůĚƌĞŶ ĂƌĞ ƚŚĞ ĐŽŶƚŝŶŐĞŶƚ ďĞŶĞĨŝĐŝĂƌŝĞƐ͘ tŚĂƚĂƌĞtĞŶĚLJ͛ƐŽƉƚŝŽŶƐǁŝƚŚƌĞŐĂƌĚƚŽƚŚĞϰϬϯ;ďͿ͍ ŐĂŝŶ͕ƚŚĞŝƌĂƐƐĞƚƐĂƚƚŚĞƚŝŵĞŽĨtŝůů͛ƐĚĞĂƚŚĂƌĞĂƐĨŽůůŽǁƐ͗ ,ŽƵƐĞ;ĞŶƚŝƌĞƚŝĞƐ͕ŶĞƚŽĨŵŽƌƚŐĂŐĞͿ

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ΨϮ͕ϭϱϬ͕ϬϬϬ͘ϬϬ

^ƵŐŐĞƐƚĞĚWůĂŶŶŝŶŐdĞĐŚŶŝƋƵĞƐ

dŚĞ/ŶƚĞƌŶĂůZĞǀĞŶƵĞŽĚĞĚŽĞƐŶŽƚƉĞƌŵŝƚtĞŶĚLJƚŽůĞĂǀĞƚŚĞĂƐƐĞƚƐŝŶtŝůů͛ƐϰϬϯ;ďͿ ĂŶĚƚƌĞĂƚƚŚĞĂĐĐŽƵŶƚĂƐŚĞƌŽǁŶ͕ďƵƚƐŚĞŚĂƐĂĨĞǁŽƉƚŝŽŶƐ͘ KŶĞŽƉƚŝŽŶŝƐƚŚĂƚƐŚĞĐŽƵůĚƌŽůůƚŚĞĂƐƐĞƚƐŽǀĞƌŝŶƚŽĂŶ/ZŝŶŚĞƌŶĂŵĞ͘LJƌŽůůŝŶŐŽǀĞƌ ƚŚĞĂƐƐĞƚƐŝŶƚŽĂŶ/ZŝŶŚĞƌŶĂŵĞ͕ƐŚĞďĞĐŽŵĞƐƚŚĞŽǁŶĞƌŽĨƚŚĞ/Z͕ĂŶĚŽĨƚŚĞƌƵůĞƐ ƚŚĂƚǁŽƵůĚĂƉƉůLJƚŽŚĞƌŽǁŶ/ZƐǁŽƵůĚŶŽǁĂƉƉůLJƚŽƚŚĞĂƐƐĞƚƐƌŽůůĞĚŽǀĞƌ͘ tŚŝůĞƌŽůůŝŶŐŽǀĞƌƚŚĞĂƐƐĞƚƐƚŽĂŶ/ZŝŶtĞŶĚLJ͛ƐŽǁŶŶĂŵĞŵĂLJŚĂǀĞďĞƚƚĞƌƌĞƐƵůƚƐĨŽƌ tĞŶĚLJĂŶĚŚĞƌďĞŶĞĨŝĐŝĂƌŝĞƐůŽŶŐͲƚĞƌŵ͕ƐƵĐŚĂƐŐƌĞĂƚĞƌŝŶĐŽŵĞͲƚĂdžĚĞĨĞƌƌĂů͕ƐŚĞŚĂƐ ƚŚƌĞĞĐŚŝůĚƌĞŶǁŚŽŵƐŚĞŝƐĐƵƌƌĞŶƚůLJƐƵƉƉŽƌƚŝŶŐ͕ŽŶĞŽĨǁŚŽŵŝƐŝŶĐŽůůĞŐĞ͘tŝůůůĞĨƚ tĞŶĚLJƐŽŵĞůŝĨĞŝŶƐƵƌĂŶĐĞ͕ďƵƚƐŚĞƐƚŝůůŚĂƐĂŵŽƌƚŐĂŐĞƚŽƉĂLJĂŶĚŶŽůŽŶŐĞƌŚĂƐtŝůů͛Ɛ ŝŶĐŽŵĞ͘^ŚĞŵŝŐŚƚŶĞĞĚƚŽĂĐĐĞƐƐtŝůů͛ƐƌĞƚŝƌĞŵĞŶƚƉůĂŶƚŽƐƵƉƉŽƌƚŚĞƌƐĞůĨĂŶĚƚŚĞ ĐŚŝůĚƌĞŶ͘/ĨtĞŶĚLJƌŽůůƐŽǀĞƌƚŚĞĂƐƐĞƚƐŝŶƚŽĂŶ/ZĂĐĐŽƵŶƚŝŶŚĞƌŶĂŵĞ͕ƐŚĞĐĂŶŶŽƚ ǁŝƚŚĚƌĂǁƚŚĞĂƐƐĞƚƐĨƌŽŵŚĞƌ/ZĂĐĐŽƵŶƚƉƌŝŽƌƚŽĂŐĞϱϵЪǁŝƚŚŽƵƚŝŶĐƵƌƌŝŶŐĂϭϬй ƉĞŶĂůƚLJ͕ƵŶůĞƐƐƐŚĞƋƵĂůŝĨŝĞƐĨŽƌŽŶĞŽĨƚŚĞĞdžĐĞƉƚŝŽŶƐƚŽƚŚĞƉĞŶĂůƚLJ͘

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

/ŶƚŚŝƐƐĐĞŶĂƌŝŽ͕tĞŶĚLJǁŽƵůĚůŝŬĞůLJďĞŝŶĂďĞƚƚĞƌƐŝƚƵĂƚŝŽŶŝĨƐŚĞĚŝĚŶŽƚŝŵŵĞĚŝĂƚĞůLJ ƌŽůůŽǀĞƌƚŚĞĂƐƐĞƚƐĨƌŽŵtŝůů͛ƐϰϬϯ;ďͿŝŶƚŽĂŶ/ZŝŶŚĞƌŶĂŵĞ͘tĞŶĚLJĐŽƵůĚƌĞĐĞŝǀĞ tŝůů͛ƐƌĞƚŝƌĞŵĞŶƚƉůĂŶĂƐƐĞƚƐŝŶƚŚĞĨŽƌŵŽĨĂŶŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚϰϬϯ;ďͿ͕ǁŚŝĐŚ ǁŽƵůĚƌĞŵĂŝŶŝŶtŝůů͛ƐŶĂŵĞĨŽƌƚŚĞďĞŶĞĨŝƚŽĨtĞŶĚLJ͕ĂƐďĞŶĞĨŝĐŝĂƌLJ͘tŝƚŚƚŚŝƐĐŽƵƌƐĞ ŽĨĂĐƚŝŽŶ͕ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐƚŽtĞŶĚLJǁŽƵůĚďĞĐŽŵƉƵƚĞĚďĂƐĞĚŽŶ tĞŶĚLJ͛ƐůŝĨĞĞdžƉĞĐƚĂŶĐLJƵƐŝŶŐƚŚĞ^ŝŶŐůĞ>ŝĨĞdžƉĞĐƚĂŶĐLJdĂďůĞ;ƐĞĞdƌĞĂƐ͘ZĞŐ͘ Αϭ͘ϰϬϭ;ĂͿ;ϵͿͲϵ͕ͲϭͿĂŶĚtĞŶĚLJ͛ƐĂŐĞŝŶĞĂĐŚLJĞĂƌĨŽƌǁŚŝĐŚĂZĞƋƵŝƌĞĚDŝŶŝŵƵŵ ŝƐƚƌŝďƵƚŝŽŶŝƐƌĞƋƵŝƌĞĚ͘ĞĐĂƵƐĞtŝůůĚŝĞĚƉƌŝŽƌƚŽŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞĂŶĚ tĞŶĚLJŝƐƚŚĞƐŽůĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJŽĨtŝůů͛ƐƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚ͕tĞŶĚLJĐĂŶĚĞĨĞƌ ƚĂŬŝŶŐĂŶLJZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵƚŚĞŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚƉůĂŶ ƵŶƚŝůtŝůůǁŽƵůĚŚĂǀĞƌĞĂĐŚĞĚŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͘,ŽǁĞǀĞƌ͕tĞŶĚLJŵƵƐƚďĞ ĐĂƌĞĨƵůƚŚĂƚƐŚĞĐŽŵƉůŝĞƐǁŝƚŚĂŶLJƌĞƋƵŝƌĞŵĞŶƚƐŽĨƚŚĞϰϬϯ;ďͿƉůĂŶĚŽĐƵŵĞŶƚƚŽĐŚŽŽƐĞ ďĞƚǁĞĞŶƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJƉĂLJŽƵƚŵĞƚŚŽĚĂŶĚƚŚĞϱͲLJĞĂƌƌƵůĞ͘hŶĚĞƌƚŚĞdƌĞĂƐƵƌLJ ZĞŐƵůĂƚŝŽŶƐ͕ƚŚĞϰϬϯ;ďͿƉůĂŶĚŽĐƵŵĞŶƚĐĂŶƌĞƋƵŝƌĞƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJŽĨĂƉůĂŶ ƉĂƌƚŝĐŝƉĂŶƚǁŚŽĚŝĞĚďĞĨŽƌĞŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞƚŽĐŚŽŽƐĞďĞƚǁĞĞŶƚŚĞϱͲLJĞĂƌ ƌƵůĞĂŶĚƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJƉĂLJŽƵƚŵĞƚŚŽĚ͕ĂŶĚĨĂŝůƵƌĞƚŽŵĂŬĞƚŚŝƐĞůĞĐƚŝŽŶĐŽƵůĚ ƌĞƐƵůƚŝŶĂƉƉůŝĐĂƚŝŽŶŽĨƚŚĞϱͲLJĞĂƌƌƵůĞŝĨƚŚĂƚƌƵůĞŝƐƚŚĞĚĞĨĂƵůƚƌƵůĞƵŶĚĞƌƚŚĞƉůĂŶ͘/Ĩ tĞŶĚLJŝŶƚĞŶĚƐƚŽĚĞĨĞƌƚĂŬŝŶŐZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐƵŶƚŝůtŝůůǁŽƵůĚŚĂǀĞ ƌĞĂĐŚĞĚŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ƐŚĞŵĂLJŶĞĞĚƚŽŵĂŬĞĂŶĂĨĨŝƌŵĂƚŝǀĞĞůĞĐƚŝŽŶ ĐŚŽŽƐĞƚŚŝƐŵĞƚŚŽĚŽǀĞƌƚŚĞϱͲLJĞĂƌƌƵůĞ͘/ĨƐŚĞŐĞƚƐƚƌĂƉƉĞĚŝŶƚŚĞϱͲLJĞĂƌƌƵůĞ͕tĞŶĚLJ ĐŽƵůĚƐƚŝůůƌŽůůŽǀĞƌƚŚĞďĞŶĞĨŝƚƐǁŝƚŚŝŶĂĐĞƌƚĂŝŶƚŝŵĞĨƌĂŵĞ͕ĞdžĐĞƉƚŝŶƚŚĞůĂƐƚLJĞĂƌŽĨ ĚŝƐƚƌŝďƵƚŝŽŶƐƵŶĚĞƌƐƵĐŚƌƵůĞ͕tĞŶĚLJĐŽƵůĚŶŽƚĞǀĞŶƌŽůůŽǀĞƌƚŚĞďĂůĂŶĐĞŽĨƚŚĞ ƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚďĞĐĂƵƐĞƚŚĞĞŶƚŝƌĞƉĂLJŵĞŶƚŝŶƚŚĞĨŝŶĂůLJĞĂƌƵŶĚĞƌƚŚĞϱͲLJĞĂƌƌƵůĞŝƐ ĐŽŶƐŝĚĞƌĞĚĂZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶ͘dŚŝƐŝƐĂďĂĚƌĞƐƵůƚ͕ƐŽĂŶLJĞůĞĐƚŝŽŶŵƵƐƚ ďĞĚŽŶĞƚŝŵĞůLJƵŶĚĞƌƚŚĞƉůĂŶ͘   ZŽůůŝŶŐŽǀĞƌtŝůů͛ƐƌĞƚŝƌĞŵĞŶƚƉůĂŶĂƐƐĞƚƐŝŶƚŽĂŶ/ZŝŶtĞŶĚLJ͛ƐŽǁŶŶĂŵĞǁŽƵůĚĂůůŽǁ tĞŶĚLJƚŽĚĞĨĞƌƚĂŬŝŶŐĂŶLJĚŝƐƚƌŝďƵƚŝŽŶƐƵŶƚŝůŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ďƵƚďLJ ƌĞĐĞŝǀŝŶŐtŝůů͛ƐƌĞƚŝƌĞŵĞŶƚƉůĂŶĂƐƐĞƚƐŝŶĂŶŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚƉůĂŶŝŶƐƚĞĂĚ͕ tĞŶĚLJĐĂŶďŽƚŚĚĞĨĞƌƚĂŬŝŶŐZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐƵŶƚŝůtŝůůǁŽƵůĚŚĂǀĞ ƌĞĂĐŚĞĚŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ĂŶĚƐŚĞĐĂŶĂĐĐĞƐƐƚŚĞŵŽŶĞLJŝŶƚŚĞŝŶŚĞƌŝƚĞĚ/Z ŽƌŝŶŚĞƌŝƚĞĚƉůĂŶĂƚĂŶLJƚŝŵĞǁŝƚŚŽƵƚƉĞŶĂůƚLJ͘^ŚĞǁŝůůƐƚŝůůƉĂLJŝŶĐŽŵĞƚĂdžŽŶƚŚĞ ĚŝƐƚƌŝďƵƚŝŽŶƐƚŽŚĞƌĂƚŽƌĚŝŶĂƌLJƌĂƚĞƐ͘ ƌŽůůŽǀĞƌǁŽƵůĚĂůůŽǁtĞŶĚLJƚŽƵƐĞƚŚĞhŶŝĨŽƌŵ>ŝĨĞƚŝŵĞdĂďůĞƚŽĐŽŵƉƵƚĞŚĞƌ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐ͕ŽŶĐĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐďĞŐŝŶ͘/Ĩ

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© 2012 The Institute of Continuing Legal Education

Estate Planning for Retirement Assets: A Case Study Approach

tĞŶĚLJƌŽůůƐŽǀĞƌƚŚĞĂƐƐĞƚƐƚŽĂŶ/ZŝŶŚĞƌŽǁŶŶĂŵĞ͕ƚŚĞĚŝǀŝƐŽƌĂƚĂŐĞϳϭƵŶĚĞƌƚŚĞ hŶŝĨŽƌŵ>ŝĨĞƚŝŵĞdĂďůĞŝƐϮϲ͘ϱ;ŽŶůLJϯ͘ϴйŽĨƚŚĞĂĐĐŽƵŶƚͿ͘/ĨtĞŶĚLJĚŽĞƐŶ͛ƚƌŽůůŽǀĞƌƚŚĞ ƌĞƚŝƌĞŵĞŶƚƉůĂŶĂƐƐĞƚƐƚŽĂŶ/ZŝŶŚĞƌŽǁŶŶĂŵĞ͕ďƵƚŝŶƐƚĞĂĚƌĞĐĞŝǀĞƐƚŚĞŵŝŶƚŚĞĨŽƌŵ ŽĨĂŶŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚƉůĂŶ͕ƚŚĞŶǁŚĞŶƐŚĞĂƚƚĂŝŶƐĂŐĞϳϭ͕ƚŚĞĚŝǀŝƐŽƌĨŽƌ ĐŽŵƉƵƚŝŶŐƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƵŶĚĞƌƚŚĞ^ŝŶŐůĞ>ŝĨĞdžƉĞĐƚĂŶĐLJdĂďůĞŝƐ ϭϲ͘ϯ;ŽƌƌŽƵŐŚůLJϲ͘ϭйŽĨƚŚĞĂĐĐŽƵŶƚͿ͘ /ĨtĞŶĚLJĐŚŽŽƐĞƐƚŚĞŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚƉůĂŶŽƉƚŝŽŶǁŝƚŚƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJ ƉĂLJŽƵƚďĞĐĂƵƐĞƐŚĞŶĞĞĚƐŵŽŶĞLJƚŽůŝǀĞŽŶĂĨƚĞƌtŝůů͛ƐĚĞĂƚŚ͕ŝƐƐŚĞƐƚƵĐŬǁŝƚŚƚŚŝƐ ĚĞĐŝƐŝŽŶ͍EŽƚŶĞĐĞƐƐĂƌŝůLJ͘ tŚĞŶtĞŶĚLJĂƚƚĂŝŶƐĂŐĞϱϵЪ͕ƐŚĞŵŝŐŚƚǁĂŶƚƚŽƌŽůůŽǀĞƌŚĞƌƌĞŵĂŝŶŝŶŐŝŶƚĞƌĞƐƚŝŶƚŚĞ ŝŶŚĞƌŝƚĞĚ/ZƚŽĂŶ/ZŝŶŚĞƌŽǁŶŶĂŵĞ͕ďĞĐĂƵƐĞĂƚƚŚŝƐĂŐĞ͕ŝƚŝƐƐĂĨĞĨŽƌŚĞƌƚŽďĞŐŝŶ ǁŝƚŚĚƌĂǁŝŶŐĂƐƐĞƚƐĨƌŽŵŚĞƌŽǁŶƌĞƚŝƌĞŵĞŶƚƉůĂŶƐǁŝƚŚŽƵƚƚŚĞϭϬйƉĞŶĂůƚLJ͘^ŚĞĐĂŶ ĐŽŵƉůĞƚĞƚŚĞƌŽůůŽǀĞƌĂƚĂŶLJƚŝŵĞ͕ĞǀĞŶĂĨƚĞƌďĞŐŝŶŶŝŶŐƚŽƚĂŬĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵ ŝƐƚƌŝďƵƚŝŽŶƐĂƐĂďĞŶĞĨŝĐŝĂƌLJ͘^ŚĞĐĂŶŶŽƚƌŽůůŽǀĞƌĂŶLJĂŵŽƵŶƚƚŚĂƚŝƐĐŚĂƌĂĐƚĞƌŝnjĞĚĂƐĂ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶŝŶĂŶLJŐŝǀĞŶLJĞĂƌ͕ďƵƚƐŚĞĐĂŶƌŽůůŽǀĞƌŽƚŚĞƌĂŵŽƵŶƚƐ͘ dŚĞƌĞĨŽƌĞ͕ƐŚĞƐŚŽƵůĚĐŽŵƉůĞƚĞƚŚŝƐƌŽůůŽǀĞƌďLJƚŚĞLJĞĂƌtŝůůǁŽƵůĚŚĂǀĞĂƚƚĂŝŶĞĚĂŐĞ ϲϵЪƚŽĂǀŽŝĚŚĂǀŝŶŐƚŽƚĂŬĞĂŵŝŶŝŵƵŵĚŝƐƚƌŝďƵƚŝŽŶĂƐƚŚĞĨŝƌƐƚĚŝƐƚƌŝďƵƚŝŽŶĨƌŽŵƚŚĞ/Z ŝŶƚŚĞLJĞĂƌtŝůůǁŽƵůĚŚĂǀĞĂƚƚĂŝŶĞĚĂŐĞϳϬЪ͘dŚŝƐƐƚĞƉŝƐŵŽƌĞŝŵƉŽƌƚĂŶƚĨŽƌĂƐƉŽƵƐĞ ǁŚŽŝƐLJŽƵŶŐĞƌƚŚĂŶƚŚĞĚĞĐĞĂƐĞĚƐƉŽƵƐĞ͘/ŶƚŚŝƐĐĂƐĞ͕ŝĨtĞŶĚLJǁĂƐďŽƌŶŝŶ:ƵůLJďƵƚ tŝůůǁĂƐďŽƌŶŝŶ:ĂŶƵĂƌLJ͕ƐŚĞĐĂŶŐĞƚĂŶĞdžƚƌĂLJĞĂƌŽĨĚĞĨĞƌƌĂůďLJƚŝŵŝŶŐƚŚŝƐƌŽůůŽǀĞƌƚŽ ƚŚĞLJĞĂƌtŝůůǁŽƵůĚŚĂǀĞĂƚƚĂŝŶĞĚĂŐĞϲϵЪ͘dŚĞƌĞƐƵůƚƐĂƌĞŽďǀŝŽƵƐůLJŵŽƌĞƉƌŽĨŽƵŶĚŝŶ ĐĂƐĞƐǁŚĞƌĞƚŚĞƐƵƌǀŝǀŝŶŐƐƉŽƵƐĞŝƐŵƵĐŚLJŽƵŶŐĞƌƚŚĂŶƚŚĞĚĞĐĞĂƐĞĚƐƉŽƵƐĞ͘ tŚĂƚŚĂƉƉĞŶƐŝĨtĞŶĚLJĚŝĞƐďĞĨŽƌĞŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞĂŶĚƚŚĞĂƐƐĞƚƐĂƌĞƐƚŝůů ŝŶƚŚĞŝŶŚĞƌŝƚĞĚ/ZŽƌŝŶŚĞƌŝƚĞĚƉůĂŶ͍/ĨtĞŶĚLJĚŝĞƐĂĨƚĞƌtŝůůďƵƚďĞĨŽƌĞŚĞƌZĞƋƵŝƌĞĚ ĞŐŝŶŶŝŶŐĂƚĞ͕ďĞĐĂƵƐĞtŝůůĚŝĞĚďĞĨŽƌĞŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ƚŚĞƌĞƚŝƌĞŵĞŶƚ ďĞŶĞĨŝƚƐǁŽƵůĚďĞƉĂŝĚƐƵďũĞĐƚƚŽƚŚĞϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞ͕ƵŶůĞƐƐtĞŶĚLJŚĂĚ ĂĨĨŝƌŵĂƚŝǀĞůLJĐŽŵƉůĞƚĞĚĂŶĞǁďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶƉƌŝŽƌƚŽŚĞƌĚĞĂƚŚŶĂŵŝŶŐ ƐƵĐĐĞƐƐŽƌďĞŶĞĨŝĐŝĂƌŝĞƐŝŶƚŚĞĞǀĞŶƚŽĨŚĞƌĚĞĂƚŚ;ĂŶĚĂƐƐƵŵŝŶŐƐŚĞŝƐƉĞƌŵŝƚƚĞĚƚŽĚŽ ƐŽƵŶĚĞƌƚŚĞƉůĂŶͿ͕ďĞĐĂƵƐĞtĞŶĚLJŝƐƚƌĞĂƚĞĚĂƐŝĨƐŚĞŝƐƚŚĞĂĐĐŽƵŶƚŽǁŶĞƌĨŽƌZD ƉƵƌƉŽƐĞƐƵŶĚĞƌƚŚĞƐĞĐŝƌĐƵŵƐƚĂŶĐĞƐ͘/ŶƚŚĞĐĂƐĞŽĨĂŶŽŶͲƐƉŽƵƐĞďĞŶĞĨŝĐŝĂƌLJǁŚŽĚŝĞƐ ĂĨƚĞƌƚŚĞƉĂƌƚŝĐŝƉĂŶƚ͕ƚŚĞďĞŶĞĨŝĐŝĂƌLJ͛ƐƌĞŵĂŝŶŝŶŐůŝĨĞĞdžƉĞĐƚĂŶĐLJŵĂLJďĞƵƐĞĚƚŽ ĐŽŵƉƵƚĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶ͘dŚŝƐƐĞĞŵƐƌĂƚŚĞƌŝŶĞƋƵŝƚĂďůĞ͕ďƵƚŝƚŝƐ ƐŽŵĞƚŚŝŶŐƚŽďĞĂǁĂƌĞŽĨŝĨLJŽƵĂƌĞƌĞƉƌĞƐĞŶƚŝŶŐƚŚĞƐƵƌǀŝǀŝŶŐƐƉŽƵƐĞͲďĞŶĞĨŝĐŝĂƌLJŽĨĂ ĚĞĐĞĚĞŶƚǁŚŽĚŝĞƐƉƌŝŽƌƚŽŚŝƐŽƌŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͘/ƚŝƐŝŵƉŽƌƚĂŶƚĨŽƌƚŚĞ

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

ƐƵƌǀŝǀŝŶŐƐƉŽƵƐĞƚŽŶĂŵĞƐƵĐĐĞƐƐŽƌďĞŶĞĨŝĐŝĂƌŝĞƐŽĨƚŚĞŝŶŚĞƌŝƚĞĚƉůĂŶŽƌŝŶŚĞƌŝƚĞĚ/Z͕ ǁŚĞŶƉĞƌŵŝƚƚĞĚ͕ƚŽĂǀŽŝĚĂƉƉůŝĐĂƚŝŽŶŽĨƚŚĞϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞ͘ /ĨƐŚĞŚĂƐŶŽƚĐŽŵƉůĞƚĞĚĂŶĞǁďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶ͕ƐŚĞŵŝŐŚƚďĞĨŽƌƚƵŶĂƚĞŝĨƚŚĞ ĚĞĨĂƵůƚďĞŶĞĨŝĐŝĂƌŝĞƐƵŶĚĞƌƚŚĞƉůĂŶŽƌ/ZĂƌĞŚĞƌĐŚŝůĚƌĞŶ͕ŝŶǁŚŝĐŚĐĂƐĞƚŚĞůŝĨĞ ĞdžƉĞĐƚĂŶĐLJŵĞƚŚŽĚĐĂŶƐƚŝůůĂƉƉůLJ͘,ŽǁĞǀĞƌ͕ŝƚŝƐŶŽƚƵŶƵƐƵĂůĨŽƌƚŚĞĚĞĨĂƵůƚďĞŶĞĨŝĐŝĂƌLJ ƚŽďĞƚŚĞĞƐƚĂƚĞƐŽĂŶĞǁďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶŝƐŽĨƉĂƌĂŵŽƵŶƚŝŵƉŽƌƚĂŶĐĞĨŽƌĂ ƐƵƌǀŝǀŝŶŐƐƉŽƵƐĞŽĨĂŶLJĂŐĞ͘ /ĨtŝůůŚĂĚĚŝĞĚĂĨƚĞƌŚŝƐZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕tĞŶĚLJǁŽƵůĚŚĂǀĞƚŽďĞŐŝŶƚĂŬŝŶŐ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵƚŚĞŝŶŚĞƌŝƚĞĚ/ZŝŶƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtŝůů͛Ɛ ĚĞĂƚŚ͕ĂŶĚƵƉŽŶtĞŶĚLJ͛ƐůĂƚĞƌĚĞĂƚŚ͕ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐǁŽƵůĚ ĐŽŶƚŝŶƵĞƚŽƉĂLJƚŽƚŚĞƐƵĐĐĞƐƐŽƌďĞŶĞĨŝĐŝĂƌŝĞƐ;ĞŝƚŚĞƌĚĞƐŝŐŶĂƚĞĚŽƌĚĞĨĂƵůƚͿĐŽŵƉƵƚĞĚ ƵƐŝŶŐtĞŶĚLJ͛ƐƌĞŵĂŝŶŝŶŐůŝĨĞĞdžƉĞĐƚĂŶĐLJ͘ ,ŽǁǁŽƵůĚƚŚĞĂŶĂůLJƐŝƐĐŚĂŶŐĞŝĨƚŚĞƌĞŝƐĂƉŽƚĞŶƚŝĂůĨŽƌ&ĞĚĞƌĂůĞƐƚĂƚĞƚĂdžĞƐŝŶƚŚĞ ĨƵƚƵƌĞ͍^ŚŽƵůĚtĞŶĚLJĚŝƐĐůĂŝŵĂŶLJŽĨƚŚĞϰϬϯ;ďͿƉůĂŶĂƐƐĞƚƐ͍ tĞŬŶŽǁƚŚĂƚtŝůůĂŶĚtĞŶĚLJŶĂŵĞĚĞĂĐŚŽƚŚĞƌĂƐƉƌŝŵĂƌLJďĞŶĞĨŝĐŝĂƌLJŽĨƚŚĞŝƌ ƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚƐĂŶĚŶĂŵĞĚĐŽŶĚƵŝƚƚƌƵƐƚƐĨŽƌƚŚĞĐŚŝůĚƌĞŶĂƐĐŽŶƚŝŶŐĞŶƚ ďĞŶĞĨŝĐŝĂƌŝĞƐ͘/ƚŝƐĂƐƐƵŵĞĚŝŶƚŚŝƐƐĐĞŶĂƌŝŽƚŚĂƚtĞŶĚLJƌĞĐĞŝǀĞƐtŝůů͛ƐĞŶƚŝƌĞĞƐƚĂƚĞ͕ƐŽ ƐŚĞǁŝůůĞŶĚƵƉǁŝƚŚŽǀĞƌΨϮDĂĨƚĞƌtŝůů͛ƐĚĞĂƚŚ͘tĞŶĚLJǁŝůůůŝŬĞůLJĚĞƉůĞƚĞƐŽŵĞŽĨ ƚŚĞƐĞĂƐƐĞƚƐƐƵƉƉŽƌƚŝŶŐŚĞƌĐŚŝůĚƌĞŶ͕ďƵƚĂƐƐƵŵĞĂƐŝƚƵĂƚŝŽŶŝŶǁŚŝĐŚtĞŶĚLJĞŝƚŚĞƌŚĂƐ ĂŵƵĐŚůĂƌŐĞƌĞƐƚĂƚĞŽƌƚŚĞƌĞŝƐĂŶĂŶƚŝĐŝƉĂƚĞĚ&dĞdžĞŵƉƚŝŽŶŽĨΨϭDĂƚtĞŶĚLJ͛ƐĚĞĂƚŚ͘ tĞŶĚLJĐŽƵůĚĞdžĞĐƵƚĞĂƋƵĂůŝĨŝĞĚĚŝƐĐůĂŝŵĞƌĂĨƚĞƌtŝůů͛ƐĚĞĂƚŚ͕ǁŝƚŚŝŶƚŚĞƌĞƋƵŝƌĞŵĞŶƚƐ ƐĞƚĨŽƌƚŚŝŶ/ŶƚĞƌŶĂůZĞǀĞŶƵĞŽĚĞ;/ZͿ^ĞĐƚŝŽŶϮϱϭϴ͕ŽĨƉĂƌƚŽƌĂůůŽĨtŝůů͛ƐϰϬϯ;ďͿƉůĂŶ ĂƐƐĞƚƐ͕ĂŶĚƚŚĞĚŝƐĐůĂŝŵĞĚĂƐƐĞƚƐǁŽƵůĚƉĂƐƐŝŶƚŚŝƐƐĐĞŶĂƌŝŽŝŶĞƋƵĂůƐŚĂƌĞƐƚŽƚŚĞ ĐŽŶƚŝŶŐĞŶƚďĞŶĞĨŝĐŝĂƌŝĞƐƵŶĚĞƌtŝůů͛ƐϰϬϯ;ďͿƉůĂŶďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶ͕ǁŚŝĐŚĂƌĞƚŚĞ ĐŽŶĚƵŝƚƚƌƵƐƚƐĨŽƌƚŚĞĐŚŝůĚƌĞŶ͘dŚĞƋƵĂůŝĨŝĞĚĚŝƐĐůĂŝŵĞƌǁŽƵůĚŽƉĞƌĂƚĞƚŽŬĞĞƉƚŚĞ ĂƐƐĞƚƐŽƵƚŽĨtĞŶĚLJ͛ƐŐƌŽƐƐĞƐƚĂƚĞĂƚŚĞƌůĂƚĞƌĚĞĂƚŚ͕ĂŶĚƚŚĞĐŚŝůĚƌĞŶ͕ĂƐƐƵŵŝŶŐƚŚĞ ĂƐƐĞƚƐĂƌĞƐĞŐƌĞŐĂƚĞĚŝŶƚŽƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƐďLJĞĐĞŵďĞƌϯϭŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐ tŝůů͛ƐĚĞĂƚŚ͕ĐŽƵůĚĞĂĐŚƚĂŬĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐďĂƐĞĚŽŶŚŝƐŽƌŚĞƌŽǁŶ ůŝĨĞĞdžƉĞĐƚĂŶĐLJ͕ĚĞĨĞƌƌŝŶŐŝŶĐŽŵĞƚĂdžĂƚŝŽŶŽĨƚŚĞĂƐƐĞƚƐĨŽƌĂŵƵĐŚůŽŶŐĞƌƉĞƌŝŽĚƚŚĂŶ tĞŶĚLJĐŽƵůĚ͘ tŚĞŶĂĚŝƐĐůĂŝŵĞƌŝƐĂŶƚŝĐŝƉĂƚĞĚ͕ŝƚŝƐŚĞůƉĨƵůƚŚĂƚtŝůůĂŶĚtĞŶĚLJ͛ƐĞƐƚĂƚĞƉůĂŶŶŝŶŐ ĂƚƚŽƌŶĞLJƉƌĞƉĂƌĞĚƉƌŽƉĞƌďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶƐƚŽĂŶƚŝĐŝƉĂƚĞĂƉŽƚĞŶƚŝĂůĚŝƐĐůĂŝŵĞƌ͘ ŽŶĚƵŝƚƚƌƵƐƚƐĨŽƌĞĂĐŚŽĨƚŚĞĐŽŶƚŝŶŐĞŶƚďĞŶĞĨŝĐŝĂƌŝĞƐǁĞƌĞĐƌĞĂƚĞĚŝŶƚŚŝƐƐĐĞŶĂƌŝŽƐŽ

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© 2012 The Institute of Continuing Legal Education

Estate Planning for Retirement Assets: A Case Study Approach

ƚŚĂƚŝŶĐŽŵĞƚĂdžĚĞĨĞƌƌĂůǁĂƐĂĐŚŝĞǀĞĚĨŽƌĂƚůĞĂƐƚƐŽŵĞƉĞƌŝŽĚŽĨƚŝŵĞďLJƚŚĞƚƌƵƐƚ ƚĞƌŵƐ͘&ŽƌĞdžĂŵƉůĞ͕ƚŚĞĐŽŶĚƵŝƚƚƌƵƐƚĐŽƵůĚƐĂLJƚŚĂƚƚŚĞĐŚŝůĚƌĞŶƌĞĐĞŝǀĞŽŶůLJƚŚĞ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐƵŶƚŝůĂŐĞϲϬ͕ǁŚĞŶŽƵƚƌŝŐŚƚĚŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵƚŚĞƚƌƵƐƚ ŵĂLJŽĐĐƵƌƉĞƌŝƚƐƚĞƌŵƐ͘dŚĞĐŽŶĚƵŝƚƚƌƵƐƚƐĂůƐŽĞŶƐƵƌĞƚŚĂƚĂƚƌƵƐƚĞĞǁŝůůƌĞĐĞŝǀĞ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨŽƌŵŝŶŽƌďĞŶĞĨŝĐŝĂƌŝĞƐĂŶĚĂƌƌĂŶŐĞĨŽƌƚŚĞƉƌŽƉĞƌ ĂƉƉůŝĐĂƚŝŽŶŽĨƚŚĂƚĚŝƐƚƌŝďƵƚŝŽŶƚŽŽƌĨŽƌƚŚĞďĞŶĞĨŝƚŽĨƚŚĞďĞŶĞĨŝĐŝĂƌLJ͘ /ĨtŝůůĂŶĚtĞŶĚLJŚĂĚŝŶƐƚĞĂĚĚĞƐŝŐŶĂƚĞĚƚŚĞŝƌƌĞƐƉĞĐƚŝǀĞĐƌĞĚŝƚƐŚĞůƚĞƌƚƌƵƐƚƐĂƐƚŚĞ ĐŽŶƚŝŶŐĞŶƚďĞŶĞĨŝĐŝĂƌLJ͕tĞŶĚLJŵĂLJŶŽŶĞƚŚĞůĞƐƐǁĂŶƚƚŽŵĂŬĞƚŚĞĚŝƐĐůĂŝŵĞƌ͕ďƵƚŚĞƌ ĂƚƚŽƌŶĞLJǁŝůůǁĂŶƚƚŽĚĞƚĞƌŵŝŶĞǁŚĞƚŚĞƌƚŚĞĐƌĞĚŝƚƐŚĞůƚĞƌƚƌƵƐƚƋƵĂůŝĨŝĞƐĂƐĂƐĞĞͲ ƚŚƌŽƵŐŚƚƌƵƐƚ͕ĂŵŽŶŐŽƚŚĞƌƚŚŝŶŐƐ͕ĂŶĚůŽŽŬĂƚƚŚĞƚƌƵƐƚƚŽĚĞƚĞƌŵŝŶĞǁŚĞƚŚĞƌtĞŶĚLJ͕ ĂƐƚŚĞĚŝƐĐůĂŝŵĂŶƚ͕ŝƐƉƌŽƉĞƌůLJůŝŵŝƚĞĚŝŶŚĞƌďĞŶĞĨŝĐŝĂůŝŶƚĞƌĞƐƚŝŶƚŚĞĐƌĞĚŝƚƐŚĞůƚĞƌƚƌƵƐƚ ƐƵĐŚƚŚĂƚŚĞƌĚŝƐĐůĂŝŵĞƌŝƐƚƌƵůLJƋƵĂůŝĨŝĞĚ͘^ŚĞŵĂLJŚĂǀĞƚŽĚŝƐĐůĂŝŵŵŽƌĞƚŚĂŶŚĞƌ ŝŶƚĞƌĞƐƚŝŶƚŚĞƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚƚŽŵĂŬĞƚŚĞĚŝƐĐůĂŝŵĞƌĂ͞ƋƵĂůŝĨŝĞĚ͟ĚŝƐĐůĂŝŵĞƌ͘ tĞŶĚLJ͛ƐĂƚƚŽƌŶĞLJǁŽƵůĚĂůƐŽǁĂŶƚƚŽƐƉĞĂŬǁŝƚŚƚŚĞƉůĂŶĂĚŵŝŶŝƐƚƌĂƚŽƌĂŶĚƌĞǀŝĞǁƚŚĞ ƉůĂŶĚŽĐƵŵĞŶƚƚŽďĞĐŽŵƉůĞƚĞůLJĐůĞĂƌĂďŽƵƚŚŽǁƚŚĞĚŝƐĐůĂŝŵĞĚŝŶƚĞƌĞƐƚǁŝůůƉĂƐƐƵƉŽŶ ƚŚĞƉƌŝŵĂƌLJďĞŶĞĨŝĐŝĂƌLJ͛ƐĚŝƐĐůĂŝŵĞƌ͘^ŽŵĞƚŝŵĞƐƚŚĞƉůĂŶĚŽĐƵŵĞŶƚǁŝůůŶŽƚĂůůŽǁĨŽƌĂ ĚŝƐĐůĂŝŵĞƌŽƌǁŝůůƉƌŽǀŝĚĞĨŽƌƐŽŵĞƌĞƐƵůƚŽƚŚĞƌƚŚĂŶǁŚĂƚǁĂƐŝŶƚĞŶĚĞĚ͘ 



© 2012 The Institute of Continuing Legal Education

1-35

Estate Planning for Retirement Assets: A Case Study Approach

Exhibit G Fact Pattern 7 - Wendy and Will Wolverine #3

 tEzEt/>>tK>sZ/E &ĂĐƚWĂƚƚĞƌŶηϳ tĞŶĚLJ tŽůǀĞƌŝŶĞ͕ Ă ǁŝĚŽǁ͕ ĚŝĞƐ Ăƚ ĂŐĞ ϲϬ͘  ,Ğƌ ƚŚƌĞĞ ĐŚŝůĚƌĞŶ ĂƌĞ ŶĂŵĞĚ ĞƋƵĂůůLJ ĂƐ ŽƵƚƌŝŐŚƚ ďĞŶĞĨŝĐŝĂƌŝĞƐŽĨŚĞƌϰϬϭ;ŬͿ͘ ,ĞƌĂƐƐĞƚƐĂƚŚĞƌĚĞĂƚŚĂƐĨŽůůŽǁƐ͗ ŽŶĚŽ;ŶĞƚŽĨŵŽƌƚŐĂŐĞͿ

ΨϯϬϬ͕ϬϬϬ͘ϬϬ

ĂƐŚĂŶĚ/ŶǀĞƐƚŵĞŶƚƐ;:dtZK^Ϳ

ϰϬϬ͕ϬϬϬ͘ϬϬ

tĞŶĚLJ͛ƐϰϬϭ;ŬͿ

ϳϱϬ͕ϬϬϬ͘ϬϬ

tĞŶĚLJ͛Ɛ/Z

ϯϱϬ͕ϬϬϬ͘ϬϬ

tĞŶĚLJ͛Ɛ>ŝĨĞ/ŶƐƵƌĂŶĐĞ

ϭϬϬ͕ϬϬϬ͘ϬϬ

dŽƚĂůƐƐĞƚƐ

Ψϭ͕ϵϬϬ͕ϬϬϬ͘ϬϬ

tŚĂƚĂƌĞtĞŶĚLJ͛ƐĐŚŝůĚƌĞŶ͛ƐŽƉƚŝŽŶƐǁŝƚŚƌĞŐĂƌĚƚŽǁŝƚŚĚƌĂǁĂůŽĨƚŚĞϰϬϭ;ŬͿĂƐƐĞƚƐ͍ DƵƐƚƚŚĞĐŚŝůĚƌĞŶƚĂŬĞƚŚĞϰϬϭ;ŬͿĂƐƐĞƚƐĂƐĂůƵŵƉƐƵŵ͍,ŽǁĐĂŶƚŚĞĐŚŝůĚƌĞŶ ĐŽŶƚŝŶƵĞŝŶĐŽŵĞƚĂdžĚĞĨĞƌƌĂůŽĨƚŚĞƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚĂƐƐĞƚƐ͍ ^ƵŐŐĞƐƚĞĚWůĂŶŶŝŶŐdĞĐŚŶŝƋƵĞƐ ƐƚŚĞĂƚƚŽƌŶĞLJŚĂŶĚůŝŶŐƚŚŝƐĞƐƚĂƚĞ;ŽƌƌĞƉƌĞƐĞŶƚŝŶŐƚŚĞďĞŶĞĨŝĐŝĂƌŝĞƐŽĨƚŚĞƌĞƚŝƌĞŵĞŶƚ ƉůĂŶͿ͕ŽďƚĂŝŶĂĐŽƉLJŽĨƚŚĞƉůĂŶĚŽĐƵŵĞŶƚŽƌƐƵŵŵĂƌLJƉůĂŶĚĞƐĐƌŝƉƚŝŽŶĂŶĚƌĞĂĚŝƚƚŽ ĚĞƚĞƌŵŝŶĞǁŚĂƚƚŚĞƉůĂŶĚŽĐƵŵĞŶƚƐĂLJƐĂďŽƵƚĚŝƐƚƌŝďƵƚŝŽŶƐƵƉŽŶĚĞĂƚŚŽĨƚŚĞ ƉĂƌƚŝĐŝƉĂŶƚ͘tĞŶĚLJĚŝĞĚĂƚĂŐĞϲϬ͕ďĞĨŽƌĞŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͘dŚĞƉůĂŶŵĂLJ ƌĞƋƵŝƌĞƚŚĂƚƚŚĞĐŚŝůĚƌĞŶǁŝƚŚĚƌĂǁƚŚĞƉůĂŶďĞŶĞĨŝƚƐŝŶĂůƵŵƉƐƵŵŽƌǁŝƚŚŝŶϱLJĞĂƌƐŽĨ tĞŶĚLJ͛ƐĚĞĂƚŚ͖ŵĂŶLJƉůĂŶĚŽĐƵŵĞŶƚƐĚŽ͘dŚĞƉůĂŶŝƐŶŽƚƌĞƋƵŝƌĞĚƚŽŽĨĨĞƌĂƐƚƌĞƚĐŚ;ůŝĨĞ ĞdžƉĞĐƚĂŶĐLJͿĚŝƐƚƌŝďƵƚŝŽŶŵĞƚŚŽĚ͘tŚĂƚĂĐƚŝŽŶƐĐĂŶƚŚĞĐŚŝůĚƌĞŶƚĂŬĞƚŽƉŽƚĞŶƚŝĂůůLJ ĚĞĨĞƌƚŚĞŝŶĐŽŵĞƚĂdž͍ WƵƌƐƵĂŶƚƚŽƚŚĞWĞŶƐŝŽŶWƌŽƚĞĐƚŝŽŶĐƚŽĨϮϬϬϲ͕ƚŚĞƉůĂŶŵƵƐƚĂůƐŽĂůůŽǁƚŚĞĐŚŝůĚƌĞŶƚŽ ƚƌĂŶƐĨĞƌƚŚĞƉůĂŶĂƐƐĞƚƐƚŽĂŶŝŶŚĞƌŝƚĞĚ/ZŝŶƚŚĞŶĂŵĞŽĨƚŚĞƉĂƌƚŝĐŝƉĂŶƚ;tĞŶĚLJͿĨŽƌ ƚŚĞďĞŶĞĨŝƚŽĨƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJŽƌďĞŶĞĨŝĐŝĂƌŝĞƐ͘dŚŝƐŝƐĐŽŵŵŽŶůLJŬŶŽǁŶĂƐĂ ŶŽŶͲƐƉŽƵƐĂůƌŽůůŽǀĞƌ͘KŶůLJĂĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJŵĂLJĚŝƌĞĐƚĂƌŽůůŽǀĞƌĨƌŽŵĐĞƌƚĂŝŶ ŶŽŶͲ/ZƉůĂŶƐŝŶƚŽĂŶŝŶŚĞƌŝƚĞĚ/Z͘^ŝŶĐĞtĞŶĚLJ͛ƐƉůĂŶŝƐĂƋƵĂůŝĨŝĞĚƌĞƚŝƌĞŵĞŶƚƉůĂŶ © 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

ŵĞĞƚŝŶŐƚŚĞƌĞƋƵŝƌĞŵĞŶƚƐŽĨ/ZϰϬϭ;ĂͿ͕tĞŶĚLJ͛ƐĐŚŝůĚƌĞŶŵĂLJĚŝƌĞĐƚĂŶŽŶͲƐƉŽƵƐĂů ƌŽůůŽǀĞƌĨƌŽŵŚĞƌϰϬϭ;ŬͿ͘,ŽǁĚŽƚŚĞLJĚŽƚŚĂƚ͍ ĂĐŚŽĨƚŚĞĐŚŝůĚƌĞŶǁŝůůǁĂŶƚƚŽƐĞƚƵƉĂƐĞƉĂƌĂƚĞŝŶŚĞƌŝƚĞĚ/Z͕ĂƚĂŶŝŶƐƚŝƚƵƚŝŽŶŽĨŚŝƐ ŽƌŚĞƌĐŚŽŽƐŝŶŐ͕ĂŶĚĚŝƌĞĐƚƚŚĞƉůĂŶĂĚŵŝŶŝƐƚƌĂƚŽƌƚŽĚŝƌĞĐƚůLJƚƌĂŶƐĨĞƌƚŚĞďĞŶĞĨŝĐŝĂƌLJ͛Ɛ ƐŚĂƌĞŽĨƚŚĞƉůĂŶĂƐƐĞƚƐŝŶƚŽƚŚĞŶĞǁŝŶŚĞƌŝƚĞĚ/Z͘^ƵĐŚ/ZĐĂŶďĞĞŝƚŚĞƌĂƚƌĂĚŝƚŝŽŶĂů /ZŽƌĂZŽƚŚ/Z͕ďƵƚƵŶůŝŬĞĂƐƉŽƵƐĂůƌŽůůŽǀĞƌ͕ƚŚĞĂƐƐĞƚƐŝŶĂŶŽŶͲƐƉŽƵƐĂů͞ƌŽůůŽǀĞƌ͟ ŵƵƐƚďĞƚƌĂŶƐĨĞƌƌĞĚĚŝƌĞĐƚůLJĨƌŽŵƚŚĞƉůĂŶŝŶƚŽƚŚĞŝŶŚĞƌŝƚĞĚ/Z͘^ƵĐŚĂĐĐŽƵŶƚƚŝƚůĞŵĂLJ ƌĞĂĚ͞tĞŶĚLJtŽůǀĞƌŝŶĞ͕ĚĞĐĞĂƐĞĚ͕/ZĨŽƌƚŚĞďĞŶĞĨŝƚŽĨ΀ŶĂŵĞŽĨĐŚŝůĚ΁͘͟/ĨƚŚĞĐŚŝůĚ ĐŚŽŽƐĞƐĂZŽƚŚ/Z͕ŚĞŽƌƐŚĞǁŝůůŚĂǀĞƚŽƉĂLJƚŚĞŝŶĐŽŵĞƚĂdžŽŶƚŚĞZŽƚŚ/Z ĐŽŶǀĞƌƐŝŽŶĨƌŽŵƚŚĞƉƌĞͲƚĂdžƉůĂŶŝŶƚŽƚŚĞĂĨƚĞƌͲƚĂdžZŽƚŚ/Z͘ /ŶƚŚĞƐŝƚƵĂƚŝŽŶŝŶǁŚŝĐŚƚŚĞƉĂƌƚŝĐŝƉĂŶƚĚŝĞƐďĞĨŽƌĞŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ƐƵĐŚ ĂƐtĞŶĚLJ͕ƚŚĞďĞŶĞĨŝĐŝĂƌLJŵĂLJĂůƐŽŚĂǀĞƚŽŵĂŬĞĂŶĂĨĨŝƌŵĂƚŝǀĞĞůĞĐƚŝŽŶƚŽŶŽƚďĞ ƐƵďũĞĐƚƚŽƚŚĞƉůĂŶ͛ƐϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞ͕ĞǀĞŶŝĨƚŚĞƉůĂŶĂƐƐĞƚƐĂƌĞƚƌĂŶƐĨĞƌƌĞĚƚŽ ĂŶŝŶŚĞƌŝƚĞĚ/Z͘dŚĞďĞŶĞĨŝĐŝĂƌLJŵƵƐƚƚĂŬĞƚŚĞĨŝƌƐƚZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶďLJ ĞĐĞŵďĞƌϯϭŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐƚŚĞLJĞĂƌŽĨƚŚĞƉĂƌƚŝĐŝƉĂŶƚ͛ƐĚĞĂƚŚ͕ŽƌƐŽŽŶĞƌŝĨƚŚĞ ƉůĂŶƌĞƋƵŝƌĞƐ͕ƚŽĞůĞĐƚŽƵƚŽĨƚŚĞϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞƐŽŝƚŝƐŝŵƉŽƌƚĂŶƚƚŽďĞĂǁĂƌĞ ŽĨďŽƚŚƚŚĞƉůĂŶĚĞĂĚůŝŶĞƐĂŶĚƚŚĞĚĞĂĚůŝŶĞƐƵŶĚĞƌƚŚĞdƌĞĂƐƵƌLJZĞŐƵůĂƚŝŽŶƐ͘ /ƚŝƐĂůƐŽŝŵƉŽƌƚĂŶƚƚŚĂƚƚŚĞĐŚŝůĚƌĞŶƐĞƚƵƉƐĞƉĂƌĂƚĞŝŶŚĞƌŝƚĞĚ/ZĂĐĐŽƵŶƚƐďLJ ĞĐĞŵďĞƌϯϭŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚŝĨƚŚĞLJĞĂĐŚǁĂŶƚƚŽƵƐĞŚŝƐŽƌŚĞƌ ŽǁŶůŝĨĞĞdžƉĞĐƚĂŶĐLJĨŽƌƉƵƌƉŽƐĞƐŽĨĐŽŵƉƵƚŝŶŐƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐ͘/Ĩ ƚŚĞLJĚŽŶŽƚĐƌĞĂƚĞƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƐ͕ŝŶƚŚŝƐƐĐĞŶĂƌŝŽ͕ƚŚĞLJŵƵƐƚƵƐĞƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJ ŽĨƚŚĞŽůĚĞƐƚďĞŶĞĨŝĐŝĂƌLJƚŽĐŽŵƉƵƚĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐ͘ůůƚŚĞƐĞ ƐƚĞƉƐĐĂŶďĞĂĐĐŽŵƉůŝƐŚĞĚĂƚƚŚĞƐĂŵĞƚŝŵĞ͕ďƵƚŵĞĞƚŝŶŐĚĞĂĚůŝŶĞƐŝƐƉŝǀŽƚĂů͘ /ĨŽŶĞŽĨtĞŶĚLJ͛ƐĐŚŝůĚƌĞŶĞŝƚŚĞƌĞůĞĐƚƐŽƌĚĞĨĂƵůƚƐŝŶƚŽƚŚĞϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞŽƌ ƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJƉĂLJŵĞŶƚŵĞƚŚŽĚ͕ŵŽƐƚŽĨƚĞŶ͕ƚŚŝƐĐĂŶŶŽƚďĞĐŚĂŶŐĞĚ͘,ŽǁĞǀĞƌ͕ tĞŶĚLJ͛ƐĐŚŝůĚŵĂLJďĞĂďůĞƚŽĐŚĂŶŐĞƚŚĞƉĂLJŵĞŶƚŵĞƚŚŽĚŝĨƚŚĞƉůĂŶĂůůŽǁƐ͘ǀĞŶŝĨ tĞŶĚLJ͛ƐĐŚŝůĚďĞŐŝŶƐƚŽƚĂŬĞZDƐƉƵƌƐƵĂŶƚƚŽƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJŵĞƚŚŽĚ͕ŚĞŵĂLJ ǁŝƚŚĚƌĂǁŵŽƌĞƚŚĂŶƚŚĞZDŝŶĂŶLJŐŝǀĞŶLJĞĂƌ͘KĨĐŽƵƌƐĞ͕ĂƐŽƵƚůŝŶĞĚĂďŽǀĞ͕ŝĨ tĞŶĚLJ͛ƐĐŚŝůĚĐŽŵƉůĞƚĞƐĂĚŝƌĞĐƚƌŽůůŽǀĞƌĨƌŽŵƚŚĞŝŶŚĞƌŝƚĞĚƉůĂŶƚŽĂŶŝŶŚĞƌŝƚĞĚ/ZďLJ ƚŚĞĞŶĚŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚ͕tĞŶĚLJ͛ƐĐŚŝůĚĐĂŶƵƐĞƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJ ƉĂLJŵĞŶƚŵĞƚŚŽĚĨŽƌƚŚĞŝŶŚĞƌŝƚĞĚ/ZĞǀĞŶŝĨƚŚĞŽƌŝŐŝŶĂůƉůĂŶǁŽƵůĚŚĂǀĞƌĞƋƵŝƌĞĚŚŝŵ ƚŽƵƐĞƚŚĞϱͲLJĞĂƌĚŝƐƚƌŝďƵƚŝŽŶƌƵůĞ͘

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© 2012 The Institute of Continuing Legal Education

Estate Planning for Retirement Assets: A Case Study Approach

Exhibit H Fact Pattern 8 - Wendy and Will Wolverine #4

 tEzEt/>>tK>sZ/E &ĂĐƚWĂƚƚĞƌŶηϴ tĞŶĚLJtŽůǀĞƌŝŶĞĚŝĞƐĂƚĂŐĞϴϬ͕ǁŚŝůĞƐŚĞŝƐůŝǀŝŶŐŝŶ^ĞŶŝŽƌ^ƉƌŝŶŐƐZĞƚŝƌĞŵĞŶƚŽŵŵƵŶŝƚLJ͘tŚĞŶ tĞŶĚLJůĞĨƚŚĞƌĐŽŵƉĂŶLJϭϱLJĞĂƌƐĂŐŽ͕ƐŚĞŚĂĚƌŽůůĞĚŚĞƌϰϬϭ;ŬͿŝŶƚŽĂƚƌĂĚŝƚŝŽŶĂů/Z͘^ŚĞĚĞƐŝŐŶĂƚĞĚ ŚĞƌƌĞǀŽĐĂďůĞůŝǀŝŶŐƚƌƵƐƚĂƐƚŚĞďĞŶĞĨŝĐŝĂƌLJŽĨŚĞƌ/Z͘tĞŶĚLJ͛ƐƌĞǀŽĐĂďůĞůŝǀŝŶŐƚƌƵƐƚƉƌŽǀŝĚĞƐĨŽƌĂ ƐƉĞĐŝĨŝĐďĞƋƵĞƐƚŽĨΨϭϬϬ͕ϬϬϬƚŽŚĞƌĨĂǀŽƌŝƚĞĐŚĂƌŝƚLJĂŶĚƚŚĞďĂůĂŶĐĞŽƵƚƌŝŐŚƚĚŝƐƚƌŝďƵƚŝŽŶƚŽŚĞƌƚŚƌĞĞ ĐŚŝůĚƌĞŶ͘ ,ĞƌĂƐƐĞƚƐĂƚŚĞƌĚĞĂƚŚĂƐĨŽůůŽǁƐ͗ ĂƐŚĂŶĚ/ŶǀĞƐƚŵĞŶƚƐ;:dtZK^Ϳ tĞŶĚLJ͛Ɛ/Z tĞŶĚLJ͛Ɛ>ŝĨĞ/ŶƐƵƌĂŶĐĞ dŽƚĂůƐƐĞƚƐ

ϲϬϬ͕ϬϬϬ͘ϬϬ ϭ͕ϬϬϬ͕ϬϬϬ͘ϬϬ ϭϬϬ͕ϬϬϬ͘ϬϬ Ψϭ͕ϳϬϬ͕ϬϬϬ͘ϬϬ

ĞƐƉŝƚĞƚŚĞĨĂĐƚƚŚĂƚƚŚŝƐŵĂLJŶŽƚŚĂǀĞďĞĞŶƚŚĞďĞƐƚďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶĐŚŽŝĐĞ͕ ǁŚĂƚĂƌĞtĞŶĚLJ͛ƐĐŚŝůĚƌĞŶ͛ƐŽƉƚŝŽŶƐǁŝƚŚƌĞŐĂƌĚƚŽǁŝƚŚĚƌĂǁĂůŽĨƚŚĞ/ZĂƐƐĞƚƐ͍ ,ŽǁĚŽĞƐƚŚĞƉƌĞƐĞŶĐĞŽĨĂĐŚĂƌŝƚĂďůĞďĞŶĞĨŝĐŝĂƌLJŝŶtĞŶĚLJ͛ƐƚƌƵƐƚŝŵƉĂĐƚƚŚĞƌĞƐƵůƚ͍ tŚĂƚĐĂŶƚŚĞdƌƵƐƚĞĞŽĨtĞŶĚLJ͛ƐƚƌƵƐƚĚŽƚŽĐŚĂŶŐĞƚŚĞƌĞƐƵůƚƉŽƐƚͲŵŽƌƚĞŵ͍ ^ƵŐŐĞƐƚĞĚWůĂŶŶŝŶŐdĞĐŚŶŝƋƵĞƐ &ŝƌƐƚ͕ďĞĐĂƵƐĞtĞŶĚLJǁĂƐƉĂƐƚŚĞƌZĞƋƵŝƌĞĚĞŐŝŶŶŝŶŐĂƚĞ͕ǁĞŶĞĞĚƚŽĞdžĂŵŝŶĞ ǁŚĞƚŚĞƌtĞŶĚLJǁŝƚŚĚƌĞǁŚĞƌĨƵůůZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶĨŽƌƚŚĞLJĞĂƌŽĨŚĞƌ ĚĞĂƚŚ͘/ĨƐŚĞĚŝĞĚŝŶEŽǀĞŵďĞƌ͕ƚŚĞƌĞŝƐĂŐŽŽĚůŝŬĞůŝŚŽŽĚƚŚĂƚƐŚĞŚĂƐƚĂŬĞŶŝƚ͕ďƵƚŝĨ ƐŚĞĚŝĚŶ͛ƚ͕ĂƐƚŚĞĂƚƚŽƌŶĞLJĂĚǀŝƐŝŶŐƚŚĞƚƌƵƐƚĞĞ͕ĂƐďĞŶĞĨŝĐŝĂƌLJ͕LJŽƵƐŚŽƵůĚĂĐƚƋƵŝĐŬůLJƚŽ ĂƐƐŝƐƚLJŽƵƌĐůŝĞŶƚŝŶŐĞƚƚŝŶŐtĞŶĚLJ͛ƐZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƉĂŝĚĚƵƌŝŶŐƚŚĞ LJĞĂƌŽĨtĞŶĚLJ͛ƐĚĞĂƚŚ͘ƵƚƚŚĞďĞŶĞĨŝĐŝĂƌLJ;ŝ͘Ğ͕͘ƚŚĞƚƌƵƐƚĞĞͿ͕ŶŽƚƚŚĞĞdžĞĐƵƚŽƌ͕ŽǁŶƐƚŚĞ /Z͘^Ž͕ƚŽƚŚĞĞdžƚĞŶƚtĞŶĚLJĚŝĚŶŽƚǁŝƚŚĚƌĂǁŚĞƌĨƵůůZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶ ĨŽƌƚŚĞLJĞĂƌŽĨŚĞƌĚĞĂƚŚ͕ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶ;ŽƌƚŚĞďĂůĂŶĐĞŽĨŝƚͿŵƵƐƚ ďĞƉĂŝĚƚŽƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJͲŝŶƚŚŝƐĐĂƐĞ͕tĞŶĚLJ͛ƐƚƌƵƐƚ͘dŚĞŝŶĐŽŵĞƚĂdžŽŶ ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶǁŝůůďĞƌĞƉŽƌƚĞĚďLJƚŚĞdƌƵƐƚ͘KĨĐŽƵƌƐĞ͕ƚĂdžĂƚŝŽŶŽĨ ƚŚĞŝŶĐŽŵĞŝŶƌĞƐƉĞĐƚŽĨĂĚĞĐĞĚĞŶƚ;/ZͿƚŽƚŚĞƚƌƵƐƚŽƌŝƚƐďĞŶĞĨŝĐŝĂƌŝĞƐŵĂLJŽĐĐƵƌŝŶĂ ŵĂŶŶĞƌŽƚŚĞƌƚŚĂŶĂĐƚƵĂůĚŝƐƚƌŝďƵƚŝŽŶŽĨƚŚĞƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐ͕ƌĞƐƵůƚŝŶŐŝŶƐŽŵĞ ŝŶĞƋƵŝƚŝĞƐ͘dŚŝƐǁŝůůĚĞƉĞŶĚŽŶǁŚĂƚƚŚĞƚƌƵƐƚŽƌƐƚĂƚĞůĂǁƐĂLJƐĂďŽƵƚŚŽǁŝŶĐŽŵĞŝƐ

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

ĐĂƌƌŝĞĚŽƵƚŽĨĂƚƌƵƐƚƚŽƚŚĞďĞŶĞĨŝĐŝĂƌŝĞƐ͘dŚĞdƌƵƐƚĞĞǁŝůůǁĂŶƚƚŽĚĞƚĞƌŵŝŶĞǁŚĞƚŚĞƌ ƚŚĞƌĞŚĂƐďĞĞŶŝŶĐŽŵĞƚĂdžǁŝƚŚŚŽůĚŝŶŐŽŶƚŚĞZD͘ dŚĞĞdžĞĐƵƚŽƌƐŚŽƵůĚĂůƐŽĐŚĞĐŬƚŽƐĞĞǁŚĞƚŚĞƌtĞŶĚLJŚĂĚƉƌŽƉĞƌůLJďĞĞŶƚĂŬŝŶŐŚĞƌ ZDƐ͘^ŝŶĐĞtĞŶĚLJĚŝĞĚĂƚĂŐĞϴϬ͕ƐŚĞƐŚŽƵůĚŚĂǀĞďĞĞŶƚĂŬŝŶŐZDƐĨŽƌƐĞǀĞƌĂůLJĞĂƌƐ͘ dŚĞdƌƵƐƚĞĞǁŝůůĂůƐŽǁĂŶƚƚŽĚĞƚĞƌŵŝŶĞǁŚĞƚŚĞƌtĞŶĚLJ͕ƚŚĞĚĞĐĞĂƐĞĚĂĐĐŽƵŶƚŽǁŶĞƌ͕ ŚĂĚĂŶLJĂĨƚĞƌͲƚĂdžŵŽŶĞLJŝŶŚĞƌ/ZĂƐƚŚĞďĞŶĞĨŝĐŝĂƌLJ͕ƚŚĞƚƌƵƐƚ͕ƚĂŬĞƐŽǀĞƌƚŚĂƚďĂƐŝƐ ĂĨƚĞƌtĞŶĚLJ͛ƐĚĞĂƚŚ͘hŶĚĞƌƚŚĞĨĂĐƚƐƉƌĞƐĞŶƚĞĚ;ƚŚĞƌŽůůŽǀĞƌŽĐĐƵƌƌĞĚƉƌŝŽƌƚŽϮϬϬϭͿ͕ŝƚ ŝƐŶŽƚůŝŬĞůLJƚŚĂƚtĞŶĚLJŚĂĚĂĨƚĞƌͲƚĂdžŵŽŶĞLJŝŶŚĞƌ/Z͕ďƵƚƚŚŝƐŝƐƐƵĞƐŚŽƵůĚďĞ ĞdžƉůŽƌĞĚǁŝƚŚĞǀĞƌLJ/ZƚŚĂƚŚĂƐďĞĞŶƌŽůůĞĚŽǀĞƌĨƌŽŵĂƋƵĂůŝĨŝĞĚƉůĂŶ͘ /ĨtĞŶĚLJŚĂĚďĞŐƵŶĂŶLJZŽƚŚĐŽŶǀĞƌƐŝŽŶŽĨŚĞƌ/ZĚƵƌŝŶŐŚĞƌůŝĨĞƚŝŵĞ͕ƚŚĞĞdžĞĐƵƚŽƌ ŵĂLJǁĂŶƚƚŽĐŽŶƐŝĚĞƌǁŚĞƚŚĞƌĂŶLJƌĞĐŚĂƌĂĐƚĞƌŝnjĂƚŝŽŶŝƐĚĞƐŝƌĞĚ͘ ƐĂƚƚŽƌŶĞLJ͕LJŽƵƐŚŽƵůĚŽďƚĂŝŶĂĐŽƉLJŽĨƚŚĞƚƌƵƐƚĂŐƌĞĞŵĞŶƚĂŶĚƌĞĂĚŝƚ͘dŚĞ ďĞŶĞĨŝĐŝĂƌŝĞƐŽĨĂƚƌƵƐƚĂƌĞEKdƚƌĞĂƚĞĚĂƐ͞ĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌŝĞƐ͟ĨŽƌZĞƋƵŝƌĞĚ DŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƉƵƌƉŽƐĞƐƵŶůĞƐƐƚŚĞƚƌƵƐƚŝƐĂƐĞĞͲƚŚƌŽƵŐŚƚƌƵƐƚ͘zŽƵǁŝůůǁĂŶƚƚŽ ĚĞƚĞƌŵŝŶĞǁŚĞƚŚĞƌƚŚĞƚƌƵƐƚŝƐǀĂůŝĚƵŶĚĞƌƐƚĂƚĞůĂǁ͘tĂƐƚŚĞƚƌƵƐƚŝƌƌĞǀŽĐĂďůĞĂƐŽĨ tĞŶĚLJ͛ƐĚĞĂƚŚ͍ŝĚLJŽƵ͕ƚŚĞĂƚƚŽƌŶĞLJ͕ŐŝǀĞƚŚĞƉůĂŶĂĚŵŝŶŝƐƚƌĂƚŽƌŽƌ/ZĐƵƐƚŽĚŝĂŶĂ ĐŽƉLJŽĨtĞŶĚLJ͛ƐƚƌƵƐƚŽƌĂůŝƐƚŽĨƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌŝĞƐďLJƚŚĞĂƉƉƌŽƉƌŝĂƚĞ ĚĞĂĚůŝŶĞ;ŐĞŶĞƌĂůůLJ͕KĐƚŽďĞƌϯϭŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐƚŚĞLJĞĂƌŽĨĚĞĂƚŚͿ͍ƌĞƚŚĞ ďĞŶĞĨŝĐŝĂƌŝĞƐŽĨtĞŶĚLJ͛ƐƚƌƵƐƚŝĚĞŶƚŝĨŝĂďůĞ͍/ŶƚŚŝƐĐĂƐĞ͕ƚŚĞLJĂƉƉĞĂƌƚŽďĞŝĚĞŶƚŝĨŝĂďůĞͲĂ ĐŚĂƌŝƚLJĂŶĚtĞŶĚLJ͛ƐƚŚƌĞĞĐŚŝůĚƌĞŶ͘ƌĞƚŚĞƚƌƵƐƚďĞŶĞĨŝĐŝĂƌŝĞƐŝŶĚŝǀŝĚƵĂůƐ͍ůĞĂƌůLJ͕ŶŽƚ ĂůůĂƌĞŝŶĚŝǀŝĚƵĂůƐƐŝŶĐĞǁĞĂĐŚĂƌŝƚĂďůĞĞŶƚŝƚLJŝƐŽŶĞŽĨƚŚĞďĞŶĞĨŝĐŝĂƌŝĞƐ͘ŽĞƐƚŚŝƐ ŵĞĂŶƚŚĂƚtĞŶĚLJ͛ƐƚƌƵƐƚĨĂŝůƐĂƐĂĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJ͍EŽƚŶĞĐĞƐƐĂƌŝůLJ͘ ĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌŝĞƐĂƌĞĚĞƚĞƌŵŝŶĞĚďLJ^ĞƉƚĞŵďĞƌϯϬŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐƚŚĞ ĂĐĐŽƵŶƚŽǁŶĞƌ͛Ɛ͕tĞŶĚLJ͛Ɛ͕ĚĞĂƚŚ͘/ŶƚŚĞƉĞƌŝŽĚďĞƚǁĞĞŶtĞŶĚLJ͛ƐĚĞĂƚŚĂŶĚ^ĞƉƚĞŵďĞƌ ϯϬŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚ͕ƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌŝĞƐŵĂLJďĞĐŚĂŶŐĞĚ ďLJĐĞƌƚĂŝŶĂĐƚŝŽŶƐ͘&ŝƌƐƚ͕ƚŚĞĐŚĂƌŝƚLJĐŽƵůĚĚŝƐĐůĂŝŵŝƚƐŝŶƚĞƌĞƐƚŝŶƚŚĞƚƌƵƐƚďLJĞdžĞĐƵƚŝŶŐĂ ƋƵĂůŝĨŝĞĚĚŝƐĐůĂŝŵĞƌ͕ƚŚĞƌĞďLJƌĞŵŽǀŝŶŐŝƚƐĞůĨĂƐĂďĞŶĞĨŝĐŝĂƌLJŽĨƚŚĞƚƌƵƐƚ͘dŚŝƐŝƐŶŽƚ ůŝŬĞůLJƚŽŚĂƉƉĞŶ͘ŶŽƚŚĞƌŽƉƚŝŽŶŝƐƚŚĂƚƚŚĞƚƌƵƐƚĞĞĐŽƵůĚƐĂƚŝƐĨLJƚŚĞĐŚĂƌŝƚLJ͛ƐďĞƋƵĞƐƚ ǁŝƚŚŶŽŶͲƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐƉƌŝŽƌƚŽ^ĞƉƚĞŵďĞƌϯϬŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚ͘ tĞŶĚLJŚĂƐůŝĨĞŝŶƐƵƌĂŶĐĞƚŚĂƚǁĂƐƉĂLJĂďůĞƚŽŚĞƌƚƌƵƐƚ͘^ŚĞĂůƐŽŚĂƐĐĂƐŚĂŶĚŽƚŚĞƌ ŝŶǀĞƐƚŵĞŶƚƐ͘dŚĞƌĞĂƌĞƐƵĨĨŝĐŝĞŶƚŶŽŶͲƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐǁŝƚŚǁŚŝĐŚƚŽƐĂƚŝƐĨLJƚŚĞ ĐŚĂƌŝƚLJ͘/ŶƚŚŝƐĐĂƐĞ͕tĞŶĚLJ͛ƐƚƌƵƐƚƉĞƌŵŝƚƐƐƵĐŚĂŶĂůůŽĐĂƚŝŽŶŽĨƚŚĞŶŽŶͲƌĞƚŝƌĞŵĞŶƚ ĂƐƐĞƚƐƚŽƚŚĞĐŚĂƌŝƚLJ͘ƐƐƵŵŝŶŐƚŚĞĐŚĂƌŝƚLJ͛ƐďĞƋƵĞƐƚŝƐƐĂƚŝƐĨŝĞĚƚŝŵĞůLJ͕ƚŚĞĐŚĂƌŝƚLJǁŝůů

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© 2012 The Institute of Continuing Legal Education

Estate Planning for Retirement Assets: A Case Study Approach

ŶŽƚŶĞĞĚƚŽďĞŽŶƚŚĞůŝƐƚŽĨĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌŝĞƐƉƌŽǀŝĚĞĚƚŽƚŚĞ/ZĐƵƐƚŽĚŝĂŶ͘dŚĞ ƚŚƌĞĞĐŚŝůĚƌĞŶǁŽƵůĚďĞƚŚĞŽŶůLJďĞŶĞĨŝĐŝĂƌŝĞƐŽĨƚŚĞƚƌƵƐƚŽŶ^ĞƉƚĞŵďĞƌϯϬŽĨƚŚĞLJĞĂƌ ĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚŝĨƚŚĞĐŚĂƌŝƚLJŝƐĐĂƐŚĞĚŽƵƚƉƌŝŽƌƚŽƚŚĂƚƚŝŵĞ͘ dŚĞdƌƵƐƚĞĞƐŚŽƵůĚĂůƐŽƉĂLJĨŽƌĂůůĞdžƉĞŶƐĞƐŽĨĂĚŵŝŶŝƐƚƌĂƚŝŽŶ͕ĐůĂŝŵƐ͕ĂŶĚƚĂdžĞƐĨƌŽŵ ŶŽŶͲƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐ͕ĂŶĚƐƵĐŚĞdžƉĞŶƐĞƐƐŚŽƵůĚďĞƉĂŝĚƉƌŝŽƌƚŽ^ĞƉƚĞŵďĞƌϯϬŽĨƚŚĞ LJĞĂƌĨŽůůŽǁŝŶŐƚŚĞƉĂƌƚŝĐŝƉĂŶƚ͛ƐĚĞĂƚŚ͕ŝĨƉŽƐƐŝďůĞ͕ŽƌĂƐĞƉĂƌĂƚĞĨƵŶĚĐŽŶƐŝƐƚŝŶŐŽĨŶŽŶͲ ƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐƐŚŽƵůĚďĞĞĂƌŵĂƌŬĞĚĨŽƌƚŚŽƐĞĞdžƉĞŶƐĞƐ͘/ĚĞĂůůLJ͕ƚŚĞŝŶŚĞƌŝƚĞĚ/Z ĂĐĐŽƵŶƚƐǁŽƵůĚďĞĞƐƚĂďůŝƐŚĞĚĨŽƌtĞŶĚLJ͛ƐĐŚŝůĚƌĞŶƉƌŝŽƌƚŽ^ĞƉƚĞŵďĞƌϯϬŽĨƚŚĞLJĞĂƌ ĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚĂŶĚƚŚĞƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐĂůůŽĐĂƚĞĚƚŽƚŚŽƐĞĂĐĐŽƵŶƚƐƐŽƚŚĞƌĞ ŝƐŶŽƋƵĞƐƚŝŽŶƚŚĂƚƚŚĞƐŽƵƌĐĞŽĨƉĂLJŵĞŶƚŽĨĞdžƉĞŶƐĞƐŽĨĂĚŵŝŶŝƐƚƌĂƚŝŽŶǁŝůůďĞĨƌŽŵƚŚĞ ŶŽŶͲƌĞƚŝƌĞŵĞŶƚĂƐƐĞƚƐ͘ ǀĞŶŝĨtĞŶĚLJ͛ƐƚŚƌĞĞĐŚŝůĚƌĞŶǁŚŽĂƌĞďĞŶĞĨŝĐŝĂƌŝĞƐŽĨtĞŶĚLJ͛ƐƚƌƵƐƚƚŝŵĞůLJƐĞƚƵƉ ŝŶŚĞƌŝƚĞĚ/ZƐƉƌŝŽƌƚŽĞĐĞŵďĞƌϯϭŽĨƚŚĞLJĞĂƌĨŽůůŽǁŝŶŐtĞŶĚLJ͛ƐĚĞĂƚŚ͕ŽƌƐŽŽŶĞƌ͕ ĂŶĚƚŚĞdƌƵƐƚĞĞĂůůŽĐĂƚĞƐtĞŶĚLJ͛Ɛ/ZƚŽƚŚĞƚŚƌĞĞŶĞǁŝŶŚĞƌŝƚĞĚ/ZĂĐĐŽƵŶƚƐ͕ƚŚĞ ZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨŽƌƚŚĞŝŶŚĞƌŝƚĞĚ/ZƐǁŝůůďĞďĂƐĞĚŽŶƚŚĞůŝĨĞ ĞdžƉĞĐƚĂŶĐLJtĞŶĚLJ͛ƐŽůĚĞƐƚĐŚŝůĚďĞĐĂƵƐĞƚŚĞƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƌƵůĞ;ĂůůŽǁŝŶŐĞĂĐŚ ďĞŶĞĨŝĐŝĂƌLJƚŽƵƐĞŚŝƐŽƌŚĞƌŽǁŶůŝĨĞĞdžƉĞĐƚĂŶĐLJƚŽĐŽŵƉƵƚĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵ ŝƐƚƌŝďƵƚŝŽŶƐͿĚŽĞƐŶŽƚĂƉƉůLJǁŚĞƌĞƚŚĞ/ZĂƐƐĞƚƐǁĞƌĞĚĞƐŝŐŶĂƚĞĚƚŽƚŚĞƚƌƵƐƚĞĞŽĨĂ ƐŝŶŐůĞƚƌƵƐƚ͕ƐƵĐŚĂƐtĞŶĚLJ͛ƐƌĞǀŽĐĂďůĞůŝǀŝŶŐƚƌƵƐƚ͘&ŽƌƚƵŶĂƚĞůLJ͕ƚŚĞĐŚĂƌŝƚLJ͛ƐŝŶƚĞƌĞƐƚ ǁĂƐƐĂƚŝƐĨŝĞĚďLJƚŚĞƚƌƵƐƚĞĞǁŝƚŚƚŚĞĐĂƐŚĚŝƐƚƌŝďƵƚŝŽŶĨƌŽŵŶŽŶͲƌĞƚŝƌĞŵĞŶƚĂĐĐŽƵŶƚ ĂƐƐĞƚƐďĞĐĂƵƐĞƚŚĞĐŚĂƌŝƚLJŚĂƐŶŽůŝĨĞĞdžƉĞĐƚĂŶĐLJĂŶĚƚŚĞĐŚĂƌŝƚLJ͛ƐƉƌĞƐĞŶĐĞĂƐĂ ĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJǁŽƵůĚŽƚŚĞƌǁŝƐĞĚĞƐƚƌŽLJƚŚĞƐƚƌĞƚĐŚŽƉƚŝŽŶ͘EŽǁ͕tĞŶĚLJ͛Ɛ ĐŚŝůĚƌĞŶĐĂŶƚĂŬĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵƚŚĞŝƌƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƐ ŽǀĞƌƚŚĞůŝĨĞĞdžƉĞĐƚĂŶĐLJŽĨƚŚĞŽůĚĞƐƚŽĨƚŚĞŵ͘ tŚĂƚĂƌĞƚŚĞďĞŶĞĨŝĐŝĂƌLJŽƉƚŝŽŶƐŝĨtĞŶĚLJ͛ƐƌĞǀŽĐĂďůĞůŝǀŝŶŐƚƌƵƐƚĚŝĚŶŽƚŵĞĞƚƚŚĞƐĞĞ ƚŚƌŽƵŐŚƚƌƵƐƚƌƵůĞƐŽƌƚŚĞĐŚĂƌŝƚLJǁĂƐŶŽƚĐĂƐŚĞĚŽƵƚƚŝŵĞůLJ͍^ŝŶĐĞtĞŶĚLJĚŝĞĚĂĨƚĞƌŚĞƌ ƌĞƋƵŝƌĞĚďĞŐŝŶŶŝŶŐĚĂƚĞ͕ƌĞƋƵŝƌĞĚŵŝŶŝŵƵŵĚŝƐƚƌŝďƵƚŝŽŶƐŵĂLJďĞƉĂŝĚŽǀĞƌtĞŶĚLJ͛Ɛ ƌĞŵĂŝŶŝŶŐůŝĨĞĞdžƉĞĐƚĂŶĐLJ͕ĐŽŵƉƵƚĞĚƵƐŝŶŐƚŚĞ^ŝŶŐůĞ>ŝĨĞdžƉĞĐƚĂŶĐLJdĂďůĞĂŶĚƚŚĞ ĚŝǀŝƐŽƌďĂƐĞĚŽŶtĞŶĚLJ͛ƐĂŐĞŝŶƚŚĞLJĞĂƌŽĨŚĞƌĚĞĂƚŚ;ŽƌƚŚĞĂŐĞƚŚĂƚƐŚĞǁŽƵůĚŚĂǀĞ ĂƚƚĂŝŶĞĚŝĨƐŚĞŚĂĚŶ͛ƚLJĞƚŚĂĚŚĞƌďŝƌƚŚĚĂLJŝŶƚŚĞLJĞĂƌŽĨŚĞƌĚĞĂƚŚ͖ŝŶƚŚŝƐĐĂƐĞ͕ƐŚĞŚĂĚ ĂůƌĞĂĚLJƚƵƌŶĞĚϴϬƉƌŝŽƌƚŽŚĞƌĚĞĂƚŚͿ͘dŚĞĚŝǀŝƐŽƌŝƐƌĞĚƵĐĞĚďLJŽŶĞĞĂĐŚLJĞĂƌ ƚŚĞƌĞĂĨƚĞƌ͘/ĨtĞŶĚLJŚĂĚĚŝĞĚďĞĨŽƌĞŚĞƌƌĞƋƵŝƌĞĚďĞŐŝŶŶŝŶŐĚĂƚĞĂŶĚƚŚĞƚƌƵƐƚĚŝĚŶŽƚ ŵĞĞƚƚŚĞƐĞĞͲƚŚƌŽƵŐŚƚƌƵƐƚƌƵůĞƐ͕ƚŚĞĂƉƉůŝĐĂďůĞĚŝƐƚƌŝďƵƚŝŽŶƉĞƌŝŽĚǁŽƵůĚďĞϱLJĞĂƌƐ;ďLJ ĞĐĞŵďĞƌϯϭŽĨƚŚĞĨŝĨƚŚLJĞĂƌĨŽůůŽǁŝŶŐŚĞƌĚĞĂƚŚͿ͘

© 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

/ĨtĞŶĚLJ͛Ɛ/ZďĞŶĞĨŝĐŝĂƌLJĚĞƐŝŐŶĂƚŝŽŶŚĂĚŝŶƐƚĞĂĚŶĂŵĞĚƚŚĞĐŚĂƌŝƚLJĂŶĚƚŚƌĞĞ ƐĞƉĂƌĂƚĞƐƚĂŶĚͲĂůŽŶĞƚƌƵƐƚƐĨŽƌƚŚĞƚŚƌĞĞĐŚŝůĚƌĞŶĂƐƚŚĞďĞŶĞĨŝĐŝĂƌŝĞƐŽĨƚŚĞ/Z͕ĂŶĚ ƚŚĞĐŚŝůĚƌĞŶƚŝŵĞůLJƐĞƚƵƉƚŚĞŝƌŽǁŶŝŶŚĞƌŝƚĞĚ/ZƐ͕ǁĞǁŽƵůĚŚĂǀĞĂĚŝĨĨĞƌĞŶƚŝŶĐŽŵĞ ƚĂdžƌĞƐƵůƚ͖ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨŽƌĞĂĐŚĐŚŝůĚǁŽƵůĚďĞďĂƐĞĚŽŶĞĂĐŚ ŽĨƚŚĞŝƌƌĞƐƉĞĐƚŝǀĞůŝĨĞĞdžƉĞĐƚĂŶĐŝĞƐ͕ĂŐĂŝŶĂƐƐƵŵŝŶŐƚŚĂƚƚŚĞĐŚĂƌŝƚLJǁĂƐĐĂƐŚĞĚŽƵƚŽƌ ƐĞŐƌĞŐĂƚĞĚƚŝŵĞůLJĨƌŽŵƚŚĞŝŶĚŝǀŝĚƵĂůďĞŶĞĨŝĐŝĂƌŝĞƐ͘ KŶĞƐŚŽƵůĚŶŽƚĞƚŚĂƚƚŚĞĨĂĐƚƚŚĂƚtĞŶĚLJ͛ƐƚƌƵƐƚĐĂůůƐĨŽƌŽƵƚƌŝŐŚƚĚŝƐƚƌŝďƵƚŝŽŶŽĨƚŚĞ ƚƌƵƐƚĂƐƐĞƚƐƚŽŚĞƌĐŚŝůĚƌĞŶƵƉŽŶŚĞƌĚĞĂƚŚĚŽĞƐŶŽƚƌĞƋƵŝƌĞƚŚĂƚƚŚĞdƌƵƐƚĞĞůŝƋƵŝĚĂƚĞ ƚŚĞ/Z͘dŚĞĐŚŝůĚƌĞŶŵĂLJƐĞƚƵƉƚŚĞŝŶŚĞƌŝƚĞĚ/ZƐĂŶĚƚŚĞdƌƵƐƚĞĞŵĂLJĂƐƐŝŐŶtĞŶĚLJ͛Ɛ /ZĂƐƐĞƚƐĞƋƵĂůůLJƚŽĞĂĐŚŽĨƚŚĞŝŶŚĞƌŝƚĞĚ/ZƐ͘dŚŝƐŵĂLJŝŶǀŽůǀĞĂϮͲƐƚĞƉƉƌŽĐĞƐƐƐŝŶĐĞ ƚŚĞdƌƵƐƚĞĞŝƐƚŚĞĚĞƐŝŐŶĂƚĞĚďĞŶĞĨŝĐŝĂƌLJŽĨƚŚĞ/Z͘dŚĞdƌƵƐƚĞĞŵĂLJĨŝƌƐƚŚĂǀĞƚŽƐĞƚƵƉ ĂŶŝŶŚĞƌŝƚĞĚ/ZŝŶƚŚĞŶĂŵĞŽĨ͞tĞŶĚLJtŽůǀĞƌŝŶĞ/ZĨŽƌƚŚĞďĞŶĞĨŝƚŽĨdƌƵƐƚĞĞŽĨ tĞŶĚLJtŽůǀĞƌŝŶĞdƌƵƐƚ͕͟ƚŚĞŶƚŚĞdƌƵƐƚĞĞǁŽƵůĚƚŚĞƌĞĂĨƚĞƌĂƐƐŝŐŶƚŚĞĂƐƐĞƚƐƚŽƚŚĞ ƐĞƉĂƌĂƚĞŝŶŚĞƌŝƚĞĚ/ZƐ͘dŚĞƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƐǁŽƵůĚďĞƚŝƚůĞĚƐƵĐŚĂƐ͕͞tĞŶĚLJ tŽůǀĞƌŝŶĞ͕ĚĞĐĞĂƐĞĚ͕/ZĨŽƌƚŚĞďĞŶĞĨŝƚŽĨ΀ŶĂŵĞŽĨĐŚŝůĚ΁͟ʹŽŶĞĨŽƌĞĂĐŚĐŚŝůĚ͘ĂĐŚ ŝŶƐƚŝƚƵƚŝŽŶŵĂLJŚĂǀĞĚŝĨĨĞƌĞŶƚŶŽŵĞŶĐůĂƚƵƌĞ͕ďƵƚƚŚĞŝĚĞĂŝƐƚŚĂƚƚŚĞ/ZĂĐĐŽƵŶƚƐĂƌĞ ŝŶŚĞƌŝƚĞĚ/ZĂĐĐŽƵŶƚƐ͘/ƚŝƐŶŽƚƚŚĞĂƐƐŝŐŶŵĞŶƚŽĨĂƐƐĞƚƐƚŚĂƚĂĨĨĞĐƚƐƚŚĞZĞƋƵŝƌĞĚ DŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶĐŽŵƉƵƚĂƚŝŽŶƐ͖ŝƚŝƐƚŚĞƐĞƉĂƌĂƚĞĂĐĐŽƵŶƚƌƵůĞƐƚŚĂƚŐŽǀĞƌŶ ǁŚĞƚŚĞƌĂďĞŶĞĨŝĐŝĂƌLJŵĂLJƵƐĞŚŝƐŽƌŚĞƌŽǁŶůŝĨĞĞdžƉĞĐƚĂŶĐLJƚŽĐŽŵƉƵƚĞZĞƋƵŝƌĞĚ DŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐ͕ĂŶĚŝĨtĞŶĚLJ͛ƐƚƌƵƐƚƚŚĞďĞŶĞĨŝĐŝĂƌLJŽĨƚŚĞ/Z͕ƚŚĞůŝĨĞ ĞdžƉĞĐƚĂŶĐLJŽĨƚŚĞŽůĚĞƐƚĐŚŝůĚŵƵƐƚďĞƵƐĞĚƚŽĐŽŵƉƵƚĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵ ŝƐƚƌŝďƵƚŝŽŶƐ͘ /ĨtĞŶĚLJŚĂĚŵŽƌĞƚŚĂŶŽŶĞƚƌĂĚŝƚŝŽŶĂů/ZĂĐĐŽƵŶƚ͕ƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵ ŝƐƚƌŝďƵƚŝŽŶƐƚŚĂƚŚĞƌĐŚŝůĚƌĞŶŵƵƐƚďĞĐŽŵƉƵƚĞĚƐĞƉĂƌĂƚĞůLJĨŽƌĞĂĐŚŝŶŚĞƌŝƚĞĚ/Z ĂĐĐŽƵŶƚ͕ďƵƚƚŚĞĐŚŝůĚƌĞŶǁŝůůďĞĂďůĞƚŽƚĂŬĞƚŚĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶĨƌŽŵ ŽŶĞŽƌŵŽƌĞŽĨƚŚĞƚƌĂĚŝƚŝŽŶĂů/ZĂĐĐŽƵŶƚƐ͘dŚĞƐĂŵĞŝƐƚƌƵĞŽĨZŽƚŚ/ZĂĐĐŽƵŶƚƐ͕ďƵƚ ŝƐŶŽƚƚŚĞĐĂƐĞǁŝƚŚƋƵĂůŝĨŝĞĚƌĞƚŝƌĞŵĞŶƚƉůĂŶƐ͘EŽƚĞƚŚĂƚĂůƚŚŽƵŐŚtĞŶĚLJĚŝĚŶŽƚŚĂǀĞ ƚŽƚĂŬĞŵŝŶŝŵƵŵĚŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵŚĞƌZŽƚŚ/ZĚƵƌŝŶŐŚĞƌůŝĨĞƚŝŵĞ͕ŚĞƌĐŚŝůĚƌĞŶǁŝůů ŚĂǀĞƚŽƚĂŬĞZĞƋƵŝƌĞĚDŝŶŝŵƵŵŝƐƚƌŝďƵƚŝŽŶƐĨƌŽŵƚŚĞŝƌŝŶŚĞƌŝƚĞĚZŽƚŚ/ZƐ͘

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Estate Planning for Retirement Assets: A Case Study Approach

Exhibit I Welber Outline - Estate Planning and the Required Minimum Distribution Rules1

Estate Planning for Retirement Assets Estate Planning and the Required Minimum Distribution Rules Nancy H. Welber Nancy H. Welber, P.C. I. Overview This outline is intended as an introduction to the topic of estate planning for retirement benefits. The main issues generally revolve around the minimum distribution rules of IRC 401(a)(9) and the related regulations (the “minimum distribution rules”) and naming the beneficiaries for each retirement account owned by your client. The scope of this outline is necessarily limited for presentation at a seminar. You may need to consider additional and more complex issues depending on your client’s situation or do additional research. 12 To make the nomenclature easier, unless the outline refers to a specific type of plan or retirement account, all qualified plans, 403(b) tax-sheltered annuities, 457(b) eligible government and tax-exempt organization plans, and IRAs will generally be referred to collectively as “retirement accounts” and the plan participant, IRA owner, or 403(b) contract-holder will usually be referred to collectively as the “account owner.” Citations preceded by “Treas Reg” and that end in “A-_” generally refer to the final minimum distribution regulations or related final regulations governing IRAs or 403(b) plans issued by the Internal Revenue Service (IRS) in a question and answer format. Nonqualified plans, such as nonqualified deferred compensation plans and nonqualified 457 plans, are beyond the scope of this outline.

II. The Technical Issues There are many questions you must ask when you are reviewing a client’s retirement account or designing a beneficiary designation as part of your client’s estate planning. You will have to know what kind of retirement account the client has and the benefit options available under the retirement account. You will also have to know your clients tax and non-tax goals. Once you have ascertained the answers to those issues, you will have to confront the technical questions that will lead you to accomplish your client’s goals. The main technical issues you must consider in most situations are as follows: Age of your client. Is the account owner under age 70½ or over age 70½? If over age 70½, is he or she retired? Beneficiary. Who is the intended primary beneficiary? Is it the client’s spouse? If the spouse is the primary beneficiary, are the children the contingent beneficiaries? Number of Beneficiaries. Will the retirement account have multiple beneficiaries as the primary beneficiary or for any level of the contingent beneficiary?

1

For additional issues not covered here and more in-depth analysis of some of the issues discussed in this outline, see “Estate Planning with Retirement Benefits”, Chapter 28 of ICLE’s Estate Planning Handbook, by Nancy H. Welber, as updated December, 2011, (“Chapter 28 of ICLE’s Estate Planning Handbook”). 2 The author wishes to thank Natalie Choate for her invaluable resource, Life and Death Planning for Retirement Benefits (7th ed 2011), which was of great assistance in checking some of the finer points included in this outline.

1. This outline originally appeared with the materials for ICLE’s Estate Planning for Retirement Assets, held on February 23, 2012, and is provided as-is for the viewer’s reference. © 2012 The Institute of Continuing Legal Education

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

Trusts. Does your planning require that a trust be named as a beneficiary of the retirement account? If so, can you identify one or more individuals who are beneficiaries who, if living at the death of the account owner, will take the retirement benefits payable to the trust outright from the trust without any conditions other than surviving the account owner and any beneficiaries with a higher priority? If you must use a marital trust, will it qualify for the marital deduction under the estate tax rules and will also qualify for income tax purposes under the minimum distribution rules?

III.

Planning Considerations

A. Know Your Client It is important for you to understand your client’s goals with their retirement accounts and what the beneficiaries who inherit the accounts are likely to do with them. Does your client need or want to use the money in the retirement account for living expenses, which may range from necessities such as longterm care to luxuries such as extensive travel, or does your client have other sources of income and thus prefer to leave the retirement accounts to children or grandchildren so that they can get as much income tax deferral as possible? If the account is small (say, under $100,000), would the children cash out the divided shares or take only the required minimum distributions and use the account as their retirement nest egg? All of these issues are important, and you should explore them with the client before starting to plan for the disposition of the retirement accounts.

B. Know Your Client’s Retirement Plans Plan types. The required minimum distribution rules in IRC 401(a)(9) generally apply to the following types of plans and accounts: 1. Corporate and self-employed pension, profit-sharing, and stock bonus plans qualified under IRC 401(a) (includes Keogh or HR 10 plans, 401(k) plans, and employee stock ownership plans or ESOPs), including deemed Roth accounts in 401(k) plans 2. Individual retirement accounts (IRAs) under IRC 408(a) 3. Simplified employee plans (SEPs) Under IRC 408(k) and SIMPLE retirement accounts under IRC 408(p) 4. Tax-sheltered annuities under IRC 403(b) (except that account balances existing on December 31, 1986, if kept separate for accounting purposes are subject to special rules), including deemed Roth accounts in these plans 5. Governmental plans and plans of nonprofit organizations under IRC 457(b), including deemed Roth accounts in these plans Roth IRAs are not subject to the lifetime required minimum distribution rules since no distributions are required during the lifetime of the owner. However, Roth IRAs are subject to required minimum distribution rules after the death of the owner of the Roth IRA. Determining available payment options. You can determine the benefit options available to the plan participant and beneficiaries by having your client provide you a copy of the plan or the plan’s summary plan description whenever you are dealing with a retirement plan from an employer. It also makes sense to review the adoption agreement for most IRAs, since sometimes special rules imposed by the IRA custodian will apply. For example, most IRAs allow the IRA beneficiaries to use the minimum distribution rules as the method for computing and taking the death benefits from the IRA. However, sometimes, if a trust is named as the beneficiary of the IRA, the IRA custodian may require the trustee to cash out the IRA so that the custodian can avoid the additional administrative burden of dealing with a trust. In addition, a plan, such as a large 401(k) plan, may require a very fast payout of the plan benefits to

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Estate Planning for Retirement Assets: A Case Study Approach

a beneficiary, especially when the plan only allows beneficiaries to take the plan benefits as a lump-sum distribution. Thus, you may have to be prepared to make a non-spouse beneficiary rollover very shortly after the plan is notified of the account owner’s death. See Priv Ltr Rul 200940031 (Oct 2, 2009). Remember that the minimum distribution rules set the maximum length of time that an account owner or beneficiary will have to take the benefits out of the retirement account. The plan or IRA can require a faster payout.

C. Know the Rules Affecting Various Plan Types It is imperative for you to know the types of retirement plans in which your client participates through his or her employer or that your client owns as IRAs through investments, rollovers, or inheritances. Qualified plans established by private employers are subject to the Employee Retirement Income Security Act of 1974 (ERISA). Special rules apply to ERISA plans, and they often must offer certain benefits, such as a qualified joint and survivor annuity (QJSA) or a qualified preretirement survivor annuity (QPSA) to the surviving spouse under the Retirement Equity Act of 1984 (REA). These are often defined benefit plans, which provide an actuarially determined benefit based on the age, earnings, and years of service of the plan participant. In contrast, defined contribution plans, or “account”-type plans, will either guarantee a contribution amount (such as in a money purchase pension plan, which will offer annuities) or make discretionary contributions to the participant’s account, such as in a profit-sharing plan. The participant’s account in a defined contribution plan is subject to investment gains and losses, and the amount which the participant, and his or her beneficiary, will ultimately receive from the plan is not guaranteed. Frequently, a profit-sharing plan, such as a 401(k) plan, will not be subject to the annuity rules of ERISA if the plan does not offer annuities, but the spouse must be the beneficiary unless the spouse signs a notarized consent form waiving his or her right to be the beneficiary. In addition, many profit-sharing plans offer only lump-sum distributions as payment options for beneficiaries. The payment options and requirements will affect the estate planning options Treas Reg 1.401(a)(9)-6 provides guidance on the minimum distribution requirements for defined benefit plans, for annuity contracts purchased with account balances under defined contribution and individual retirement plans, such as IRAs, and for annuity contracts under 403(b) arrangements. Except as otherwise noted, this outline will focus on defined contribution plans: profit-sharing plans such as 401(k) plans and 403(b) tax-sheltered annuities, 457(b) plans, and IRAs subject to the minimum distributions rules, when distributions will not be in the form of an annuity.

III. How Retirement Benefits Are Treated for Estate Tax Purposes A. In General

Retirement benefits, like any other asset, are subject to estate tax. IRC 2039.3 In general, retirement benefits are taxable at their fair market value based on the value of the assets in the account at the date of death of the account owner. If the plan is a defined benefit plan or is otherwise paying benefits in the form of an annuity, you should ask the plan administrator for IRS Form 712 (form 2.1), which will provide you with the estate tax value of the annuity. On November 18, 2011, the IRS issued proposed regulations that clarify how to apply the alternate valuation rules to retirement benefits. Prop. Treas Reg 20.2032-1(c). There is no step up in basis for income tax purposes at the death of the account owner. Retirement benefits are taxed as income in respect of a decedent (IRD) under IRC 691(a). Likewise, there is no 3

Prior to its repeal in 1984, there was an exemption from estate taxes of up to $100,000 for all types of retirement benefits owned by the decedent. However, if an individual was a participant in a qualified plan, was receiving payments under the plan as of December 31, 1982, and had irrevocably elected his or her benefit by that date, the benefit is still exempt from estate tax under a transition rule found in section 525 of the Tax Reform Act of 1984, Pub L No 98-369, 98 Stat 494, 873, as modified by section 1852(e)(3) of the Tax Reform Act of 1986, Pub L No 99514, 100 Stat 2085, 2868.

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Estate Planning for Retirement Assets: A Case Study Approach, September 25, 2012

reduction in the value of the retirement account for the income taxes payable when the benefits are distributed. Instead, the beneficiary or beneficiaries of the retirement account may take an income tax deduction for the federal estate taxes attributable to the retirement benefits payable to them. IRC 691(c). This deduction is an itemized deduction that is not subject to the 2 percent floor for miscellaneous itemized deductions. Because the beneficiary gets a deduction for the estate taxes paid, but not a credit, the deduction is not a complete offset against the income that will be taxed to the beneficiary when the distribution is received. The deduction is not available for state estate or inheritance taxes paid.

B. The Marital Deduction If the retirement account is payable outright to the surviving spouse, the retirement account qualifies for the marital deduction, either under the general rules of IRC 2056(a) concerning property passing to the surviving spouse, or under IRC 2056(b)(6) for the rules governing annuities with general powers of appointment. Under IRC 2056(b)(7)(C), if the retirement account is payable in the form of a joint and survivor annuity, such as in a defined benefit plan, a special rule treats the annuity as if it qualifies under the rules for QTIP. For planning purposes, if the annuity is a true joint and survivor annuity, the participant will include the value of the annuity in his or her estate and the estate will receive a marital deduction. However, at the death of the surviving spouse, nothing will be included in the surviving spouse’s estate. The annuity will end at the surviving spouse’s death and, consequently, will have no value for purposes of the surviving spouse’s death. Some annuities have guaranteed periods, such as a 20-year guaranteed period. Thus, if the account owner and the spouse both die before the end of the guaranteed period, the account owner’s beneficiaries will receive payments due over the remaining years left in the guaranteed period or in a lump sum as the commuted value of the remaining payment stream. The value of this stream of payments will be subject to tax in the surviving spouse’s estate. They will be valued using the IRC 7520 rate for the value of an annuity. The plan administrator or insurance company providing the annuity should provide the beneficiary with IRS Form 712 to assist in reporting the value of the annuity on the federal estate tax return. Some examples of these estate tax concepts are as follows: 1. The beneficiary designation states, “My primary beneficiary shall be my husband, Richard, if he survives me.” If the retirement account allows Richard to take a lump-sum distribution at any time, the benefits will qualify under IRC 2056(a) as an interest that passed from the decedent account owner. 2. The beneficiary designation states, “My primary beneficiary shall be my husband, Richard, if he survives me, but if he does not survive me or does not survive to the complete distribution of my account, then to my children who are then living as contingent beneficiaries.” In this case, Richard would likely have a continuing power during his lifetime to withdraw the account balance, so his interest would qualify for the marital deduction under IRC 2056(b)(5) as a general power of appointment. However, if the account is not an IRA, you should check the plan to be absolutely certain on this detail. • Moreover, many plan administrators or IRA custodians will not permit this form of beneficiary designation. Once the account owner has died, the plan or IRA may state that the beneficiary has vested in the retirement account, and the beneficiary designation cannot divest the beneficiary of the beneficiary’s rights to withdraw benefits or name successor beneficiaries. 3. The inability to use this beneficiary designation format can be problematic, particularly in second marriages, where the contingent beneficiaries are the account owner’s children from the first marriage. Moreover, even if the surviving spouse is willing to “do the right thing” and name the children from the first marriage as the contingent beneficiaries, the plan or IRA custodian often will

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Estate Planning for Retirement Assets: A Case Study Approach

not allow the spouse to preemptively name successor beneficiaries before the death of the account owner. This prohibition can become problematic if the surviving spouse dies shortly after the account owner or is incompetent and is unable to complete a form to name the appropriate successor beneficiaries. 4. The beneficiary designation names Richard as “my sole primary beneficiary,” but the retirement account is an ERISA qualified plan offering only a qualified preretirement survivor annuity. In this case, the account would qualify under the special QTIP rule under IRC 2056(b)(7)(C) for annuities. This rule can also be applied if the spouse were to receive only minimum distributions from an IRA at the account owner’s direction, for example, or does not have a continuing power during his or her life to withdraw the account balance.

C. Portability of the Unused Basic Exclusion Amount of the Surviving Spouse’s Last Deceased Spouse The 2010 Tax Relief Act brought us the new concept of portability. Under portability, a term that is not actually used in the Code, the estate of a surviving spouse may tack onto his or her exclusion amount as adjusted for inflation the unused basic exclusion amount of the surviving spouse’s last deceased spouse. Pub L No 111-312, §§302(a)(1), 303(a), 124 Stat 3296 (2010) (amending IRC 2010(c)) Many commentators have observed that the biggest winners under the concept of portability are married couples (a man and a woman) who have estates with large retirement accounts and little else besides a house and a small amount of after-tax assets. Prior to portability, and especially when the applicable exclusion amount was $600,000 or even $1,000,000, married couples had to choose between saving estate taxes by funding the credit shelter trust of the spouse who was the account owner, or obtaining the stretch-out of the retirement account by using a spousal rollover, thereby getting the most income tax advantageous treatment available for the retirement benefits. With portability, these bad choices no longer have to be made. The personal representative for the first spouse must file a federal estate tax return (Form 706) to elect portability, even if a return would not otherwise be required. (In fact, the return is designed so that portability is automatic unless the personal representative elects out.) With the current basic exclusion amount at $5,000,000 in 2011 and the 2012 basic exclusion amount set to increase for inflation to $5,120,000 in 2012, the vast majority of couples will not have to worry about estate taxes for the next year. However, the risk of estate tax still looms as long as the basic exclusion amount may revert to $1,000,000 in 2013, absent legislation. However, for now, a couple can plan to leave the retirement benefits to the surviving spouse outright and surviving spouse can roll over the benefits to an IRA (or another retirement account) and stretch the benefits over his or her lifetime and the lifetimes of his or her children or other beneficiaries without having to worry about estate taxes, as long as a federal estate tax return is filed at the death of the first spouse. In fact, with the possibility that the exclusion will decrease to $1,000,000, most personal representatives for married decedents who have died in 2011 or or 2012 should be considering filing an estate tax return to make this election to lock in the $5,000,000 or $5,120,000 exclusion as a hedge against future estate taxes, as long as the couple’s combined estate is or may grow to over $1,000,000 in the future.

D.

Reporting Retirement Benefits on the Federal Estate Tax Return

Retirement benefits are reported as annuities on Schedule I of the federal estate tax return (Form 706). For this purpose, you would report IRAs and other account plans on Schedule I, even though, strictly speaking, payments may not be paid in the form of an annuity. If the retirement benefits qualify for the marital deduction, the marital deduction is reported on Schedule M, Bequests, etc., to the Surviving Spouse. Pay special attention to Question 3 on this form. This question asks whether you want to opt out of treating annuities as QTIP property. It is stated as a negative because IRC 2056(b)(7)(C) was written to require QTIP treatment for annuities unless the

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personal representative opts out of such treatment. In most cases, you will answer this question “no” so that the retirement benefits get QTIP treatment. Here is the question, taken verbatim from Schedule M: Election Out of QTIP Treatment of Annuities. Do you elect under section 2056(b)(7)(C)(ii) not to treat as qualified terminable interest property any joint and survivor annuities that are included in the gross estate and would otherwise be treated as qualified terminable interest property under section 2056(b)(7)(C)?

If a retirement account is payable to a trust that qualifies for QTIP treatment, Rev Rul 89-89 and Rev Rul 2000-2, which govern QTIP trusts as beneficiaries of retirement accounts, state that the QTIP election must be made for both the trust and for the portion of the retirement account payable to the QTIP trust. This is best accomplished by attaching a statement to Schedule M making the election for both the trust and the affected retirement account.

IV. The Account Owner’s Lifetime Minimum Distribution Rules A. In General The minimum distribution rules contained in the Internal Revenue Code and Treasury Regulations are designed to assure that wealth accumulated on a tax-deferred basis in the various “retirement vehicles” described above is not allowed to continue the tax deferral feature forever. In effect, the minimum distribution rules assure that retirement accounts will be used for the account owner’s retirement and not simply as an enhanced inheritance for the account owner’s children or grandchildren. When it is available, the most beneficial distribution option from an income tax perspective is to take distributions according to the minimum distribution rules. An employer plan may require that the employee or the beneficiary take the distributions from a qualified plan faster than the minimum distribution rules require, even making a lump-sum distribution the only option under the plan. This is information you must know before you begin planning. In contrast, IRAs are fairly uniform and generally offer designated beneficiaries the ability to use the minimum distribution rules to calculate and receive distributions from the retirement account, both during the account owner’s lifetime and after his or her death. Required beginning date. Usually, required minimum distributions must begin no later than April 1 of the year after the year the account owner attains age 70½, which is called the “required beginning date.” For example, the required beginning date for an account owner born on June 30, 1942, will be April 1, 2013. He will attain age 70½ on December 30, 2012. For an account owner born on July 1, 1942, the required beginning date is April 1, 2014, since the account owner will not attain age 70½ until January 1, 2013. In employer plans that permit it, the participant must begin to take distributions by April 1 of the year following the year the account owner attains age 70½ or, if later, April 1 of the year following the year of actual retirement. The deferral of distributions to actual retirement does not apply to an employee who is a 5 percent owner, and it does not apply if the plan does not permit this delayed start date.4 The delayed required beginning date applies to all 403(b) and 457 plans if the account owner is still working after age 70½. The required beginning date for traditional IRAs is always April 1 of the year after the account owner attains age 70½. There is no required beginning date for a Roth IRA account owner because no required minimum distributions are required for owners of Roth IRAs. 4

There is an exception for the 5 percent owner of a business. An owner who signed an election under the Tax Equity Fiscal Responsibility Act (TEFRA) §242(b) (Pub L No 97-248, 96 Stat 324, 521 (1982)) by January 1, 1984, may defer until his or her actual retirement date unless he or she has revoked the election. Treas Reg 1.401(a)(9)-8, A13.)

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The ability to defer until actual retirement is not without its pitfalls. If the employee defers taking minimum distributions because he or she is still working after age 70½ and the plan delays the required beginning date until actual retirement, the employee will be treated as if he or she has died before his or her required beginning date if the employee dies while he or she is still working. Treas Reg 1.401(a)(9)-2, A-6(b). Likewise, since the Roth IRA owner does not have to take lifetime required minimum distributions, the Roth IRA owner is treated as though he or she has died before his or her required beginning date. Treas Reg 1.408A-6, A-14(b). If the employee’s beneficiary is not a “designated beneficiary” in this instance, his or her beneficiaries will have to distribute the entire account balance by the end of the fifth year following the employee’s death. For example, if an employee in this situation dies in 2012 without a designated beneficiary, his or her account balance will have to be distributed in full by December 31, 2017. However, the Preamble to the final regulations allows the employee who is still working after age 70½ and whose employer plan does not delay the required beginning date to actual retirement, to use the “statutory definition of required beginning date.” 67 Fed Reg 18,989 (2002). In that case, the participant may be able to take the “required” distribution received from the employer plan and roll it over into an IRA.

B. Notification by IRA Custodians During the account owner’s lifetime, IRA custodians must provide information to the account owner that will alert him or her (and the IRS) to the fact that a minimum distribution is required in a given year. The custodian must report the prior December 31 account balance and the deadline for making the distribution. The custodian must provide a statement showing the amount of the required minimum distribution (but this might ignore some issues for the IRA owner, such as that the IRA owner’s spouse is more than 10 years younger than the IRA owner), or inform the IRA owner that the IRA owner must take a required minimum distribution and that the custodian will calculate the required minimum distribution on request (taking all pertinent facts into account). IRS Notices 2002-27, 2003-3 (annuity contracts). Qualified plans are subject to a similar rule if only because qualified plans must calculate and distribute minimum distributions as a requirement for qualification. The notification rule does not yet apply to 403(b) or 457 plans, but it may in the future. The notification requirement does not apply to inherited IRAs or to Roth IRAs, the latter of which do not have any lifetime required minimum distributions for the account owner.

C. Roth IRAs and Roth 401(k) Accounts There are no minimum distributions required for the Roth IRA owner. Treas Reg 1.408A-6, A-14(a). The same rule applies to the surviving spouse if he or she treats the Roth IRA as his or her own. See Treas Reg 1.408A-2, A-4. Note that Roth 401(k) and 403(b) plans do have lifetime minimum distribution requirements for the account owner. The minimum distribution requirements can be avoided by rolling over the Roth 401(k) or 403(b) account to a Roth IRA when the employee retires or terminates employment with the employer, subject to a possible five-year holding period until the Roth IRA is tax free.

V. Calculating Lifetime Minimum Distributions A. In General The minimum distribution is the smallest amount that must be paid under the law, although it may not be the smallest amount that must be paid under the plan. For example, an auto company defined benefit plan will pay distributions only in the form of an annuity (which has its own minimum distribution rules under Treas Reg 1.401(a)(9)-6). A profit-sharing plan (such as a 401(k) plan) in a medical practice may pay only in a lump-sum distribution or in a 5-year installment payment. Penalty for failure to take the required minimum distribution. If the full required minimum distribution is not taken with respect to a retirement account, the penalty is 50 percent of the shortfall.

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Treas Reg 54.4974-2, A-1 The penalty may be waived by the IRS for reasonable cause. Treas Reg 54.4974-2, A-7(a). The penalty applies in addition to the regular income tax. The account owner is responsible for reporting the underpayment even if the shortfall is not corrected until a future year. Although the IRS may waive the penalty for good cause, a waiver is not automatic. Therefore, it is very important to understand how the minimum distribution rules apply to your clients’ plans and to be sure that your clients are complying with these rules. Distribution calendar year. Each year that an account owner of an IRA or another defined contribution account-type plan must take a minimum distribution is called a “distribution calendar year.” The “first distribution calendar year” coincides with the year that triggers the need for a required minimum distribution, i.e., the year the account owner attains age 70½ or retires, if later and permitted by the plan. Applicable distribution period. The period over which required minimum distributions must be distributed is determined from a factor based on the relevant age of the account owner, the account owner or his or her spouse, or an individual beneficiary found in the IRS tables set forth in Treas Reg 1.401(a)(9)-9. The factor is the number of years over which the account must be distributed under the minimum distribution rules. The number of years determined under the table is called the “applicable distribution period.” Treas Reg. 1.401(a)(9)-5. Calculating the required minimum distribution for an IRA. The calculation of the required minimum distribution is a relatively easy math problem in most cases: 1. Take the December 31 account balance for the year before the distribution calendar year at issue. For example, for 2012, use the December 31, 2011, account balance. Assume it is $100,000. 2. Divide that number by the factor found in the Uniform Lifetime Table listed for the account owner’s age. The Uniform Lifetime Table is found at Treas Reg 1.401(a)(9)-9, A-2. At age 80, the factor is 18.7. 3. The result is the required minimum distribution for that account for the distribution calendar year: ($100,000 ÷ 18.7 = $5,348). Treas Reg 1.401(a)(9)-5, A-1. This example illustrates the technique used to calculate minimum distributions for most IRAs or 403(b) plans.5 It is the account owner’s responsibility to assure that the required minimum distributions are calculated and distributed for IRAs and some 403(b) plans, subject to the reporting requirements for IRA custodians. Deferral of the initial required distribution. The account owner may defer the initial required minimum distribution to his or her actual required beginning date, i.e., as late as April 1 of the year following the year when the account owner attains age 70½, or, if applicable, retires. For an IRA or in a 403(b) plan with a December 31 valuation date, the account owner’s first required minimum distribution is not subtracted in determining the second minimum distribution if the account owner delays the first payment until the first quarter of the second distribution calendar year. Note that the account owner cannot beat the system by having a rollover “in transit” over the year end so that it does not count either in the distributing plan’s December 31 balance (because it was withdrawn in mid-December, for example) or in the receiving plan’s December 31 balance (because it does not arrive in the account until January 15, within the 60-day rollover period).

B. Determining the Life Expectancy Factor 5

In a qualified plan, the calculation also takes into account additional contributions made after the end of the calendar year as well as forfeitures from other plan participants.

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The Uniform Lifetime Table. The Uniform Lifetime Table is used to determine lifetime distributions to the account owner. The table is found at Treas Reg 1.401(a)(9)-9, A-2; The table assumes the account owner has a beneficiary who is 10 years younger than the account owner, regardless of the actual identity of the beneficiary or even if no beneficiary is named. The “Much Younger Spouse” Exception. The Uniform Lifetime Table is used in all cases to determine the spouse’s required minimum distribution, except when the account owner’s spouse is more than 10 years younger than the account owner. In that case, the actual recalculated life expectancies of the account owner and the spouse are used, if the spouse is also the “sole beneficiary” of the retirement account. See the Joint and Last Survivor Table, Treas Reg 1.401(a)(9)-9, A-3. The spouse must be the sole beneficiary of the account owner’s entire interest at all times during the year. Treas Reg 1.401(a)(9)-5, A-4(b)(1). If the account owner and the spouse are married on January 1 of the distribution calendar year, the spouse will be the beneficiary for that year in the following instances: 1. The spouse dies during the year and was still the beneficiary at the date of death. In this case naming a new beneficiary has no effect on the required minimum distribution for the year of death. 2. The couple divorces and the ex-spouse remains the beneficiary through the end of the year. If the account owner changes the beneficiary before the end of the year, the Uniform Lifetime Table must be used. Treas Reg 1.401(a)(9)-5, A-4(b)(2). Thus, in a divorce situation when the account owner’s former spouse was more than 10 years younger than the account owner, you should be sure that your client who is past his or her required beginning date takes makeup distributions from his or her retirement accounts in the year of the divorce if he or she names a new beneficiary in the year of a divorce (assuming the beneficiary is not a new spouse who is also more than 10 years younger). If the spouse is considered the beneficiary for the entire year under these provisions, the Uniform Lifetime Table will begin to apply in the year after the spouse’s death or the divorce (assuming the new beneficiary is not a new spouse who is also 10 years younger than the previous spouse). Id.

C. Distributions That Count Toward the Minimum Distribution Requirement In general. Treas Reg 1.401(a)(9)-5, A-9 provides a list of distributions that are taken into account in determining whether the required minimum distribution is satisfied in a given year and those that are not. For example, net unrealized appreciation and recovery of investment in the contract, though excluded from income, are counted in determining the required minimum distribution for the year. Corrective distributions of excess contributions and loans that are deemed distributions are examples of items that do not satisfy the minimum distribution requirement. A similar list of exclusions appears in Treas Reg 1.4088, A-11 for IRAs. Direct rollovers to charities also satisfy the IRA owner’s required minimum distribution for the year if Congress has enabled such rollovers in a particular year and if the direct rollover is considered a “qualified charitable distribution.” Account owner with multiple plans If an account owner has multiple types of plans, he or she must take minimum distributions from each plan type. Treas Reg 1.408-8, A-1. A qualified plan may not be aggregated with an IRA or 403(b) plan. In addition, if an employer has a defined benefit pension plan and a profit-sharing plan, a minimum distribution must be taken from each of these plans. For example, your client may question why a distribution must be taken from his or her 403(b) plan when he or she can take distributions in the “correct total amount” from his or her IRAs. Unfortunately, the law is drafted in a manner that requires not only the correct total minimum distribution amount, but also the correct amount from each type of plan. Failure to take the distribution from one plan can subject the client to a 50 percent penalty on the shortfall from that plan, even if the total amount taken adds up to the amount of the minimum distributions required from all accounts and plans. Defined benefit and other pension plans have their own minimum distribution rules under the section 401(a)(9) regulations that apply to almost all annuity-type options. They limit the number of years over

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which the annuity may be paid, depending on the participant’s age, and other annuity features which may be offered. Treas Reg 1.401(a)(9)-6 et seq. Separate distributions must be taken from these plans in addition to minimum distributions from IRAs and defined contribution plans. Aggregation rules for IRAs and 403(b) plans. Some accounts may be aggregated with one another for purposes of determining whether the minimum distribution requirements are met. For example, IRAs may be aggregated with one another so the IRA account owner may take his or her IRA required minimum distributions from any combination of his or her IRAs. Treas Reg 1.408-8, A-9. Similarly, 403(b) plans may also be aggregated with the account owner’s other 403(b) plans. Treas Reg 1.403(b)-3, A-4. However, 403(b) plans and IRAs may not be aggregated with one another. A distribution must be taken from both the account owner’s 403(b) plans and from his or her IRAs. An account owner who also inherits an IRA or 403(b) plan benefits cannot aggregate his or her own IRAs or 403(b) plans with the like inherited accounts. The beneficiary of the inherited account can aggregate multiple inherited IRAs or 403(b) plans from the same decedent, but again, only IRAs and 403(b) plan benefits from the same decedent can be aggregated and only accounts or plans of the same type may be aggregated.

VI.

Important Concepts for Beneficiaries Under the Minimum Distribution Rules

There are three important concepts that govern the determination of the applicable distribution period once the account owner has died. They are: whether the account owner died before his or her required beginning date, the concept of multiple beneficiaries, and the determination of designated beneficiaries. These concepts are intertwined.

A. Timing of Account Owner’s Death Death before the required beginning date – non-spouse beneficiary. If the account owner dies before his or her required beginning date, a non-spouse designated beneficiary will generally use his or her own remaining life expectancy to calculate required minimum distributions. The factor is based on the beneficiary’s age in the year after the year of the account owner’s death, and then it is reduced by a factor of one for each year that elapses. Treas Reg 1.401(a)(9)-5, A-5(c)(1). The Single Life Table is found in Treas Reg 1.401(a)(9)-9, A-1. Required minimum distributions must begin by December 31 of the year after the year of the account owner’s death. Treas Reg 1.401(a)(9)-3, A-3(a). If the account owner dies before his or her required beginning date and there is no designated beneficiary, the retirement account must be paid out by the end of the fifth year after death. This is the five-year rule.6 For 2012 decedents, the last day for the account to be paid out is December 31, 2017, if there is no designated beneficiary. Treas Reg 1.401(a)(9)-3, A-2. In addition, the plan is allowed to require that the five-year rule is the only rule that applies, even if there is a designated beneficiary. Treas Reg 1.401(a)(9)-3, A-4(b). Fortunately, the non-spouse designated beneficiary rollover rules can be used by individual beneficiaries and some trusts to “opt out” of the required five-year rule in the plans that require its use. The non-spouse beneficiary will be able to establish an inherited IRA, if done on a timely basis, and stretch the payments over the beneficiary’s life expectancy. A charity, an estate, and some trusts, such as a charitable remainder trust, do not qualify as designated beneficiaries. Treas Reg 1.401(a)(9)-4, A-3. Because they are entities, they are treated as if they have a life expectancy of zero. Death before the required beginning date – spouse as beneficiary. The main issue at this juncture when planning for a spouse as the primary beneficiary is that the spouse can defer taking required 6

Because of the moratorium on required minimum distributions during 2009, if an account owner died without a designated beneficiary and the five-year rule period included the year 2009, then the five-year rule is extended to a six-year rule. This rule will, therefore, affect beneficiaries of account owners who died in 2004-2009. The last extended six-year period will end on December 31, 2015.

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minimum distributions until December 31 of the year the account owner would have been age 70½ The surviving spouse can choose this option even if the surviving spouse is over age 70½. However, the spouse must be the sole beneficiary of the account. Treas Reg 1.401(a)(9)-3, A-3(b). If there are multiple individual beneficiaries, the spouse will be the sole beneficiary if separate accounts are created by December 31 of the year following the year of the account owner’s death. Treas Reg 1.401(a)(9)-8, A2(a)(2). In that case, the spouse can defer the required minimum distributions, establish an inherited IRA, or roll over the account to the spouse’s own IRA or employer plan accounts. The spouse who is under age 70½ should be sure to name beneficiaries of whatever account he or she decides upon the be sure that the 5-year rule will not apply should the surviving spouse die before his or her required beginning date. Treas Reg 1.401(a)(9)-3, A-5. In addition for the under age 70½ surviving spouse, he or she should be sure to roll over the inherited IRA to his or her own IRA by the year the account owner would have attained age 69½ to avoid a required minimum distribution in the year the account owner would have attained age 70½. Death on or after the required beginning date – non-spouse beneficiary. If the account owner dies on or after his or her required beginning date, any unpaid portion of the account owner’s required distribution from the year of death must be paid to the beneficiary by December 31 of the year of death. Treas Reg 1.401(a)(9)-5, A-4(a). If the account owner dies on or after his or her required beginning date, a non-spouse designated beneficiary will use the longer of (i) the account owner’s remaining life expectancy; or (ii) the beneficiary’s own remaining life expectancy to calculate required minimum distributions. Treas Reg 1.401(a)(9)-5, A-5(a)(1). The account owner’s life expectancy factor is determined based on the account owner’s age he or she attained or would have attained in the year of death had the account owner lived for the entire year. The beneficiary’s life expectancy factor is based on the beneficiary’s age in the year after the year of the account owner’s death. Both the account owner’s theoretical remaining life expectancy and the beneficiary’s life expectancy are found in the Single Life Table from Treas Reg 1.401(a)(9)-9, A-1. Required minimum distributions must begin to the beneficiary by December 31 of the year after the year of the account owner’s death. Treas Reg 1.401(a)(9)-5, A-5(a). Consequently, the account owner’s life expectancy will be reduced by a factor of one (1) from the year of death and the beneficiary’s life expectancy will be compared as of the year after the year of the account owner’s death to see whose life expectancy is longer. Thereafter, whichever life expectancy is used to determine the applicable distribution period for the first distribution calendar year, that factor will be reduced by a factor of one (1) each year. In application, this rule comes into play when the non-spouse beneficiary is a sibling or some other beneficiary who is close in age to the account owner who is not the account owner’s spouse. If the account owner dies before his or her required beginning date and there is no designated beneficiary, then the account owner’s remaining life expectancy as determined in the year of his or her death will be the remaining life expectancy used. Again, since the beneficiary’s required minimum distributions begin in the year after the account owner’s death, the account owner’s life expectancy reduced by a factor of one will actually be used to determine the applicable distribution period in the first distribution calendar year. Death after the required beginning date – spouse as beneficiary. If the account owner dies after his or her required beginning date and the spouse is the beneficiary, the surviving spouse will almost always choose to roll over the retirement account to the spouse’s own IRA or employer plan account. However, if the surviving spouse does not roll over the funds, then the determination of the applicable distribution is again based on the longer of the life expectancy of account owner in the year of death or the spouse’s life expectancy. Unlike the non-spouse beneficiary, the spouse must annually compare his or her life expectancy with the theoretical remaining life expectancy of the account owner reduced by one (1) each year to see which yields the longest distribution period through the year of the spouse’s death.

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Treas Reg 1.401(a)(9)-5, A-5(c)(2).7 The longer applicable distribution period is always used in this situation; it is not an election. After the spouse’s death, the spouse’s life expectancy is fixed in the year of the spouse’s death and reduced by a factor of one each year. It is unclear from the regulations whether the account owner’s life expectancy is then removed from the equation at that point, however it is safer to assume that this is the case. This situation occurs most frequently when spouses die within a short time of one another and there has not been enough time for the surviving spouse to complete a rollover or when a surviving spouse has neglected to do a rollover after the account owner’s death.

B. Multiple Beneficiaries Rules governing a retirement account with multiple beneficiaries are confusing and have largely been illuminated through private letter rulings. The regulations can be in Treas Reg 1.401(a)(9)-5, A-7. When a group of individuals are named as beneficiaries, it is the oldest beneficiary whose life expectancy will be used to determine the applicable distribution period. However, if the beneficiaries are able to establish separate accounts, generally by December 31 of the year following the year of the account owner’s death, each beneficiary may be able to use his or her own life expectancy to determine the applicable distribution period for the beneficiary’s required minimum distributions. Treas Reg 1.401(a)(9)-8, A-2(a)(2). If the surviving spouse is one of the beneficiaries, then he or she can roll over the benefits or otherwise use any options available to the surviving spouse. If an entity is one of the named beneficiaries, the entity will have the shortest life expectancy, unless the entity is a trust that is considered a “see-through” trust, because an entity has a life expectancy of zero and the retirement account will have no designated beneficiary. Therefore, it is imperative to be able to segregate the entity’s interest during the planning stage, such as by establishing separate IRAs for charities and for individual beneficiaries. The IRS views the concept of multiple beneficiaries both “horizontally,” for example when the account owner’s children are named as the primary beneficiaries of an IRA, and “vertically,” when the account owner names primary and contingent beneficiaries of a retirement account. When all of the primary and contingent beneficiaries named in the beneficiary designation are individuals, the issues are really limited to having groups of individuals needing to create separate accounts before December 31 of the year after the year of the account owner’s death so that each beneficiary may use his or her own life expectancy to determine their respective required minimum distributions from the retirement account. Determining whether there are designated beneficiaries among a group of beneficiaries who must share the account balance, and the resulting life expectancy or life expectancies to be used are the “horizontal” issues. The “vertical” issue occurs when determining who will take if a primary beneficiary does not survive the account owner and contingent beneficiaries come into play. If all of the beneficiaries are individuals, the vertical issue is not very difficult to analyze. However, when trusts are involved, as will be described in Section X, below, then the horizontal issues may still arise but the “vertical” determination of beneficiaries becomes paramount.

C. Beneficiary Determination Date The most important date in the planning stage is September 30 of the year following the year of the account owner’s death. It is the date by which it is determined under the regulations whether the 7

Caution: The IRS has ignored the regulation that uses the longer of the spouse’s recalculated life expectancy or the account owner’s remaining life expectancy following the account owner’s death after the account owner’s required beginning date if the spouse has not attained age 70½. See Priv Ltr Rul 200945011 (Nov 6, 2009). Instead, the IRS is treating the spouse as the account owner, which can lead to disastrous results if the spouse dies shortly after the account owner and has not had time to name his or her own beneficiary, which was the case in this ruling. The IRS applied the five-year rule in this ruling, which contravenes Treas Reg 1.401(a)(9)-5, A-5(a) and (c).

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retirement account at issue has any designated beneficiaries, and if it has a designated beneficiary, which designated beneficiary’s life expectancy will be used to determine the applicable distribution period. Fortunately, between the account owner’s death and the September 30 “beneficiary determination date” unwanted beneficiaries can often be eliminated through disclaimers or by cashing them out. This interim period will be discussed in the post-mortem planning portion of the seminar.

VII. Designating Beneficiaries The key to estate planning with retirement benefits is the beneficiary designation and its interaction with the law and the retirement account that governs the payment of benefits. The identity of the beneficiary or beneficiaries will determine whether the retirement account will be eligible to stretch the post-death payments over the beneficiary’s life expectancy or, perhaps, for as little as five years, or in the case of some plans, only for a period immediately following the account owner’s death. The period over which the required minimum distributions must be paid out is called the “applicable distribution period”. Treas Reg 1.401(a)(9)-5, A-4

A. Hierarchy of Beneficiaries. Individuals are favored over entities in the minimum distribution regulations. Among individuals, the surviving spouse has most-favored beneficiary status and will be the preferred choice as the beneficiary in most instances. If there is no spouse, or the goal is to stretch the retirement account for as long as possible, children and grandchildren (nieces or nephews) are the next tier of beneficiaries that are given preference. The younger the beneficiary, the longer the possible stretch-out. Trusts occupy a middle tier in the Treasury regulations. The IRS has a general disdain for trusts as beneficiaries and tries to make it as difficult as possible for a trust to be named as the beneficiary of a retirement account. However, trusts can be used as long as it has “identifiable” individual beneficiaries so that the trust beneficiaries can be treated as designated beneficiaries. Finally, entities as beneficiaries; such as estates, charities, and trusts that do not qualify their beneficiaries as designated beneficiaries; will cause the retirement account to not have a designated beneficiary, so that the account may be subject to the 5-year rule or a lump-sum payout if the account owner dies before his or her required beginning date, or the account owner’s remaining life expectancy if the account owner dies on or after his or her required beginning date. A trust that has a charity as a remainder beneficiary, such as a charitable remainder trust or a garden-variety QTIP trust with a charitable remainder will not qualify as a designated beneficiary. However, if the individual beneficiary of the CRT or the QTIP is the account owner’s spouse, and the spouse is almost the same age as the account owner, then the fact that the trust beneficiary does not qualify as a designated beneficiary will not have much of an impact on how fast distributions will come out of the retirement account.

B. Spouse as Most-Favored Beneficiary Naming surviving spouse as the sole beneficiary8 provides the most flexibility in planning. The surviving spouse has the most options to choose from when deciding how to treat the benefits. 1. The income from the retirement account will be taxed at the spouse’s income tax rate, which is not likely to be the highest marginal rate, as compared to a trust.

8 The issues involved with naming a non-U.S. citizen spouse as the beneficiary of a retirement account are discussed in the marital trust portion of this outline. It is possible to use a qualified domestic trust (“QDOT”) but it is extremely difficult.

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2. A spouse who is under age 70½ can delay the commencement of minimum distributions until the spouse’s required beginning date by rolling over the retirement benefits to his or her own retirement account or treating an IRA as his or her own. 3. Once minimum distributions begin, the spouse will be able to use the Uniform Lifetime Table to calculate the required minimum distribution. 4. In the rare instance when the spouse chooses to continue to take distributions if the account owner has died after his or her required beginning date, the spouse takes required minimum distributions using the longer of the account owner’s life expectancy on a fixed basis or the spouse’s life expectancy, recalculated annually during the spouse’s life expectancy, as previously noted. Treas Reg 1.401(a)(9)-5, A-5(a)(1). 5. In addition, the spouse’s beneficiaries have the best chance to stretch out the benefits over their own life expectancy, or at least the life expectancy of the oldest beneficiary, if the spouse rolls over the benefits and begins minimum distributions using the Uniform Lifetime Table, assuming the account owner died after his or her required beginning date. The spouse can name beneficiaries that will use their own life expectancies to determine their required minimum distributions either for an inherited account, if the account owner dies before his or her required beginning date, or for the spouse’s own account, if the spouse rolls over the account or treats an IRA as his or her own.

C. Children and Grandchildren as Beneficiaries If the client’s children or grandchildren are old enough to act responsibly with their share of the retirement account proceeds, naming the children and grandchildren as beneficiaries will allow the client to maximize the stretch-out of his or her retirement accounts. If the beneficiaries cooperate and create separate accounts and perform non-spouse beneficiary rollovers on a timely basis, the beneficiaries will be able to use their own life expectancies to determine the applicable distribution period for their inherited IRA account. (Note that even for a Roth IRA, they will have to take required minimum distributions, although they will likely not be subject to income tax.) If a client has a very large retirement account, care must be taken to avoid the generation-skipping tax. If the spouse has adequate resources with most of the retirement benefits or there is no spouse, the appeal of the stretch-out is obvious using the IRS single-life table to determine the applicable distribution period for an IRA. Under the IRS table: 1. At age 40, a child’s life expectancy is 43.6 years; 2. At age 21, a grandchild’s life expectancy is 62.1 years; and 3. At age 12, a grandchild’s life expectancy is 70.8 years.

D. Charities as Beneficiaries If a client can meet his or her planning objectives by leaving the retirement benefits to the charities directly through the beneficiary designation, it can be beneficial for the client who has charitable intent. Naming as charity as a beneficiary shifts income in respect of a decedent (“IRD”) from individual beneficiaries to the charity, which will not pay income tax on the retirement account distributions because the charity is tax-exempt. If the choice is between a charity and a very young beneficiary, then it is a closer call and projections should be run to determine whether it would be better for the child or grandchild to inherit the retirement account and take the stretch-out or inherit after-tax assets (such as an insurance policy bought in an irrevocable life insurance trust) or other after-tax assets instead. Giving the surviving spouse the option. Some clients want to benefit a charity, but they aren’t sure whether the surviving spouse will need the assets to live on. In that case, the beneficiary designation form can name the surviving spouse as the primary beneficiary and the charity as the contingent beneficiary. If

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the spouse does not need all of the retirement account assets and wants to avoid recognition of the income on some portion of the account, the spouse can disclaim part (or all) of his or her interest in the retirement account. The estate can then claim an estate tax charitable deduction for the amount that was transferred to the charity by way of the disclaimer, although such a deduction may not be necessary at the death of the first spouse. The charity is at risk in case the spouse chooses not to disclaim the interest or if there is a mistake (for example, the disclaimer is not made within the applicable nine-month period or it fails to meet some other requirement for a qualified disclaimer). Create separate IRAs for charities. It is wise to create, whenever possible, a separate IRA for the charitable beneficiaries and another IRA for the individual beneficiaries to allow for the possibility that the separate accounts might not be established by the dates required to designate beneficiaries or create separate accounts to be sure that the shares that are payable to the individual beneficiaries will allow them to use their life expectancies to determine required minimum distributions. The separate IRAs for each beneficiary group will ensure that the individual beneficiaries will at least be able to use the life expectancy of the oldest beneficiary to compute required minimum distributions instead of being defaulted into the five-year rule or the account owner’s theoretical remaining life expectancy, as will be discussed in the portion of this seminar covering the calculation of post-death required minimum distributions. Avoid using trusts. If a client wants to name a charity as the beneficiary of a retirement account, it is almost never advisable to name a trust as the beneficiary and then try to name the charity as the beneficiary of the retirement account through the trust. The IRS released Prop Treas Regs 1.642(c)3(b)(2) and 1.643(a)-5(b), in June 2008, which state that allocations of IRD, including retirement benefits, to a specific subtrust under a trust agreement or to a pecuniary bequest generally will not be recognized unless the allocation has independent economic effect. 1. For example, if the trust states that a gift to a charity is to be paid first from retirement benefits, the allocation may not be upheld if the allocation has no independent economic effect. Independent economic effect means that the allocation must have a result that could change the outcome of the allocation other than the income tax consequences. 2. If a trust agreement gives the trustee discretion to pay a charitable bequest from IRA proceeds, then payment of some of the proceeds to the charity will not have independent economic effect aside from the tax consequences, and the income generated by the distribution of the proceeds will be allocated pro rata among the beneficiaries. 3. However, if the bequest required that a $100,000 charitable bequest be paid only from retirement benefits and the trust does not have $100,000 of retirement benefits, this directive should have independent economic effect because part of the bequest will lapse if the trust is not permitted to pay the bequest from other trust assets. 4. Likewise, a specific bequest of the IRA itself to a charitable beneficiary should have independent economic effect, since there is a risk that the IRA will be exhausted at the time of the death of the account owner and the charity could end up with nothing. 5. Allocation of retirement accounts to charities that are residuary beneficiaries and specific legatees should also be recognized under Treas Reg 1.691(a)-4(b)(2). 6. In addition, if a provision in a trust prohibits the trustee from using retirement benefits to fund a bequest or share, this negative directive should be upheld. A trust might include such a prohibition if it is desirable for individual trust beneficiaries to receive the retirement benefits in a conduit trust to obtain the stretch-out of the retirement account. Priv Ltr Rul 200644020 (Nov 3, 2006). In this ruling, a trust provided that on the death of the grantor, the sum of $100,000 was to be paid to three charities. The trust specifically allowed this gift to be paid in cash or kind and the trustee also had the power to make distributions in cash or kind. The trustee satisfied the distributions by dividing the grantor’s IRA into three separate accounts and titled the accounts in the names of the respective charitable beneficiaries (presumably as IRAs inherited from the

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grantor). The IRS ruled that under IRC 691(a)(2), the payments are transfers of the right to receive IRD and the trust must include in its gross income the value of the portion of the IRA that is IRD to the extent the IRA was used to satisfy the pecuniary legacies. The IRS specifically rejected the taxpayer’s argument that the exception to the constructive receipt rule found in IRC 408(d)(1) applies in this case. It is also important to remember that in order for the trust to be eligible for the income tax charitable contribution, the trust document must provide that the charitable bequest either can be or must be paid from the trust’s gross income. Otherwise, there will be no income tax charitable deduction for the distribution of the IRA proceeds or other IRD to the charity, if the trust receives the income (or is deemed to receive the income) before the charity is paid. In Priv Ltr Rul 200644020, the IRS also denied the trust a charitable deduction for the amount included in income resulting from the acceleration of the IRD, since the trust did not direct or require the trustee to pay the pecuniary legacies from the trust’s gross income. See IRC 642(c)(1). So, the trust ended up picking up the tax on the IRAs without actually withdrawing any of the funds and did not get an offsetting charitable contribution deduction.

E. Estate as Beneficiary In most instances, the estate is the worst possible beneficiary because it cannot be a designated beneficiary. Usually, the estate ends up being the beneficiary when the account owner failed to name a beneficiary and the plan or IRA adoption agreement names the estate as the default beneficiary. The estate can also end up as the default beneficiary when an account owner names only a primary beneficiary and that beneficiary dies. Surviving spouse as sole beneficiary. If the surviving spouse is the sole residuary beneficiary and the sole personal representative of an estate, or he or she is the sole beneficiary and sole trustee of a trust with the discretion to choose which assets to allocate to the subtrusts, numerous private letter rulings will allow the surviving spouse to roll over the benefits to an IRA. See, e.g., Priv Ltr Ruls 200344024 (Oct 31, 2003) and 200940031 (Oct 2, 2009). This exception is not found in the body of the regulations, but it is found in the preamble to the regulations and the preamble is regularly cited in private letter rulings allowing the surviving spouse to roll over the retirement account to his or her own IRA. Of course, a private letter ruling applies only to the taxpayer who submitted the ruling request, but it is widely accepted that this is how the IRS treats this situation. It is best not to rely on this rule in planning. It is better used if you are counseling a client post-death and a retirement account has an estate or a trust as the beneficiary.

F. Importance of Naming Contingent Beneficiaries In most cases, it is beneficial to have a designated beneficiary, especially if the account owner dies before his or her required beginning date. It is extremely important that the account owner name both primary and contingent beneficiaries for this reason. See Priv Ltr Rul 200742026 (Oct 19, 2007). For many plans, if an account owner does not name a beneficiary, the default beneficiary will be his or her spouse. However, if there is no surviving spouse, the default beneficiary is usually the account owner’s estate. If the account owner’s estate is the beneficiary and the account owner dies after his or her required beginning date, the longest possible payout period is the account owner’s remaining life expectancy reduced by one for each year that passes. If the account owner dies before his or her required beginning date and the estate is the beneficiary, the five-year rule applies and all of the benefits must be distributed to the estate beneficiaries by the end of the fifth year following the account owner’s death. In Priv Ltr Rul 200742026 (Oct 19, 2007), the IRS did not honor the court-ordered reformation of a beneficiary designation. The reformed beneficiary designation named the account owner’s daughter as the primary beneficiary after the account owner mistakenly did not name a contingent beneficiary for his IRA. When the account owner’s spouse, who was the original primary beneficiary, died very shortly before the account owner, the account owner’s estate became the primary beneficiary. Even though the account owner had the form to change the primary beneficiary to the daughter, he died before the form

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was signed. The IRS felt that the account owner could have named a contingent beneficiary under the original beneficiary designation and that it did not have to honor the state court reformation. This ruling emphasizes the importance of naming contingent beneficiaries every time a beneficiary designation is updated. Whenever possible, do not rely on your clients or the financial institution to change beneficiary designations. When the stakes are so high, a beneficiary designation should be a “don’t try this at home” project. At a minimum, ask for a copy of the beneficiary designation as filed by your client with the plan or the IRA if the client insists on doing his or her own beneficiary designations. Be sure that the plan administrator or IRA custodian confirms the acceptance of the beneficiary designation as submitted.

VIII. Trusts as Beneficiaries There are many reasons for naming a trust as a beneficiary to achieve estate planning goals that may or may not be tax related.

A. General Rules for Treating Trust Beneficiaries as Designated Beneficiaries The requirements for a trust to be a “see-through” trust, i.e., a trust that meets all of the requirements under Treas Reg 1.401(a)(9)-4, A-5 so that the trust beneficiaries are treated as the designated beneficiaries of the retirement account, seem straightforward. These trusts may also be called “lookthrough” trusts. The term “see-through” trust is not found in the regulations. It is a handy abbreviation for a trust whose beneficiaries are treated as designated beneficiaries. Such a trust must meet the following requirements: 1. The trust must be a valid trust under state law, or would be but for the fact that there is no corpus. 2. The trust must be irrevocable, or will, by its terms, become irrevocable on the death of the employee. This includes testamentary trusts. See Treas Reg 1.401(a)(9)-5, A-7(c)(3), examples 1 and 2. The revocable trust does not have to state that the trust will become irrevocable as long as it will become irrevocable under state law. Beware of joint trusts that do not become irrevocable on the death of the first spouse, although recent rulings, especially in community property states where joint trusts are common, seem to allow flexibility when the surviving spouse is the trustee and the marital trust is essentially revocable because it grants the spouse a full right of withdrawal. 3. The trust must have beneficiaries who are identifiable from the trust instrument within the meaning of Treas Reg 1.401(a)(9)-4, A-1. This is the hardest rule to meet. 4. The trust must have documentation described in Treas Reg 1.401(a)(9)-4, A-6 that has been provided to the plan administrator. In general, the documentation must be provided to the plan administrator, IRA custodian, or 403(b) provider by October 31 of the year after the year of the account owner’s death. Documentation may be required by the account owner’s required beginning date if the account owner has named a trust where the spouse is the sole beneficiary and the spouse is more than 10 years younger than the account owner.

B. Ramifications If the Trust Is Not a See-through Trust What if the trust is not a see-through trust so that the trust beneficiaries are not considered designated beneficiaries? If the account owner dies on or after his or her required beginning date, the applicable distribution period will be the account owner’s remaining life expectancy. This result may be about the same in the case of a see-through trust whose oldest beneficiary is the surviving spouse if the surviving spouse is about the same age as the account owner. However, if the account owner dies before his or her required beginning date, the five-year rule applies. In addition, if the trust is not a see-through trust, the trustee will not be allowed to roll over benefits in a qualified plan to an IRA, since the trust is treated as a non-spouse beneficiary in most instances. Without the ability to do a non-spouse beneficiary rollover, the

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trustee may get a minimal or no stretch-out of the retirement benefits. Therefore, it can be vitally important that the trust be a see-through trust.

C. The Hardest Rule to Meet—All Trust Beneficiaries Must Be Identifiable In all but the most unusual cases, ensuring that the trust has identifiable beneficiaries is the only truly difficult requirement to meet in order to satisfy the see-through trust rules. On its face, the inquiry may seem simple. However, you must do a great deal of analysis to assure yourself that, in fact, you have considered all potential trust beneficiaries and that all are identifiable. The “identifiable beneficiaries” test really means that all trust beneficiaries who are “counted” in determining whether the trust beneficiaries will be treated as designated beneficiaries must be individuals. Your notion of a beneficiary and the Service’s notion of a beneficiary in this context are very different. However, the regulations do allow the “undesirable” beneficiaries to be eliminated. The period starting with the date of the account owner’s death until the September 30 date is informally referred to as the “shake-out period.” Treas Reg 1.401(a)(9)-4, A-4. This is the period during which beneficiaries can be eliminated (“shaken out”) but not added. Generally, these beneficiaries are either charities, older default beneficiaries that will cause the applicable distribution period for the trust to be much shorter than anticipated, powers of appointment, and certain trustee powers. Payment of debts, expenses and taxes. Identifying potential undesirable beneficiaries will also include consideration of the trustee’s power to use retirement benefits to pay estate taxes and expenses of administration. The IRS takes the position that the power to use retirement benefits payable to the trust to pay estate taxes and expenses of administration benefits the account owner’s estate and makes the estate a beneficiary of the trust. This concept would apply whether the payment from the trust is required or is discretionary. A trust with this power could cause the trust to fail the see-through test and the trust would not be a qualified trust. However, the IRS has conceded that if all payments of expenses and taxes from retirement benefits occur before the September 30 beneficiary determination date, the estate will no longer be considered a beneficiary. See the Preamble to the final regulations and Priv Ltr Rul 200432027, 200432028, and 200432029 (Aug 6, 2004). As a planning matter, your trust should include a provision that either prohibits the use of retirement benefits for the payment of estate taxes, debts, and expenses of administration or limits their payment to the period ending before September 30 of the year after the year of the account owner’s death. You might find that an outright prohibition is not suitable for an estate whose largest and most liquid asset is the retirement account. Whether your trust includes such a provision, it is also good practice to obtain an affidavit from the trustee stating that retirement benefits were not used to pay taxes, debts, and expenses of administration, or, if they were, that they were paid before the September 30 deadline. You may also want to obtain a private letter ruling for absolute certainty on the issue.

D. Assuring that Beneficiaries are Identifiable and are Individuals. In the minimum distribution context, the IRS does not view the beneficiary as the person who is entitled to income at a given point in time. Rather, all beneficiaries are considered or “counted” as beneficiaries from the grantor’s date of death (ignoring beneficiaries whose interests are eliminated by the September 30 beneficiary determination date) until a beneficiary or beneficiaries are found who both (1) are living at the death of the account owner and (2) take the retirement benefits outright from the trust. 1. For this purpose, “outright” does not include a distribution of the retirement accounts when the beneficiary attains a certain stated age, for example. 2. It means identifying a beneficiary or beneficiaries whose interest in the retirement account is immediately distributed to the beneficiary without any limitations as soon as the beneficiary’s interest in the trust has ripened.

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For example, in a typical credit shelter trust, even if the spouse is the only beneficiary of income and principal during his or her lifetime, because some portion of the retirement benefits paid to the trust might be accumulated in the trust during the spouse’s lifetime for the benefit of the children, the children are also considered beneficiaries of the retirement account, although they have no entitlement to the benefits until the spouse dies. 1. If the children’s interest may be accumulated until they reach a specified age (and they haven’t reached that age at the death of the account owner/grantor), you must look further “down” the trust to see which additional beneficiaries must be considered to determine whether all beneficiaries are individuals and who has the shortest life expectancy. 2. In the above example, if the children receive their interest in the credit shelter trust outright at the death of the surviving spouse, only the spouse and children are considered the beneficiaries of the credit shelter trust and the spouse will have the shortest life expectancy, except in an unusual second marriage situation. See Treas Reg 1.401(a)(9)-5, A-7(c)(3), example 1. 3. Note that this example from the regulations does not contain any default beneficiaries in case none of the named beneficiaries survive to the complete distribution of the trust. The IRS has taken the position with this example that once you can identify which beneficiary or beneficiaries will receive the retirement benefits outright at the death of a prior beneficiary, you have identified all of the relevant beneficiaries and any further contingent beneficiaries are “mere potential successors,” discussed in the next section, below. 4. What would be problematic is a trust that names (1) the spouse as the income beneficiary; (2) the children as the remainder beneficiaries, with the children receiving their interests outright only upon reaching a stated age; and (3) no default beneficiary. If none of the children have reached the stated age in the trust by the death of the account owner, then it is not clear from the regulations whether the account owner’s heirs-at-law are the takers in default or whether the IRS would conclude that there are no identifiable beneficiaries.

E. Multiple Beneficiaries—Contingent and Successor Beneficiaries Because there are limited circumstances when the IRS will look to the sole lifetime beneficiary of a trust to determine whether the beneficiaries are identifiable, it is crucial to understand the rules governing multiple beneficiaries, especially those beneficiaries who are contingent beneficiaries of a trust. Even if the beneficiaries are (seemingly) identifiable, the beneficiaries still have to be individuals, and the beneficiary with the shortest life expectancy is used to determine the applicable distribution period. 1. Treas Reg 1.401(a)(9)-5, A-7(b) and (c)(1) discuss contingent and successor beneficiaries. Although not exclusive to trusts, it is the area that causes most of the problems in the trust context, because most designations naming individuals give the primary beneficiary a complete right to withdraw the retirement account assets at any time, rendering the contingent beneficiary’s rights irrelevant. 2. Under Treas Reg 1.401(a)(9)-5, A-7(b), if a beneficiary has a contingent right, the beneficiary will be counted in determining whether the account owner has a designated beneficiary and which designated beneficiary has the shortest life expectancy (a “contingent beneficiary” under the regulations). In the language of the regulations, any person “who has any right (including a contingent right) to an employee’s benefit beyond being a mere potential successor to the interest of one of the employee’s beneficiaries upon that beneficiary’s death” is considered a beneficiary of the trust. Treas Reg 1.401(a)(9)-5, A-7(c). This language in the regulations seems to indicate that almost any contingent beneficiary would have some contingent interest in the trust and would be counted. 3. However, under Treas Reg 1.401(a)(9)-5, A-7(c)(1), if a person (i.e., a legal person whether or not an individual) could become the successor to the interest of a beneficiary only because of the prior beneficiary’s death, that successor beneficiary will not be considered in determining whether there is a designated beneficiary or which designated beneficiary has the shortest life expectancy. Indeed, to be a successor beneficiary, the preceding beneficiary’s interest in the retirement account would have to be:

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Distributed outright to the beneficiary if he or she survives the account owner (or another prior beneficiary); a complete right to withdraw the retirement account from the trust at any time (a general power of appointment); or a conduit trust, which requires the trustee to distribute to the beneficiary all withdrawals from the retirement account upon receipt by the trustee.

F. Multiple Trust Beneficiaries and the Separate Account Rule Trusts generally are not eligible to use the separate account rules that apply to most multiple beneficiary situations. Treas Reg 1.401(a)(9)-4, A-5(c). If a group of individuals receive their shares in a retirement account outright, they can each establish a separate account and use their own life expectancies to determine the applicable distribution period for their respective accounts, assuming they complete it by the separate account date. When retirement benefits are payable to a trust, even if the trust document states that the trustee can establish separate accounts for each separate share entitled to a portion of a retirement account, in most cases the life expectancy of the beneficiary with the shortest life expectancy will be used to determine the applicable distribution period for required minimum distributions payable to each subtrust. This may be true even if all of the trusts are conduit trusts. Trust is named as beneficiary. Generally, if a trust is named as the beneficiary of a retirement account in the beneficiary designation, such as “The Wendy Wolverine Revocable Living Trust dated February 2, 2012,” all of the trust beneficiaries must be considered in determining whether the trust beneficiaries can be deemed designated beneficiaries and whose life expectancy is used to determine the applicable distribution period for the trust, unless it is impossible under the terms of the trust for retirement assets to be allocated to a particular subtrust or share. If the trust document creates separate shares for the beneficiaries, and even pays them the retirement benefits outright by the Beneficiary Determination Date, separate accounts can be established for each beneficiary but beneficiaries must use the age of the oldest of the beneficiaries to determine the applicable distribution period for required minimum distributions payable to the trust. The separate-share rule does not apply because the retirement benefits are payable to a trust. Subtrusts as beneficiaries. However, in Priv Ltr Rul 200537044 (Sept 16, 2005), the IRS moderated its position on this issue. The IRS allowed the trustee to create separate accounts for each separate trust established by one master trust document and each beneficiary of the separate trust was allowed to use his or her own life expectancy to determine the required minimum distributions. However, the facts were quite specific in this case. Each subtrust was named in the beneficiary designation form. Each subtrust started out as a conduit trust that required all withdrawals from the retirement accounts payable to the subtrust be distributed to the trust beneficiary. 1. Naming subtrusts directly in a beneficiary designation seems to be the one exception when it is possible for the trust beneficiaries to use their own life expectancies to determine the required minimum distribution applicable distribution period. 2. However, separate trusts each, with its own taxpayer identification number, and separate inherited retirement accounts must be maintained for each subtrust. 3. It is recommended that the trust document clearly state that if retirement benefits are payable to a separate share, that the trustee must establish separate trusts for each share. In application, to be sure that the separate account rule will work for your clients’ trusts, absent further authoritative guidance from the IRS or your own private letter ruling, during your client’s lifetime: 1. The account owner can separate his or her IRA or 403(b) contract into separate IRAs or 403(b) contracts for each trust and name each individual subtrust as the sole beneficiary of the IRA or 403(b) contract. This technique works with IRAs and 403(b) plans and for qualified plans only after the participant leaves employment and rolls his or her qualified plan balance into an IRA, unless the plan allows in-service distributions; or

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2. The account owner can create a separate trust document for each beneficiary (i.e., for three beneficiaries, you would need three identical trust documents with each beneficiary’s name on their respective trusts) so you could identify that specific trust in the beneficiary designation form. 3. The latter technique would work for qualified plans that cannot be split into separate accounts while the participant’s funds remain in the employer’s retirement account. The trustee of the trusts can roll over the funds from the employer plan into an IRA for the trust beneficiaries so that the beneficiaries will get the advantage of the stretch IRA. Practical problems with separate accounts. Even if the beneficiary designation does specify to which trusts the retirement account must be allocated, it may be impossible to “establish” the accounts either by the September 30 or December 31, especially if an estate tax return is being filed. In that case, the trustee can establish separate accounts at any time for purposes of investment only that will not change the applicable distribution period. This may not present a big problem if the trust beneficiaries are close in age to one another.

G. Overview of Accumulation Trusts and Conduit Trusts. Even though, actuarially, it may be extremely likely that a current trust beneficiary will eventually take his or her interest in the retirement account payable to the trust outright upon attaining a specified age, the IRS has chosen to reject the notion of an actuarially based test for determining whether a succeeding beneficiary is a contingent beneficiary or a successor beneficiary. Consequently, all trusts that are beneficiaries of retirement accounts fall into one of two categories. The trust is either an accumulation trust or a conduit trust. 1. When the trustee does not have to distribute to or for the beneficiary all of the withdrawals from the retirement accounts payable as they are received, so that after the current beneficiary’s death the remainder beneficiary could theoretically receive some of the retirement benefits withdrawn during the current beneficiary’s lifetime, the trust is an “accumulation trust”. 2. The identity of the remainder beneficiaries of the accumulation trust will play a key role in determining whether: • The trust is a see-through trust; and • The applicable distribution period for required minimum distributions payable to the trust. 3. A typical trust governed by an ascertainable standard based on health, education, maintenance and support is an example of an accumulation trust. Priv Ltr Rul 200228025 (July 12, 2002), gave birth to the notion of the “accumulation trust” and the “conduit trust.” The IRS stated that a trust set up for the account owner’s two minor grandchildren could not use the oldest grandchild’s life expectancy where the trustee had the discretion to accumulate or distribute income and principal for the health, support, maintenance, and education of the grandchildren and each grandchild had the right to withdraw his or her share of the trust at age 30. If a grandchild died before age 30, that grandchild’s share went to the other grandchild. If they both died, the trust assets passed to the contingent beneficiaries, the oldest of whom was age 67. In a surprising ruling at the time it was issued, the IRS held that the discretion of the trustee to accumulate IRA distribution constituted “a contingency over and above the death of a prior beneficiary.” Therefore, required minimum distributions had to be based on the life expectancy of the oldest beneficiary, including the contingent beneficiaries. While this ruling was decided under the 1987 proposed regulations, it is probably not a coincidence that it was issued on April 18, 2002, two days after the final regulations were issued (although its official publication date was in July, 2002). 1. If the trustee must distribute to the current beneficiary all amounts withdrawn from retirement accounts payable to the trust, then the trust is a “conduit trust.” 2. If the trust is a conduit trust:

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Both the required minimum distribution and amounts withdrawn in excess of the required minimum distributions must be distributed to or for the benefit of the beneficiary to qualify as a conduit trust; but The remainder beneficiaries are irrelevant.

Determining the type of trust, whether the trust is a see-through trust, and how long the required minimum distributions can be stretched is like a simultaneous equation. The type of trust, whether accumulation or conduit, and the identity of the beneficiaries drives 1. Whether the trust is a see-through trust; 2. The length of the applicable distribution period; and 3. How you can meet your client’s planning goals in the context of the rules governing retirement benefits payable to a trust.

H. Problematic Beneficiaries in an Accumulation Trust If the trust is a long-term generation-skipping trust that does not distribute the assets outright to a beneficiary living at the death of the account owner or a subsequent living beneficiary, i.e., it is an accumulation trust, the trust may fail as a see-through trust or the beneficiary that determines the applicable distribution period may be much older than the “target” beneficiaries. (e.g., maybe it distributes outright to unborn great-grandchildren). The following are the ramifications of various possible default beneficiaries. Charities. The charity will cause the trust to fail as a see-through trust because it is not an individual and its interest cannot be eliminated by the beneficiary determination date. It may be helpful to draft a provision stating that no retirement benefits may be paid to charities after the Beneficiary Determination Date. If it is possible to cash out the charity’s share prior to the September 30 Beneficiary Determination Date, then the charity can be ignored. It is hard to do that if the charity is a default beneficiary unless the charity can be persuaded to disclaim its interest in the trust. Parents and other elderly relatives. It is natural for the account owner to want to include the parents of the account owner as contingent beneficiaries, especially if the account owner is wealthier than his or her parents. However, if the account owner has children who will not take the retirement benefits outright at the account owner’s death, for example, a divorced account owner with young children who will take the retirement benefits in trust until age 35, then the eldest parent’s life expectancy will be used to determine the applicable distribution period. Instead, the trust should prohibit the parents from receiving the retirement benefits or they should not be named as contingent beneficiaries. Consider buying a term life insurance policy payable to the parents if needed for their support rather than accelerating the payout of the retirement benefits payable to the trusts for the children. Heirs-at-law. If the heirs-at-law of the account owner and his or her spouse are the default beneficiaries, they have to be included in determining whether the trust is a see-through trust. 1. The age of the oldest living individual beneficiary, including those beneficiaries who come before the default beneficiaries, will determine the applicable distribution period. 2. Under EPIC, the State of Michigan is the final heir, a non-individual beneficiary. In this case, there would be no designated beneficiary and the trust would not be a qualified trust. Your trust should address this problem by specifically eliminating the State of Michigan from the definition of heirs-at-law in the trust document. The Michigan Trust Code, in MCL 700.1104(n), retains the state under the definition of heir. Unborn issue. Even if the trust distributes outright to, say, unborn great-grandchildren, those greatgrandchildren are not identifiable if none of them are living at the account owner’s date of death. If no further beneficiaries are named, you may have no identifiable beneficiaries. At that point, you will default to the state anti-lapse statute to determine the beneficiary with the shortest life expectancy or whether there are no identifiable beneficiaries.

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Spouses of children or issue. Spouses of beneficiaries named generically as contingent beneficiaries will cause the trust to have beneficiaries that are unidentifiable and will fail as a see-through trust. If a child is widowed or divorces, his or her new spouse could be older than the oldest beneficiary living at the date of the account owner’s death. 1. If you wish to include spouses of beneficiaries as contingent beneficiaries, the best practice is to identify them by name. 2. Otherwise, you can generically refer to spouses but include a provision that states, “No spouse from a marriage to a beneficiary occurring after the date of the account owner’s death can be older than the oldest beneficiary of the trust who is living at the date of the account owner’s death,” or words to that effect. Adopted issue. Most clients treat adopted children as part of the family. However, because the rare adult adoption can occur, it is also a good idea to include a provision limiting beneficiaries who are adopted subsequent to the account owner’s death to beneficiaries who are younger than the oldest beneficiary who is living at the date of the account owner’s death.

I. Choosing Default Beneficiaries for an Accumulation Trust Carefully choosing individual beneficiaries as the default beneficiaries for an accumulation trust is vitally important. The choice will depend on the age of the likely oldest beneficiary. There are a variety of possible solutions: Siblings. If the spouse is the primary beneficiary and the oldest trust beneficiary, then the siblings of the account owner and the spouse might be good default beneficiaries, if they are close in age to the spouse. Nieces and nephews. Ask the client whether he or she has any relatives who are close in age to the beneficiary or beneficiaries most likely to be the oldest beneficiary of the trust. Often you might choose nieces and nephews who are about the same age as the account owner’s children. “Winner-takes-all trust.” A “winner-takes-all trust” requires the distribution of the retirement account to the last living beneficiary from a group of potential named trust beneficiaries. The life expectancy of the oldest beneficiary in the pool would be used to determine required minimum distributions. 1. If the trust is used for generation skipping, the trust beneficiaries in the group of permissible beneficiaries would necessarily be younger than the beneficiaries of a prior generation. 2. It is possible that the retirement account would pay out the entire stream of required minimum distributions to the trust, depending on the ages of the beneficiaries in the “pool of potential winners” at the time of the account owner’s death. 3. The potential winner must be living at the account owner’s death, otherwise the trust runs the risk of having a beneficiary who is not identifiable. Therefore, great-grandchildren as a class should not be named in a winner-takes-all trust unless the account owner has a living great-grandchild. No default beneficiary. You might also draft a trust having no default beneficiaries. Thus, the only possible pool of beneficiaries is those named in the “first level” of the trust. Such a trust would be patterned after the trust found in Treas Reg 1.401(a)(9)-5, A-7(c)(3), example 1. While it is unsettling for an estate planner to draft a trust without default beneficiaries, a client may be much more willing to take the risk that his or her children and grandchildren will survive to take the retirement benefits. The conscious omission of a default beneficiary clause will only work if there is at least one individual beneficiary who is living at the death of the account owner and that beneficiary takes his or her interest in the retirement accounts payable to the trust outright at the death of the account owner or at the death of a prior beneficiary.

J. Powers of Appointment in an Accumulation Trust

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Powers of appointment can be very tricky to use with an accumulation trust. They are perfectly acceptable if the trust is a conduit trust. General power of appointment. Usually, retirement benefits payable to an accumulation trust that includes a testamentary general power of appointment designed to avoid the generation-skipping tax or included for other reasons, will mean that the trust is not a see-through trust because the potential appointees cannot be identified at the death of account owner. In this case the powerholder could name: 1. His or her estate, which cannot be a designated beneficiary; 2. His or her creditors, which would make the beneficiary’s estate a trust beneficiary; 3. Someone who is older than the oldest known beneficiary on the beneficiary determination date; or 4. Someone who is not yet living at the account owner’s death, such as a great-grandchild. A general power of appointment will be disregarded when the trust is a conduit trust or, in the case of a marital trust and perhaps some other limited exceptions, a trust that gives the beneficiary a lifetime general power of appointment that includes a complete right of withdrawal in favor of the beneficiary.9 Limited powers of appointment. Accumulation trusts that have a special or limited power of appointment can pass the see-through test because the potential appointees are often individuals who are identifiable. 1. A special power of appointment limited to the beneficiary’s issue should qualify since all potential beneficiaries are younger than the powerholder. 2. If the power is to be broader than the beneficiary’s issue, the power must be drafted so it is exercisable only in favor of a class of individuals who are younger than the oldest trust beneficiary living as of the date of the grantor’s death. 3. If the powerholder can create interests in trust, the power should be drafted to limit the trusts to those that will qualify under the see-through rules. Every subsequent trust must qualify under the see-through rules, including trusts created in a separate trust agreement. 4. Trusts that contain sprinkling powers may qualify as see-through trusts if the beneficiaries who “may be sprinkled” with the income or principal are limited to an identifiable class of individuals, at least one of whom is living on the account owner’s date of death. However, if none of the beneficiaries take the retirement benefits outright at the death of the income beneficiary, you must look to more remote beneficiaries to determine whether all of the beneficiaries are identifiable and are individuals.

K. Other Drafting Pitfalls Affecting Accumulation Trusts and Conduit Trusts There are a number of common provisions added to trusts that might cause beneficiaries to be deemed unidentifiable or might change the identity of the beneficiary with the shortest life expectancy. They are as follows: Holdback provisions for beneficiaries who are disabled or have substance abuse problems. While well-intentioned for obvious non-tax reasons, inserting provisions allowing the trustee to hold back distributions if a beneficiary becomes disabled or has a substance abuse problem, might “undo” the benefits of a conduit trust that requires all of the distributions from the retirement account to be distributed to the trust beneficiary. 1. For example, if there is a holdback provision that allows the trustee to retain otherwise mandatory distributions until the beneficiary is no longer disabled or seeking substance abuse treatment, the conduit trust becomes an accumulation trust and you must look to the

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See Chapter 28 of ICLE’s Estate Planning Handbook for a more complete discussion of powers of withdrawal in the context of trusts that are not marital trusts, and the limited uses of grantor trusts to own retirement benefits, especially for special needs beneficiaries.

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contingent remainder beneficiaries to determine the beneficiary whose life expectancy will be used to calculate required minimum distributions. 2. Consider drafting to allow the trustee to use the required minimum distributions and other withdrawals that are payable to a conduit trust for the beneficiary’s treatment or other benefit. 3. A holdback provision might also turn an outright distribution to a beneficiary at the death of the account owner or a prior beneficiary into a constructive trust of indefinite duration. In this latter case, the possible holdback turns an outright distribution into an accumulation trust that expands the pool of possible beneficiaries and which could change the payout period for required minimum distributions if older beneficiaries or charities are named among the more remote contingent beneficiaries. Holdback provisions for minor beneficiaries. Often clients who do not yet have grandchildren will use a per stirpes designation but they are not inclined to draft trusts for the outside possibility that their children will not survive them and will have children of their own. Rather than allowing the trustee to hold back an outright distribution to a minor beneficiary, be sure to include a facility of payment clause that will allow the distribution of the retirement account to be paid to a Uniform Transfers to Minors Act account. Then find a custodian that will allow the account required minimum distributions to be paid to an UTMA. Trusts for contingent minor beneficiaries. Instead of a general holdback for minor beneficiaries, the trust might include a trust for those very contingent grandchildren or great-grandchildren or other minor beneficiaries. Insert conduit trust language into the trust that is a placeholder for those unborn or unlikely beneficiaries. Even if multiple grandchildren might inherit, they will receive all of the distributions over the life expectancy of the eldest grandchild (assuming no one in an older generation is counted as a beneficiary), which probably will not be a bad outcome. Trust provisions allowing the trustee or trust protector to set up a special needs trust by court order. You might have a broader provision in your trust document that allows either the trustee or a trust protector to petition the probate court to set up either a third-party special needs trust or a first-party special needs trust if special needs were not an issue when the trust was originally drafted. In addition, you might have to modify a trust, even without those provisions if a beneficiary were a special needs beneficiary. If retirement benefits might be payable to the trust of a special needs beneficiary, the trust provision should require the trustee or trust protector to establish the special needs trust no later than September 30 of the year following the year of the account owner’s death so it is clear who the remainder beneficiaries will be for that special needs trust and for purposes of determining whose life expectancy will be used to calculate the applicable distribution period for the special needs trust, or for all of the trusts under the trust agreement, depending on the structure of the trust document and the beneficiary designations. You might also give the trustee the power to obtain a private letter ruling if there is any question about how the required minimum distribution will apply to the trust, especially if it is a firstparty special needs trust. Provisions for trust protectors. Although trust protectors have been in use for a long time by many estate planning attorneys, with the advent of the Michigan Trust Code giving more clarity as to how trust protectors are treated under Michigan trust law, the use of trust protectors is likely to increase. 1. Many trust protectors are given broad powers to modify the trust and the timing of trust distributions. Provisions such as these, like the holdback provisions described above, can derail the intentions of otherwise well-drafted conduit trusts or outright distributions, by allowing the trustee to amend the trust, in general, or to modify the timing for distributions, in particular. 2. Consider restricting the trust protector’s powers so that the trust protector is not allowed to make any changes to the trust or timing of the distributions that could have effect of negating conduit trust mandatory distributions or outright distributions of retirement benefits.

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3. Do not allow the trust protector to add beneficiaries unless they are younger than the oldest trust beneficiary living at the date of the account owner’s death. Incontestability clauses. A clause designed to prevent a beneficiary from taking his or her trust share if the beneficiary brings a trust contest without probable cause, should have the intended effect of preventing the beneficiary from receiving his or her share of the trust. However, if the litigation has not been resolved by September 30 of the year following the year of the account owner’s death, the beneficiary should still be counted for purposes of determining whether the beneficiary’s life expectancy will be used to determine the applicable distribution period. This author is unaware of any rulings addressing the effect of an incontestability clause or disputes subject to such a clause and its effects on the calculation of the applicable distribution period.

L. Conduit Trusts

A properly drafted conduit trust will automatically pass the look-through test10. Treas Reg 1.401(a)(9)-5, A-7(c)(3), example 2. This type of trust is informally called a “conduit trust” because the trustee must distribute all withdrawals from the retirement account to the beneficiary on receipt. In effect, the trust is a mere pass-through, or conduit, for the retirement account. Because the conduit beneficiary can potentially receive the entire balance of the retirement account if the beneficiary lives to his or her full life expectancy, contingent beneficiaries are “mere potential successors” and do not have to be counted when determining which beneficiaries are identifiable and are individuals. A trust that is not required to distribute all withdrawals from the retirement account to the beneficiary, is informally called an “accumulation trust.” The typical credit shelter trust having the spouse as the income beneficiary and the children as remainder beneficiaries is an accumulation trust. Requirements. The conduit trust must require that all withdrawals from the retirement accounts payable to the conduit trust must be distributed immediately to the conduit trust beneficiary or used for the benefit of the conduit trust beneficiary. 1. The conduit trust can be drafted to limit withdrawals from the retirement accounts to the required minimum distributions. 2. However, if the trustee can withdraw more than the required minimum distribution, the “excess” distributions must also be distributed to the beneficiary or used for the beneficiary’s benefit. 3. The IRS has agreed that the trustee may pay the ongoing expenses of the trust (as distinguished from the account owner’s estate taxes and expenses of administration of his or her estate) from the retirement account withdrawals without affecting the classification of the trust as a conduit trust. Priv Ltr Rul 200537044 (Sept 16, 2005). 4. The conduit trust language requires a pass-through only of the retirement benefits payable to the trust. The trust income and principal from other trust assets may be accumulated or distributed as appropriate to meet your client’s wishes. 5. The conduit trust beneficiary can have a general power of appointment or the default beneficiaries for the conduit trust can be individuals who are older than the conduit trust beneficiary or even charities. Planning considerations. A conduit trust is most useful when the account owner wants either professional management of the retirement account (or management by someone other than the trust beneficiary), or the ability to control the contingent beneficiary of the retirement account and the ability of the beneficiary to stretch the payment of the retirement account for as long as possible.

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The one caveat is that the trust still must limit the payment of debts, expenses of administration and taxes to the period ending on September 30 of the year following the year of the account owner’s death.

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1. They are especially useful with young children. The trustee can control the stretch out of the retirement account over the child’s life expectancy or the oldest beneficiary’s life expectancy. 2. If the child is a minor, the distributions from the retirement accounts can be paid to a custodial account under the Uniform Transfers to Minors Act (UTMA), and the trust will still qualify as a conduit trust. To allow for that possibility, the clause creating the payment of the retirement account withdrawals to the conduit trust beneficiary may be stated as payable “to or for the benefit of” the conduit trust beneficiary. 3. Similarly, the trustee could use the retirement account withdrawals in lieu of using other trust assets for payments under an ascertainable standard, for example. The trust would qualify as a conduit trust as long as all of the retirement account withdrawals in each calendar year, i.e., required minimum distributions and additional withdrawals, are paid to the beneficiary, distributed to an account under the Uniform Transfers to Minors Act for a minor beneficiary, or used by the trustee to pay for other needs or expenses of the beneficiary. Conduit Pot Trust. The conduit trust can be a “pot trust” or a “group trust” with multiple beneficiaries, and it can be a sprinkle trust. 1. The trustee must pay out all of the withdrawals from the retirement account to or for the conduit trust beneficiaries. 2. The oldest beneficiary’s life expectancy will be used to determine the applicable distribution period, assuming the conduit beneficiaries are the only trust beneficiaries who are relevant to the determination (i.e., there are no other trusts in the trust document whose beneficiaries could affect the determination of the applicable distribution period). 3. As long as the required minimum distribution and any other withdrawals from the retirement account are distributed to or for the conduit trust beneficiaries each year, it is unimportant which of the beneficiaries receives the required minimum distribution and other retirement account withdrawals and how much of the required minimum distribution and withdrawals each beneficiary receives. When a Conduit Trust May Not Be Useful. Conduit trusts are not useful in all situations. 1. Conduit trusts are generally not appropriate when using retirement benefits to fund the credit shelter trust. Typically, the goal of the credit shelter trust is to benefit the surviving spouse in a manner that will provide the spouse with income and principal during his or her lifetime but not cause inclusion of the trust assets in the spouse’s estate. If the spouse is the sole beneficiary of the trust and it is a conduit trust, it is possible that all of the retirement benefits will end up in the spouse’s estate, which is exactly the result which you are trying to avoid with a credit shelter trust. In addition, the benefits will be distributed at a rate that is much faster than would have been required if the surviving spouse had rolled over the benefits to an IRA and used the Uniform Lifetime Table to take required minimum distributions. 2. Finally, conduit trusts are rarely appropriate for a trust established to benefit a special needs child. Generally, the special needs trust is designed so that the special needs beneficiary will qualify, and continue to qualify, for needs-tested government benefits such as social security income (SSI) and Medicaid. The conduit distributions will increase substantially as the special needs beneficiary ages, especially if withdrawals are limited to required minimum distributions each year. Consequently, if a trust is drafted to pay the required minimum distributions solely for the benefit of the special needs child (which would become very difficult if the child has a normal life expectancy), the required minimum distributions could exceed the expenses that can be paid by the trust for the benefit of the child, causing the unused portion of the required minimum distribution to have to be paid to the child as he or

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she approaches old age. This, in turn, could cause the child to have excess income or countable assets in excess of the ceilings needed to qualify for SSI and Medicaid.

IX.

Using Retirement Benefits to Fund the Credit Shelter Trust

When planning a taxable estate in which the largest asset is a retirement account, it would seem axiomatic that the retirement account would be used to fund the credit shelter amount. Using the retirement account to fund the credit shelter trust is probably the area where the income tax and estate tax laws are most likely to intersect, but not with an optimal result. 1. Even if the spouse is the only beneficiary of income and principal during his or her lifetime, because some portion of the retirement benefits payable to the trust might be accumulated in the trust and paid to the remainder beneficiaries after the spouse’s death, the trust is deemed to have multiple beneficiaries. 2. Since the spouse is not considered the sole beneficiary of the trust, the spouse loses mostfavored beneficiary status and is treated like a nonspouse beneficiary for purposes of applying the minimum distribution rules to the credit shelter trust. As a result of the increase in the estate tax exemption to $5,000,000, with portability of the unused exemption for the surviving spouse under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub L No 111-312, §§302(a)(1), 303(a), 124 Stat 3296 (2010) (amending IRC 2010(c)), the need to fund a credit shelter trust with retirement benefits may diminish, if not vanish, for most taxpayers. Unless the couple has substantial after-tax assets to fund the credit shelter trust, and with the possibility of a $1,000,000 exemption still looming in 2013, special planning still has to be done to at least allow for the possibility that some or all of the stretch-out might have to be given up by funding the credit shelter to save estate taxes. Benefits lost when retirement accounts are payable to the credit shelter trust. The following benefits are lost when retirement accounts are payable to the credit shelter trust instead of outright to the surviving spouse: 1. There is no ability to defer required minimum distributions until the account owner would have attained age 70½. Distributions must begin the year after the death of the account owner, regardless of the age of the surviving spouse or the account owner. If the spouse is young, this could mean many years of deferral are lost by using the retirement benefits to fund the credit shelter trust. 2. Minimum distributions may only be distributed over the surviving spouse’s remaining life expectancy, if the trust is a see-through trust, and the account owner dies before his or her required beginning date. If the trust is a see-through trust and the account owner dies on or after his or her required beginning date, distributions will paid over the longer of the surviving spouse’s remaining life expectancy, not recalculated, and the account owner’s remaining life expectancy. This assumes that the surviving spouse is the beneficiary with the shortest life expectancy under the terms of the credit shelter trust. The Uniform Lifetime Table, which is based on two individuals who are 10 years apart in age, may not be used. 3. At the death of the surviving spouse, if the account owner’s children or other younger beneficiaries take the remaining trust assets outright, they may only defer any undistributed benefits over the surviving spouse’s remaining life expectancy. No further stretch out is available. 4. Much of the distribution will be taxed at trust income tax rates. Under the Uniform Principal and Income Act (UPIA), MCL 555.501 et seq., 10 percent of the required minimum distribution would be considered trust accounting income and the rest of the distribution would be principal, unless the trust document states otherwise, or unless the income in the retirement account can be identified as such. Distributions in excess of the required minimum distributions would be treated as principal. MCL 555.809(3).

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•

The entire distribution would be ordinary income (assuming there is no basis in the contract from after-tax contributions), since retirement benefits are taxed as income in respect of a decedent under IRC 691(a).. • The distribution would be taxed in the trust at the very high trust tax rates instead of what is likely to be the spouse’s lower income tax rate. In 2012, a trust will be in the 35 percent bracket at $11,650 of taxable income. An individual will not be in that bracket in 2012 until he or she has taxable income of $388,350. Id. • A Chief Counsel Memorandum clarified that the portion of the required minimum distribution allocable to principal that is distributed to beneficiaries is part of distributable net income and is therefore taxed at the beneficiary’s individual tax rates. Priv Ltr Rul 200644016 (Nov 3, 2006).) 5. Under UPIA, except for retirement benefits payable to a marital trust, the trustee does not have to distribute the income accrued in the retirement account to the trust each year. The income can continue to build up inside the retirement account and only when it is actually distributed to the trust is it characterized as income or principal. 6. If the trust treated the entire required minimum distribution as income, the IRS might not accept the treatment by the trust and claim it is a fundamental departure from local law. Moreover, it may cause the surviving spouse to receive all of the retirement account distributions, essentially making the trust a conduit trust, which is not desirable for a credit shelter trust. 7. Because the retirement account assets must go into the trust at their fair market value, they will be diminished by income taxes as they are distributed into the trust. 8. In most cases it is preferable to fund the credit shelter trust with assets that have a basis which will be stepped up at the death of the account owner and that might eventually increase in value with only capital gains taxes being imposed on the increase. In summary, funding a credit shelter trust with retirement benefits, “wastes” the retirement benefits. 1. If the surviving spouse is the oldest beneficiary of the credit shelter trust, as is usually the case, the retirement benefits are distributed faster than would be the case with a spousal rollover, the income taxes on the distributions would be paid at the trust level at high trust tax rates further depleting the value of using the retirement benefits to save estate taxes, and the remainder beneficiaries will not be able to stretch the benefits beyond the surviving spouse’s remaining life expectancy. 2. Using a Roth IRA does not have the negative income tax problems, since the distributions are tax-free, but the depletion of the Roth IRA is more profound because minimum distributions are required when paid to the credit shelter trust while the surviving spouse could roll over the Roth IRA into his or her own Roth IRA without taking any lifetime required minimum distributions. Use of a pecuniary formula clause to fund the credit shelter trust and the marital trust. Many revocable trusts allocate the trust assets between the marital trust and the credit shelter trust based on a formula designed to maximize the use of the estate tax exemption. 1. If the formula will result in allocating the retirement account assets to a pecuniary trust (whether it is the marital trust or the credit shelter trust), the IRD rules might cause all of the income in a retirement account to be accelerated and recognized when the pecuniary trust is funded. 2. This interpretation derives from Treas Reg 1.691(a)-4(b)(2), which implies that since the payment of a specific or residuary legacy does not trigger the acceleration of the IRD when such a legacy is paid, the payment or use of an item of IRD does accelerate the income when it is used to pay a pecuniary legacy.

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3. There was a contrary school of thought which stated that there was no income recognition because IRC 402(a), 403(a), and 408(d)(1) provide exceptions from the constructive receipt rules that, in effect, state that income from qualified plans, tax-sheltered annuities, or IRAs are only included in gross income in the year that the income is distributed and that this rule trumps the general interpretation of the IRD rules. This issue has now been largely settled, absent a taxpayer willing to take the issue to Tax Court. In Priv Ltr Rul 200644020 (Nov 3, 2006), a trust provided that on the death of the grantor, the sum of $100,000 was to be paid to three charities. The trust specifically allowed this gift to be paid in cash or kind and the trustee also had the power to make distributions in cash or kind. The trustee satisfied the distributions by dividing the grantor’s IRA into three separate accounts and titled the accounts in the names of the respective charitable beneficiaries (presumably as IRAs inherited from the grantor). The IRS ruled that under IRC 691(a)(2), the payments are transfers of the right to receive IRD and the trust must include in its gross income the value of the portion of the IRA that is IRD to the extent the IRA was used to satisfy the pecuniary legacies. Moreover, the IRS specifically rejected the taxpayer’s argument that the exception to the constructive receipt rule found in IRC 408(d)(1) applies in this case. Fractional formula or specific direction in beneficiary designation. Since the Treas Reg 1.691(a)-4(b)(2) interpretation does not apply to fractional share formula clauses, it is virtually the rule that the formula clause in a trust should almost always be drafted as a fractional share, if retirement benefits might become an asset of the revocable living trust. See Priv Ltr Rul 199931033 (Aug 6, 1999). If it is clear from your planning which trust should receive (or should not receive) the retirement accounts, the beneficiary designation should specifically allocate the retirement accounts to the desired trust. If the beneficiary designation allocates the retirement benefits to a specific trust, even if there is a pecuniary formula in effect for the remaining trust assets, the acceleration of income tax issue will not apply. Specifically allocating the retirement benefits may have other benefits as well. For example, if the beneficiary designation states that the retirement accounts must be allocated to a marital trust that grants the spouse a lifetime power of withdrawal, the spouse will be treated as the sole beneficiary of the account and the spouse will probably be allowed to roll over the benefits to an IRA. The IRS is now enforcing the rules under the general rules governing the specific allocation of items of income to trust beneficiaries based on the language of the trust document. Treas Reg 1.652(b)-2. 1. The IRS will allocate items constituting income in respect of decedent (IRD) (as defined in Treas Reg 1.691(a)-1(b)), which would include retirement benefits, proportionately among all subtrusts, unless the allocation has economic effect independent of the income tax consequences of the transaction. 2. Therefore, a formula clause in a trust will generally result in part of the retirement benefits (and other IRD) being allocated to the marital trust and the other part to the credit shelter trust. 3. However, an affirmative allocation in a beneficiary designation will be respected, as will a provision in a trust document prohibiting the trustee from allocating retirement benefits to a particular trust. Funding the credit shelter trust with disclaimers of retirement benefits. If the only asset available to fund the credit shelter trust is a retirement account, there is a solution that allows the surviving spouse to fund the trust with the minimal amount of retirement benefits necessary to use up the account owner’s estate tax exemption. 1. The spouse should be named as the primary beneficiary of the retirement account and the credit trust should be the contingent beneficiary. At the death of the account owner, the surviving spouse can then disclaim the portion of the benefit necessary to use up the account owner’s remaining estate tax exemption, or enough of the exemption so that the surviving spouse is unlikely to have a taxable estate at the surviving spouse’s death.

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2. Under IRC 2518, the spouse can disclaim an asset and still have use of the asset after the disclaimer, although there can be some restrictions that apply, as described below. 3. When a disclaimer is being considered, projections should be done that compare: • The estate tax savings in the estates of both spouses and the loss of continued income tax deferral of the retirement account if the spouse disclaims in favor of the credit shelter trust with: • The estate tax cost in the surviving spouse’s estate of the surviving spouse rolling over the retirement account to an IRA and taking the minimum distributions using the Uniform Lifetime Table, followed by the remainder beneficiaries taking the minimum distributions using their own life expectancies. 4. A properly drafted trust and beneficiary designation allow the surviving spouse to defer decisions until the death of the account owner when more information is available about the spouse, the children, and their financial situation. Disclaimer trust. Some practitioners prefer to create a separate disclaimer trust in their revocable living trust document that will receive the retirement benefits if the spouse disclaims. 1. This trust can look like a QTIP trust and can have the language necessary to allow the trust to qualify for QTIP treatment and to ensure that it meets the requirements for the spouse’s use of the trust assets after a disclaimer (no testamentary special powers of appointment, or distributions by the spouse limited to an ascertainable standard rather than discretionary, and lifetime limited powers of appointment also limited by an ascertainable standard, for example). By using a disclaimer trust, the family has more time to decide whether it makes sense to use the disclaimed benefits to use up the estate tax exemption or to qualify for the marital deduction, if it turns out too much is disclaimed. The disclaimer must be completed no later than 9 months after the account owner’s death, but if the personal representative extends the account owner’s estate tax return, the personal representative has 15 months to determine whether to elect QTIP treatment on the disclaimed portion. 2. Alternatively, the trust may look more like a credit shelter trust without the additional language needed to qualify the trust as a QTIP marital trust. In this form, the trust would look like a credit shelter trust without limited powers of appointment for the spouse. The “main” credit shelter trust can then have all of the desired lifetime and testamentary limited powers of appointment for the surviving spouse since assets will not be disclaimed into the main credit trust. 3. If the overwhelming majority of assets available to fund the credit shelter trust are retirement benefits, then it may not make sense to use a separate disclaimer trust, if it would not be economically feasible to administer a separate trust for the non-retirement assets.

X.

More on Planning with Disclaimers.

There are variations on planning with disclaimers, rather than just disclaiming to the credit shelter trust, that might provide more flexibility in planning and that give a result that is more satisfactory to the client. Credit shelter trust as secondary beneficiary. One concept is to name the spouse as the primary beneficiary and name the children as the contingent beneficiaries of the retirement account. The credit shelter trust can be named in the beneficiary designation as the secondary beneficiary only if the spouse disclaims, while keeping the desired contingent beneficiaries, e.g., the account owner’s children, as the contingent beneficiaries should the spouse not survive the account owner. In this scenario, the children will take their share of the retirement account outright if the spouse does not survive the account owner. The children can then stretch out payments using their own life expectancies and can carry out a nonspouse designated beneficiary rollover after the disclaimer, if necessary, from a qualified plan to an inherited IRA to get the stretch-out. (Most IRA custodians and many 403(b) plan administrators will

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allow this disclaimer language in a custom beneficiary designation attached to the printed form.) The contingent beneficiaries could also be trusts for the children, if the children are minors or have creditor issues, for instance. For IRAs and 403(b) plans. The other variation works with IRAs or multiple 403(b) plan accounts. The account owner establishes two accounts (or splits one account into two separate accounts). The first, and usually the larger account, will have a beneficiary designation as described in the previous paragraph, with the spouse as the primary beneficiary, the children as the contingent beneficiaries, and the credit shelter trust as the secondary beneficiary if the spouse disclaims. The second IRA or 403(b) plan account will name the spouse as the primary beneficiary and the children as contingent beneficiaries, but it will omit the disclaimer language, or specify that a disclaimer will result in the disclaimed benefits passing to the children. In this second retirement account, the spouse may still disclaim but the result will be a disclaimer in favor of the children. 1. This approach allows the spouse to use up part of the account owner’s estate tax exemption and to get some of the retirement account assets into the hands of the children during the spouse’s lifetime without gift tax consequences. 2. It also shifts the income tax payable on the retirement benefits to the children, who will report the income as income in respect of a decedent on their respective tax returns. 3. This technique is used when the spouse knows that he or she will not need all of the assets in the account owner’s IRAs or 403(b) plan accounts and can give up some of the benefits in favor of their children. Laddering Disclaimers. It is also possible to be more creative with disclaimers by “laddering” disclaimers within the beneficiary designation and allowing the surviving spouse, other beneficiaries, or the trustee to disclaim the retirement benefits to achieve various estate planning goals. 1. For the trustee to disclaim an interest in the trust or its assets, the trust document must give the trustee the right to disclaim. MCL 700.2902(1). 2. Techniques such as laddering disclaimers generally require very sophisticated clients and trustees and may not work for many clients. 3. A good example of laddering disclaimers is covered in Priv Ltr Rul 200938042 (Sept 18, 2009). 4. For a more complete discussion of this technique, see Harvey B. Wallace II, Planning for Qualified Plan and IRA Benefits—The Final Minimum Required Distribution Rules, as edited by Nancy H. Welber, in Estate Planning for Retirement Assets (ICLE seminar held Feb 4, 2010). Drafting the beneficiary designation for a disclaimer. When drafting a beneficiary form to include disclaimers there are two points that you must know: 1. Will the plan administrator or IRA custodian accept a disclaimer? Before you draft a plan that includes disclaimer planning, you should be sure that the retirement account will honor the disclaimer. You may need to see a copy of the plan, not merely the summary plan description, to make this determination. Most IRA custodians accept disclaimers. Some qualified plans specifically disallow the use of disclaimers. Most qualified plans, however, do not address the issue at all. If a qualified plan does not address the issue of disclaimers, check the law of the state cited in the choice-of-law section of the plan. In Michigan, unless a trust states otherwise, the trust must accept a disclaimer of an interest by a beneficiary. See MCL 700.2902(1). However, your client’s employer plan may not be governed by the laws of the State of Michigan. (Thanks to Natalie Choate and her presentation on this topic to the American College of Trust and Estate Counsel (ACTEC) employee benefits committee in October, 2009.) See also Kennedy v Plan Adm’r for DuPont Sav & Inv Plan, 555 US 285, 129 S Ct 865 (2009).

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2. Where will the disclaimed property end up? This is usually more a function of how the disclaimer itself is drafted. However, careful drafting of the beneficiary designation can insure against unintended results. Name the specific subtrust. When the beneficiary designation form is drafted, it is important for the beneficiary designation form to reference the specific subtrust that will receive the benefits after the disclaimer, rather than the master trust document as a whole. Naming the subtrust instead of the master trust document provides better control over whose life expectancy will dictate the applicable distribution period for the required minimum distributions payable to the trust. 1. If the master trust document is named, then the oldest trust beneficiary’s life expectancy will be used to determine the payout rate for required minimum distributions, even if, for example, the trust leaves all of the trust assets outright in equal shares to the children, and the children could easily create separate inherited accounts for the retirement accounts payable to the trust by the September 30 beneficiary determination date. 2. However, if, for example, the conduit trusts for each child are named in the beneficiary designation so that it is clear that separate trusts will be created for each child, each child will be able to use his or her own life expectancy to determine the applicable distribution period for the required minimum distributions. 3. In addition, by naming a specific subtrust, it is possible that the retirement benefits payable to that subtrust would not be subject to the claims of creditors since it is a specific devise and not a residuary devise. 4. This specific reference avoids the potential for the retirement benefits to be allocated to the master trust that could then subject them to a pecuniary formula clause. 5. It is possible to use a formula clause in the disclaimer document to determine how much of the retirement account will be allocated to the credit shelter trust, however this would usually only be possible in an IRA or 403(b) plan. • If using a formula clause is desirable, the formula in the disclaimer should be a fractional share formula to avoid a possible acceleration of income under Treas Reg 1.691(a)-4(b)(2) and to more easily meet the rules under IRC 2518 governing disclaimers of fractional interests. • If the spouse will receive the portion of the account that is not disclaimed, using a fractional formula also ensures that all gains and losses will be allocated to the separate shares of the spouse and the credit shelter trust until the accounts can be separated (and the spouse either rolls over the remaining share or treats it as his her own, if it is an IRA). • The IRA custodian may not accept a formula clause disclaimer or may accept it only if the custodian is exonerated from liability for payments based on the formula. If you anticipate using a formula disclaimer at the time that you file the beneficiary designation, state in the beneficiary designation that the disclaimer may be based on a formula and add a clause exonerating the IRA custodian for following the instructions of the trustee when the formula is implemented. The trustee will have to provide detailed written instructions when it is time to fund the trusts to show the proper allocations to the credit trust and marital trust or share. Rules Governing Disclaimers. The rules governing the use of disclaimers will be discussed in the post-mortem planning portion of the program.

XI.

More on Custom Beneficiary Designations

Most IRA custodians, 403(b) providers, and some plan administrators will allow the plan participant or account owner to use a custom beneficiary designation attached to the printed beneficiary designation form supplied by the custodian or plan administrator. Whenever your client’s largest asset is his or her

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retirement account or the planning includes a concept that will not fit onto a printed form, you should consider drafting a custom beneficiary designation. Types of provisions that might require a custom beneficiary designation. There are any number of situations that might cause you to go beyond the printed form provided by the plan administrator or custodian. The partial list includes: 1. Naming a default beneficiary in case of a family disaster; 2. The ability to establish UTMA accounts for minor beneficiaries in lieu of using a trust or a conservatorship to receive minimum distributions; 3. Provisions for division into separate accounts for the beneficiaries so that they can use their own life expectancies; 4. Use of a formula clause to make a marital or charitable bequest; 5. A simultaneous death provision: 6. Provisions giving the beneficiaries the right to name a successor beneficiary in case of their death; 7. Provisions allowing the beneficiary to move the account to another custodian or 403(b) provider by a trustee-to-trustee transfer; and 8. Directions for the custodian to disclose information to the account owner’s attorney-in-fact and personal representatives and to follow instructions given by the account owner’s attorney-in-fact under a general durable power of attorney and his or her personal representative or trustee after the account owner’s death. Excellent examples of all of these provisions, and more, can be found in Natalie Choate’s authoritative book, Life and Death Planning for Retirement Benefits (7th ed 2011). Sample Disclaimer Language for a Beneficiary Designation. The following is sample language that may be used in a custom IRA beneficiary designation with the goal of allowing the retirement benefits to flow to a credit shelter trust in the account owner’s revocable living trust if the surviving spouse disclaims all or part of his interest in the account balance: 1. My Primary Beneficiary shall be my spouse, Peter S. Participant, if my spouse survives me. His date of birth is [date]. 2. After my death, my spouse shall have the power to change any installment payment schedule to one that is more rapid than that required by applicable law and shall have the power to withdraw all or any portion of the income or principal constituting the account balance at any time or from time to time. These rights shall be in addition to, and not in limitation of, any rights given to my spouse by law, by the IRA custodian [name of custodian], or by this statement. 3. Notwithstanding the foregoing, if my spouse survives me and my spouse or his personal representative disclaims all or any part of the account balance that is payable to my spouse pursuant to this designation, the Secondary Beneficiary for the portion of the account balance that my spouse disclaims shall be the then-acting trustee(s) of the Family Trust as set forth in Article X of the [name of participant] Revocable Living Trust under agreement dated [date] and as may be amended from time to time (“Family Trust”). 4. If my spouse does not survive me, I designate as my Contingent Beneficiaries, in equal shares, my children who survive me: [names of children]; provided, however, if a child does not survive me, but leaves issue who survive me, the share such deceased child would have taken if living shall be allocated to such issue who survive me, per stirpes. By right of representation. If you want the gift over to the issue to be by right of representation, as the term is used in Michigan, this author highly recommends that you use the term “per capita at each generation” instead of “by right of representation.” To the extent that a beneficiary designation provided by an IRA custodian or plan administrator addresses the issue of beneficiaries, it typically uses the term

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“per stirpes.” In addition, the retirement account may not be governed by Michigan law. “By right of representation” may still mean “per stirpes” in the state whose law governs the beneficiary designation.

XII. Funding a Marital Trust with Retirement Benefits A. In General If a marital trust is the beneficiary of a retirement account, the trust and/or the beneficiary designations must be drafted so that the trust and the retirement account qualify for the marital deduction and under the minimum distribution rules. Both the trust and the beneficiary designation forms should be drafted so that they both are clear about these qualification issues. As a result of the increase in the estate tax exemption to $5,000,000, with portability of the unused exemption for the surviving spouse, some clients will be disinclined to leave any property to their spouse in trust if these provisions are made permanent. On the other hand, especially in a second marriage situation, the use of marital trusts could increase, especially since the nonretirement assets could get a second step-up in basis on the death of the surviving spouse. If the total estate is not expected to exceed $10,000,000 (as may be adjusted for inflation), the surviving spouse can use the first spouse’s unused basic applicable exclusion amount (presumably $5,000,000) and then use his or her own unused applicable exclusion amount. There will be no estate taxes, but since the assets in the marital trust are included in the estates of both spouses, the basis of the nonretirement and other non-IRD assets would get a step up (or down) in each estate.

B. Marital Trust Revenue Rulings A QTIP trust drafted in its usual form with all of the income payable to the surviving spouse for his or her lifetime and principal to be used for his or her health, support, maintenance, and education will not have the requisite language needed to qualify under the estate tax marital deduction rules and the minimum distribution rules. There are three revenue rulings that have developed and formed the bright line rules that exist in this area of estate planning with retirement benefits. The revenue rulings apply to all marital trusts, including general power of appointment marital trusts with a lifetime or testamentary power of appointment, but the revenue rulings use QTIPs as their model. Note that a marital trust with only a testamentary general power of appointment may cause the trust to fail the seethrough trust test unless it is a conduit trust. Revenue Ruling 89-89. Rev Rul 89-89, required, in effect, that the beneficiary designation form and the trust document must direct the trustee to withdraw from the retirement account payable to the QTIP trust the greater of (1) the income earned by the retirement account or (2) the required minimum distribution each year. This would satisfy both the marital deduction and minimum distribution concerns. It would also greatly accelerate the distribution of the retirement account to the spouse as compared to rolling over the retirement account to an IRA and taking distributions using the Uniform Lifetime Table. Revenue Ruling 2002-2. Rev Rul 2000-2, confirmed that the spouse does not have to receive all of the income from the retirement account. The spouse can have a right to demand payment of all of the income. The trust would qualify for the marital deduction and would meet the minimum distribution rules, assuming it met the other rules for a qualified trust as long as: 1. The spouse can demand payment of the income at least annually; and 2. The retirement account does not prohibit the trustee from taking distributions that exceed the required minimum distributions, since the trust income may exceed the required minimum distribution in a given year. • It is sufficient if the trust has the additional QTIP language and the qualified plan documents, 403(b) plan documents, or IRA adoption agreement does not have any language that would prohibit the trustee from acting on the spouse’s demand to exercise the power.

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•

It is very important to check the plan document and the beneficiary designation to be sure that the withdrawal right will be allowed under the plan or that your client has not somehow limited the trustee’s rights by choosing a payment option (which cannot be changed on his or her death) that only allows for the payment of minimum distributions and nothing in addition to the required minimum distributions. Choosing a payment option can happen as simply as a client checking a box in ignorance and with the best of intentions. The demand right sounds good on paper as a way to limit the distributions from the retirement account to the required minimum distributions, but it raises a number of issues. 1. If the power is exercisable on an annual basis and the spouse doesn’t exercise the power in a given year, the failure to exercise the power is a lapse of the power and, because it is not limited to $5,000 or 5 percent of the trust income, it is a gift to the remainder beneficiaries. This, in turn, triggers additional trust accounting for the portion that has lapsed, since the surviving spouse would be treated as the owner of that portion of the trust under the grantor trust rules. 2. To forestall this outcome, the spouse should have a continuing, nonlapsing power to exercise the right of withdrawal. The trustee would also have to track all of accrued but undistributed income in the retirement account to be sure the spouse could withdraw the income if the spouse decided to exercise the withdrawal power. Consequently, the scheme under Rev Rul 89-89 requiring the distribution of the greater of the retirement account income or the required minimum distribution each year may work better in practice. Rev Rul 2000-2 did ease up on one requirement. It is no longer necessary to have the required QTIP language in both the trust and the retirement account beneficiary designation, although it is advisable. However, when electing QTIP treatment for the retirement account on the federal estate tax return, it is still necessary to make the QTIP election for both the retirement account and the trust. Revenue Ruling 2006-26. Rev Rul 2006-26, modifies Rev Rul 2000-2 and gives further guidance on the definition of income from a QTIP and a retirement account in light of the adoption of the Uniform Principal and Income Act (UPIA) and the expanded use of total return trusts. Michigan’s version of UPIA is found in MCL 555.501 et seq. The revenue ruling starts with the example found in Rev Rul 2000-2. The ruling then analyzes three scenarios: the power of a trustee to make adjustments between principal and income found in MCL 555.504, the use of a unitrust amount for the QTIP trust or for the IRA as provided under state law (which Michigan has not yet formally adopted), and the use of a traditional definition of income in the QTIP trust or retirement account. It also addresses the statutory allocation of 10 percent of a minimum distribution to income and the balance to principal if the trust does not have a contrary provision, and the use of marital deduction savings clauses. 1. Power to Adjust. If the trustee has the power to adjust in accordance with the statutory scheme found in UPIA, i.e., adjustments between income and principal may be made, as under MCL 555.504(1), when trust assets are invested under the Michigan prudent investor standard, the amount to be distributed to a beneficiary is described by reference to the trust’s income, and the trust cannot be administered impartially after applying Michigan’s statutory rules regarding the allocation of receipts and disbursements to income and principal. The ruling describes how the trustee applies the power to adjust to the QTIP trust and the retirement account: • For each calendar year, the trustee determines the total return of the assets held by the QTIP trust other than the retirement account and then determines the portion of the total return that is to be allocated to principal and to income under the Michigan power to adjust. This income is then distributed to the surviving spouse.

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• Similarly, for each calendar year, the trustee determines the total return of the assets held in the retirement account and then determines the portion of the total return that would be allocated to principal and to income under the power to adjust. If the surviving spouse exercises a withdrawal power similar to the one described in Rev Rul 2000-2, the trustee withdraws from the retirement account the amount allocated to income (or the required minimum distribution amount, if greater) and distributes to the surviving spouse the amount allocated to income for that year. Rev Rul 2006-26, Situation 1. By making the two separate determinations of the total return between the retirement assets and the nonretirement assets held by the trust, the allocation of the total return of all of the assets is considered a reasonable apportionment of the total return of the retirement account and the other trust assets between the income and remainder beneficiaries underTreas Reg 20.2056(b)-5(f)(1) and 1.643(b)-1. 2. Unitrust. The ruling also explains how to qualify a QTIP trust and a retirement account held by the trust if the trust and the retirement account meet the requirements for a statutory unitrust under UPIA. Rev Rul 2006-26, Situation 2. To meet these requirements the governing instrument must contain a unitrust percentage of between 3 and 5 percent or the interested parties must consent to the unitrust treatment. The Michigan statute did not have a statutory unitrust provision by design, However, Michigan is in the process of allowing the limited use of a unitrust for retirement accounts payable to marital trusts if the income of the retirement account cannot be determined. The unitrust must have a 3.5% return under the proposed legislation. The procedure for making the proper determination of income and principal is similar to the procedure under the power to adjust described in Situation 1: • Each year on the valuation date, the unitrust amount is determined for the QTIP trust without considering the retirement account, and the unitrust income is distributed to the surviving spouse. (In the ruling it was 4 percent). • The same determination is then made for the retirement account that is being treated as a unitrust. If the spouse exercises his or her right to withdraw the retirement account assets, the 4 percent unitrust income, or the required minimum distribution, if greater, is withdrawn from the retirement account, and the income is distributed to the surviving spouse. As in the first example, the retirement account is treated as if it were a separate QTIP trust. Consequently, if the state has enacted a statutory unitrust amount as well as the power to adjust, it is possible to administer the QTIP trust as a unitrust but the retirement account under the power to adjust, or vice versa. However, this must be done consistently throughout the administration of the trust. 3. Traditional definition of income and principal. If the QTIP trust is using a traditional definition of income and principal, the trustee will still make a determination of income for the trust, exclusive of the retirement account, and then will determine the income in the retirement account separately, without any adjustments. Rev Rul 2006-26, Situation 3. The income from the nonretirement assets of the trust will be distributed to the surviving spouse, and the income generated by the retirement account, or the required minimum distribution, if greater, will be withdrawn from the retirement account and the income distributed to the surviving spouse, if the surviving spouse exercises his or her withdrawal right. 4. Allocation between income and principal. In all of the scenarios described in the ruling, the allocation of income and principal in the retirement account is made independent of the trustee’s determination with respect to trust income and principal under MCL 555.809(3). Under this provision, except as provided in the trust agreement, 10 percent of a required minimum distribution is treated as income and 90 percent is treated as principal. All

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distributions in excess of the required minimum distribution are treated as principal. The ruling states that the 10 percent to income provision is not relevant in determining whether the surviving spouse has received (or is entitled to receive) all of the income from the QTIP trust or the retirement account since neither the amount of the required minimum distribution nor the 10 percent allocation of the required minimum distribution bear any relation to the actual return from the retirement account. Furthermore, the IRS said that the requirement that the trustee must allocate more than 10 percent of a required minimum distribution to income if necessary to qualify for the marital deduction may just be a savings clause, which will not help the trust or the retirement account qualify for the marital deduction. The ruling views this provision as a saving clause and rejects it as a means of determining marital trust income. As a consequence of this portion of Rev. Rul. 2006-26, the Michigan UPIA is in the process of being amended to require the trustee to determine the income of a retirement account payable to a marital trust. Under the proposed legislation: • If the trustee is unable to determine the income of the retirement account but can determine the value of the retirement account, then the trustee must apply the unitrust concept at the rate of 3.5% based on the value of the retirement account at the beginning of the accounting period. • If the trustee is unable to determine both the income and the value of the retirement account, then the internal income of the retirement account is determined by multiplying the IRC 7520 rate for the month preceding the beginning of the accounting period by the present value of future expected payments. Fortunately, for IRAs, many custodians have begun to provide the income earned in the IRA on the statements so that the trustee will know the IRA’s income for an IRAs payable to a marital trust. 5. Application to all retirement accounts. The ruling uses an IRA in its examples. However, the ruling clearly states that it applies to all retirement plans which are defined contribution plans. In addition, the ruling specifically allows the mandatory distribution of the greater of the retirement account income or the required minimum distribution each year to the surviving spouse. It used the power to withdraw to follow the same fact pattern found in Rev Rul 2000-2.

C. Other Issues with QTIP Trust and Retirement Accounts Payment of estate taxes at death of surviving spouse. One other vexing issue with QTIP trusts is that most QTIP trusts provide that the marginal estate taxes due under IRC 2044 as a result of the inclusion of the QTIP trust in the surviving spouse’s estate will be paid from the QTIP trust’s assets. If this language appears in the trust, the trust may not have a designated beneficiary because the surviving spouse’s estate would be a trust beneficiary, if the surviving spouse has a taxable estate. Preferably: 1. The trust should be drafted to prohibit the payment of taxes from retirement benefits payable to the trust; or 2. The surviving spouse’s will and the trust should provide for an alternate source for the payment of the spouse’s marginal estate taxes. • The surviving spouse should waive the right of recovery in his or her will. • If the account owner has already died, the trustee should disclaim the right of the trust to pay the taxes if the document has a tax payment clause that permits or requires the marginal amount of estate taxes incurred due to inclusion to be paid from the remaining QTIP trust assets. However, a (now former) IRS representative at a May, 2008 ALI-ABA seminar has indicated that the provision for paying taxes due under IRC 2044 may not be fatal to look-through trust

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treatment, since the IRS realizes that the marginal estate tax must be paid one way or the other, and the IRS does not want to create an unnecessary conflict with itself. Issues with employer plans and marital trusts. As a practical matter, it may be difficult to use a QTIP trust if the client’s retirement account is in a qualified plan. 1. The trustee of the trust may not be able to make withdrawals of income from the qualified plan to meet both the marital deduction and minimum distribution requirements because either the plan administrator will not track the income in the account sufficiently for the trustee to meet his or her obligations or additional withdrawals from the plan may not be allowed. • Most qualified plans probably do not offer an option for the spouse’s benefits to be paid strictly as a minimum distribution. • They probably pay either in the form of an annuity or use a method that is faster than minimum distributions. 2. Fortunately, with the advent of the non-spouse beneficiary rollover, this limitation may no longer be fatal since all defined contribution plans must offer this rollover option to designated beneficiaries, including see-though trusts. Regardless, depending on your client’s objectives, you must check whether the designation of a QTIP trust will work with the qualified plan before you advise your client to make the designation.

D. Conduit Trust Used as QTIP Trust It is possible to use a conduit trust as a QTIP trust, but the conduit trust language alone is not enough to qualify the trust for the marital deduction. A general power of appointment marital trust may also be fashioned as a conduit trust, although it would be rare to use it in practice. The conduit trust language meets the minimum distribution requirements. All income issues. However, the trust still must include the distribution of all the income from the retirement account to the QTIP on an annual basis, or the power in the spouse to demand that the trustee pay the income to the spouse. In a conduit trust/QTIP situation, it is probably better to give the spouse the continuing right of withdrawal, both because of the grantor trust issues that the power of withdrawal creates and to be sure that the trust meets the technical requirements of a conduit trust, i.e., that all amounts withdrawn from the retirement account must be distributed to the trust beneficiary. Best applications of conduit QTIP trust. The conduit trust/QTIP would be most useful if: 1. The spouse and the account owner are young, so the spouse could delay minimum distributions until the year the account owner would have reached his or her required beginning date. The spouse would be the sole beneficiary even though no distributions would have to come out for quite a while. 2. It would also be a good planning tool if the remainder beneficiary were a charity, even if the account owner dies before his or her required beginning date. The marital deduction would be allowed at the death of the account owner and then the spouse would get a charitable deduction at his or her death. Caution. Priv Ltr Rul 200644022 (Nov 3, 2006) provides a caveat for a young spouse who is named as the beneficiary of a conduit marital trust. See the discussion below about general power of appointment trusts for a more complete discussion of this ruling. Given this ruling, it would be wise to include a special power of appointment in a conduit marital trust allowing the spouse to name a successor beneficiary of the retirement benefits and to avoid the application of the five-year rule if the young spouse dies before distributions are required to begin. If the power is a limited power, it should be designed to allow the spouse to name the intended beneficiary of the conduit marital trust. In effect, the power of appointment and its exercise are additional steps that must be taken when planning the surviving spouse’s

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estate to be sure that the design of the account owner’s plan is carried out. (No comment on what happens when the surviving spouse remarries and doesn’t exercise the power.) Limitations on the conduit marital trust. The conduit trust/QTIP does not allow for all of the options that other forms of marital trusts might provide. 1. The spouse is considered the sole beneficiary of the conduit trust but the trust does not rise to the level needed to allow a rollover or the ability to treat an IRA as the spouse’s own. 2. If the account owner desires a specific allocation of the assets remaining in the trust at the surviving spouse’s death even among a specified group of remainder beneficiaries, then granting the surviving spouse a limited power of appointment for a young spouse may thwart the account owner’s intent and may make a conduit QTIP impractical. 3. Even though all retirement benefits must be distributed to the surviving spouse, the conduit trust/QTIP does not give the surviving spouse a right to withdraw all of the benefits from the conduit trust. A lifetime general power of appointment trust would be appropriate if complete withdrawals are desirable or naming the spouse directly as the beneficiary may be more appropriate.

E. Qualified Domestic Trust If the spouse is not a U.S. citizen and the account owner dies before his or her required beginning date, the conduit trust/QTIP trust might be a good alternative as a form for a QDT. The trust would give the spouse a right to all of the income but would not require any minimum distributions until the year the account owner would have attained age 70½. This trust would meet the requirements of a QDT, assuming it has a U.S. trustee and the other requirements specific to a QDT, but not necessarily require the distribution of any trust principal until the spouse can become a U.S. citizen, because minimum distributions could be deferred. However, if the spouse will have to take minimum distributions through the trust beginning the year after the account owner’s death, a conduit trust/QTIP is probably not appropriate. The distribution of the portion of the required minimum distribution that is allocable to principal will trigger the recomputed estate taxes in the account owner’s estate unless the hardship distribution exception applies. A QDT that qualifies for the marital deduction without the conduit trust language, but with language necessary for it to qualify for the marital deduction, might not have this shortcoming. In that case, the trustee would distribute the income portion of the required withdrawal (which might be greater than the required minimum distribution) to the spouse and could retain the principal portion in the trust. Until the principal portion is distributed, the recomputed estate tax does not apply.11

F. General Power of Appointment Trust A marital trust that grants the surviving spouse a lifetime power of withdrawal will probably be able to ignore remainder beneficiaries for purposes of determining whether the marital trust has multiple beneficiaries. 1. Because the spouse can withdraw the whole retirement account at any time, the spouse is likely to be treated as the sole beneficiary for that purpose and can delay minimum distributions until the account owner’s required beginning date and use the spouse’s life expectancy on a recalculated basis to determine his or her own minimum distributions into this trust. 2. The spouse may also be able to roll over distributions from the deceased account owner’s retirement account at least to the extent no one (other than the spouse) has discretion to allocate the retirement benefits to the general power of appointment trust. There are

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For a more complete discussion of the QDOT issues, see Chapter 28 of ICLE’s Estate Planning Handbook.

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numerous private letter rulings in this area. See, e.g., Priv Ltr Rul 200940031 (Oct 2, 2009), 200208031 (Feb 22, 2002), 199942052 (Oct 22, 1999). 3. However, the surviving spouse may not treat an IRA payable to the trust as his or her own. This is prohibited under Treas Reg 1.408-8, A-5(a). 4. The ability to roll over may also be limited if some of the retirement benefits could have been used to fund the credit shelter trust under a reduce-to-zero formula clause. Those benefits that could have been used to fund the credit shelter trust but are allocated to the marital trust will have to stay in the IRA (i.e., they cannot be rolled over). However, at least the spouse will likely be treated as the sole beneficiary of the trust for that portion of the benefits. See Priv Ltr Rul 199918065 (May 7, 1999), 9623056 (Mar 12, 1996), 9502042 (Oct 21, 1994),9510049 (Dec 12, 1994). 5. Note that even though the revenue rulings dealt with QTIP trusts, the general power of appointment trust should give the surviving spouse the power to withdraw the greater of all of the income earned in the retirement account or the required minimum distributions to be absolutely sure that the trust qualifies for the marital deduction and meets the minimum distribution requirements. Caution. A private letter ruling provides a caveat about the use of the general power of appointment trust when the spouses are young. In Priv Ltr Rul 200644022 (Nov 3, 2006), a marital trust was named as the beneficiary of an IRA. The account owner had died before his required beginning date. The trust was reformed so that the surviving spouse had the right to the greater of all of the IRA income or the minimum distributions from the IRA and she had a complete power of withdrawal over the IRA assets. She was treated as the sole beneficiary of the trust for purposes of the IRA. The remainder beneficiary was her son, who took the trust assets outright at her death. The surviving spouse died before December 31 of the year her late husband would have attained age 70½, which was her required beginning date. Because the surviving spouse was treated as the sole beneficiary of the trust, she was subject to the rule of IRC 401(a)(9)(B)(iv), which states that if the account owner dies before his or her required beginning date and the surviving spouse is the sole beneficiary, the spouse steps into the shoes of the account owner and the surviving spouse may name his or her own beneficiary to take the distributions if the surviving spouse dies before his or her required beginning date. In the private letter ruling, the surviving spouse did not name a beneficiary for the IRA, instead very reasonably (it seemed) relying on the language of the trust to transfer the IRA to her son at her death. Unfortunately, the surviving spouse died before her required beginning date, and the IRS stated that because she did not have a beneficiary designation on file with the IRA custodian naming the son as the designated beneficiary of the IRA, the IRA did not have a designated beneficiary and the five-year rule applied to the distributions to her son. In short, when using a general power of appointment trust for retirement accounts for a young (under age 70½) spouse, you should grant the spouse a power of appointment to allow the spouse to name a successor beneficiary of the retirement account and the spouse should exercise the power by submitting a beneficiary designation to the IRA custodian (or plan administrator). 1. Although the trust, by its nature as a general power of appointment trust already allows for this power, by including a special provision, it alerts the surviving spouse and the trustee that a problem exists. Moreover, the trust likely will only allow for the power to be exercised by will, which would not be helpful in this situation. A beneficiary designation would be needed. 2. A general power of appointment marital trust is not appropriate in a second marriage because the surviving spouse may not leave the trust assets to the beneficiaries desired by the account owner if the power is exercised. 3. In short, the general power of appointment marital trust may be better in a first marriage situation when a non-tax reason exists for keeping the retirement benefits in trust, such as the need for professional management of the retirement account and other trust assets, that

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outweighs the tax advantage of a spousal rollover and use of the Uniform Lifetime Table to determine the applicable distribution period.

XIII. Roth IRAs and Roth 401(k) and 403(b) Accounts A. In General There are several significant differences between Roth IRAs and traditional IRAs. The general list is enumerated in Treas Reg 1.408A-1, A-2. The most significant differences are as follows: Eligibility to contribute. Special limits on the modified adjusted gross income (MAGI) tests must be met to be eligible to contribute to a Roth IRA. In 2012: 1. Contributions to a Roth IRA may be made by married taxpayers filing jointly with an MAGI of up to $183,000 (the contribution limit is reduced ratably for MAGI between $173,000 and $183,000); 2. By single taxpayers or heads of household with MAGI of up to $125,000 (the contribution limit is reduced ratably for MAGI between $110,000 and $125,000). The contribution limit is found in Treas Reg 1.408A-3, A-3(a). Contribution limit. For 2012, the contribution limit is $5,000 per year, with a catch-up contribution of $1,000 for taxpayers over age 50. Contributions to a Roth are limited to the extent of contributions made to a traditional IRA by the account owner each year. The total of the traditional IRA and Roth IRA contributions cannot exceed the $5,000 and $1,000 contribution limits. Spousal Roth contributions are also permitted. Conversions. An individual or couple, regardless of MAGI, may convert a traditional IRA to a Roth IRA. The amount that can be converted is unlimited, but the account owner must pay ordinary income tax on the taxable portion of the amount converted in the year of the conversion. The year of the first contribution or conversion counts as a full tax year. So a conversion anytime in 2012 will be tax-free on January 1, 2017. Contributions to a Roth IRA are never deductible. Qualified distributions from a Roth IRA are not includable in gross income. This is the main feature that makes a Roth IRA so attractive. 1. Roth contributions have to remain in the Roth IRA for at least five taxable years from the date of the first contribution for the Roth distribution to be completely tax free. 2. For a Roth IRA conversion, the funds must remain in the Roth IRA for five taxable years following the conversion. 3. In both cases, the account owner must also be over age 59½ at the time of the distribution for the Roth distribution to be completely tax-free, unless an exception applies for early distributions under IRC 72(t). • The 72(t) exceptions that apply to a Roth IRA are not quite the same as the exceptions that apply to a traditional IRA. • For early distributions of conversions, the penalties can apply to the entire amount converted, even though they would otherwise be distributed tax free. • The penalty tax simply does not apply to the distribution of the basis portion of a regular contribution within the first five years of the Roth IRA. • Distributions within the first five years of a conversion, if the account owner is under age 59½, are fully subject to the 10% penalty tax, even the portion of the account owner’s basis that is not subject to income tax in a non-qualified distribution. The penalty assessed on the entire conversion (or the portion withdrawn), not just the income earned in the account, was devised to prevent younger taxpayers from converting a traditional IRA to a Roth IRA and then quickly taking a withdrawal of after-tax money before age 59½.

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• Once the conversion has been in the IRA for more than five years, the penalty will apply to the earnings distributed, if any, if the account owner is under age 59½ at the time of the distribution. However, the original conversion amount, which has been subject to tax, is deemed to be distributed first under the ordering rules found in Treas Reg 1.408A-6, A-9. • Each conversion by an account owner before he or she is age 59½ has its own five-year period and it may be wise to have separate Roth IRAs for each conversion to be able to track the basis, the earnings and when the five-year period for each expires, at least until the account owner is over age 59½ and all of the conversions have been in a Roth IRA for five years. The nontaxable portion of a Roth IRA is deemed to come out first. In contrast to a traditional IRA, the nontaxable portion of a traditional IRA comes out on a pro-rata basis. If the account owner takes an early distribution from his or her Roth IRA, which is only a partial distribution, the distribution may not be taxable because the portion attributable to the basis in the contract is deemed to be distributed first and the income is distributed last. IRC 408A(d)(4)(B). Regular contributions come out first, followed by conversions. The minimum distribution rules of Treas Reg 1.401(a)(9) do not apply during the lifetime of a Roth account owner. This is a huge advantage over a traditional IRA. The ability to build up the account on a tax-free basis can be quite remarkable. Because the surviving spouse can elect to treat the Roth IRA as his or her own, Treas Reg 1.408A-2, A-4, the spouse becomes the account owner and can continue the tax-free build up. The minimum distribution rules will still apply to the beneficiary of the inherited Roth IRA. Contributions to a Roth IRA may be made after the account owner has attained age 70½. This is another departure from the rules for traditional IRAs. Since the Roth IRA owner has no minimum distribution requirement, he or she may continue to contribute to the Roth IRA as long as the account owner meets the eligibility requirements. The account owner must have earned income to contribute. Conversions may occur at any age without regard to whether the account owner has earned income. Conversions to a Roth IRA may come from a traditional IRA or from a qualified plan, a 403(b) annuity, or a 457(b) plan. Previously, only funds in a traditional IRA could be converted into a Roth IRA. IRC 408A(e). If a plan participant wanted to transfer an eligible rollover distribution to a Roth IRA, he or she first had to roll that money into a traditional IRA and then convert the traditional IRA to a Roth IRA. Under the Pension Protection Act of 2006, Pub L No 109-280, §824, 120 Stat 780 (2006), IRC 408A(e) was amended to allow direct conversions from qualified plans, IRC 403(b) plans, and IRC 457 governmental plans. 1. The distribution will be taxed to the participant in the year of the conversion, so the participant should plan to pay estimates or take additional withholding to pay the additional taxes on the conversion. 2. A nonspouse beneficiary who is eligible to roll over inherited benefits from a qualified plan to an inherited IRA may directly roll over the after-tax qualified plan benefits to an inherited Roth IRA and pay the tax on the converted funds. IRS Notice 2008-30. Certain military death benefits can be contributed to a Roth IRA. The 2008 Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), Pub L No 110-245, 122 Stat 1624 (2008), allows the recipient of a military death gratuity or the proceeds from the Servicemembers Group Life Insurance (SGLI) program to contribute to a Roth IRA tax free the amount received as a military death gratuity or as an SGLI death benefit within one year of receipt, less any amount contributed to a Coverdell IRA, without regard to contribution limits or the limit on the number of rollovers allowed by a taxpayer each year. Id. at §§109(a)–(b) (amending IRC 408A(e)(2)). The provision is effective for the military death benefits received on or after June 17, 2008.

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B. Roth IRA Conversions An account owner of a traditional IRA can convert all or part of the traditional IRA by rolling over all or part of the traditional IRA to a Roth IRA or by changing the existing account from a traditional IRA to a Roth IRA. Generally, the taxable portion of the conversion will be subject to ordinary income tax in the year of the conversion. Conversion Rules. While the account owner may convert a specific traditional IRA into a Roth IRA, the IRS requires the account owner to determine the nontaxable portion of the conversion based on the taxable and nontaxable portions of all traditional IRAs, SEP-IRAs, and SIMPLE-IRAs held by the account owner before the conversion in the aggregate. 1. The account owner may not simply decide to convert the traditional IRA with the most basis in the contract to a Roth IRA in order to pay the least amount of tax possible. 2. The account owner decides how much he or she wants to convert, and the taxable and nontaxable percentages of the resulting Roth IRA are based on the same percentages as would be taxable or nontaxable if all of the account owner’s traditional IRAs, SEPs, and SIMPLEs were held in one account. 3. Some account owners can roll the taxable portion of all of his or her IRAs into a qualified plan or 403(b) plan. Under IRC 408(d)(3)(A), nontaxable amounts may not be rolled from an IRA into a qualified plan. The account owner can convert the remaining funds in the traditional IRA, now all nontaxable, to a Roth IRA, tax free. However, not all account owners want to have most of their funds held in a qualified plan when they can be sure that they will get better distribution options in an IRA and can direct their own IRA investments. 4. Special rules apply to SEPs and SIMPLEs. • A SIMPLE IRA is not eligible to be rolled over into a Roth IRA during the employee’s initial two years of participation in any SIMPLE IRA plan maintained by the individual’s employer. Treas Reg 1.408A-4, A-4(c). In fact, a SIMPLE is precluded from being rolled into any IRA other than a SIMPLE within that two-year period. IRC 408(d)(3)(G). • And both SEP and SIMPLE IRA account owners must actually take distributions from their SEP or SIMPLE and then roll them into the Roth IRA. The employer contributions cannot be made directly to a Roth IRA. Treas Reg 1.408A-4, A-4(c)) When is a Roth IRA worthwhile? A Roth IRA yields the best results for those account owners who do not plan to use the funds during their lifetime (and, even better, the lifetime of the surviving spouse) and who have funds outside of the Roth IRA that can be used to pay the income taxes. 1. If the account owner uses funds from the Roth IRA to pay the taxes and then takes the equivalent of minimum distributions from the Roth IRA, then there likely will be no benefit to the Roth IRA conversion. 2. One exception would be the account owner with a taxable estate who reduces his or her estate by paying the taxes on the Roth IRA from whatever source is necessary. If the account owner retains the traditional IRA, his or her beneficiaries will pay estate taxes on the value of the traditional IRA, including the deferred income taxes that will have to be paid when the traditional IRA is distributed. If the account owner converts to a Roth IRA, the account owner pays the income taxes and the taxable estate is reduced by the income taxes paid. 3. Likewise, an account owner who has large net operating loss carryforwards or charitable contribution carryforwards or wishes to make a large charitable contribution in a given year may decide that a Roth IRA conversion in that year will have minimal tax cost because it will be offset by the deductions available due to the net operating loss or charitable giving.

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For less wealthy account owners, a more in-depth analysis may have to be completed by the estate planning attorney or a financial planner before converting a traditional IRA into a Roth IRA. Many factors will enter into the decision-making process. 1. Will the account owner need the funds for living expenses so that distributions will be taken that are close in value to minimum distributions from a traditional IRA, thus diluting the value of the conversion? 2. Does the account owner have the funds from outside of the Roth IRA to pay the taxes on the conversion? 3. How long will the account owner hold the Roth IRA before drawing on the funds? The longer the Roth IRA is growing tax free, the better the results. 4. How old is the account owner? 5. Will the account owner’s beneficiaries continue the deferral or will they cash out the Roth IRA? 6. Does the account owner have a lot of pretax funds in retirement accounts and annuities, so that the Roth IRA affords the opportunity to have some after-tax investments? It has been difficult to find software to run an adequate financial analysis because there are so many factors that enter into the decision-making process. The decision is much more than a straight numbers game. There may be other more subtle issues that can have an impact on the Roth IRA decision. For example, a client with large medical expenses late in life may or may not want to do a Roth IRA conversion. Likewise, the upcoming 3.8% Medicare surtax under the health reform act might dictate a conversion in 2012 to avoid required minimum distributions later that might expose the client to the surtax. For a more complete discussion of these issues see Chapter 28 of ICLE’s Estate Planning Handbook. Recharacterizations of Roth IRA conversions. One other notable feature of a Roth IRA conversion is the ability of the account owner to recharacterize the Roth IRA back into a traditional IRA if circumstances change after the conversion. IRC 408A(d)(6). The account owner can have up to October 15 of the year following the year of the conversion to recharacterize a Roth IRA back to a traditional IRA. 1. For example, if market conditions deteriorate and the value of the Roth IRA decreases substantially after the conversion, the account owner might not want to pay income taxes based on the value of the Roth IRA on the date of the conversion. The account owner can recharacterize the Roth IRA and avoid the taxes altogether on the conversion. 2. Another strategy might be to set up more than one Roth IRA and only recharacterize those Roth IRAs that have not performed well after the conversion. 3. In fact, it is highly recommended that each Roth conversion be kept in separate Roth IRAs, at least until it is clear that the account will not be recharacterized, because of the need to track the income in the converted Roth IRA should a recharacterization occur. 4. It is also recommended that the client keep the Roth IRA at the same financial institution and maintain some funds in the traditional IRA (unless the custodian keeps the traditional IRA account open as a placeholder) until the recharacterization period passes so that the custodian will have records of the conversion, income or losses in the account, and the recharacterization itself. 5. For account owners under age 59½, each conversion should be kept in a separate Roth IRA until five years has passed and the account owner is over age 59½ to guard against the imposition of the 10% tax on a non-qualified early distribution. 6. Once a Roth IRA has been recharacterized, the account owner may not reconvert the amount recharacterized to a Roth IRA until the taxable year following the taxable year of the original conversion or until at least 30 days have elapsed since the recharacterization, if later. 7. The election to recharacterize is irrevocable.

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8. The amount that must be recharacterized will include the original converted amount and any net income earned, or losses accrued, on the converted amount. Note that a contribution to a Roth IRA may also be recharacterized to a contribution to a traditional IRA. As with a late 60-day rollover, it is possible to get a waiver of the deadline for a recharacterization if there is good cause for the delay, such as a mistake by a professional or financial institution or another intervening event out of the account owner’s control, such as a hospitalization. Treas Reg 301.91003(b)(1). In Priv Ltr Rul 201024071 (June 18, 2010), the IRS did not grant an extension for a late recharacterization. The account owner filed his tax return late because of his messy divorce, but there was no mistake in the conversion process and, significantly, the value of his account had declined since the original conversion. The IRS did not find any of his reasons persuasive. It is probably more difficult to successfully get a waiver for a late recharacterization if the value has declined since the conversion, unless the facts of the case are compelling and it is obvious that the account owner is not trying to manipulate the system. The IRS will not grant relief “ordinarily” unless the government’s interest in the matter would not be prejudiced by allowing a late recharacterization. Treas Reg 301.9100-3(c)(1)(ii). Also see, Priv Ltr Rul 201022026, where the IRS allowed a late recharacterization for an account owner who reasonably thought his adjusted gross income was less than $100,000, the prior AGI limit for Roth conversion eligibility, until his return was adjusted on audit after the October 15 recharacterization deadline.

C. Roth Accounts in Qualified Plans and 403(b) Annuities EGTRRA added IRC 408(q) and created the concept of a deemed IRA, beginning in 2003. Under a deemed IRA, a qualified employer plan may elect to allow employees to make voluntary employee contributions to a separate account established under the plan that is treated as a traditional IRA or a Roth IRA, as applicable. The employee must meet all of the eligibility requirements to be able to make voluntary contributions to the IRA or the Roth IRA. It is possible that you may encounter a few of these, but it is doubtful many employers have spent the extra time and effort involved in setting up IRAs for their employees, which the employees could do on their own. For a more complete discussion of these issues see Chapter 28 of ICLE’s Estate Planning Handbook

XIV. Powers of Attorney It is important to address an attorney-in-fact’s ability to deal with his or her principal’s retirement accounts when drafting a general durable power of attorney. If the general durable power of attorney does not specifically address the agent’s powers related to the retirement accounts, the plan administrator or IRA custodian may refuse to speak with the attorney-in-fact, much less carry out instructions, especially if the account owner is incapacitated. There are a number of issues that the general durable power of attorney should address: 1. The document might allow the agent to establish or contribute to various retirement plans, whether qualified or nonqualified, including tax-deferred annuities, IRAs, and other deferred compensation plans in which the principal has an interest currently or might have once it is established by the principal or his or her employer, and even by his or her agent by using the general durable power of attorney. 2. The document should also allow the agent to take distributions, including electing benefit options and making rollovers and trustee-to-trustee transfers from the plans of the principal and his or her spouse. 3. The document might also allow the agent to borrow from retirement plans, assuming the principal has the power to do so (you cannot borrow from an IRA and not all qualified plans have loan provisions).

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4. At a minimum, the power of attorney document should allow the agent access to account information, such as balances and transactions, so the agent can work on any problems that may be occurring with the account. A riskier proposition is whether to allow the attorney-in-fact to execute beneficiary designation forms on behalf of the principal, especially if the agent is a current beneficiary or may be a beneficiary. 1. This is a good backstop in case the principal designates his or her trust as the beneficiary, for example, and the trust is not designed as a see-through trust. 2. It would be wise to have others sign off by having successor agents consent or by being sure that all beneficiaries of equal consanguinity are equally benefitted. 3. You might also limit the possible beneficiaries or state that the agent cannot change the overall estate plan except that a beneficiary might take the retirement benefits directly instead of in trust. 4. Consider requiring the agent to consult legal or tax counsel before executing the beneficiary designation. The inclusion of this power should be discussed with the client so that the client understands that the beneficiary designation could be changed by the agent if the power is included in the document. Many IRA custodians and 403(b) providers have forms that you can review and fill out to give an individual a power of attorney over the retirement account. These powers can vary from giving information to the account owner’s attorney so he or she can do estate planning, to allowing a financial planner to trade on the account so the account owner’s investments can be professionally managed, to a broad power of attorney that gives the agent the power to step into the shoes of the account owner. You should evaluate the forms, but often these forms are adequate and will save you and your client time because you know that the financial institution will accept them.

XV. Conclusion Estate planning with retirement benefits presents many issues that are not encountered in other areas of estate planning. The required minimum distribution rules require many choices by the attorney and the client with results that are not always optimal. It is important to understand the income tax consequences of naming beneficiaries, especially trusts, and the interaction between the estate and gift taxes and the income tax law. On the hand, when the minimum distribution rules are applied to maximum effect, the tax attributes can last for generations.

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Exhibit J Morrissey Outline - Post-Death Administration Issues2

Post-Death Administration Issues

Amy N. Morrissey Westerman & Morrissey, P.C. Ann Arbor

I.

A.

IRAs: Post-death Options, Distributions & Trusts

Definitions for purposes of this outline

1. Participant - The individual who owns the retirement benefits. For purposes of our discussion, the Participant will be deceased in most cases.

2. Required Beginning Date (RBD) - The date on which the Participant must begin taking his or her required minimum distributions from a retirement account. Generally, age 70 ½ but there are exceptions (deferred retirement, etc.).12

3. Required Minimum Distribution (RMD) - The amount that a Participant or beneficiary is required to take pursuant to IRC §401(a)(9). The starting point for a Participant, while living, is generally age 70 ½ (with some exceptions). After death of a Participant, the beneficiary’s RMD typically must be taken by December 31 of the year following the Participant’s death (with some exceptions as well).13

4. Applicable Distribution Period (ADP) - The factor by which or period over which the RMDs are computed.14

12

Internal Revenue Code (“IRC”) §401(a)(9)(C)

13

Treasury Regulation (“Reg.”) 1.401(a)(9)-5

14

Reg. 1.401(a)(9)-9

2. This outline originally appeared with the materials for ICLE’s Estate Planning for Retirement Assets, held on February 23, 2012, and is provided as-is for the viewer’s reference. © 2012 The Institute of Continuing Legal Education

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5. Designated Beneficiary (DB) - Any individual designated as a beneficiary by the employee.15 A designated beneficiary is an individual who is designated as a beneficiary under the plan. An individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan so provides, by affirmative election by the employee.16 Such individual is entitled to receive part or all of the Participant’s Retirement Plan. It may include a contingent beneficiary. The beneficiary may be named by name or by class, so long as the individual beneficiary is identifiable. The identity of the Designated Beneficiary is not fixed until September 30 of the year following the Participant’s death. As we’ll see below, not every beneficiary is a designated beneficiary for RMD purposes. It’s important to have a “Designated Beneficiary” to maximize stretch-out of plan asset distribution after death of the Participant.

6. Designated Beneficiary Deadline (DBD) - September 30 of the year following the Participant’s death. This is not a term used in the IRC or the Regulations. It describes the deadline for determining who are a Participant’s beneficiaries for RMD purposes.

7.

Types of Retirement Plans (there are many)

a. Qualified Retirement Plan (QRP) - A retirement plan that meets the requirements of IRC §401(a). Can be a defined benefit plan or defined contribution plan. Some types of QRPs: profit-sharing plan, Keogh, pension plan, 401(k). b. Individual Retirement Account (IRA) - A retirement plan that meets the requirements of IRC §408. IRAs created under §408 are traditional IRAs; there are distinctions for Roth IRAs. An IRA is not a QRP. c. Tax-sheltered Annuities (TSAs) a/ka IRC §403(b) Plan - Have similar requirements as QRPs but are held in the name of the participant/employee like IRAs rather than in the name of the plan. d.

IRC §457 plans

8. The outline mainly addresses the rules with regard to IRAs. Some of the rules for other types of retirement plans are discussed and differentiated.

B.

Spouse as Beneficiary

15

IRC §401(a)(9)(E)

16

Reg. §1.401(a)(9)-4, A-1

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1. Inherited IRA and RMD Computation - A surviving spouse may leave benefits in the Decedent’s (“Participant’s”) IRA and be treated as beneficiary.

a. Death of Participant before RBD - RMDs are computed based on the spouse’s life expectancy (using the Single Life Table found in Reg. §1.401(a)(9)-9, A-1, and the spouse’s age in each year for which a distribution is required, i.e., recalculated, beginning with the year following the Participant’s death). The first RMD must be taken by December 31 of year following Participant’s death; provided however, if the Participant dies before his or her Required Beginning Date, the spouse may elect to delay commencement of the RMD until the Participant would have turned age 70 ½.17

b. Death of Participant after RBD - RMDs are computed based on the spouse’s life expectancy (again, using the Single Life Table found in Reg. §1.401(a)(9)-9, A1, and the spouse’s age in each year for which a distribution is required, i.e., recalculated), or what would have been the remaining life expectancy of the Participant, whichever is longer.18 The first RMD must be taken before by December 31 of the year following the Participant’s death.19

2.

Rollover

a. Election to treat IRA as own - A surviving spouse may elect to treat the IRA as the spouse’s own (the effect is similar to a tax-free rollover discussed below), however, the RMD for the year of the Participant’s death must be taken if the Participant didn’t do so during life. A deemed election happens if the spouse does not take out a timely RMD; the deemed election is permitted only if the spouse is the sole beneficiary of the account and has an unlimited right to withdraw from the account.20

b. Direction to rollover - A spouse may rollover or treat the Participant’s IRA as her own even after taking one or more distributions as a beneficiary.21

17

Reg. §1.401(a)(9)(B)(iv)(I); §1.401(a)(9)-3, A-3(b)

18

Reg. §1.401(a)(9)-2, A-6.

19

Reg §1.401(a)(9)-2, A-5

20

Reg §1.408-8, A-5(a)

21

IRC §408(d)(3)(c); Reg. 1.408-9, A-5(a).

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Again, any RMD that was required for the Participant’s year of death must come out of the plan first and may not be rolled over.

c. IRS Notice 2007-7 states that, when the 5-year rule applies, the entire remaining balance in the Retirement Plan becomes the RMD in the year that contains the fifth anniversary of the Participant’s death; therefore, no spousal rollover would be possible after the fourth year when the 5-year rule applies.

d. Spousal rollover rules are the same for a Roth IRA as a traditional IRA except that a spouse may not roll over Roth IRA assets into anything but another Roth IRA.

3. Combination Approach - Helpful if spouse is young (under age 59 ½). Spouse can leave some in Participant’s IRA to take out as needed before age 59 ½ and rollover the rest.

C.

Individual Non-Spouse Beneficiary

1.

RMD Computation

a. Death of Participant before RBD - The ADP is the Designated Beneficiary’s life expectancy.22 However, a plan may also permit the Designated Beneficiary of a Participant who died before his RBD to choose between the 5-year rule and the Designated Beneficiary’s life expectancy.23

b. Death of Participant after RBD - The ADP is the Designated Beneficiary’s life expectancy or the life expectancy of the deceased Participant, if longer.24

2. If there are multiple beneficiaries, see Part I.C.4 of this outline below regarding the importance of establishing separate accounts. 22

IRC §401(a)(9)(B)(iii), (iv).

23

Reg. §1.401(a)(9)-3, A-1

24

Reg. §1.401(a)(9)-5, A-5(a)(1)

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3.

Non-spouse Beneficiary Options

a. A beneficiary may do a plan-to-plan (trustee-to-trustee) transfer of an inherited IRA. See PLR 2005-28031

b. As a result of the Pension Protection Act of 2006 (PPA), a beneficiary may also do a direct transfer (i.e., “rollover”) of an inherited Retirement Plan (ORP) benefit into a separate inherited IRA established to receive the “rollover.” The beneficiary cannot take the distribution and then put it into an IRA - it must be direct.25 Only post-2006 distributions are allowed. Because of an oversight in drafting of the PPA, it was not mandatory for employers to permit the rollover, but Congress finally has corrected this problem in the Worker, Retiree and Employer Recovery Act (WRERA). As of January 1, 2010, all employer-sponsored Retirement Plans are required to offer direct IRA rollovers to non-spouse beneficiaries.

c.

Special considerations in a non-spouse rollover

(1) The RMD for the year of the Participant's death, if any, cannot not be rolled into the inherited IRA (2) The rollover applies only to post-2006 distributions. Note that this relates to the date of distributions, not the date of the Participant's death. Note also that non-spouse beneficiaries cannot complete a rollover of an inherited plan that the deceased Participant directed prior to his death even if the Participant had done everything to effectuate the rollover prior to his death.26 However, if the money left the Participant's plan, the rollover may be completed by the Personal Representative. (3) A beneficiary can roll over part of the Participant's plan into an inherited IRA and leave the balance in the plan or receive a distribution of the balance. (4) The rollover must be a trustee-to-trustee transfer (directly from the employer plan to the new inherited IRA). A non-spouse beneficiary may not take a distribution, even accidentally, and attempt to contribute it to an inherited IRA. (5) The rollover must be to a new IRA. (6) The new IRA must be titled as an inherited IRA. For example, Mary Doe, deceased, IRA f/b/o Larry Doe. In this sense, a non-spouse rollover is not really a rollover at all because 25

Section 829 of the Pension Protection Act of 2006

26

PLR 200204038

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the assets do not get retitled in the beneficiary's name nor do the assets become the beneficiary's own IRA assets.

d. Even if a non-spouse beneficiary does a direct rollover of a plan to an inherited IRA, if the Participant died before his or her RBD, the beneficiary may be subject to the 5-year rule for RMD in the inherited IRA. While the PPA was intended to allow a beneficiary to escape a potential rigid plan document (which may require lump sum distribution), the Treasury Regulations provide that the 5-year rule may apply to the inherited IRA if: (1) the Plan document provided that the 5-year rule would apply; (2) the Plan document gives the beneficiary the choice between the 5-year rule and the stretch-out with the default being the 5-year rule if the beneficiary does not elect otherwise and the beneficiary fails to make the election. Notice 2007-7 says that the 5-year rule under the plan will carry over to the inherited IRA, but it provides a special rule allowing the beneficiary to elect to use his or her life expectancy as the ADP if the beneficiary directs the rollover prior to the end of the year following the Participant's death. This is important to keep in mind for beneficiaries who are going to otherwise be “stuck” with a 5-year rule. The rollover to the inherited IRA should occur either in the year of the Participant's death or the year following the Participant's death. If the rollover occurs in the year following the Participant's death, the beneficiary must remember to take the RMD based upon his/her life expectancy before rolling the rest over. If the rollover occurs at a later time, it would appear that the beneficiary is stuck with the 5-year rule, regardless of whether the beneficiary took distributions from the plan every year based on his life expectancy.

e. The rollover rules cannot be treated as creating a Designated Beneficiary where there otherwise was none, such as in the case of a plan account that has no beneficiary and defaults to the estate of the Participant, who dies before his RBD. The beneficiaries of the estate may be able to rollover the assets from the plan to an inherited IRA, but again, they would be stuck with the 5-year rule payout method.

f. Since an RMD cannot be rolled over, the latest that a rollover could occur would be the year that contains the fourth anniversary of the participant’s date of death. The entire account is treated as the RMD in the fifth year RMDs may not be rolled over.

g. Pursuant to WRERA and IRS Notice 2008-30, non-spouse beneficiaries also have the option of directly rolling over funds into a Roth IRA instead of a traditional IRA. So long as the rollover meets the technical requirements for a Roth IRA, then the same rules apply for

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creating the inherited Roth IRA as they do for creating the inherited IRA.

4.

Multiple Individual Beneficiaries (NOT through a trust)

a. Death of Participant Before RBD - Where there are multiple beneficiaries of an IRA, the ADP is the life expectancy of the oldest beneficiary if all beneficiaries are individuals27 or the 5-year rule. The 5-year rule applies if one or more of the multiple beneficiaries is not an individual - there is no Designated Beneficiary.

b. Death of Participant Before RBD - Where there are multiple beneficiaries of an IRA, the ADP is the life expectancy of the oldest beneficiary if all beneficiaries are individuals or the Participant’s remaining life expectancy, if longer.28 If one or more of the multiple beneficiaries is not an individual - there is no Designated Beneficiary and the Participant’s remaining life expectancy is the ADP.29

c. Separate Accounts Rule - If separate account treatment is desired so that each beneficiary may use his/her own life expectancy to compute RMDs, it is important that separate accounts be established prior to December 31 of year following Participant’s death. Separate accounts can be established by separate accounting, not merely physical division of the account.30

5.

Roth IRAs

a. Post death RMD rules apply to Roth IRAs in the same manner that they apply to traditional IRAs in the case of the Participant's death prior to his or her RBD.

D.

Trusts as Beneficiaries

27

Reg. §1.401(a)(9)-5, A-7

28

Reg. §1.401(a)(9)-5, A-7; Reg. §1.401(a)(9)-5, A-5

29

Reg. §1.401(a)(9)-4

30

Reg. §1.401(a)(9)-8

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1.

Is there a Designated Beneficiary?

a. Generally, a trust is NOT a designated beneficiary, so RMDs must be paid over five years if Participant died before his RBD or will be paid over the life expectancy of the Participant if he died after his RBD.31

b.

Exception - “Look-through” or “See-through” trust.32

i.

The trust must be valid under state law;33

ii. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the Participant;34

iii. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee benefit must be “identifiable” from the trust instrument;35

(1) This doesn’t necessarily mean that the beneficiaries must be listed by name so long as the beneficiary is identifiable. May be members of a class that is capable of expansion or contraction so long as possible to identify the member with the shortest life expectancy (eg. grandchildren);

(2) Powers of appointment often cause problems with identifying beneficiaries. A beneficiary cannot be an unknown individual (as in the case of a future spouse of a holder of a power of appointment).

31

§401(a)(9)(B)(ii); §401(a)(9)(B)(i)

32

Reg. §1.401(a)(9)-4, A-5(b). Also See PLR 200708084. There are numerous PLRs on this issue.

33

Reg. §1.401(a)(9)-4, A-5(b)(1)

34

Reg. §1.401(a)(9)-4, A-5(b)(2)

35

Reg. §1.401(a)(9)-4, A-5(b)(3)

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iv. Certain documentation must be provided to the plan administrator (i.e., custodian of IRA, employer of Participant or person responsible for carrying out the plan) by October 31 of the year following Participant’s death36 as follows:

(1) A final list of all beneficiaries of the trust as of September 30 of the year following Participant’s death and certification that the list is complete and correct, that the trust rules are satisfied; or

(2)

A copy of the actual trust document for the trust

that is named beneficiary.

v.

All trust beneficiaries must be individuals;37

(1)

Cannot be charities.

(a) A Trustee can change an unfavorable result of having no DB by paying the charity before DBD. (2)

Cannot pass to the estate of the Participant.

(3) Cannot be used for payment of estate expenses and estate taxes.38 However, the IRS has consistently ruled in various Private Letter Rulings that payment of debts, taxes and estate administration expenses from the trust or bequests to charity do not preclude see-through status so long as the payment is completed prior to the DBD.39

36

Reg. §1.401(a)(9)-4, A-5(b)(4)

37

Reg. §1.401(a)(9)-4, A-5(b)

38

Private Letter Rulings (PLRs) 200317044, 200317043, 200317041, 200218039, 200211047, 200208031, 200432027, 200223065, 200235038 giving guidance to avoiding this problem

39

PLRs 200610026, 200620026, 200608032

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c. A conduit trust - one which pays all RMDs out to the beneficiary during the beneficiary’s lifetime, allows the conduit beneficiary to qualify as the Designated Beneficiary for RMD purposes.

2.

Spouse as Beneficiary of Trust

a. Minimally, a spouse must be the “sole beneficiary” of the trust in order to rollover assets from the Participant’s IRA to her own.40

b. The Treasury Regulations state that a surviving spouse can elect to treat the Participant’s IRA as the spouse’s own “only if the spouse is the sole beneficiary of the account and has unlimited right to withdrawal from the account. This requirement is not satisfied if a trust is named as beneficiary of the IRA.”41 Therefore, a QTIP Trust (pay all the income) or a Conduit Trust (pay all of the RMD) would not allow a spouse to rollover the account into the spouse’s name or treat the account as the spouse’s own.

c. However, it appears that a spouse may be able to roll over Retirement Plan assets payable to a trust in which certain requirements have been met. Rollovers have been permitted in situations in which the spouse not only had complete access to the marital trust assets but also had the discretion, as trustee, to allocate the Retirement Plan assets to the marital trust. Rollovers have also been permitted in cases in which the trust directs that the proceeds of the qualified plan or IRA are to be paid directly to the surviving spouse (i.e., situations in which the spouse was not the trustee but the trustee had no discretion under the terms of the trust to allocate the proceeds anywhere but the marital trust). There are several Private Letter Rulings on this topic.42

d.

Computing RMDs when spouse is beneficiary of a trust

i. The special rule for computing RMDs when spouse is the beneficiary do not apply to a trust (i.e., the recalculation method is not used, but rather a fixedterm basis) unless the spouse is determined to be the “sole beneficiary” of the trust. So if a 40

Reg. §1.401(a)(9)-5, A-4(b)(1)

41

Reg §1.408-8, A-5(a)

42

PLRs 200249013, 200707159, 200646026, 200621020, 200615032, 200703047, 200704033

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spouse is one of multiple beneficiaries, RMDs are based on the fixed single-life payment method.

ii. A spouse is the “sole beneficiary” of the account for RMD purposes if the trust is a conduit trust, so the special method of computing RMDs applies and the delayed commencement date of §401(a)(9)(B)(iv) applies.

3.

Non-spouse Beneficiary of Trust

a. If the non-spouse beneficiary of a see-through trust is the Designated Beneficiary, the life expectancy of the beneficiary is used to compute RMDs.

4.

Multiple Beneficiaries of Trust

a. The separate accounts rule does not apply to beneficiaries of a trust. Even if the trust requires that separate shares or sub-trusts are created upon the Participant’s (grantor’s) death for purposes of allocating income, the separate accounts rule will not apply to allow the beneficiaries to use their own life expectancies to compute the RMD.43 Assuming the beneficiaries of the trust qualify as Designated Beneficiaries, the RMD is typically computed using the life expectancy of the oldest trust Designated Beneficiary, or the remaining life expectancy of the Participant (grantor), if longer.

5.

Termination of the Trust

a. The Trustee is not required to terminate the plan or IRA and distribute all of the assets out to the beneficiaries upon termination of the trust. The Trustee may “assign” or transfer the plan to the beneficiaries. See Part I.E.3 of this outline below regarding assigning plan assets to beneficiaries (of a trust or estate). Assignment of the assets to beneficiaries does not change the ADP which is fixed by the DBD.

E.

Estate as Beneficiary

43

Reg. §1.401(a)(9)-4, A-5

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1. Computation of RMD - When the estate is either the named beneficiary or Retirement Plan assets pass to the estate of the Participant because of no designated beneficiary, there is no “Designated Beneficiary” for RMD computation purposes so IRA assets must be distributed out over (no longer than) five (5) years if Participant died before his Required Beginning Date; otherwise over the Participant’s remaining life expectancy.44

2. Spouse as Beneficiary of Estate - The general rule is that a surviving spouse is not eligible to roll over an IRA payable a Participant’s estate, even when the spouse is the sole beneficiary of the estate, however, the Service has consistently held in numerous private letter rulings that the surviving spouse may roll over benefits that are distributed from an estate to the spouse if the spouse has the right to the payments or to demand the payments.45

3. Assigning IRA assets from an Estate to the beneficiaries - Although the RMDs may have to come out over five years, the Estate does not need to remain open for five years plus. The Estate may transfer or assign the IRA to the beneficiaries. This type of assignment is not an impermissible assignment.

a. The Personal Representative instructs the IRA custodian to change the name and social security number on the IRA to the name and social security number of the beneficiary(ies) of the estate. The IRA does not need to be terminated and paid lump sum to the estate.

b.

F.

What to do when the plan administrator won’t cooperate -

i.

Move the IRA to a custodian who will cooperate

ii.

Court order might work

No Designated Beneficiary

44

Reg. §1.401(a)(9)-5, A-5(a)(2)

45

PLRs 200344024,200331704, 200305030, 200325008, 200324059, 200634065, 200644031, 200650023, 200703035

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1. If Participant dies before Required Beginning Date (generally, age 70 ½), then assets need to be paid out over five years (by December 31 of the year following the death of the Participant).46

2. If Participant dies after Required Beginning Date, assets may be paid over what would have been the remaining life expectancy of the Participant (using Single-Life Table).47

3. Caveat: Always look at the plan document. If for some reason the Participant failed to name a beneficiary, the plan document may provide for an alternate beneficiary or a method of payment.

G.

Death of a Beneficiary after Death of Participant

1. Whether the beneficiary dies before or after the DBD, the ADP is based on original Designated Beneficiary. The ADP is irrevocably established based on the original Designated Beneficiary. Any beneficiary who succeeds to the benefits will take according to the original beneficiary’s ADP.48

a. Caveat: There is a notable exception for a surviving spouse who is a beneficiary if the Participant dies before his RBD, and his beneficiary-spouse who survives him then dies before the date that distributions are required to commence to her. In this case, the ADP after the surviving spouse’s death will not be based on the spouse’s life expectancy but rather will be by December 31 of year five after the spouse’s death, or if spouse had designated her own beneficiary, the ADP will be based on the spouse’s Designated Beneficiary’s life expectancy.49

b. Also see PLR 200644022 which conclusion seems to follow the caveat mentioned in the preceding paragraph, even though the spouse was the “sole beneficiary” of Participant’s trust rather than individually. 46

§401(a)(9)(B)(ii), Reg. §1.401(a)(9)-3, A-4

47

Reg. §1.401(a)(9)-5, A-5(a)(2)

48

Reg. §1.401(a)(9)-5, A-7(c)(2)

49

Reg. 1.401(a)(9)-3, A-5, A-6, §1.401(a)(9)-4, A-4(b)

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2. How do the plan or IRA assets pay out after the death of the Designated Beneficiary? It depends on the plan and actions taken by the beneficiary, but the assets do not pass to the contingent beneficiary named by the Participant (unless the plan has a required survival time period for the primary beneficiary).

a. Some plans and IRA custodians allow beneficiaries of inherited plans/IRAs to name a successor beneficiary.

b.

Some plans and IRAs require the benefits to be paid to the estate

of the beneficiary.

H.

Post-death Cleanup: Changing the Designated Beneficiary (and/or ADP) After

Death

1. There are a couple of ways in which the Designated Beneficiary can be changed after the death of the Participant. No new Designated Beneficiaries can be added, but certain beneficiaries can be eliminated by disclaimer of a beneficiary or distribution to a beneficiary in satisfaction of a bequest (if permitted by the document, state law or otherwise) prior to the DBD.

2. The disclaimer or distribution that effectively eliminates a beneficiary must happen by no later than DBD and may need to happen sooner (eg., qualified disclaimer must be made with 9 months).

3. The ADP can be changed by division of the plan account after death into separate accounts, where permitted, to allow multiple beneficiaries to each use their own life expectancy, but the Designated Beneficiaries are fixed as of the DBD.

I.

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Disclaimers by Beneficiaries

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Estate Planning for Retirement Assets: A Case Study Approach

1. A disclaimer made by the Designated Beneficiary Finalization Date removes the disclaiming beneficiary from the list of “Designated Beneficiaries” for RMD computation purposes. To be a qualified disclaimer for purposes of the Internal Revenue Code, the disclaimer must be made within 9 months of the Participant's death.50

2.

Planning Considerations:

a.

Shift assets to a beneficiary with longer life expectancy;

b.

Utilize some of Participant’s Federal estate tax exemption amount.

3. A beneficiary may take the RMD for the year of Participant’s death and then disclaim the balance of the assets.51 The RMD is a severable interest.

II.

Discretionary Distributions

A.

Payments under Trusts

1. support:

Some types of trusts requiring discretionary distributions or distributions for

2.

a.

Trusts for minors;

b.

Trusts for individuals who are disabled;

c.

Trusts for spouses (QTIP, family trust)

Handling distributions under a trust for minors.

50

IRC §2518

51

Reg. 25.258-3(a)(1)(ii) regarding severable interests

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a. If the trust is a conduit trust, the trustee will be required to distribute all RMD to the beneficiaries. The trustee will need to determine whether distributions must be made proportionately among the beneficiaries. If not, the trustee may factor in the age of the beneficiary, the income tax bracket of the beneficiary, and other circumstances permitted by the Trust document.

3.

Handling distributions under a trust for an individual with a disability

a. Typically, the trust for an individual with a disability will contain very specific requirements about the timing and manner of distributions. Consideration will need to be given to whether the beneficiary qualifies for government assistance (i.e., SSI, Medicaid) and whether trust distributions would disqualify the beneficiary from such assistance.

b. If the individual with a disability is one of several discretionary beneficiaries, the trustee may need to weigh several factors and the grantor's intent before making direct distributions to the beneficiary with a disability.

B.

Trustee Discretion from an Income Tax Perspective

1. In a fully discretionary type of trust, the beneficiary's substantive rights to receive the Retirement Plan distributions will not be altered by the definition of “income.”

2. Trustee discretion can be problematic when a trust is funded with Retirement Plan assets and the trust instrument does not clearly delineate how the Retirement Plan assets are to be allocated or distributed. See III.C.1 of this outline below. Issues can arise concerning:

a.

Fulfillment of the Trustee's duties to the beneficiaries;

b.

Acceleration of income tax; c.

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Charitable deduction for income tax purposes.

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Estate Planning for Retirement Assets: A Case Study Approach

III.

A. checklist):

Pitfalls and Other Plan Considerations

Some things to look for if handing estate of a Participant (to add to your

1.

Participant’s failure to take RMD’s during his lifetime - either in year of

death or prior. a.

Who pays penalty? Form 5329 and request for waiver.

2. The Plan Document. Obtain a copy and READ it thoroughly. It will have information regarding: a. the default rules for IRAs; b.

Distribution options for beneficiaries which may be different from

Default beneficiaries.

3.

Merging companies or Participant who changed employers often during

4.

Review the trust agreement if trust is beneficiary of a Retirement Plan

life

a. Determine if conduit trust or see-through trust (is a PLR necessary to confirm that trust is a see-through trust?)

5. Consider the advisability of disclaimers, distributions to unfavorable beneficiaries, need to segregate the Retirement Plan accounts (be cognizant of who is your client when giving advice).

B.

Required Minimum Distribution in Year of Death

1. If Participant is passed his RBD, the Participant’s RMD must be taken by December 31 of year of death. This is a big alert for Personal Representatives.

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2. Who takes the RMD? The designated beneficiaries, not the estate of the Participant, are entitled to the RMD for the year of death.52 3. The RMD in year of death is based on the Participant’s life expectancy using the Uniform Lifetime Table (or the same manner in which the Participant was computing his RMD during lifetime).53

C.

Income tax and trust accounting issues

1.

Funding a pecuniary bequest with an IRD asset.

a. Funding a pecuniary bequest under a trust instrument with an IRD asset will trigger income tax.54 The trust may end up paying the income tax if the Retirement Plan assets used to satisfy the pecuniary bequest even if the Retirement Plan assets are not withdrawn by the trustee and are assigned directly to the beneficiaries of such bequests.55 Furthermore, if the pecuniary beneficiaries are charities, the trust would not receive a Distributable Net Income (DNI) deduction (as there is no DNI deduction for payments to charity) but they also would not receive a charitable deduction if the satisfaction of the bequest with the IRD asset was in the discretion of the Trustee. The trust could receive a charitable deduction if the distribution was satisfied out of the trust's gross income pursuant to the governing instrument.

b. The trust would not receive a DNI deduction for distributions of IRD assets to non-charitable beneficiaries in satisfaction of a pecuniary bequest unless the trust document required that the distributions be made in more than three installments. For this reason, Personal Representatives should avoid using IRD assets to satisfy pecuniary bequests, but this may create a fiduciary dilemma for them.

c. If a trust consists of both Retirement Plan and non-retirement assets and the non-retirement assets are used to satisfy the pecuniary bequest to avoid the acceleration of income tax, the residuary beneficiaries end up with the IRD assets and ultimately, less assets. If 52

Reg. §1.401(a)(9)-5, A-4(a)

53

Reg. §1.408-8, A-5(a)

54

IRC §691(a)(2)

55

Chief Counsel Memorandum (CCM) 200644020

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the amount of the pecuniary bequest exceeds the trust's non-Retirement Plan assets, the Personal Representative may wish to fulfill the pecuniary bequest by partly or entirely assigning the IRA to the pecuniary beneficiary, but it would be wise to seek an IRS private letter ruling regarding the income tax treatment first or to seek a judicial reformation of the trust. d. There are some exceptions to the automatic realization of income tax upon the satisfaction of a pecuniary bequest with an IRD asset. The transfer of an inherited Retirement Plan to a beneficiary in fulfilment of a pecuniary bequest to such beneficiary should not result in immediate taxation of the IRD inherent in the plan if either: (1) the Retirement Plan is the only asset available to fund the pecuniary bequest or (2) the governing instrument or applicable state law requires that particular asset to be used to fund that particular bequest or allows the beneficiary to choose the Retirement Plan to fund the bequest and the beneficiary so chooses. However, if the trustee has the discretion to satisfy the pecuniary bequest with the Retirement Plan and chooses to fund the pecuniary bequest by assigning to the beneficiary all or part of the Retirement Plan, the assignment may result in taxable income to the estate or trust under § 691(a)(2).

2 If no part of a payment can be characterized as interest, dividends or equivalent payment and the payment is required to be made, under the Uniform Principal and Income Act, a trustee shall allocate to income 10% of the part of the payment that is required (i.e., the RMD).56

3. If an IRA is subject to estate tax on the death of the owner, a beneficiary may be entitled to an estate tax deduction on their personal income tax return. The portion of the IRA that is subject to income tax when received by the beneficiary is Income in Respect of a Decedent (IRD). The beneficiary deducts a proportionate share of the estate tax as the IRD is received.

4. When an IRA beneficiary must take a large distribution in a single year, consideration should be given to paying any state income tax prior to year end in order to match the deduction with the income reportable that year. Consideration should also be given to the impact of the Alternative Minimum Tax (AMT) as state income taxes are an AMT adjustment.

5. Deceased Participant’s Basis in an IRA Carryover Basis - Any nondeductible contributions to a traditional IRA made during the Participant’s lifetime may create 56

MCL 555.809(3)

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basis for the decedent in the IRA. Upon death, the basis will carry over to the beneficiaries. Sometimes these result from a divorce or after-tax money distributed from a QRP.

6. Any available basis will reduce the IRD portion of the IRA reported in the estate tax return, thereby, reducing the estate tax deduction. The carryover basis should be reported and tracked on the beneficiary’s income tax return on Form 8606.

7. No 10% Penalty on death distributions - Distributions from an IRA due to the owner’s death are not subject to the 10% penalty. This applies to distributions to the beneficiary even if they are under age 59 ½.

D.

Trusteed IRAs a/k/a Individual Retirement Trusts (IRTs) IRC §408(a)

1.

All RMDs must be passed out of the IRT to the beneficiary directly.

2. Benefit is that the substantive terms of a trust is combined with the tax deferral of an IRA and no separate trust instrument is necessary.

2. The beneficiary’s control is limited (eg. the Participant can name a successor) beneficiary).

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