Bradley J. Frigon, CELA, JD, LLM Law Offices of Bradley J. Frigon 6500 S. Quebec St. Suite 330 Englewood, CO

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1 Bradley J. Frigon, CELA, JD, LLM Law Offices of Bradley J. Frigon 6500 S. Quebec St. Suite 330 Englewood, CO

2 Overview of Retirement Assets Income in Respect of a Decedent (IRD) No step-up in basis under IRC Taxed to beneficiary as ordinary income when distributed from a retirement plan. Most heavily taxed assets, with double or triple taxation possible: Income, Estate, GST.

3 Income Tax Objective: Defer Income Tax as Long as Possible The usual income tax objective with respect to retirement accounts is to defer and to reduce the amount of distributions as much as possible in order to generate investment income on the deferred income taxes.

4 Income Tax Objective: Defer Income Tax as Long as Possible (con t) For example, if there is $100,000 in a traditional IRA, then if the entire account is liquidated in a single year there could be a combined federal and state income tax liability of $40,000 from the taxable distribution, leaving the individual with just $60,000 to invest after taxes. Had the distribution not been made, the $40,000 would remain in the IRA and would generate investment income for the IRA owner.

5 Income Tax Objective: Defer Income Taxes as Long as Possible (con t) If, instead, the IRA Owner had a $100,000 Roth IRA, then a complete distribution would not trigger any income tax liability because distributions from Roth accounts are generally tax-exempt. Still, there is a significant cost of liquidating a Roth account.

6 Income Tax Objective: Defer Income Taxes as Long as Possible (con t) Once the $100,000 leaves the Roth account, the investment income earned on the $100,000 is generally taxable whereas it would have been tax-exempt had it been earned in the Roth account. Thus, with either a traditional IRA or a Roth IRA, the income tax objective is to keep the balance at $100,000 inside the IRA and to avoid an early distribution.

7 Roth IRAs Roth IRAs are exempt from mandatory lifetime distributions. Individuals who have a Roth 401(k) or Roth 403(b) account do not have this advantage, but they can easily obtain it by making a tax-free rollover of the account to a Roth IRA.

8 Required Beginning Date For Account Owner A participant must begin taking Required Minimum Distributions (RMDs) from his retirement assets by his Required Beginning Date or RBD. The RBD is April 1 st of the calendar year AFTER the calendar year in which the participant reaches age 70½.

9 Required Beginning Date For Account Owner (con t) There is an exception for QUALIFIED PLANS only if the participant is not retired at age 70½ and the participant is not a five percent or greater owner in the business in which he or she works, RBD can be postponed until April 1 st of the year after the participant actually retires. RMDs from an IRA cannot be postponed beyond age 70½, even if the participant is continuing to defer distributions from the qualified plan.

10 Required Beginning Date Bob is born on 6/30/1937. Bob turns 70 on 6/30/2007. Bob turns 70 ½ on 12/30/2007. Bob s RBD is 4/01/2008. Jane is born 7/01/1937. Jane turns 70 on 7/01/2007. Jane turns 70 ½ on 01/01/2008. Jane s RBD is 04/01/2009.

11 Required Lifetime Distributions After Age 70 ½ General Rules Unless you are married to someone who is more than ten years younger than you, there is one and only one- table of numbers that tells you the portion of your IRA, 403(b) plan or qualified retirement plan that must be distributedtoyoueachyearafteryouattaintheage of 70 ½.

12 Required Lifetime Distributions After Age 70 ½ (con t) Theonlyexceptiontothistableisif (1)youaremarried to a person who is more than ten years younger than you and (2) she or he is the only beneficiary on the account. In that case the required amounts are even lessthantheamountsshown in thetable. Tobeexact, the required amounts are based on the actual joint life expectancy of you and your younger spouse.

13 Required Lifetime Distributions After Age 70 ½ (con t) Two Simple Steps: Step 1: Find out the value of your investments in your retirement plan account on the last day of the preceding year. For example, on New Years Day look at the closing stock prices for December 31. Step 2: Multiply the value of your investments by the percentage in the table that is next to the age that you will be at the end of this year. This is the minimum amount that you must receive this year to avoid a 50% penalty.

14 Required Lifetime Distributions Example: After Age 70 ½ (con t) Jane had $100,000 in her only IRA at the beginning of the year. She will be age 80 at the end of this year. She must receive at least $5,350 during the year to avoid a 50% penalty (5.35% times $100,000).

15 Overview of Retirement Assets Uniform Table Age RMD Age RMD Age RMD Age RMD Age RMD

16 Overview of Retirement Assets Selected Excerpt from Joint Table Ages

17 Penalties Penalties 50% penalty for failure to take RMD. IRC % penalty for taking a distribution before age 59½. IRC 72

18 Exceptions to 10% Penalty Distributions due to death or disability; Distributions for payment of unreimbursed medical expenses that exceed 7.5% of AGI; Distributions for the payment of health insurance premiums for certain unemployed individuals; Distributions for the payment of qualified higher education expenses; Distributions consisting of substantially equal periodic payments; Distributions to a qualified first-time homebuyer; and Distributions due to an IRS levy on the IRA. If you do not meet one of the above exceptions, you can avoid paying the 10% penalty tax if you redeposit the early distribution amount within 60 days of the distribution.

19 Distributions at Death Proper Titling for Inherited IRA John Doe (Deceased) IRA fbo Mary Doe. John Doe (Deceased) IRA fbo Mary Doe, Trustee under the John Doe Trust dated January 1, John Doe (Deceased) IRA fbo Mary Doe, Trustee of the Jane Doe Trust created under the John Doe Trust dated January 1, NOT Mary Doe (unless rollover).

20 Required Distributions After Death Terminology Beneficiaries versus Designated Beneficiary ( DB ) A beneficiary is any person or entity that is entitled to receive benefits from a QRP or IRA account after the account owner s death. By comparison, a designated beneficiary is an individual who is entitled to the benefits of the IRA or QRP account upon the death of the employee/participant/ira owner (hereafter account owner ). Neither a charity nor the decedent s estate will qualify as a DB since neither has a life expectancy. If certain criteria are met, a trust may be the beneficiary of an IRA or QRP and distributions will be based on the beneficiaries of that trust (an eligible trust ).

21 Required Distributions After Death Terminology (con t) Determination Date The date when the beneficiaries must be determined is September 30 of the calendar year that follows the calendar year of the account owner s death. Example: Sarah died on April 29, The determination date for her IRA and QRP accounts will be September 30, The minimum distributions will be computed based only on the beneficiaries who still have an interest on the determination date. If a beneficiary s interest is eliminated between the time that the account owner died and the determination date for example by a cash out or a disclaimer then that beneficiary will not have any impact on the required minimum distributions.

22 Required Distributions After Death Terminology (con t) Determination Date There are basically three ways to eliminate some of the beneficiaries before the determination date: (1) disclaimers, (2) cash-out of a beneficiary and (3) separate accounts for different beneficiaries.

23 Disclaimer What happens when a person disclaims an interest in an inherited retirement plan account? That is, upon the employee s death, the primary beneficiary makes a qualified disclaimer within the applicable 9 month period so that the property passes to a contingent beneficiary, such as a charity.

24 Disclaimer (con t) The IRS will allow a primary beneficiary to disclaim all or part of an inherited retirement account even if he or she received a mandatory distribution from the account in the year of the account owner s death. Rev. Rul , IRB 1368 (by comparison, any acceptance of benefits will normally disqualify a disclaimer). The estate can then claim an estate tax charitable deduction for the amount that was transferred to a charity by way of the disclaimer. A disclaimer is not advised for a beneficiary receiving means tested public benefits such as SSI- Medicaid. This will be treated as a transfer without consideration that will disqualify the beneficiary from benefits.

25 Receipt of IRA Distributions Above Required Minimum Distribution Does Not Preclude Surviving Spouse's Partial Disclaimer PLR (Nov. 15, 2012). Decedent established an IRA and received the required minimum distributions (RMDs) by automatic deposit into a bank account held by his revocable trust, which was the beneficiary of the IRA. Decedent died survived by Spouse and their four children. Spouse was named primary beneficiary of the IRA. Two of the RMDs were deposited automatically into an account in the name of Spouse, after which the distribution order was cancelled. The amount of distributions for the year of death exceeded thermds forthatyear, and nootheramounts werepaid from the IRA. Spouse made no investment decisions with respect to the IRA. The revocable trust states that any portion of the assets that Spouse disclaims will be added to the Family Trust. Spouse, acting through her son as attorney-in-fact, wants to disclaim the rest of the IRA. The disclaimer will be timely, and Spouse wants to disclaim the principal of the IRA existing on the date of death that has not already been paid to Spouse, and a proportionate amount of IRA income attributable to such principal balance.

26 Receipt of IRA Distributions Above Required Minimum Distribution Does Not Preclude Surviving Spouse's Partial Disclaimer (con t) The IRS stated that thedisclaimerby Spouse of herinterest in the IRA is a qualified disclaimer under 2518, even though prior to making the disclaimer, the Spouse received from the IRA amounts in excess of the RMD for the year of Decedent's death. The IRS relied on Rev. Rul , C.B. 1368, where a beneficiary received required minimum distributions before making a disclaimer, and the IRS ruled that receipt of the required minimum distributions constitutes acceptance of that portion of the corpus of such account, plus the income attributable to that amount, but that it does not preclude a beneficiary's disclaimer of the remaining balance of the IRA. The IRS refused to distinguish receiving the RMD from receiving somewhat more than the RMD, except to the extent that the amount received affects the amount that can be disclaimed.

27 IRA Designation - Spouse

28 IRA Designation Spouse (con t)

29 Distributions at Death For Spouse Spouse as Beneficiary Rollover Option Spouse must be sole beneficiary of IRA. No RMDs until age 70 ½. Use Uniform Table. Can name new beneficiaries to take at death.

30 Spousal Rollover In order for the spouse to rollover the inherited retirement assets, he or she must be the sole beneficiary of the retirement asset. So, if an IRA named a spouse and child as beneficiaries, spouse would only be the sole beneficiary as to half of the IRA. Therefore, the spouse could rollover half of the IRA into an IRA in her name and child could take the other half as an inherited IRA.