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Estate and Distribution Planning For Retirement Benefits: A Planner’s Guide

Posted on: April 10th, 2015
Threshold Question. Whether life expectancy payout for issue is a desirable goal.

If not, then payout is within 5 years, if before RBD (or if after RBD, then over participant’s life expectancy).

  1. If Life Expectancy Payout for Issue Is a Desirable Goal.

Separate into “inherited IRA” before December 31 of the year after participant’s death. Otherwise, the age of the eldest child is utilized for payout.

If there are non-individual beneficiaries (e.g., charitable recipients, then you must pay all non-individuals their entire share to preserve life expectancy payouts for individual beneficiaries before September 30 of the year after the participant’s death year.

  1. Rules to Qualify Trust Beneficiary Designations as IRA Individual Beneficiary for Administration by Trustee.

    1. Trust must be valid under the state law of its situs.

    2. The trust must become irrevocable upon the event of the participant’s death.

    3. Documentation must be given to the retirement plan administrator before October 31st of the year after the year of death. (Trustee provides trust agreement or summary of the same.)

    4. All beneficiaries must be individuals and the eldest beneficiary must be the age for the determination of the life expectance payouts.

  • No retirement plan benefits may be utilized for the payment of taxes and expenses of trust administration. If used for this purpose, the trust must be completely distributed and terminated before September 30th of the year following the year of the participant’s death.
  • Safe harbor distributions:
  1. - Conduit trust: as payments are received, they are immediately paid out to individual beneficiaries.

  2. - Payments are paid outright to now living persons (e.g., income to spouse, then outright to children or at some point, their children. When you get to charity level before outright level, you do not have a conduit).

  • Minor Children. For accumulation trust. Avoid using elder ultimate beneficiaries (e.g., if accumulate to pot trust and pay out at 25, then ultimate beneficiary is counted as final individual. If an elderly uncle, then that life is used as life expectancy person.
  • To cure: (i) Conduit trust for IRA assets; (ii) “Last man standing” (if at any time only one child is living at that level, pay out to that child, omit retirement plan assets from ultimate beneficiary assets; (iii) omit old ultimate beneficiary person; or (iv) forget the rules, presume 5 year payout, and purchase life insurance to pay the tax.
  1. Summary.

  • Minor Beneficiaries: Outright distribution to minor beneficiary is not recommended. Better to utilize conduit trust or see through accumulation trust.
  • Multiple Beneficiaries: multiple IRAs (1 to each beneficiary), fractional shares in trust.
  • Charitable Beneficiaries: Sole plan beneficiary, use other assets to fund gift, separate trust, disclaimer activated gift.

Disclaimer Notice: It is my intention that the comments, articles, and other information provided on this website are intended to provide you with general information which may be interesting and of value to you. You should not construe any of this information as legal advice or my opinion as it may relate to your specific circumstances. Please feel free to contact me directly if you would like to discuss your own situation and your estate, real property, or business planning needs.

 

 

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Leonard A. Hagen, J.D., LL.M.
Sound Estate Planning, PLLC
152 3rd Ave. South, Ste. 107
Edmonds, WA 98020
Phone: (425) 967-7287
len@soundestateplanning.com

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