Structuring IRA Trusts in Estate Planning:

Strategies for Minimizing Taxes

and Preserving Assets

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, DECEMBER 18, 2014

Presenting a 90-Minute Encore Presentation of the Webinar with Live, Interactive Q&A

Edwin P. Morrow, III, Esq., Senior Wealth Specialist,

Key Private Bank Wealth Advisory Services, Dayton, Ohio

Salvatore J. LaMendola, Member, Giarmarco Mullins & Horton, Troy, Mich.

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Structuring IRA Trusts in Estate Planning: Strategies for Minimizing Taxes and Preserving Assets

 Note: throughout this outline, I often refer to IRAs only to simplify reading.  Unless otherwise noted, however, most considerations apply to 401k, 403b, 457 or other qualified plans equally.  Those inheriting qualified plans that do not permit a “stretch” can transfer account via trustee to trustee transfer to an inherited IRA. 

                          Page 

I. Value of a “Stretch IRA”                        1 

II. The deception of the “Stretch IRA” and why a trust can be an ideal beneficiary           3 

III. Why the Beneficiary Designation Form (BDF) should be more customized –                 4 

Including examples of different BDF customizations 

IV. How ATRA makes separate or “standalone” IRA trusts more compelling                        7     

V. What if the “Stretch” is botched?  Tax, penalties and asset protection disasters           8 

VI. Proposed Senate bill – What if Congress “snaps” the stretch?  How to plan for it       10 

VII. Four basic choices: Trusteed IRA, IRA Annuity, Conduit, Accumulation Trust          13 

VIII. Charities ‐ a preferred DIRECT beneficiary of non‐Roth retirement accounts         17 

IX. 5th Choice: charitable trust as IRA Beneficiary?  When this is preferred                      19 

X. Pre‐Mortem Trust Drafting Checklist ‐ overlooked trust provisions that may               20 

kill the “stretch”, with examples of common offending clauses  

XI. Post‐Mortem IRA Trust Checklist ‐ planning mode v. “clean up” mode –                       37 

what can be done with charitable bequests, disclaimers/releases, early payouts  

Appendix  Comparison Chart of Estate Planning and Trust Options for IRAs/Retirement Plans 

Treasury Regulations §1.401(A)(9)‐4, ‐5 re “See Through Trusts”, i.e. Conduit/Accumulation Trusts  

Article: Using Separate or Standalone Trusts as Beneficiaries of Retirement Plan Benefits,  

Article: Trusteed IRAs: An Elegant Estate Planning Option, Trusts and Estates, Sept 2009 

Article: Clark v. Rameker: Supreme Court holds inherited IRAs are not protected in bankruptcy: Are 

spousal inherited IRAs and even rollovers IRAs threatened as well? 

 

 Edwin P. Morrow III, J.D., LL.M. (tax), CFP® National Wealth Specialist, Key Private Bank 

(937) 285‐5343  edwin_p_morrow@keybank.com 

© 2012‐2014 Edwin P. Morrow III, with permission granted to any attendee to use and adapt any portion for their legal practice.  While effort is made to ensure the material is accurate, this material is not intended as legal advice and no one may rely on it as such.  Do not assume that any trust sent to or involving KeyBank has necessarily been analyzed or vetted against the concerns in this outline.  Based on material presented in Feb 2012 at the American Bar Association Tax Section Semi‐Annual Meeting.  Constructive criticism welcome.    

    1

I.  The Value of the “Stretch”

“We hold these truths to be self‐evident: that all accounts are not created equal, 

that they are endowed by their Creator with certain alienable rights, that among 

these are the power to defer or avoid taxation and shelter assets from creditors ‐ 

That to secure these rights, attorneys are endowed with certain powers to 

arrange such accounts as necessary for the public good.” 

Everyone agrees that tax deferral is valuable, but the precise value is difficult to 

quantify, especially with stretch IRAs.  Many factors are speculative: Would a beneficiary ever 

get divorced, sued or spend all the money?  What will future state and federal tax rates be for 

the beneficiary?  Will they move to another state?  Could estate or inheritance tax be a factor?  

What will future investment returns be?   What are the mix of investments and the tax rate and 

return for each?  What inflation should be assumed?  What rate of turnover on taxable 

investments?  Using some reasonable assumptions (7% growth on investments both inside and 

outside of the IRA, 35% bracket without factoring in 2013 tax increases), the chart below shows 

the potential impact of tax deferral at the end of forty years (the contrast would be greater for 

longer periods) by contrasting a $1Million IRA passing at death to 1) beneficiaries with no 

“stretch” (immediate distribution), 2) beneficiaries with deferral over five years, 3) a 42 year old 

beneficiary with maximum deferral over the 42 year old’s life expectancy and 4) an 18 year old 

beneficiary with maximum deferral over an 18 year old’s life expectancy.   

    2

 

At the end of forty years (when the IRA accounts will have been completely distributed 

to the 42 year old – the life expectancy under the tables being to age 82), the amount in the 

taxable accounts where the IRA was fully “stretched” ($8,196,353) far exceeds the value where 

funds were taken out and put in taxable accounts ($6,910,060 if immediate, or $7,140,595 if 

deferred for 5 years).  The long‐term savings illustrated by these numbers (over a $1 million) 

exceeds the current value of the IRA itself (not backed out for present value).   

If instead, we use the same assumptions, but change the beneficiary to an 18 year old, 

this leads to an even greater difference (more than $3Million) due to greater tax deferral, even 

with the same 40 year time horizon for comparison (note, however, that long‐term savings may 

even be greater since an 18 year old is permitted 65 years of deferral rather than the 40 years 

illustrated on this chart).   

 

 

    3

II.  Why use a trust (or trusteed IRA) at all?  

1) Ensure the “stretch” really happens by protecting beneficiaries from themselves, their poor investments, spending habits or spousal influence. An AXA study cited by Professor Chris Hoyt at Heckerling concluded that 87% of children liquidate an inherited IRA within one year of death.  Not only does this “blow the stretch”, but it also may lead to commingling what would otherwise remain separate property with marital property for divorce purposes. After all, how many 18 year olds inheriting a million dollar IRA voluntarily spend only 1/65 ($13,485) in the first year?   

 2) Asset protection from creditors of beneficiaries: most states do not protect inherited 

IRAs (perhaps FL, ID, TX – now with HB 479, Ohio, but you really can’t plan for where a beneficiary may move).  Inherited IRA protection in bankruptcy is uncertain as well.1  Also, the IRA may have a clause in the agreement that jeopardizes the asset protection, or have been jeopardized through a self‐dealing issue.2 

 3) Avoidance of estate and inheritance tax (both state and federal) by excluding 

proceeds from the beneficiary’s estate and leveraging GST exclusion.  

4) Possible avoidance of state income tax for beneficiary.  For example: if trustee and situs is in FL/DE/WA/TX/etc and beneficiary lives in state with a state income tax, IRA distributions that accumulate in the trust (not K‐1’d) may escape state income tax. 

 5) Keeping funds “in the family bloodline”. The grantor can control where the assets go 

when the beneficiary dies and/or limit the recipients via terms of a special power of appointment.  Not subject to beneficiary’s spouse’s elective share rights, kept as separate property for divorce purposes. 

 6) Ensuring funds are not counted for Medicaid/VA or other government benefits 

 7) Making it easier for estate/trust to collect any apportioned state or federal estate 

tax, or income tax  

8) Avoiding botched titling/transfers by non‐professional beneficiaries 

1 Although the trend had been pro-debtor, the 7th Circuit recently bucked this trend. In re Heidi Heffron-Clark (7th Cir. 2013). The Supreme Court recently upheld the 7th Circuit – see separate article 2 See In re James L. Daley, Jr., 459 B.R. 270 (U.S. Bankr E.D. Tenn 2011), Yoshioka v. Charles Schwab Corp, 2011 U.S. Dist. LEXIS 147483 (N.D. Ca 2011) – the former case holding that a typical Merrill Lynch IRA agreement which grants the custodian a lien, even if no debt/loan is incurred or attachment ever made, still constitutes a prohibited transaction under IRC §4975 and eviscerates the IRA creditor protection; the latter case staying class action suit on similar issues with Schwab IRAs until the IRS/DOL rules on an exemption request to overrule Advisory Opinion 2009-03A, which declared such transactions to be prohibited. For an extensive outline on creditor protection issues for qualified plans, IRAs, 403bs, annuities, insurance, Coverdell ESAs and 529 plans, including discussion of prohibited transactions and the above cases, email the author.

    4

III.  Why the lowly Beneficiary Designation Form (BDF) should be customized  

1) Most IRAs default to the IRA owner’s estate if no valid BDF is filed.  Most qualified plans, however, do default to a spouse, and some even have children as contingent defaults. 

 2) Most IRA BDF’s do NOT have a per stirpes default.   

 Example: I leave my IRA to my children Peter, Paul and Mary.  Paul predeceases me.  My 

IRA will go to Peter and Mary, 50/50, and Paul’s children will NOT get 1/3.    Example 2: I leave my IRA 10% to my wife and 30% each to my 3 children from prior 

marriage.  One of my children predecease.  Under most IRA defaults, the IRA is now 20%, 40%, 40%; under many others, it is pro rata, and would be 13%, 43.5%, 43.5%.  NEITHER would probably be desired by the client.   

Solution: customize the BDF form.  Print “see attached”, and leave clear instructions as to what your client wants to have happen in the event a beneficiary predeceases or disclaims (a disclaimer disposition can be different). 

 3) If you want the optimal “stretch” tax treatment, you have to customize the form.  This 

may also avoid inadvertently blowing up the IRA because of other drafting issues (see points 11‐14 on the pre‐mortem checklist), but may have some other drawbacks (see article in Appendix). 

 Example: Dr. Do‐Good wants to leave his IRA in trust for his current wife and 3 children from a prior marriage.  He would like 50% to go to a bypass/qtip trust for her, remainder to children, and 50% to his children at his death, in trust.  Dr. Do‐Good also has converted $500,000 of his IRA to a Roth IRA.  He has set up subtrusts for grandchildren for these Roth IRA funds, thinking that they will get 70‐80 years of tax‐free growth.  His wife is 60, his children are 42, 45 and 50, grandchildren ages 4,6,10,12,15.    Accordingly, he names the Dr. Do‐Good revocable living trust as 100% primary beneficiary of his IRAs, and puts his subsequent instructions in the trust. This is a mistake. EVEN IF the trust is properly drafted (discussed in subsequent sections).  This is because the IRS will look to the oldest beneficiary of the trust, not just the oldest beneficiary of the SUBTRUST that it is ultimately going to, unless the subtrust is named directly on the beneficiary designation form.3  Thus, all IRAs must be distributed based on the 60 year old wife’s life expectancy.  Solution: Dr. Do‐Good changes his IRA BDF to name 50% to his revocable trust (or bypass trust), which will still use his wife’s LE, but he names 50% to his children’s subtrusts (which will use 42,45,50 LE, or 50 for all three subtrusts, depending on design), 

3 See Treas. Reg. § 1.401(a)(9)-4, A-5(c), Treas Reg. § 1.401(a)(9)-8, A-2(a)(2), PLR 2003-17041

    5

and he names his grandchildren’s subtrusts as beneficiaries of the Roth IRA (now, 4‐15 yr old LE, or depending on the trust design, 15 yr old’s for all 5 subtrusts – still a much better result).  Although this does not affect the share for the surviving spouse, this is a much better result for the children and grandchildren. 

 

4) If you like to use pecuniary A/B, GST formulas, you have to modify your BDF to avoid blowing up the IRA (see discussion in next section). Example: John Doe leaves his IRA to his trust, which funds the first $5.12Million (or whatever the applicable exclusion amount is at the time) to a bypass trust for his wife.  The IRA goes into the trust, then the bypass trust.  Because IRD is being used to satisfy a pecuniary obligation, it triggers the income tax. Solution: either amend the trust, or simply change the BDF so that John leaves his IRA to the Bypass trust directly.   Drafting example: “If my wife survives me, I leave 100% of my IRA to the subtrust under Article X of the John Doe Trust dated ______”   

5) If the trust is a “mere probate avoidance tool” that simply pays outright to beneficiaries (or at a certain age that has passed), then ask why is the client even bothering with the trust as a beneficiary in all cases?    Example: Client’s trust pays out to child at age 30.  Child will turn 30 on February 16, 2019.  Consider modifying the beneficiary designation form so the IRA pays to the subtrust if client dies before that date survived by the child, and to the child directly if client dies after that date.  While this is more hassle in the short term, this saves a lot of post‐mortem hassle, delay, complexity and room for error in the long‐term.    Drafting Example: On the BDF where you name beneficiary, you write “See attached sheet”, and then attach a sheet (“Attachment to John Doe’s IRA beneficiary designation for IRA account number XXXXXXXX” at top) “If I die after February 16, 2019 survived by my child ________, I name my child ____ as beneficiary of ____% of my IRA.  Otherwise, I name the trustee of the ___________ Trust dated ______ fbo child ____ per stirpes as beneficiary of ____% of my IRA.  The trust currently uses my address and social security number, but will use a different address and EIN upon my death.  My child’s address and SS are:  _____.”  

6) Similarly, it is common to have a trust as contingent beneficiary to anticipate potential disclaimer bypass trust funding. Example:  IRA owner names his wife as 100% beneficiary.  Then his Trust (or bypass trust, as discussed above) as contingent, to allow disclaimer funding.  However, children are grown and there is no desire for continued trust protection.  This complicates matters if she predeceases because the funds unnecessarily flow through the trust. Drafting example: “If my wife survives me, I name my wife ______100% beneficiary.  If my wife survives me but makes a qualified disclaimer under federal and Ohio law, I name the Bypass Trust under Article X of the John Doe Trust dated X as beneficiary of 

    6

any portion of the IRA so disclaimed.  If my wife does not survive me, I name my child ____ as primary beneficiary of 100%.”  

7) If you have smaller IRAs/estates that do not merit a trust, yet have minor children as contingent, at least customize the form to name an UTMA custodian to avoid continuing guardian of the estate hassles and at least give protection until age 21. Example: If I die before _______ (date when child turns 21), and my daughter Jane survives me, I name my brother James Doe as custodian under the Ohio Transfers to Minors Act for my daughter Jane until she reaches the age of 21 of 100%.  If I die on or after _________ (date when child turns 21), and my daughter Jane survives me, I name my daughter Jane as beneficiary of 100%.  If my daughter Jane does not survive me, I leave 100% to James Doe as custodian under similar terms for Jane’s issue.  If my daughter Jane does not survive me, nor leaves issue surviving, I leave 50% to the University of Dayton and 50% to my brother James Doe.  

 

    7

IV. Why ATRA makes standalone/separate IRA trusts more compelling  

For a list and explanation of why many attorneys are choosing to use 

separate/standalone trusts holding only IRAs, see the attached article entitled Using Separate 

or Standalone Trusts for Retirement Benefits. 

Since that article was published, Ohio has eliminated its estate tax, and the federal 

income tax scheme surrounding irrevocable non‐grantor trusts has changed, so that there are 

very compelling tax reasons to make sure that trust income can be sprayed to children or 

charities.  For instance, if a beneficiary makes $100,000 outside of the trust, and the irrevocable 

trust has $100,000 capital gains and $50,000 dividends/interest, the capital gains will incur 

23.8% tax over $11,950, whereas if it is taxed to the beneficiary, it will be taxed at only 15%.  If 

it can be distributed to a beneficiary in the lower two tax brackets, the rate is 0%.  Similarly, 

even 43.4% income can be taken to 0% if it can be sprayed to charity. 

This trust income tax planning, along with “step up in basis” planning, are the subjects 

of two separate articles and outlines and beyond the scope of this CLE.4  Here is why I need to 

mention them at least in passing.  The best planning tools to achieve better “step up” and avoid 

“step down” in basis is to use flexible testamentary powers of appointment.  Two of the best 

planning tools to avoid ongoing income tax are spray provisions and lifetime limited powers of 

appointment.  All of these are poison to “see through trusts” designed to achieve stretch IRA 

treatment.  While conduit trusts are still consistent with the optimal basis planning techniques, 

even conduit trusts are inconsistent with lifetime limited powers of appointment and spray 

powers, unless they are very carefully constructed and different from the lifetime limited 

power of appointment over the rest of the trust.

4 Avoiding the Medicare Surtax on Trusts, Trusts and Estates, Dec. 2012, The Optimal Basis Increase Trust, March 2013, Leimberg Information Services.

    8

IV.  What’s at stake with improper planning and administration?   

Tax Traps, Penalties and other Potential Disasters 

The potential for additional Income and Excise Tax liability due to mistakes in estate 

planning now exceeds potential estate tax liability for 99.8% of estates.  The federal estate tax 

exclusion is $5,250,000 in 2013, with portability of spousal exclusion, and the Ohio estate tax is 

eliminated.  Assuming these stand, the two most important tax areas where attorneys provide 

value to their clients are in planning for income tax basis (the subject of another CLE outline 

and article), and exploiting tax deferral for retirement benefits. 

We discussed all the various reasons for using trusts or trusteed IRAs to receive 

retirement benefits, but unfortunately it entails much greater risk for the attorney.  After all, 

when people don’t use trusts as beneficiaries, it’s hard to imagine any liability for the attorney, 

not only because the attorney probably did not advise on or draft the beneficiary designation 

form, but because none of the beneficiaries would have standing (privity) to sue under 

Zipperstein, and even if the estate had privity, it would rarely be the estate that would suffer 

damages – it is the beneficiaries who lose out. 

Unfortunately, this is not the case when a trust is named as beneficiary.  Not only is the 

attorney intimately involved in the drafting of the trust and beneficiary designation (or should 

be), but the trust could have significant damages and there is unlikely to be the privity problem 

to block the family from suing, since the attorney probably represented the initial trustee of the 

living trust or the surviving spouse, and such cases may well be the kind of case the Ohio 

Supreme Court mentioned in Shoemaker v. Gindlesburger (“question for another day”) that it is 

willing to revisit regarding privity.  Additionally, there is greater potential for tax problems and 

snafus during trust administration that the attorney may be consulted on.  

We discussed the value of the stretch in the previous section – and recall, the numbers 

might be greater if tax rates increase (the spreadsheet/chart used 2012 numbers and I did not 

update the chart for 2013 income tax changes), or if a beneficiary lives in a state with a 

separate state income tax, or if the beneficiary is younger.  The “damages” to the beneficiary 

would have to be backed out to present value from the charts above, but would still be 

significant.  If this stretch is blown and taxable income is trapped in trust, the damages are 

    9

worse still – because any ordinary income trapped in an irrevocable non‐grantor trust is taxed 

at the highest federal rate after approximately $11,950. 

Let’s take a simple example.  Assume Dr.  Do‐Good, age 70, dies with a $2 million IRA 

rollover as part of his estate and leaves this to a revocable living trust for his third wife and 

children from prior marriages.  Imagine the trust has one of the potential problems noted in the 

checklists below and does not qualify as a “see through trust”, yet all the parties think that it 

does and only take out 3‐4% required minimum distributions each year.  Six years later, the 

trust is audited, or perhaps another attorney or IRA provider newly reviews the trust agreement 

and it is determined that the IRA should have been withdrawn by the end of the fifth year (this 

is the rule for non‐qualifying trusts when someone dies before their required beginning date).  

The excise tax under IRC § 4974 is 50% of the amount that should have been distributed.  

Assuming the IRA is still approximately $2 million at that time, the 50% excise tax would be 

$1,000,000, in addition to the income tax all trapped in the highest bracket, potential 

underpayment/negligence penalties and interest on the $2 million of ordinary income.   

If the mistake was not obvious, a taxpayer might be able to seek relief for “reasonable 

cause”.5  However, this is somewhat reliant on the good graces of the IRS ‐ not a great position. 

Even if the excise taxes are waived, there is still the substantial issue of the loss of the 

stretch, the additional tax because of taxation in the highest bracket, and there is potentially, 

depending on the terms of the trust, potential action by beneficiaries if a remainder or current 

beneficiary is prejudiced at the expense of the other (e.g. a botched conduit trust would hurt 

remainder beneficiaries greater than current beneficiaries because the inadvertent early 

distributions would all inure to them). 

In many cases people may think that the statute of limitations on the issue has run so 

they are in the clear.  This is not always the case for QP/IRA situations that may involve an 

excise tax or unrelated business income.  Generally, for the statute of limitations to run against 

the IRS the appropriate tax return must be filed6 and few people would have filed a Form 5329 

or Form 5330.  Although there is at least an argument that filing Form 1040 and declaring $0 

“additional tax on IRAs, qualified plans” should start the statute.

5 Treas. Reg. §54.4974-2 A-7 6 IRC §6501(a), (c)(3)

    10

V.  What if Congress “Snaps” the Stretch?  Coping with Legislative Change

 It’s bad enough that the rules encompassing trusts and IRAs are extremely complicated, but 

some in Congress want to change them again.  See the noted language in the proposed bill in 

the Appendix.  Do the trust provisions our clients have still make sense if Congress “kills the 

stretch” for non‐spousal rollovers and institutes a blanket 5 year rule, or something similar?   

More importantly, what if the client dies BEFORE amending their trust but after 

Congressional meddling?  This can be a DISASTER for conduit trusts, accumulation trusts, and 

even trusteed IRAs, and is not easily fixed post‐mortem via court order or private settlement 

agreement due to conflicts between parties, interpreting grantor intent and uncertainty 

whether the IRS will honor any post‐mortem interpretations/reformations thereof. 

 Consider: 

a) If a conduit trust or trusteed IRA is established and Congress kills the stretch, would 

clients want the IRA paid out completely over a mere 5 years?  Some may answer “yes”, 

because they would not want the ordinary income trapped in the trust at the highest tax 

bracket.  Many more would say “no”, because it defeats the asset protection purposes 

and estate tax shelter (if GST is allocated) of the trust.  Regardless, you have an inherent 

conflict – current beneficiaries will answer, “yes” and remainder beneficiaries “no”. 

 

b) If an accumulation trust is established and Congress kills the trust, would clients really 

want the entire IRA over $11,950 to be taxed at the highest tax rates, as would likely 

happen if stretch limited to 5 years?  Again, current beneficiaries will answer “of course 

not”, remainder beneficiaries “of course”.  Would all the limits on powers of 

appointment, charitable bequests etc still be desired?  

 

c) There is no easy boilerplate fix – the answers depend on the client’s main purposes for 

the trust, the proportion of IRA/QP to total trust assets, the beneficiaries’ state and 

federal tax brackets, their level of expected estate, whether accounts are Roth or 

traditional  and other factors. 

    11

 

Consider some potential fixes to the trust to accommodate changes in law: 

  Material Purpose of Retirement Plan Provisions and Adapting to Law Changes  

a) “It shall be considered a material purpose of this trust that my children [grandchildren, 

beneficiaries etc] (through each subtrust for the beneficiary) qualify as a “designated 

beneficiary" of the retirement plan, and thus each child’s life expectancy [alternately, for an 

accumulation trust or for when subtrusts are not named directly on the beneficiary 

designation form, the oldest child’s or beneficiary’s life expectancy] be used to exploit the 

tax deferral according to the designated beneficiary’s current life expectancy according to 

single life tables under Treas. Reg. §1.401(a)(9)‐9, A‐1, or successor table.  I understand that 

Congress or the Treasury, pursuant to the proposed Highway Investment, Job Creation and 

Economic Growth Act of 2012 or otherwise, may limit this “stretch” to five years or some 

other drastically shorter deferral period.  If such changes (or substantially similar) affect my 

trust, my trust may be amended accordingly by the trustee, trust protector, under Uniform 

Trust Code §416 or otherwise, and I hereby inform my trustee of my intentions that: 

[Option 1]: My desire for protective provisions, including vesting conditions, 

distribution provisions and standards, outweigh my desire for minimum income tax 

treatment of IRA distributions, and therefore I would not want such standards 

modified and understand that taxable income may be trapped in trust at higher 

income tax rates than if distributions were in turn made to the beneficiary or made 

to the beneficiary directly.  However, the additional restrictions designed to comply 

with the treasury regulations in effect at the time of the execution of this trust in 

paragraphs ____, ____ and ____ may be deleted (e.g. this may be restrictions on 

powers of appointment).  

 

[Option 2]: My desire for minimizing overall income tax to my family outweighs the 

protective provisions of the trust.  Therefore the additional restrictions designed to 

comply with the treasury regulations in effect at the time of the execution of this 

trust in paragraphs ____, ____ and ____ may be deleted.  However, I encourage the 

    12

trustee to continue with a quasi “conduit” distribution scheme to the extent this 

reduces the combined overall income tax to my current beneficiaries and my trust, 

even if such distributions exceed the distribution standards otherwise applicable.  

For example, if an IRA distribution is $100,000, and my beneficiary would pay tax on 

$90,000 of the distribution at lower overall rates than my trust, I encourage the 

trustee to distribute the $90,000 even if that amount is beyond what is needed for 

his or her health, education and support pursuant to paragraph ____.  To the extent 

my beneficiary pays the same or higher tax rate than the trust, the distribution 

provisions for non‐retirement assets in paragraph ___ applies. 

[Option 3] the overall income tax considerations and secondary desire to benefit 

charity as well outweigh the protective and flexible provisions of this trust, therefore 

I instruct [do not “encourage”, that may not be enough to secure deduction to 

estate] the trustee to fund any such retirement benefits to the charitable remainder 

trust outlined in paragraph ___ below. 

As mentioned above, a CRT might be a viable back up option to ensure the stretch.  It could be 

incorporated into the beneficiary designation form for either trusteed IRAs or ordinary IRAs, or 

in the trust agreement for the trust named as beneficiary of the IRA.  For the former solution, 

the tricky issue is drafting the form in a manner that the trustee/custodian will accept.  For 

example, what if something slightly different from the originally proposed Baucus bill is passed 

(this is not uncommon in legislation)?  Say, 10 years instead of 5?  Custodians do not like 

uncertainty as to who is entitled to the money.  Trusts can adapt to this easily through the use 

of a trust protector or other discretion.  Custodians/trustees of IRAs do not want to make such 

determinations, but may accept a clear direction from someone else.  E.g. “If Congress or the 

Treasury, pursuant to the proposed Highway Investment, Job Creation and Economic Growth 

Act of 2012 or otherwise, limits the permissible tax deferral to less than ten years, I hereby 

name KeyBank, NA, trustee, or successor trustee of the John Doe Charitable Remainder 

Unitrust fbo Jennifer Doe and Greater Cincinnati Foundation, Inc as primary beneficiary of 100% 

of this IRA.  My custodian/trustee may consult with XYZ law firm, LLC and shall be completely 

indemnified for any reasonable interpretation of this clause. 

    13

VI. Four Basic Choices to Protect the Stretch: Trusteed IRA, Conduit Trust, Accumulation Trust, IRA Annuity with Restricted Payout Options  

The easiest solution, if it is available, is to simply put protective trust terms into the IRA 

beneficiary designation itself and avoid a lot of the complexity and pitfalls noted elsewhere herein – this 

is known as a trusteed IRA.7   

  Many people are unaware there are two legal forms of Individual Retirement Accounts (IRAs): a 

custodial IRA under IRC § 408(h)(more common) or a trusteed IRA under IRC § 408(a) (rarer).  One is in 

the legal form of a trust, the other a contract.  There are no differences between the two forms of IRA as 

to the income tax benefits to the current owner.  Historically most IRAs have been opened as custodial 

accounts because companies do not want greater legal duties nor want to qualify under state or federal 

law as a trust company and come under additional regulatory scrutiny.  There could be various state 

laws and issues where differences in legal form (contract/agency v. trust) matter, but for most investors 

the two forms of IRAs are indistinguishable during their lifetime.8 

With some banks and trust companies, there is no difference at all because they simply copy the 

beneficiary designation forms and options available to custodial IRAs.  However, there can be 

tremendous estate planning advantages to the beneficiaries of a trusteed IRA after the owner’s death if 

the IRA trustee is flexible and prepared to administer it as an irrevocable third party created trust.  A 

trusteed IRA can combine many of the estate planning advantages of a trust while ensuring the 

compliance and income tax benefits of an IRA.  In essence, it creates a conduit trust without the legal, 

tax and accounting complexities of a separate trust instrument. 

There can be a wide variety of distribution options to the trusteed IRA owner.  An experienced 

estate planning attorney may wish to further customize the form, provided that the strictures of the 

IRA/RMD rules are complied with.  For instance, an owner may mandate that only the RMDs be paid to a 

beneficiary until they reach age 40, after which point there are no longer any restrictions, or that only 

the MRDs be paid out unless an emergency dictates that more be distributed, or for the traditional 

“health, education and support”.  An owner may also limit the ability of a beneficiary to name another 

beneficiary, thus keeping funds in the family bloodline.  

7 See generally, Life and Death Planning for Retirement Benefits, 7th Ed., Choate, ¶6.1.07, Trusteed IRAs: An Elegant Estate Planning Option, article in Appendix 8 E.g. Waller v. Davis (In re Estate of Davis), 225 Ill. App.3d 998 (2000), in which the form of the IRA did matter to the court in fending off an ex-spouse’s attempt to attack the IRA as not subject to divorce disinheritance statute; plus there are many cases holding that custodial IRAs cannot get §541 bankruptcy exclusion because they are not trusts

    14

 Naming a separate trust – Conduit v. Accumulation v. Non‐Qualifying Trust 

 

For an extensive comparison, email the author for a copy of an article on this topic.9  For a quick 

comparison chart, see the spreadsheet in the Appendix.  For purposes of this CLE, it is probably more 

useful to give the simplest explanation possible, point out the Regulation in the Appendix, and then go 

through portions of the checklists in the subsequent sections. 

A beneficiary is simply anyone inheriting funds, whether named on a beneficiary designation 

form or not, but there is a term of art necessary to understand IRA/Trust planning – the designated 

beneficiary.  This is the important term for qualification for the “stretch” based on a beneficiaries’ life 

expectancy.  To be a designated beneficiary, one must be an individual named on the BDF, or in the 

document as default (for example, a spouse is often a default for ERISA plans if no form is filed).10    

A conduit trust is basically whenever any retirement plan distributions that pay to the trust are 

paid “directly to” the beneficiary.  Even if some expenses are paid, no retirement plan distributions ever 

“accumulate” in the trust.  It is NOT a trust that merely pays “all net income annually”, without more, 

because some retirement accounts are not taxable (Roth) or have basis (non‐deductible contributions to 

IRAs).  More importantly, “all net income“, without more, is referring to fiduciary accounting income, 

not taxable income, and IRA distributions are typically divided between principal and income according 

to the Uniform Principal and Income Act.  A trusteed IRA is a simplified variation on a conduit trust. 

An accumulation trust is any trust wherein distributions might be paid to the trust and 

potentially “accumulate” for one or more beneficiaries and that otherwise complies with the see‐

through trust regulations (more on this later). 

Note that a bypass trust, marital trust and/or QTIP trust can be either one, or neither. 

You may wonder why the code and regulations appear to be under the qualified plan section 

rather than the sections on IRAs.  This is because IRC §408(a)(6) makes those applicable to IRAs as well. 

We cannot go through the various differences in depth.  The biggest differences are in technical 

clauses in the trust, and when spouses are named as beneficiaries, the tax deferral is markedly different 

for a conduit/trusteed IRA versus an accumulation trust.  See following page. 

IRA Annuity with Restricted Payout Options Some annuity companies will allow a qualified annuity (IRA Annuity) to have restricted 

payout options after death.  This mimics the trusteed IRA, but without any discretion that a trust company would be allowed to use.  For instance, paying ONLY the RMDs.  Restricted annuities might be viable in narrow circumstances as the “poor man’s trust”.11

9 Contrasting Conduit Trusts, Accumulation Trusts and Trusteed IRAs, Morrow, J. Retirement Planning, May-June 2007 10 Treas. Reg. §1.401(a)(9)-4, A1 11 See discussion of IRA annuities compared to separate trusts and trusteed IRAs in Ensuring the Stretch, Kavesh/Morrow, J. Retirement Planning, July-August 2007

    15

Minimum payout Tables for 60 yr old leaving an IRA to 60 year old spouse via: Age   Rollover      Conduit/Trusteed IRA   Accumulation Trust   Non‐Qualifying Trust     (best for income tax,  (2nd best for income tax  (3rd best for income tax,  (worst for income tax,   worst for protection)  (3rd  best for protection)  2nd best for protection)  best for protection) 

60  n/a      n/a        1/25.2      1/5 or none 61  n/a      n/a        1/24.2      1/4 or none 62  n/a      n/a        1/23.2      1/3 or none   63  n/a      n/a        1/22.2      1/2 or none 64  n/a      n/a        1/21.2      1/1 by Dec 31 65  n/a      n/a        1/20.2      (five year rule) 66  n/a      n/a        1/19.2      (need not  67  n/a      n/a        1/18.2      be pro rata ‐ 68  n/a      n/a        1/17.2      could take 69  n/a      n/a        1/16.2      100% in yr 5) 70  1/27.4      1/17        1/15.2      (Roths should 71  1/26.5      1/16.3        1/14.2      wait, but trad. 72  1/25.6      1/15.5        1/13.2      IRAs should 73  1/24.7      1/14.8        1/12.2      usually spread   74  1/23.8      1/14.1        1/11.2      incometo avoid 75  1/22.9      1/13.4        1/10.2      bracket creep) 76  1/22.0      1/12.7        1/9.2      Note – if owner  77  1/21.2      1/12.1        1/8.2      were past 78  1/20.3      1/11.4        1/7.2      RBD, then 5 79  1/19.5      1/10.8        1/6.2      year rule is 80  1/18.7       1/10.2        1/5.2      unavailable ‐  81  1/17.9      1/9.7        1/4.2      but may use 82  1/17.1      1/9.1        1/3.2      “ghost” life 83  1/16.3      1/8.6        1/2.2      expectancy of 84  1/15.5       1/8.1        1/1.2      owner 85  1/14.8      1/7.6        gone 86  1/14.1      1/7.1        ‐ 87  1/13.4      1/6.7        ‐ 88  1/12.7      1/6.3        ‐   89   1/12.0      1/5.9        ‐ 90   1/11.4      1/5.5        ‐ 91  1/10.8      1/5.2        ‐ 92   1/10.2      1/4.9         93  1/9.6      1/4.6  94  1/9.1      1/4.3 95  1/8.6      1/4.1   96  1/8.1      1/3.8 97  1/7.6      1/3.6 98  1/7.1      1/3.4 99  1/6.7      1/3.1 100  1/6.3      1/2.9  

 

    16

The Graph of the next page is from a spreadsheet wherein a young 50 year old widow inherits a 

$1,000,000 IRA under these four results methods.  The second chart is if she dies 20 years later.  The 

ending value includes both tax‐deferred IRA and outside taxable accounts.  7% growth assumed.   

Note that the above life expectancy table does not take into account another advantage to the 

IRA rollover and the conduit trust or trusteed IRA for surviving spouse that is noted in the charts below – 

that the spouse who is “sole beneficiary” (potentially including a conduit trust) can name a new 

beneficiary to take at their death and get a new “stretch” over the beneficiary’s life expectancy.  While 

most practitioners are familiar with this nuance of IRA rollovers, most are not familiar with this quirk of 

inherited spousal IRAs (even via trust) when the spouse is considered the “sole beneficiary”.12 

It has been said by a few learned commentators that conduit trusts are silly IRS constructs 

having no practical value because if you leave IRA assets in a conduit trust, they will be gone by the 

beneficiary’s life expectancy and therefore all trusts should be drafted as accumulation trusts.  While I 

might agree with the first part of this critique about the arbitrariness of the IRS regulations and 

interpretations, the second part ignores two salient points: 

1) The “sole spousal beneficiary” feature of the code and the fact that people rarely have 100% 

of their estate in retirement plans.  If spouses are roughly the same age, over 70 ½, there is 

no income tax benefit to structuring the trust for a surviving spouse as an accumulation 

trust (although there may be if spouse does not survive or the surviving spouse disclaims).  If 

the IRA owner/participant dies after their required beginning date, the trust will be subject 

to a similar RMD payout scheme whether it qualifies as a see‐through trust or not (recall, 

the 5 year rule is for owner/participants who die without a designated beneficiary BEFORE 

their RBD, beneficiaries of those who die after that date can use the “ghost” life expectancy 

of the decedent, even if not “designated beneficiaries”). 

2) Conduit trusts are often needed to ensure the use of younger beneficiaries’ life expectancy 

whenever children vary greatly in age, or much more starkly, when different generations, 

such as children and grandchildren, are beneficiaries.  E.g. if I name an accumulation trust 

for my granddaughter, and the remainder beneficiary is my daughter, then my daughter’s 

life expectancy is used, not the granddaughter’s – not so with a conduit trust.  That’s huge. 

12 Special “sole beneficiary” rules discussed elsewhere herein, also see Treas. Reg. §1.401(a)(9)(5), A5 (c)(2), Treas. Reg. §1.401(a)(9)(4), A4(b): “if the employee's spouse is the sole designated beneficiary as of September 30 of the calendar year following the calendar year of the employee's death, and the surviving spouse dies after the employee and before the date on which distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), the rule in section 401(a)(9)(B)(iv)(II) will apply. Thus, for example, the relevant designated beneficiary for determining the distribution period after the death of the surviving spouse is the designated beneficiary of the surviving spouse.”

    17

VII.  Why Charities are Preferred DIRECT beneficiaries of Retirement Accounts 

 

The reason to name charities as beneficiaries of non‐Roth retirement accounts is 

fairly obvious – the charities don’t pay tax on inherited IRA distributions, unless there is a 

very unique circumstance, such as a self‐directed IRA with business interests generating an 

unrelated business income tax (UBIT).  Income in Respect of a Decedent (IRD), such as 

inherited IRA distributions, is taxable to whomever has a right to receive it.13  Generally, 

unless it is a Roth IRA, has substantial basis (from non‐deductible IRA contributions) or 

qualifies as net unrealized appreciation from employer securities from a lump sum 

distribution from a qualified plan, or is eligible for a partial IRC §691(c) deduction, taxpayers 

pay ordinary income tax on 100% of the distribution (usually state as well as federal).   

Charities typically pay no income tax.  Plus, there are non‐tax advantages to having 

the charity receive their assets directly from the IRA provider, such as not having to have 

the charity involved in probate/trust administration and accountings. 

Deferred compensation is even more ideal than retirement benefits to leave to 

charity, because deferred comp would not otherwise even receive a “stretch” over a 

beneficiaries’ life expectancy.  Similarly, non‐qualified deferred annuity contracts will not if 

the alternative beneficiary were a trust.14   

Of course, you could leave bequests in a Will or Trust, the charity won’t pay taxes on 

that either, and, the estate/trust may get an offsetting deduction under IRC §642(c).  

However, even in the very best circumstances, you have additional administration and 

accounting hassles.  However, two bigger problems loom:  1) the potential for disqualifying 

the trust from the stretch for other beneficiaries if administration is delayed and the charity 

is not paid its entire share by Sept 30 of the year after death; and 2) the potential that the 

IRS disallows the charitable income tax deduction, which it has ruled it will do unless the 

Will/Trust has instructions to use IRD (IRA) assets to satisfy charitable bequests.15  The 

executor/trustee may avoid the latter issue by transferring the IRA in kind, rather than 

taking a distribution, but again, this is dependant on the cooperation of an IRA provider.  

Conclusions here – name the charity directly on the BDF unless you have compelling reason 

to do otherwise, and add a boilerplate clause in your will to have charitable bequests paid 

from IRD. 

13 IRC §691, Treas. Reg §1.691(a)(4)(B) 14 Though a small number of annuity companies will permit the stretch and there is an argument that NQ annuities payable to trust should be eligible – however, there is no definitive ruling on this issue. 15 Rev. Rul. 2003-123

    18

However, even if charities are named directly on the BDF, there can still be 

complexities – such as planning an exact dollar or percentages when charity is not getting 

100% of the IRA.  

Planning can get tricky when someone wants to make relatively small percentage 

gifts in the most tax‐effective way for charity.  For instance, an executive might want his 

deferred comp to be first source for a charitable bequest, followed by an old low basis non‐

qualified annuity, followed by retirement plan assets, and it’s not uncommon to want 

“caps” on charitable bequests.  This can get complex (see Section III for some variations on 

customizing BDFs).  If I want $200,000 to go to charity, can I state in my IRA BDF to pay 

$200,000 minus amounts, if any, left to XYZ charity pursuant to my deferred comp 

agreement and/or deferred annuity contract?  In theory, yes, but good luck getting a 

custodian to honor that.  Be aware that you may have to battle with and perhaps even 

change IRA custodians for any unique beneficiary designation form drafting. 

Is it a problem if I name 10% to Salvation Army and 30% each to my three children?  

No ‐ as long as the account is divided and the Salvation Army gets their share before 

September 30 of the year after my death, because at that point, the Salvation Army is no 

longer a beneficiary of the IRA.  Absent substantial litigation tying up an estate, this should 

not be a problem.  For those hyper‐conservative, the IRA could be divided during lifetime 

(e.g. 4 IRAs, 4 different beneficiaries).  While this solves one issue, it may cause other, 

probably greater problems, such as calculating and taking RMDs, differences in investment 

performance changing legacies, more difficulty managing and understanding investments, 

potentially higher fees/loss of break points, more difficulty changing the estate plan and 

greater chance of administrative errors. 

However, when the charity is a remainder or contingent beneficiary of a trust 

receiving substantial retirement benefits, this creates several problems that we will discuss 

in the next section (e.g. I give my estate to my wife, then child, but if they die then 1/3 to 

the Ohio State University, 1/3 to Xavier University and 1/3 to the Salvation Army).  

    19

VIII.   5th Choice: Charitable Trust?  When this may be preferred    If Congress “snaps” the stretch, or if the trust is otherwise payable to an older 

beneficiary without a long life expectancy (e.g. surviving spouse or sibling), or if the client has 

significant deferred income within a non‐qualified annuity (which does not get the “stretch”, 

even if a colorable argument can be made that it does), deferred compensation, royalties or 

other “non‐stretch” income in respect of a decedent (IRD), consider leaving such assets to 

“stretch” via Charitable Remainder Trust.  The charity need only receive 10% minimum share.  

Ultimately, due to the tax deferral, beneficiaries may be better off, and you have the added 

benefit of helping a charity of choice.  Interest in this option will greatly increase if Congress 

passes anything close to the Baucus bill.   

CRTs will also become more compelling as interest rates increase and revert to historical 

norms, and as capital gains tax rates increase.  Lifetime CRTs are also more compelling when 

women are beneficiaries, because their life expectancy is higher than the blended average life 

expectancy that IRS/CRT tables must use.  A small, but interesting nuance.  For a sixty year old 

couple, the difference between male and female life expectancy is about 3 years, for an 80 year 

old couple, only about a year and a half difference.    

Example of a recent case with compelling reason for IRA payable to CRT: 

John, age 65, is unmarried, without children, and wishes to leave his $6million estate 

(with $2million in IRAs) to his sister, for her health and support, with the remainder to various 

charities.  If he leaves everything to a fully discretionary trust, there is no charitable deduction 

(because it is not in an approved split‐interest trust form), and no “stretch” for the IRA (because 

it is not a see‐through trust).  So, he left approximately $3million, including the IRA, into a CRT 

for his sister, which would generate a $1million charitable deduction at his death, eliminating 

his estate tax (assuming $5million exclusion, and of course, this could be formula dependent).  

This would establish the “floor” for his sister to have an assured income stream, and the 

remaining $3million in non‐IRA assets could be fully discretionary to fund any excessive needs 

beyond the CRT annuity. 

    20

IX.  Pre‐Mortem Checklist  a) Checking the client’s plan, IRA, BDF or other non‐trust issues that could affect the trust 

 1) _____  Check the BDF itself.16  Are the beneficiary designations all really naming the 

trust as claimed?  And which trust?  Sometimes forms will name a subtrust (e.g. Credit Shelter, Marital) as beneficiary, sometimes a testamentary trust, more often in Ohio, the master revocable living trust.  It may matter a great deal if the bypass/marital trust or other subtrusts are named directly as beneficiary rather than the master trust.17   

 It makes a positive difference when SUBTRUSTS are named as beneficiary if there are multiple beneficiaries of the trust.  E.g. I name my trust 100% primary beneficiary (which in turn splits between my child and grandchild) may have quite a different tax result than if I direct 50% to my child’s subtrust and 50% to my grandchild’s subtrust.18  And, be careful of sloppy BDFs that say “as stated in will” or “as stated in trust” and do not name the testamentary trust or trust explicitly as beneficiary.  A BDF written as quoted above may NOT qualify as designated beneficiary (see PLR 2008 49020). Also verify that the trust is the same trust you are dealing with – it is becoming more common to have a separate, standalone trust solely for retirement benefits.  

2) _____ If you have an ERISA retirement plan (401k, defined benefit, some 403bs) and spouse is not named, check to make sure the spouse has waived rights as primary beneficiary.  The Retirement Equity Act of 1984 may grant a surviving spouse rights despite a validly executed beneficiary designation form that purports to name a trust or someone else.  The law requires vesting at one year of marriage, but allows plans to vest it sooner (many plans will immediately vest a spouse with rights upon marriage).  Note that a prenup is ineffective to waive rights – such waivers must be done after marriage. 

 3) _____  If you have an ERISA retirement plan, and a same sex spouse is not named 

(even if a trust for the same sex spouse is named), check to make sure that spouse has waived rights as primary beneficiary, even if those rights are as yet unclear.  We have already seen same sex spouses win court cases (e.g. Windsor v. U.S.) declaring the Defense of Marriage Act (DOMA) unconstitutional.   This issue can, and probably will, seep into ERISA and qualified plan law at some point as well.  Same sex spouses may someday be entitled to joint/survivor annuity rights, spousal rollovers, etc.  If DOMA is ruled constitutional, and a non‐traditional spouse waives rights granted by the plan, rather than by law, query whether a waiver could be a taxable gift.  However, if the plan tracks federal law, then “spousal” rights move in tandem and this issue disappears. 

16 See Section III of outline above 17 See generally, Morrow, Using Separate or Standalone Trusts as Beneficiaries of Retirement Benefits, J. Retirement Planning (2007), included in Appendix 18 Treas. Reg. §1.401(a)(9)-4, A-5(c)

    21

 4) _____ If you have an ERISA retirement plan and ex‐spouse is not named, and no QDRO 

addressed the ERISA plan, you may still want to check into whether the ex‐spouse became vested in client’s ERISA benefits prior to divorce.  Just because non‐participant spouse waived benefits in a property settlement/divorce does not waive them for ERISA purposes unless qualifying as a QDRO.19 

 5) _____ Check the “Schedule A” and any Assignments/Transfer Schedules executed with 

a living trust –  pursuant to many state laws, listing assets on this schedule or transferring them with a separate assignment may transfer ownership or change beneficiaries, EVEN IF no form (or a different form) is filed with the IRA custodian/trustee.20  This state law application is highly unlikely to apply to ERISA accounts.21  Do not let clients do this, it unnecessarily risks the IRA and muddies the estate, but it could be a savior in post‐mortem clean up planning if you are trying to find a valid beneficiary where there is not otherwise one properly named.   

 6) _____ Check Ages of Beneficiaries ‐ Does “See‐Through Trust” status even matter?  If 

client is a retired 72 year old naming his trust for his 71 year old brother and 73 year old sister as the beneficiaries of the trust, there is really very little to be gained by achieving “see‐through trust” status because the life expectancy payouts would be effectively the same whether the trust is “qualified” or not (unless the brother/sister predecease and/or disclaim so that younger beneficiaries take).  If it is a 72 year old spouse, qualifying as an accumulation trust has no benefit, but qualifying as a conduit trust would (see discussion in section above). 

 7) _____ Check Pre/PostNuptial Agreements – are there clauses that address retirement 

plan benefits?  A prenuptial agreement may not be a valid waiver of vested benefits of ERISA spousal rights.22  A marital agreement could even affect the marital deduction and/or rollover, if it restricts the surviving spouse’s rights even after death. 

 8) _____ Beware of Reliance on Disclaimer Planning for ERISA, 401k accounts – ERISA 

plans are not required to permit disclaimers (federal law trumps state law).  So, if you see primary beneficiary as spouse, contingent as bypass trust (the plan being to disclaim optimal amount at death), see the SPD or get written confirmation that the plan permits disclaimers. 

 

19 Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 129 S. Ct. 865 (2009) 20 See Stephenson v. Stephenson, 163 Ohio App. 109, where a court held that a custodial IRA owner changed ownership of his IRA to his living trust by listing it on Schedule A attached to his living trust that purported to transfer assets, overriding the beneficiary designation form filed with Merrill Lynch, the custodian. 21 Egelhoff v. Egelhoff, 532 U.S. 141 (2001) 22 Treas Reg §1.401(a)-20, A28

    22

9) ____ Beware of annuities within accounts – Sometimes an annuity will be held by an IRA.  The annuity company will have their own BDF for the annuity that may differ from the BDF for the IRA custodian which holds it. 

 10) ____ Is there any basis in the IRA or QP?  Most plans and IRAs don’t, but many do.  

Have Form 8606s been filed (this would indicate if a non‐deductible IRA were established, which would cause the IRA to have basis)?  If there is considerable basis in a plan, consider a complete distribution followed by a rollover of pre‐tax funds over basis within 60 days to permit efficient use of basis and less complicated administration.23  Consider a Roth IRA conversion, especially where there is a high percentage of basis to overall IRAs.  Remember the “cream in the coffee rule” that has to take into account all IRAs for this, including rollovers to IRAs later in the same year from other qualified plans. 

 11) ____ Keep a copy of the BDF in the file.  Financial firms move, go out of business, get 

bought out and merged, employees leave or make mistakes, computers crash – keep a signed copy (ideally, with signed acknowledgement by the IRA custodian/trustee). 

 12) ____  Consider Power of Attorney language to address and allow changes in retirement 

plan elections, beneficiaries, rollovers, Roth conversions/recharacterizations, lump sum distributions.  Consider clauses to limit abuse by one family member at the expense of others (e.g. “my agent may change qualified plan/IRA beneficiaries to my existing trust, to my children equally per stirpes, or to subtrusts for my children equally.  My agent may also make changes to beneficiary designations that are unequal, provided all my children, or their issue per stirpes, unanimously consent….). 

 13) ____  Consider Roth Conversions, even (more especially?), deathbed Roth conversions. 

This may work out better for the family overall in some instances.  For instance, a client may have net operating losses, large end‐of‐life medical expenses, short tax years, or other reasons why a partial Roth conversion would not “cost” much in the last year of life.  Additional factors might be whether there would be a state estate tax (because IRC 691c does not allow a deduction for that), or if estate taxes are paid, whether the beneficiaries itemize their deduction (necessary for the IRC 691c benefit).   

 14) ____ Plan for Potential Roth Recharacterizations.  Many people have recently or will 

this year be doing full or partial Roth Conversions, for large accounts often with a Roth Segregation Conversion Strategy.  This is especially compelling this year with the anticipated 2013 tax increases in both income tax rates and the 3.8% health care surtax.  Have reminders been set to reevaluate the conversions prior to the end of the year, before April 15 or October 15 deadlines (the latter is available if returns/extensions are filed on time)?  Is there a traditional IRA left with a valid BDF to recharacterize back to if the owner dies before the deadline?   If not, you may not have a valid designated 

23 See IRC §402(c)(2)

    23

beneficiary.  And are the rules clear to the executor/trustee as to whether and when to do so?  This may not be an issue if the beneficiaries are exactly the same, but one can imagine many scenarios where someone has strong pecuniary incentives or disincentives to recharacterize or not recharacterize an IRA contrary to what the owner originally intended (e.g. plan leaves estate to kids, IRAs to grandkids).  

 15)  ____  Has a financial planner or wealth management team reviewed the investments 

as “IRA appropriate”?  It would be rare to have an investment advisor or client silly enough to buy tax‐free municipal bonds, for example, in an IRA.  However, there is a lot of inefficient placement of investments between taxable and tax‐deferred accounts that is less obvious.  Does the IRA invest in an international fund that kicks off foreign tax credits that go wasted?  Does it invest in money market funds or short‐term treasuries making 0.01% interest?  Are REITs and high yield bonds in the taxable account instead of the IRA?  What about Gold ETFs that kick off 28% collectible income?  (trick question there – be careful with any collectibles in an IRA, but many PLRs seem to indicate the IRS is OK with IRAs holding Gold ETFs).  Are the individual stocks that kick off 15% long‐term capital gains and 15% dividend income and can be manipulated for tax‐loss harvesting held in the IRA when they may be more efficiently managed in the taxable account?  Are high‐turnover managed funds kicking off gains (even, gasp! short‐term capital gains) held in the taxable account when they may be more efficiently held in the IRA?  It rarely makes sense to have the exact same asset allocation in an IRA as in a taxable account for larger sums, yet this is very common practice among unsophisticated investors and advisors. 

 16) _____  If the sole primary beneficiary is a spouse (or conduit trust for spouse), and the 

spouse is more than 10 years younger than the IRA/QP owner, remember that the owner is entitled to more favorable required minimum distributions under a different life expectancy table.  If a conduit trust is named, this will require similar trust documentation delivered to the custodian/trustee as discussed herein for post‐mortem see through trust compliance.24  

  

 

24 Treas. Reg. § 1.401(a)(9)-4, A6

    24

b) Checking the Trust Itself   The requirements seem much simpler than they are.  Recall Natalie Choate’s warning that “drafting a ‘see through trust’ to be named as beneficiary of retirement benefits requires complying with very precise and narrow requirements – requirements that most typical estate planning trusts will NOT meet”.25   The requirements are that:  

1) the trust must be valid under state law (easy);  2) it must be irrevocable (also easy, but beware of joint trusts);  3) beneficiaries must be identifiable (harder to determine than it seems, corollary to this is that all beneficiaries must be individuals);  4) IRA custodian/trustee must receive copy of trust (or alternative summary) by October 31 of year after death (easy, but often overlooked).26  

 However, if it were that simple, we would not need 100 page outlines, treatise chapters or the next 20+ pages below to devise a checklist!  The above is completely worthless as a practical guide for attorneys.  Items 20‐24 below may not apply if a subtrust or separate trust is named directly on the BDF (as opposed to using a “master” living trust that splits into subtrusts post‐mortem, which is more common).  They do, however, apply whether the trust is designed as a “conduit trust” or an “accumulation trust”.  Some points in this checklist are not required (such as the first two below), but are a good practice for various reasons.  Others are quite simply unresolved, with a PLR or even less for guidance ‐ they warrant care in proactive planning and drafting, but would merit a more aggressive stance in post‐mortem reporting/arguments (in fact, this might be the majority of the points below!).  17) _____ Define “retirement benefits”.  While not technically required, I strongly suggest 

defining “retirement benefits”, or distinguishing “deferrable retirement benefits” or “stretchable retirement benefits” in the document.  People have different definitions of whether a non‐qualified annuity, deferred comp, inherited retirement plans, ESOP, group term insurance, qualified annuities, stock options and the like are “retirement benefits”.  As noted throughout herein, some accounts cannot or should not be “stretched”, at least not for the beneficiary’s life expectancy, and therefore many trust clauses should not apply to them all equally.   For example, non‐qualified annuities may not get the same treatment as qualified annuities in an IRA or 403(b).  Previously inherited accounts already have their stretch determined, and lump sum distributions to achieve 10‐year averaging or net unrealized appreciation advantages are intended to get tax benefits other than a “stretch”.  Some provisions, such as a marital deduction or 

25 LISI Employee Benefits and Retirement Planning Newsletter #593 (January 31, 2012) 26 Treas. Reg. §1.401(a)(9)-4, A5

    25

QTIP provision, must affect qualified plan/IRAs, annuities etc even if they are not further “stretchable” – but that is to qualify for the marital deduction, not the stretch. 

 18) _____ State on PAGE ONE, clearly, that a material purpose of the trust is to qualify as 

a designated beneficiary of any retirement benefits payable to the trust, perhaps even name the beneficiaries that are intended to be used as the measuring life or lives.  No, this is not required at all, but psychologically, this should predispose any IRS examiner or IRA/QP custodian/trustee in your favor.  It would also assist in post‐mortem reformations pursuant to UTC or other state statutes that look to whether an amendment would frustrate a “material purpose” of the grantor.   

 19) _____ Conversely, if the trust is NOT DESIGNED to qualify as a designated beneficiary, 

state that the trust is not so designed, perhaps even why.  For example, the oldest beneficiary is close in age to the grantor who is over 70 ½ , charitable or older contingent remaindermen are important to the grantor, QP/IRA is a small portion of the trust, optimal special needs trust design goals outweigh stretch, maximizing asset protection/GST outweighs stretch, etc.  That goes a long way in explaining the design to trust beneficiaries who might otherwise be inclined to sue the drafting attorney later for loss of stretch out, or to successor trustees.  

 20) _____ Check the “pour‐up”/”transportation” clause.  Could IRA funds be used to pay 

taxes/expenses of the probate estate after September 30 of the year after death?  If so, the IRS may argue that the estate is a de facto beneficiary and thus blow the stretch.  Look for a clause similar to this: 

"No payment of the grantor’s debts, expenses of estate administration or estate taxes shall be made by withdrawal from any qualified retirement plan or IRA/457/403b account or annuity (or the income on or proceeds from any investment of any such withdrawal) on or after September 30 of the calendar year following that of the grantor’s death.  The above shall not apply to any such account inherited by the grantor as beneficiary prior to the grantor’s death that was not rolled over into the grantor’s own name as owner."   

  Note: the last sentence is to exempt inherited plans for which no further stretch is sought.  E.g. H dies, with his own IRA and an IRA he inherited from his mother leaving both in trust for kids.  Only H’s IRA needs to be circumscribed in the above clause (and others herein), the inherited IRA from H’s mother will not change payout and therefore the terms of the trust are irrelevant to it (at least, the clauses like this regarding see through trust qualification, the pecuniary funding with IRD issue would still apply). 

 21) _____ Check the A/B funding clause.  Is the formula a fractional or pecuniary formula?  

(e.g. “that amount which”, “shall allocate that pecuniary amount which”).  If it is a pecuniary formula, is the pecuniary amount going to the Bypass or the Marital?  Funding a pecuniary obligation (e.g. put the first $5Million in the bypass trust) with IRA assets 

    26

(not to mention NQ annuities, deferred comp, other retirement plans or other IRD) triggers the tax in the IRA and blows up the stretch pursuant to IRS Chief Counsel Memorandum (CCM) 2006‐44020.  However, see discussion in Section III – this may not be an issue if the BDF pays directly to a subtrust. 

 22) _____ Check the GST Exempt funding clause.  As with the AB trust division, a pecuniary 

clause (e.g. put the first $5 million in the GST exempt subtrust) dividing between GST/GST Non‐Exempt Trusts may equally blow up the IRA, even if the trust otherwise qualifies as a “see through trust”. 

 23) _____ Check for whether IRA funds may be needed or even required to be paid from 

for any other significant pecuniary bequests.  For example, “I leave $2 million to my son Joe, and the remainder to my wife Jane.”  What if the trust is $3 million and $700,000 of this is the home directed to Jane and $1.3 million is in IRAs?  At least half of the IRA will have to be used to fund Joe’s bequest (or, perhaps the estate/trust could borrow funds, but guess what happens when you try to use the IRA as collateral?).  Same issue as above.  Not uncommon in second/third marriages ‐ I have seen many trusts pay the home plus $X to 2nd spouse, remainder to children. 

 24) _____ Check for any “Roth inappropriate” clauses in the trust that make sense for 

taxable IRD, but not tax‐free distributions – e.g. a clause mandating that charitable bequests be made from “IRA assets” or that marital or GST non‐exempt trust be funded with IRA/QP assets and bypass/GST exempt trust be funded with non‐IRA assets. 

 25) _____ Check for overbroad savings or other clauses that might inadvertently apply to 

non‐qualified deferred comp, non‐qualified annuities, NUA stock or QP/IRAs inherited by the decedent. 

 26) _____ If the client has significant employer securities (especially ESOP), consider 

waiving the absolute duty to diversify under the Uniform Prudent Investor Act (UPIA) to permit the holding of those securities for evaluation and effectuation of potential exploitation of Net Unrealized Appreciation (NUA).  See discussion below in ¶ 32.  

 27) _____ If a trust designed to qualify for the marital deduction is the beneficiary (or 

sometimes even a bypass trust that is qualifying for marital deduction for STATE estate tax purposes), then check to make sure it qualifies for the marital deduction as well.  Special language is required if qualified plan/IRA benefits are in a marital trust.  See Rev. Rul. 2006‐26 – “all net income annually” is NOT enough in most states, because only 10% of an IRA distribution is accounting income under the UPAIA.   Note for Ohio reviewers: do not count on Ohio’s savings clause in § 5815.23(C), which is poorly written and probably ineffective for federal tax purposes (because qualifying for the marital is a prerequisite for application). 

    27

Sample clause intending to qualify the trust as a QTIP (but NOT sufficient to be a conduit provision in itself): “The Trustee shall withdraw from such Retirement Plan and distribute to the surviving spouse the greater of (i) the annual income generated by such Retirement Plan, undiminished by expenses, and (ii) the required minimum distributions under Section 401(a)(9) of the Code. The surviving spouse shall further have the absolute right to direct the Trustee or any investment advisor to convert or make productive [of income] within a reasonable time the assets of such Retirement Plan which are or may be distributed to the Trustee as part of such trust.” Note: QTIPs require all “net” accounting income, so you might think about whether you might delete the “undiminished by expenses” above. As discussed below, this is not enough in itself to qualify as a conduit trust, but would be enough if combined with something like #28 below. For an accumulation trust, if it would otherwise qualify, you would not need “(ii) the required minimum distributions….” Additionally, QTIPs do not require the trustee to pay, they merely require the spouse have the ability to withdraw, so my preference would be to reform the above with something like “My spouse shall have the ability to withdrawal from such retirement plans the net income at least as often as annually….”

 28) _____ Check your trust – are non‐pro rata transfers permitted in dividing the estate?  Many wills/trust will have this in boilerplate, and I can see no reason not to add this to all trusts.  If an estate or trust makes unauthorized non‐pro rata distributions of property to its beneficiaries, the IRS has ruled that the distributions are equivalent to a pro rata distribution of undivided interests in the property, followed by an exchange of interests by the beneficiaries. This deemed exchange may tax both beneficiaries to the extent that values differ from basis.27  This is deadly when you have no basis at all.  Imagine you have a $600,000 estate ‐ $200,000 in qualified plans, $200,000 in cash/home to be sold and $200,000 in mutual funds, with two children who get 50% of the estate each.  The executor and children agree that child #1 gets the plans, child #2 gets the mutual funds, and they split the cash and proceeds from home, but the will/trust does not authorize non‐pro rata transfers.  Let’s say the stock and mutual funds increased by $20,000 by the time of transfer.  The IRS interpretation of this transaction is that each child got ½ the plans and ½ the mutual fund, and then they each sold/exchanged the other half to each other.  So child #2 is selling his share of the mutual funds for $110,000, with no basis to offset, since the exchanged IRA has no basis ($110,000 of taxable gain).  Child #1 is selling his share of the IRA for $110,000, with $100,000 of basis in the exchanged funds to offset ($10,000 of gain), which is bad enough and sounds like child #1 is better off, but who knows what this does to child #2’s IRA moving forward (would it trigger a prohibited transaction or disqualify the entire IRA?  Just half?)  To avoid this result, expressly authorize non‐pro rata distributions in your will/trust. 

27 Rev. Rul. 69-486

    28

c) Conduit Trusts  28) _____ Check for any conduit clause.  If you see a clause similar to below that REQUIRES 

ALL IRA distributions to be paid to the current beneficiary, NOT just “all net income” and NOT just “all required minimum distributions”, then you can skip the checklist items pertaining to accumulation trusts only. "[Conduit Provision] Upon receipt of any retirement plan distributions other than a lump sum distribution of a qualified plan holding significant employer securities completed before September 30 of the year after my death as discussed above, the trustee(s) shall thereafter distribute directly to or for the benefit of the beneficiary all such amounts received by the trust (with reasonable reduction for trustee fees, investment management fees or other expenses allocable to management of those assets).  The trustee shall not accumulate any retirement plan distributions for the benefit of any mere potential successor beneficiaries, other than a lump sum distribution completed prior to September 30 of the year after my death. [As of September 30 of the year after my death], this conduit provision shall supersede any forfeiture clause (including no contest provisions), holdback provision or any other clause that might interfere with distribution of the retirement plan proceeds pursuant to this section.   For purposes of this section, ‘to or for the benefit of’ shall not include payments to another trust, even a 2503(c) minor’s trust, via decanting or otherwise." 

 Note – the above is not sufficient by itself to qualify for QTIP, discussed later.  Here is a recent example of a conduit trust provision that may not work, due to the italicized language permitting retirement plan distributions to be accumulated in the trust under certain circumstances for the next remainder beneficiaries in line (note in this trust there was a separate paragraph for non‐spouses): 

“The Trustee shall withdraw from such Retirement Plan and distribute to the surviving spouse the required minimum distributions (RMDs) under Section 401(a)(9) of the Code. If the Trustee elects to withdraw from such Retirement Plan amounts in excess of the required minimum distributions, then the Trustee shall also distribute to the surviving spouse such excess amounts so withdrawn unless the surviving spouse pursuant to the terms of such trust has the absolute right to withdraw the principal of such trust and fails to exercise such right. Unless the surviving spouse has an absolute right to withdraw the principal of such trust, any election made by the Trustee to withdraw amounts from any Retirement Plan in excess of the required minimum distributions under Section 401(a)(9) of the Code may only be made by a Trustee who is a person other than the surviving spouse.”  Although this author disagrees with using the italicized language above (it is mistakenly 

borrowing a permitted QTIP concept – if the spouse has absolute right to all the principal the spouse should probably consider rolling the IRA over into his or her own name), something like the last sentence may be a good idea.  It was added to police common situations in which the surviving spouse is 

    29

the sole trustee of the conduit trust.  Without this sentence, the fear would be that the surviving spouse could withdraw 100% of the retirement plan and then, the surviving spouse as trustee would be compelled to take the entire amount pursuant to the conduit clause, regardless of the HEMS or other standards in the trust.  The withdrawal would probably be a breach of fiduciary duty in that instance, but I suppose the extra prohibition is a “belt and suspenders” approach.  Another way to rectify this would be to specifically limit the trustee’s ability to withdraw greater than the RMDs/net income to the ascertainable standards if the trustee is the beneficiary or related/subordinate thereto. 

   28) _____ Check that no other provision, such as lifetime powers of appointment, trust 

protector, amendment, holdback clauses, in terrorem clauses, etc could override the conduit clause. E.g. John Doe dies leaving his estate to his daughter Violet.  Violet has a lifetime power to appoint assets from the GST exempt trust to her children, their spouses or to charities, and the lifetime power to appoint assets in the GST‐non‐exempt trust to her children’s education/medical providers pursuant to §2642(c)/2503(e) exception.  This is a great clause for non‐retirement plan assets, but problematic for our beloved IRAs and goal of a “see through trust”.  While testamentary powers of appointment do not offend the conduit trust regulations, lifetime ones do. 

   29)  _____ Check that the spendthrift clause is an ordinary “no assignment, transfer, 

attachment….” clause, and not one that changes a beneficiary’s rights via shifting executory interest (“forfeiture clause”).  An ordinary spendthrift clause is actually favored by the IRS, see IRC §401(a)(13) ‐ there is a basic spendthrift clause prohibiting assignment in any IRA or QP.28  However, you won’t see a clause in those plans that divests a beneficiary or takes away mandatory distribution rights.  A substantial minority of firms/forms use a form of spendthrift clause that goes beyond merely prohibiting a transfer or assignment and actually removes a beneficiary altogether, temporarily changes (shifts) the beneficiary, or converts the trust to a wholly discretionary trust (often including other beneficiaries, such as descendants of the grantor), either one of which could affect the validity of a conduit provision, and could affect the determination of countable beneficiaries and analysis of an accumulation trust.  If the IRS questions such clauses jeopardizing a QSST determination, which is very similar in concept, why would they not think likewise for a conduit trust?29  Perhaps such shifts should be confined to non‐retirement accounts. 

   30)  _____ Check to make sure there is a provision to deduct fees if there is a conduit clause, especially if IRAs are the only asset in the trust (called a “standalone retirement plan trust” by some).  This is not yet the norm, but is becoming more common.  Otherwise, how does the attorney, trustee or accountant get paid? 

   31)  _____ Check to make sure the conduit clause is not so broad as to include inherited retirement accounts, which would unnecessarily distribute such assets when it is not 

28 See IRC §401(a)(13) and IRC §408(a)(4), IRC §408(b)(1) 29 See AICPA article in The Tax Advisor by Raymond Olczak discussing undesirable boilerplate spendthrift or no contest clauses that could disqualify QSSTs that must pay all S Corp income to one beneficiary: http://www.thefreelibrary.com/QSST+documents+should+avoid+dangerous+provisions.-a011757864

    30

needed for “stretch” (other than accounts inherited by decedent from a spouse and rolled into the decedent’s own IRA of course).   32)  _____ Check to make sure the conduit clause is not so broad as to inadvertently preclude lump sum distributions timely completed to exploit Net Unrealized Appreciation (NUA) loopholes, which might be very advantageous.  Perhaps this is addressed in your definition of stretchable retirement benefits.  You may want to outline under what terms a lump sum distribution should be permitted and for how much (e.g. instruct trustee to make a rollover of qualified plan to an inherited IRA, while instructing/permitting an exception for lump sum distribution of employer securities completed prior to the beneficiary determination date).  E.g. John has $500,000 in a 401(k) and $500,000 in an ESOP.  The ESOP is 95% employer stock with a “basis” of $50,000.  The trustee may well wish to rollover the 5% of the ESOP that is not employer stock and the 401(k) to an inherited IRA and take the $475,000 worth of employer securities as a lump sum distribution, incurring tax on $50,000, but enabling the remaining $425,000 gain to be deferred and/or taxed as long‐term capital gain (15% federal tax rate) when sold outside of the qualified plan/IRA.  A hastily drafted conduit clause may easily preclude this.  33)  _____ Check whether a “facility of payment” clause intended for minors allows a payment to a 2503(c) trust.  Typical clauses permit distributions to guardians, conservators, UTMA/UGMA custodians or direct transfers, but §2503(c) trusts are more problematic because of the GPOA and default of §2503(c) trusts to pay to the minor’s estate if death occurs before age 21 (age 25 in some states such as Washington or Oregon).  Accordingly, you may want to prohibit the trustee from distributing retirement benefits to a §2503(c) trust. 

 34) _____ Even if there is no explicit clause as above, does the trust mandate “all net 

income” be paid annually, and then later define (contrary to the default under most 

state’s laws) “accounting income” to include ALL IRA or qualified plan distributions?  While strange to me, I have seen one such trust drafted in this manner.  Query whether a “power to adjust” between principal and income, which may be explicitly in the trust, or granted under state UPIA statute, might thwart this method of conduit trust compliance, or other IRS guidance re defining principal/income may question this, such as Treasury’s admonition that: “Trust provisions that depart fundamentally from traditional principles of income and principal will generally not be recognized.”30 In short, this kind of clause may work, but why try it when other solutions do not have as much hair on them? 

 

30 Treas. Reg. §1.643(b)-1

    31

d) Accumulation Trusts  35) _____ Check who would inherit if the first line of beneficiaries died before being 

entitled to receive all the benefits.  Continue until someone inherits immediately and outright.  These beneficiaries’ life expectancies need to be counted as well.  It would not be uncommon to have a charity as a contingent beneficiary, for instance, which would blow the stretch.    For example, Father John leaves his trust to his children, Tom, Dick and Harry, to take in full at age 35.  If one of them dies before that age, their 1/3 share goes to their issue per stirpes, and if no issue survive the child, then to the University of Dayton.  If Tom, Dick and Harry are all over age 35 and living at the time of Father John’s death, then no problem, but if Harry is under 35 with no children, University of Dayton is counted as a potential beneficiary, even though Harry is over 34 and actuarially 99% likely to live until age 35.31  Even if Harry has a 6 year old child, since that child will probably not be entitled to receive all the benefits immediately outright either (most trusts contain a delayed vesting for minors at least), you still have to look to the next beneficiary in line.  If instead, his brothers Tom and Dick were “next in line” if Harry died without issue, this satisfies the “test” and allows the oldest brother’s LE to be used, since they would inherit immediately and outright.  Natalie Choate refers to this method as “outright to now living persons (O/R‐2‐NLP)”.32 

 36) _____ Check for any other provision, such as trust protector, holdback clauses, 

forfeiture type spendthrift clauses, etc that could spoil what you think or would argyue to the IRS is an immediate and outright vesting of benefits.   For example, your client just died with an estate leaving $4million estate with $1million IRA to bypass trust for wife, remainder to children at age 35.  Kids are over 35 now, so you think you are OK to stop the search for potential identifiable beneficiaries with the kids.  But, consider the effect of this clause paraphrased from a recently reviewed trust:  “if the trustee determines that a beneficiary is disabled in any way, whether formally adjudicated or not, the trustee may delay termination of the trust and distribute income and principal for the beneficiary’s health, education and support in the trustee’s discretion.  If during this period of disability, the beneficiary should pass away, any remaining trust corpus shall be paid to the beneficiary’s estate”  Many trusts have some kind of variation on this.  While there is always a chance that the IRS will let this kind of provision slide, I would not count on it.  The effect is to make the beneficiary’s estate a potential beneficiary under the accumulation trust regs and rulings, and thus, the trust would have no life expectancy (ie. no stretch). 

31 See PLRs 2002-28025, 2004-38044, 2005-22012, 2006-10026, BUT, see PLR 2013-20021 – taxpayer friendly! 32 Choate, Life and Death Planning for Retirement Benefits, 7th ed., Ch. ¶6.3.08

    32

 37) _____ Use, but don’t count on a “savings clause” (while everyone loves a savings 

clause, it may foster unwarranted confidence in the efficacy of the trust). Here is one variation I have seen:  

 “Notwithstanding any other provision herein, the trustee may not distribute to or for the benefit of my estate or any other non‐individual beneficiary any qualified retirement benefits payable to this trust, it being my express intention that this trust qualify as a designated beneficiary under IRC §401(a)(9) and regulations pertaining thereto.”   

 A great idea in theory, but questionable in practice – everyone loves a savings clause that simplifies compliance, but there are several flaws: It applies equally to inherited IRAs (meaning the decedent had inherited them prior to the decedent’s death), and lump sum distributions taken to exploit NUA capital gains treatment, that do not need or benefit from the “stretch”, so you would generally want to limit application to the qualified retirement plans that would benefit. There is no clause prohibiting older individuals from taking.  If granny is 3rd in line to inherit and is 90 years old, you have messed up the stretch just as much as if you had no eligible beneficiary.  You might add “older than my children” or, depending on family “older than my siblings”, or something similar to above. What if the IRS follows Deep Throat’s directive to Woodward and Bernstein to “follow the money” – are there actually younger beneficiaries in the family eligible to take and would they take outright?  Fully dynastic trusts may be a problem, or trusts that have various holdback clauses (see example below).  E.g. John leaves his IRA in trust for his daughter in a dynasty trust with a clause similar to above.  John may not have any younger eligible extended family – maybe any siblings/cousins/etc are all older than his daughter w/o issue.  An absence of eligible beneficiaries would create a default of a resulting trust in favor of John’s estate (meaning no DB).    In addition, there is no time period, such as “on or after September 30 of the year following my death” that allows the IRA assets to be withdrawn to pay trust and/or estate expenses before that time. In addition, there is no tracing of IRA distributions and prohibition of benefits both PAID and “payable”.  To illustrate, say the trustee withdraws $50,000 from an IRA and distributes $10,000 to the beneficiary.  $40,000 is “accumulated” – invested in stocks, bonds, etc outside of the qualified plan/IRA (not a conduit trust).  The above savings clause says nothing about that $40,000.  Even if it did, by modifying to “paid or payable”, you still have a tracing and tracking problem unless you have a separate or standalone trust segregating retirement benefits at the outset. In addition, it is not clear the provision restricts decanting or other further payments in trust for an individual.  

 38) _____ Check limited and general powers of appointment.   Do they permit the transfer 

of IRA accumulations to anyone older than the beneficiary?  Note that it is NOT enough 

    33

to limit the appointment of IRA assets only, because the IRS is concerned with accumulations in the trust that originally came from the IRA – this is a great rationale for a separate trust/subtrust for IRA assets only when an accumulation trust rather than conduit trust provision is contemplated.  Could assets be appointed to one’s creditors/estate, or to a charity?  Does the marital trust have a “stub” income provision giving the spouse/beneficiary a GPOA right to appoint any undistributed trust income at her death?  If so, the stretch may be blown. 

 39) _____ Check for powers of appointment that enable payment to other trusts.  Even if a 

LPOA/GPOA is limited to younger individuals than the intended beneficiary, does it still permit a transfer in further trust?  It may not have to say so – generally under most states’ laws this power is implicit in a power to appoint.33  Consider limiting such transfers only to trusts that would otherwise be considered designated beneficiaries (e.g. other subtrusts established by the grantor for a sibling/nieces/nephews of a powerholder), or, more simply, prohibit POAs from transferring to trusts at all.  The IRS may argue that, since no copy or summary of any trusts created after October 31 of the year after the participant/owner’s death will not have been given to the IRA trustee/custodian by that date (recall, that is a prerequisite under §1.401(A)(9)‐4), the trust will not qualify as a Designated Beneficiary.  Additionally, all the beneficiaries may not be “identifiable”.  This is one of the most overlooked problems with accumulation trusts, and a reason for segregating such assets into a different subtrust altogether. 

 40) _____ Consider whether to limit the trustee’s ability to decant or amend the trust for 

similar reasons.  Approximately eighteen states have enacted or proposed enacting decanting statutes, in addition to potential common law powers to do so.  Ohio has recently enacted a decanting statute, effective March 22, 2012.34 Is the following clause overly conservative?  

“This trust expressly overrides and prohibits the trustee from using common law, Ohio R.C. §5808.18 or its successor or other state decanting law to decant qualified retirement benefits (as defined above) and any distributions remaining in trust therefrom to another trust, unless both of the following apply: 1) such decanting is done prior to September 30 of the year after my death and 2) a copy of the new “second” trust (or qualifying alternate description) is given to and received by the appropriate IRA custodian(s) and/or trustee(s) by October 31 of the year after my death pursuant to Treas. Reg. 1.401(A)(9)‐4, A6.” 

33 See, 1 Scott on Trusts, §17.2 34 Ohio R.C. 5808.18. The savings clause in new §5808.18(C)(6) is somewhat overbroad (because it applies to “any interest subject to…MRDs”, such as previously inherited IRAs and other retirement accounts for which qualification as “see through” trust is not needed), and perhaps even inadequate vis a vis accumulation trusts (because it permits decanting in the first place, especially after the beneficiary determination date – Sept 30 of the year after death). The IRS has placed decanting on its “no ruling” list with respect to how decanting affects income, gift and GST tax. Rev. Proc. 2011-3 issued March 28, 2011. The IRS later stated it would issue some guidance on the gift/GST effects but is slow forthcoming. IRS 2011-2012 Priority Guidance Plan issued September 2, 2011.

    34

 41) _____ Check for “springing” or formula GPOAs designed to trade a lower estate tax for 

a higher GST tax or to soak up a deceased beneficiary’s estate tax exclusion for basis increase, and make sure they do not apply to retirement benefits.35  

 42) _____ Consider – Is it possible to have a GPOA if there is also a savings clause that no 

retirement benefits are to ever be distributed to non‐individuals or individuals older than the intended designated beneficiary?  If I grant my daughter the power to appoint to any creditor who is an individual younger than my daughter, is that still a general power?  Probably, but the IRS may see that as a bit too cute.  See the attempt to so limit a GPOA through a partial release in PLR 2012‐03033, which did not address this GPOA/GST issue, but allowed such a limitation for see through trust purposes.36 

 43) _____ Consider, in lieu of GPOAs discussed above to avoid GST in GST non‐Exempt 

Trusts, whether to instead grant the beneficiary the power to withdraw all of the IRA assets  ‐ (not limited by any ascertainable standard) – this triggers estate in lieu of GST tax37, but does not cause the problem of new, non‐identifiable or non‐qualifying beneficiaries via GPOA. This could be done with the consent of a non‐adverse trustee for slightly better asset protection. 38 

 44) _____ Check “Trust Protector/Advisor” clauses.  Do any provisions allow a charity, 

corporation and/or older people than the beneficiary to be named later?  Do provisions allow granting a General Power of Appointment or broad Limited Power of Appointment over retirement plan assets, or accumulations therefrom? If so, the stretch may be lost because those beneficiaries may have to be counted since they could conceivably receive IRA accumulations. 

 45) _____ Check for the “older adoptee” issue.  While there is no IRS case on this point yet, 

query whether all beneficiaries are “identifiable” if the class can later be expanded to include an older beneficiary via adoption.  E.g. I name my grandchildren as beneficiaries (either directly on form, or via trust) – my children could theoretically adopt children (in most states, even older adults) that are older than the grandchildren living at the date of my death.  Solution: limit/close the class for retirement benefit purposes to those same age or younger than class.  For example: 

 “Issue”, “grandchildren” or “descendants” shall not include an individual adopted after my death who is older than the oldest beneficiary who was a beneficiary at my death.” 

35 For discussion of the “Optimal Basis Increase Trust”, using flexible powers of appointment to achieve optimal basis step up (and avoiding “step downs”) for trust assets, email the author for CLE materials and article. The author’s sample clause considers this issue. 36 PLR 2012-03033 37 IRC §2041(a)(2), §2041(b)(1)(C), although query whether the lapse of this withdrawal right at death only triggers estate tax on 95% of the property due to the 5/5 lapse protection of IRC §2041(b)(1)(C)(2). 38 Consider that generally any lifetime GPOA reduces creditor protection. This power may also greatly complicate the administration and tax accounting of the trust (causing partial beneficiary grantor trust status due to IRC §678).

    35

 46) _____ Check for the “older spouse” issue.  Similar to above.  Sometimes people name 

spouse of children/grandchildren as contingent beneficiaries.  This class could be expanded by marriage to include someone much older than the intended measuring life. 

 47) _____ If a marital accumulation trust is beneficiary, check whether the client has 

considered the more beneficial tax treatment of a conduit trust for a spouse as opposed to an accumulation trust for a spouse (two key provisions ‐ delayed required beginning date and recalculation of life expectancy each year).  The first is especially relevant for younger spouses, irrelevant if IRA owner is past 70 ½.  If spouse is young, consider showing an illustration showing the detrimental tax effect of accumulation v. conduit. 

 48) ____ If a marital accumulation trust is primary beneficiary and the spouse is more 

than 10 years younger than the owner, who is over 70 ½ (think Hugh Hefner) consider the effect that this has on the IRA owners current RMDs.  Hugh can use a more advantageous tax table than the Uniform Life Table, taking into account his spouse’s actual age, but only if his spouse is the sole primary beneficiary (a conduit trust would qualify as a “sole beneficiary” for this purpose). 

 49) ____ If a marital accumulation trust is beneficiary and charities are a part of a client’s 

annual giving or estate plan, evaluate leaving IRA assets to a charitable remainder trust (CRT) in lieu of an accumulation trust – the “stretch” might even be longer. 

 50) ____ Check for “pet trusts”, “cemetery trusts”, charitable provisions or other clauses 

that leave funds to non‐individuals.  If present, consider adding a clause to forbid retirement funds for which a stretch is desired from going to these bequests (see example above), or, better yet, have retirement accounts pay directly to subtrusts and/or separate standalone trust so as to bypass these provisions entirely. 

 51) _____ Is the QP/IRA only a small part of the potential trust corpus and the trust 

mandates that “all net income” be paid anyway?  If so, there is very little to be lost by using the conduit trust safe harbor.  It may be easier and safer.  E.g. John leaves $5 million in trust for his daughter Jane, $800,000 of which is an IRA.  It mandates “all net income” be paid, but is not a conduit.  If “all net income” is roughly 3%, that is $150,000, dwarfing whatever meager conduit payment from the IRA there might be (for a 51 year old, only about $24,000!).  Even if the trust does not mandate “all net income”, is there a trust beneficiary alive that is not going to demand $24,000 from a $5 million trust?  And is even that $24,000 so at risk from creditors with a typical UTC/trust facility of payments clause?

52)  _____  Check for an old‐fashioned “stub income” provision buried in the marital or 

even the bypass trust. If found, delete it.  You could try to amend it to exclude retirement benefits that have been paid to the trust, but this is more problematic because it brings up tracing issues, so it’s safer to simply delete it – few clients will care 

    36

about deleting the stub income provision. For some time, it was thought that to get a marital deduction for a trust, you had to mandate that the surviving spouse’s estate receive any income received but not distributed in the year of death (this is no longer required, at least if it is a QTIP, but beware GPOA maritals)39.  This was called “stub income”.  Such a provision could destroy the see‐through status of an accumulation trust, because, arguably, the surviving spouse’s estate would be a potential beneficiary of the accumulated retirement plan distributions, ergo, no D.B., no stretch.

Example of clause TO AVOID in an Accumulation Trust: “Final Distribution. When Grantor’s spouse is no longer living, the Trustee shall pay to Grantor’s spouse’s estate any undistributed income and also any federal estate taxes and state death taxes attributable to this trust;” Or similarly, what about something like this: “Upon the death of my spouse (beneficiary), the trustee may in its discretion pay the funeral bill and final medical expenses of the beneficiary.”

The first paragraph above has a tax payment provision as well as a stub income provision.  Would the IRS argue that the tax payment provision also makes the estate or government a beneficiary?  It is distinguishable, and less likely to cause a problem than the stub income, because if there are taxes attributable to the trust, via QTIP election or otherwise, federal or state statutes apportion taxes anyway.40  However, I would leave out the tax clause as well– it adds nothing useful, forces payment from the trust to the estate (potentially jeopardizing asset protection), potentially conflicts with tax apportionment addressed elsewhere, and unnecessarily tempts the IRS.  The second paragraph above seems laudable – why not pay the final expenses, funeral bill, monument, etc.?  However, it is akin the same as paying to an estate, since it is the estate’s burden and the estate that benefits.  Of course, an estate is an entity that does not qualify as a “designated beneficiary”, even if individuals are the only beneficiaries of an estate.  Moreover, if you are not clear that such expenses cannot be used from retirement funds (and that any accumulations can be traced), the default rule in many states if the trust is silent is probably that such final expenses CAN be paid.41  Would the IRS squelch a retirement benefit because of such an otherwise laudable goal? 

 53) _____ Have you or should you consider separate accounting provisions, if you are not 

going to have a separate or standalone trust for retirement benefits?  As noted above, you probably don’t want payments for estate expenses, appointments, decanting, amendments to the retirement distributions of the trust after the beneficiary determination date.   How do you track this when it would typically be commingled with 

39 Treas. Reg. §20.2056(b)-7(d)(4), §25.2523(f)-1(c)(1)(ii) for QTIPs, Treas. Reg. §20.2056(b)-5(f)(8) for GPOA marital trust 40 See Treas. Reg. §20.2044-1(d)(2), IRC §2207, IRC §2207A, Ohio R.C. §2113.86 41 A recent Ohio appellate court held that where trust was silent on issue, the trustee could pay the funeral expenses of the initial primary beneficiary. In re Cletus P. McCauley & Mary A. McCauley Irrevocable Trust, 2014-Ohio-3692

    37

other interests, dividends and other investments once out of the plan?  Would something like this realistically be followed by a non‐professional trustee? 

“If any trust hereunder shall have the right to receive qualified stretchable retirement accounts (as defined in paragraph XXX), the trustee shall track and account for, preferably in a separate account altogether, but not necessarily as a separate share for Subchapter J accounting purposes, any distributions from the qualified retirement plan accounts (“Accumulated Retirement Distributions Account”). With respect to any such separate accounts created hereunder, the trustee is encouraged, but not required, to take any distributions from this Accumulated Retirement Distributions Account first. The following rules shall apply to this Account, as well as any qualified stretchable retirement accounts, notwithstanding any other provision of this instrument to the contrary:

1. No power of appointment may be exercised in favor of any entity (entity for this purpose shall include a trust), nor in favor of any individual older than the powerholder. If, after division of this trust, retirement benefits and any accumulated retirement distributions account is held by a GST non-exempt trust having an exclusion ratio greater than zero, any such power of appointment may also be exercised in favor of individual persons who happen to be creditors who are younger than the powerholder.

2. No funds from stretchable retirement accounts, nor any accumulated retirement distributions account, may be used to pay last expenses, funeral costs or any other estate expenses of a deceased beneficiary.”    

    38

IX. Post-Mortem Checklist - considerations in reviewing and administering an estate where Trust is beneficiary (perhaps contingent beneficiary) of IRA/QP assets

1) _____  Tell  executor/trustee(s)  (especially  spouses)  NOT  TO  SIGN  ANYTHING  with 

financial  advisors  or  employee  benefits  personnel  without  reviewing  with  you  first.  Financial  firms are often overeager  to help grieving  families.   Not only do  these well‐meaning advisors ignore issues such as disclaimers, AB trust funding, post‐mortem Roth conversion opportunities for inherited qualified plans and spousal rollover traps (pre 59 ½ surviving spouses may not want to rollover immediately), but even financial firms can and have gotten IRA titling wrong – the IRS has historically been EXTREMELY strict with the wording and form of the titling of accounts. 

 2.  _____ Get DOD/AVD values.  If the IRA provider will not give the trustee/executor any 

valuations regarding the account balance on date of death (or Alternate Valuation Date) because  the  estate/trustee  is  not  the  beneficiary,  consider  sending  them  a  letter informing them that the  IRS will require them to prepare and  file an estate tax return regarding the asset under IRC § 6018(b) unless the appropriate information is provided to complete the return.  Natalie Choate’s “bible” has a sample form.42  Note ‐ a trustee or anyone else  in possession of  inherited property may nonetheless be responsible for filing tax returns as deemed executor  in the event there  is no personal representative (executor, administrator) appointed.43  

 3. _____  If  no BDF  is  filed  and  there  is  no  default  beneficiary  (and  the  dollar  amount 

merits),  check  to  see  if  any  document  can  function  as  a  “substantial  compliance” substitute beneficiary designation form (this will  likely require a court order to effect).  The IRS has allowed a beneficiary designation form to be construed post‐mortem when the intent of the decedent was clear but the proper form not filled out with the new IRA provider.   PLR 2006‐16039, PLR 2006‐16040, PLR 2006‐16041.   Might  this also be  the case with “Schedule As” attached to trusts, from  letters to counsel/financial advisor or from other account designations?44   

 4. _____  If  stepchildren  or  children  of  same  sex  partner  were  probably  intended 

beneficiaries, but were not named,  consider  an  argument  that  they were  “equitably adopted”,  thus  taking under BDF  (if  “children” are named or default) and/or  through estate  if  the  estate  is  default.    Laws  prohibiting  same  sex  partner  adoptions may  be unconstitutional.    For  ERISA  plan  accounts,  this may  take  additional  steps  and work arounds, since ERISA plans may disregard state law.45 

42 The single best treatise in this area, Natalie Choate, Life and Death Planning for Retirement Benefits, 7th ed. 2011, www.ataxplan.com 43 IRC §2202, §2203, Ohio R.C. 5731.37(B) 44 In addition to the strange case of Stephenson, discussed in footnote 18, see the successful attempt in getting a “substantially compliant” BDF approved even where the formal BDF requirements of the IRA custodian/trustee were not met In re Estate of Golas, 751 A.2d 229 (Pa. Sup. 2000) – neither case addressed the see through income tax issue, however. 45 See Herring v. Campbell, 2012 U.S. App. LEXIS 16397 (5th Cir. 2012)

    39

 5.  _____  Take  year  of  death  RMD.    If  an  IRA/retirement  plan  owner  dies  on  or  after 

his/her required beginning date (RBD), the required distribution that had not been paid prior to the date of his/her death must be paid to the beneficiary of the IRA/retirement plan owner.   This MRD  is based on  the decedent’s  LE and Uniform  Life Table  (unless decedent had a spouse greater than 10 years younger) rather than the beneficiaries’ LE and Single Life Table.   Note that  it  is possible to have passed the RBD for IRAs and not for retirement plans (e.g. if employee was still working).  Remember that you can make this Required Minimum Distribution WITHOUT  affecting  the  subsequent  right  to  later disclaim any or all of the account.46  A COMMON MYTH is that the estate or living trust takes  any  year of death RMD not  taken by  the decedent –  this  is  false.    The named beneficiary(ies), unless they disclaim, should take the RMD.   And, this should be taken before  any  attempted  rollovers  (such  as  moving  an  inherited  401k  or  403b  to  an inherited IRA). 

 6.  _____ Counsel beneficiaries to consider disclaimer issues.47  For instance, it is common 

to  name  spouse  and  then  bypass  trust  for  spouse  as  contingent  beneficiary.    Should spouse  disclaim  and  force  some  retirement  plan  assets  into  the  bypass  trust?    This depends on what other assets are there to fund the bypass trust, the total assets of the surviving  spouse,  the  applicable  exclusion  amount  and,  of  course, whether  the  trust qualifies  as  a  see‐through  trust.    Similarly,  perhaps  a  child may  wish  to  disclaim  a percentage in favor of a trust for grandchild – who may get 20‐40 additional years of tax deferral.   Counsel the client regarding consequences of “acceptance of benefits”, such as  active  investment management,  that might  preclude  a  qualified  disclaimer.   Mere retitling  should not preclude a disclaimer  (e.g.  John Doe, deceased,  IRA  fbo Daughter Doe).   Watch out for surprises as to who the alternate beneficiaries are on the BDF, as discussed  in  the Part  IV of  this outline.   An  IRA beneficiary may be able  to disclaim a pecuniary  amount  of  an  IRA,  but  it’s  probably  safest  and  easier  to  disclaim  a percentage.48 

 7.  _____ If there are factors which make it questionable whether the trust can qualify as a 

see‐through  trust  (Designated  Beneficiary),  and  the  dollar  amount  merits,  hire  an outside CPA/tax attorney familiar with the state of the law in this area. 

 8) _____ If the trust does not qualify, consider whether early terminating distributions to 

a beneficiary may remove a beneficiary from consideration (e.g. paying off a charity).  9) _____ If the trust does not qualify, consider qualified disclaimers of certain powers 

(such as powers of appointment, overbroad trust protector powers) to remove the impediments to qualifying as a see‐through trust. 

46 See Rev. Rul. 2005-36 47 IRC §2518 for gift/estate issues, IRS CGM 39858 for income tax effect of qualified disclaimer 48 See PLR 9630034, in which a disclaimer of an interest in an IRA, construed to be a pecuniary disclaimer, did not accelerate IRD.

    40

 10) _____ If the trust does not qualify, and nine months has passed or a qualified disclaimer 

is for any reason otherwise unavailable, consider a “non‐qualified” disclaimer or a common law release of such powers under applicable state law.49  Do NOT execute a non‐qualified disclaimer over IRA benefits, unless you can get a private letter ruling, since the deemed gift might trigger income taxation on the IRA. 

 11) _____ Check to make sure the IRA provider receives a copy of the trust instrument 

(or appropriate substitute) by October 31 of the year following death. This is a prerequisite for getting see‐through trust treatment as well.50  While not required, I recommend sending Certified Mail, Return Receipt Requested.  

 12) _____ If the trust does not qualify, examine whether a trust protector or 

amendment clause could allow a change of the terms.  Also consider post‐mortem reformations under the UTC or other state law (new Ohio Trust Code’s provisions ORC §5804.11, §5804.12, §5804.15 and especially §5804.16 allow retroactive modification for tax reasons, whether the IRS will honor the changes is more unclear and could be the subject of another paper).51  If a memo is needed, research various cases and rulings on post‐mortem reformations effective for QSSTs and other similar safe harbor trusts (there are cases both ways regarding reformations to establish QSST qualification, for example). 

 13) _____ If there is a broad trust protector or other power to amend going beyond 

state law defaults, make sure it cannot be used on or after September 30 of the year after death (the Beneficiary Designation Date) to affect the beneficiaries’ rights to retirement benefits, and that no other clauses can be so construed as well.  If they can affect the beneficiary’s rights – amend the trust to prevent amendments after that date which would negatively impact see through trust status.   

 14) _____ Make sure any post‐mortem amendment of the trust, via Private Settlement 

Agreement (PSA), Trust Protector or otherwise, goes to the IRA custodian/trustee by the October 31 of year after death cutoff, or a new summary compliant with the regulation is sent.  Would the IRS catch this or care?  Unsure, but be on the safe side. 

 15) _____  If  a  qualified  retirement  plan  (especially  an  ESOP)  is  payable  to  the  trust, 

BEFORE TAKING A DISTRIBUTION OR CONSIDERING A TRANSFER TO AN  INHERITED IRA,  investigate whether and  to what extent employer  stocks/bonds are part of the  plan  assets.    Employer  stock  can  be  rolled  out  post‐mortem,  taking  only  the basis of the stock into income under Net Unrealized Appreciation (NUA) rules.52  This 

49 See PLR 2012-03033 for a good example of how this planning can save the day 50 Treas. Reg § 1.401(a)(9)-4, A6 51 See PLRs 2002-18039, 2005-22012, 2005-37044, 2006-08032, 2006-20026, 2007-03047 and 2007-04033 (allowing reformation to affect tax result for IRA/see through trust), and PLR 2007-42026, 2010-21038 (contra) 52 IRC § 402(e)(4).  

    41

allows the stocks/bonds to be sold  later with the amount above basis qualifying as long‐term  capital gains  rather  than ordinary  income.   Beware  that  the  timing and manner  of  such  “lump‐sum  distributions”  is  critical  to  qualify  as  NUA  and  avoid other pitfalls. 

 16) _____  If  the  trust  can  otherwise  qualify  as  a  see‐through  trust  (Designated 

Beneficiary), and  is beneficiary of any non‐IRA qualified  retirement plan accounts, investigate whether a conversion to a Roth IRA may be advantageous to the trust beneficiaries (e.g. perhaps there is basis in the plan, or perhaps there are losses that might  soak  up  additional  income  upon  conversion).    Contact  retirement  plan administrators  to  rollover  any  accounts  into  an  inherited  IRA  pursuant  to  the Pension  Protection  Act.53     Who/what  trusts would  be  good  candidates  for  post‐mortem conversions?   Typically,  if the estate  is  large enough to pay estate tax and therefore has a §691(c) IRD deduction, this deduction may offset the tax  liability of conversion by 35‐55%.   Beneficiaries of  large estates would be more  likely to have enough  to pay  the  tax as well.   This  is somewhat analogous  to  those with basis  in their non‐deductible traditional IRAs converting to Roth IRAs because they won’t pay tax on most of the conversion. 

 17) _____ If there is a federal estate tax attributable to IRAs and other deferred income 

assets, make  sure  the  tax  preparer  considers  and makes  it  clear  to  trustee  and beneficiaries  the  implication  and  mechanics  of  the  691(c)  IRD  deduction  – otherwise it can easily go to waste. 

 18) _____    If there  is a federal estate tax attributable to  IRAs, make sure the executor 

considers new guidance  for  the alternate valuation date  (generally  six month or sooner if sold).54   

 19) _____  If  the  trust  is a “mere probate avoidance  tool”  that simply pays outright  to 

beneficiaries (or at a certain age that has passed), consider an in‐kind and trustee‐to‐trustee transfer  from  John Doe, Deceased  IRA  fbo  John Doe Trust  to  John Doe, Deceased IRA fbo his son James and John Doe Deceased IRA fbo his daughter Mary.  See  the  fine article by Michael  Jones  in 145 Trusts and Estates No. 4  (April 2006) entitled Transferring  IRAs.    If an  IRA provider  is difficult  to deal with  in making  in‐kind transfers (and many are), GET ANOTHER IRA PROVIDER – you can always make a  trustee‐to‐trustee  transfer  with  the  account  titled  the  same  way  at  another institution, and then change the beneficial owner.   

 20) _____ Whenever in‐kind transfers are made, instruct the transferring IRA provider to 

contact you prior to doing so  if they plan to report the transfer as a distribution 

53 IRC § 402(c)(11) 54 IRC 2032(a), see IRAs and the Alternate Valuation Method, Natalie Choate, Trusts and Estates, January 2009, and her follow up, Estate Tax Alternate Valuation Method, December 2011

    42

despite IRS guidance on pages R‐3, 4 of the 1099‐R instructions.  This gives you the opportunity to find a more agreeable IRA provider. 

 21) _____  If  the  trustee  or  other  beneficiary  fails  to  properly  take  the  Required 

Minimum Distribution, see Treas. Reg. §54.4974‐2 A‐7 for waiver of the 50% excise tax for reasonable cause. See also IRS Form 5329 and instructions. 

 22) _____  Divide/segregate  the  account  if  there  are  multiple  beneficiaries  by 

December 31 of the year after death, otherwise the oldest beneficiary’s LE will have to be used.   Plus,  it’s  just  a mess  tax wise  if  you don’t.   Usually beneficiaries  are chomping at the bit to get at funds so this is done as a matter of course, but it’s not uncommon  (especially  when  people  try  to  resolve  an  estate  without  an  estate attorney)  for  inertia  to prevent  this.    In  some  rare  cases  you might even want  to divide  an  IRA  for  one  beneficiary  (e.g.  if  partial  QTIP,  GST  or  state  partial  QTIP applies).  Inform the trustee/subtrustees/beneficiaries of what measuring life to use for the minimum required distributions and make sure IRA provider agrees.   

 23) _____ If the spouse is the sole beneficiary of the trust (e.g. conduit QTIP or bypass 

trust  only  benefiting  spouse),  confirm  that  the  trustee  and  the  IRA  provider recognize 1)  that  if  the decedent was under 70 ½,  the  trust  is eligible  to use  the special delayed required beginning date of the year when the decedent would have reached 70 ½ and 2) when using the spouse’s LE under the single life table, the trust has the ability to recalculate the divisor every year rather than simply reduce by 1 as is done when the spouse is not the sole beneficiary.  These advantages can easily be overlooked.   

 24) _____ If the spouse is the sole beneficiary of the trust (e.g. conduit or trusteed IRA), 

name a new beneficiary of the inherited IRA.  A conduit trust for a surviving spouse may have a potential negative if the spouse dies prior to the end of the year in which the owner would have been age 70 ½,  if  the  surviving  spouse  (or  in  this  case  the trustee  for  the conduit  trust  for  the surviving spouse) does not  in  turn name  their own new designated beneficiary – without a newly named beneficiary the trust may be stuck with no beneficiary  if surviving spouse dies.55   The  lesson  is paradoxically this – the trustee as the beneficiary  (ideally with the spouse  if they are not one  in the same) should file a new designation of beneficiary form naming the subtrust that would  next  take  under  the  trust,  typically  the  subtrust  for  a  grantor/decedent’s children.  Better yet, grant the spouse a limited testamentary power to appoint IRA assets at death, and have both the trustee and the spouse (if they are not one in the same) sign the new BDF.  This should get around the IRS’ misguided thinking in PLR 2006‐44022. 

55 PLR 2006-44022. See also Steve Leimberg's Employee Benefits and Retirement Planning Newsletters by Natalie Choate (#395) and Barry Picker (#405) on this PLR. This author agrees with Ms. Choate that the IRS clearly got this ruling wrong, but it doesn’t cost anything to file a new Beneficiary BDF to be certain, bizarre as it sounds.

    43

 25) _____  Review  QRP/IRA  investments  for  compliance  with  the  Uniform  Prudent 

Investor Act.  It may NOT be sufficient to simply keep the same assets intact – even if  it  will  be  distributed  in  kind  nine  months  later.    ESPECIALLY  when  there  is significant employer stock in a Qualified Retirement Plan, such as an ESOP, or other concentrations of assets. 

 26) _____  Know  how  the  applicable  state’s  version  of  the  Uniform  Principal  and 

Income  Act  applies  to  divide  retirement  plan  payments  to  the  trust  between principal  and  income.56    Distributions  of  RMDs  may  differ  radically  from distributions of amounts greater than RMDs, and this might  factor  in greatly  if the five year  rule  is applicable.   For example,  John died  leaving his Roth  IRA  in a non‐qualifying  trust.   The  trustee must withdraw  the  IRA by December 31 after  the 5th anniversary of John’s death.  If the trustee takes it all out in year 4, this may be 100% “principal” for trust accounting because the distribution was not yet required, yet if the  trustee  takes  it  all  out  the  last  year,  when  it  is  arguably  “required”,  the distribution is probably 90% principal and 10% income (UPIA default). 

 27) _____ If the trust is an accumulation trust that does not mandate the payment of all 

IRA  distributions  from  the  trust  annually,  consider  trust  distributions  at  least annually before March.  The trustee may have time to make additional distributions to beneficiaries so that ordinary income is not trapped in the trust in higher income tax brackets.   The  trustee can  then elect under  IRC § 663(b)  to make distributions made within 65 days of the end of the taxable year treated as distributions made in the prior year. 

 28) _____ Check to make sure the executor/tax preparer elected QTIP for both the 

marital trust and the IRA payable thereto (or the trusteed IRA functioning as such).  

29) _____ Check if surviving spouse could demand the entire IRA outright, if so, bring up for discussion w. spouse and/or attorney for estate.  A spousal rollover may still be allowed even if an estate or trust is beneficiary if the spouse can demand the IRA – this is a complicated issue with literally dozens of PLRs.   

 30) _____ Check to see if you can cash out any undesirable beneficiaries (e.g. older 

individuals, charitable entities) via distribution prior to September 30 (the beneficiary designation date). 

 31) _____ Double Check the IRA Agreement and/or Form 5305 when transferring an 

inherited retirement plan to a newly created inherited IRA (e.g., not when simply keeping the same agreement/firm).  Is the trustee of the trust that is the beneficiary 

56 Uniform Principal and Income Act, http://www.law.upenn.edu/bll/archives/ulc/upaia/2000final.htm (2000), §409 and (2008 version) http://www.law.upenn.edu/bll/archives/ulc/upaia/2008_final.htm

    44

(or the individual) inadvertently signing the new agreement as the “grantor” (“depositor” for custodial accounts)?  Should the agreement be modified to clarify that the beneficiary is not establishing the new IRA as grantor/depositor, but as beneficiary?  Read through the agreement and makes sure it makes sense when the person signing the new document is a beneficiary rather than an initial grantor/depositor of the IRA. 

 32) _____ For the year after the year of death, make sure to take both the RMD for 

traditional IRAs and the RMD for Roth IRAs SEPARATELY.  After taking any RMD for the decedent for the year of death (if death after the required beginning date), take the required minimum distributions for the year after death.  Don’t wait until the last week of December.  Repeat every year. Just as you have to take your RMDs from qualified plans separately from RMDs for IRAs during your lifetime, a similar rule will apply post‐mortem for Roth and non‐Roth variants.  If you have $15,000 RMD resulting from an inherited traditional IRA and $10,000 RMD resulting from an inherited Roth IRA (even if from the same decedent), you cannot take all $25,000 from either one and none from the other to satisfy the required distribution, you have to take those minimums from each computed separately.57  You can take aggregate all of one type (traditional or Roth) inherited from the same decedent, but this doesn’t help much, since for administrative and investment convenience you would probably combine those anyway.58  This is also a good reason for combining, say, an inherited non‐Roth 403(b) or 401(k) from a decedent into an inherited non‐Roth IRA, so you don’t have to fuss with several RMD requirements (recall, those distributions have to be taken separately).   I have seen CLE presentations/outlines that get this flat out wrong. 

 33) ____ Counsel beneficiaries (or have them consult their own counsel) about 

exercising their powers of appointment and integrating with their own financial and estate plan.  A majority of trusts nowadays have limited or general powers of appointment.  Most require a specific reference in a will, trust or other document (for various reasons, consider whether you want to require a will to effect an appointment, and whether you want to absolve a trustee who relies on an absence of notification of an appointment to distribute funds to default beneficiaries after a certain period of time).  As noted elsewhere, this would also be a good time to consider whether, if it is an accumulation trust, the power should be disclaimed/released/limited and/or a copy of any appointive trust be given to the custodian/trustee.  It is also a good time to examine whether investments in the beneficiary’s IRA/trust are appropriate and, for accumulation trusts, whether to encourage or avoid distributions trapped inside the trust for optimal income tax/trust income tax/Medicare surtax planning. 

57 Treas. Reg. §1.408A-6, A15 58 Treas. Reg. §1.401(a)(9)-8, A-1, or Treas. Reg. 1.403(b)-3, A-4 for 403(b)s

    45

 34)  ____ Don’t make a 643(e)(3) election to trigger gains on transfers to beneficiaries 

in the same year you might distribute an IRA/QP in kind to beneficiary.  While this is not used very often, you don’t want to trigger gains to the trust/estate when there are IRA/QP assets distributed. 

 35)  ____ Take the RMD for the year after death.  Continue annually.  

    46

Appendix Select Code/Regulations regarding Trusts as Designated Beneficiaries

I have included IRC §401(a)(9) itself and the most important sections from Treas Reg § 1.401(a)(9)-4 and §1.401(a)(9)-5 regarding qualifying trusts as designated beneficiaries below. Bold and italic emphasis added. I have also added [brackets] to indicate which part of the regulation discusses conduit trusts and which example discusses accumulation trusts, and to note any comments. IRC § 401(a)(9)

(9) Required distributions. -

(A) In general. - A trust shall not constitute a qualified trust under this subsection unless the plan provides that the entire interest of each employee -

(i) will be distributed to such employee not later than the required beginning date, or

(ii) will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).

(B) Required distribution where employee dies before entire interest is distributed. -

(i) Where distributions have begun under subparagraph (A)(ii). - A trust shall not constitute a qualified trust under this section unless the plan provides that if -

(I) the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), and

(II) the employee dies before his entire interest has been distributed to him,

the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph (A)(ii) as of the date of his death.

(ii) 5-year rule for other cases. - A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee's interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee.

(iii) Exception to 5-year rule for certain amounts payable over life of beneficiary. - If -

(I) any portion of the employee's interest is payable to (or for the benefit of) a designated beneficiary,

    47

(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary (or over a period not extending beyond the life expectancy of such beneficiary), and

(III) such distributions begin not later than 1 year after the date of the employee's death or such later date as the Secretary may by regulations prescribe,

for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date on which such distributions begin.

(iv) Special rule for surviving spouse of employee. - If the designated beneficiary referred to in clause (iii)(I) is the surviving spouse of the employee -

(I) the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the date on which the employee would have attained age 70 1/2, and

(II) if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be applied as if the surviving spouse were the employee.

(C) Required beginning date. - For purposes of this paragraph -

(i) In general. - The term "required beginning date" means April 1 of the calendar year following the later of -

(I) the calendar year in which the employee attains age 70 1/2, or

(II) the calendar year in which the employee retires.

(ii) Exception. - Subclause (II) of clause (i) shall not apply -

(I) except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2 , or

(II) for purposes of section 408(a)(6) or (b)(3).

(iii) Actuarial adjustment. - In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year in which the employee attains age 70 1/2 , the employee's accrued benefit shall be actuarially increased to take into account the period after age 70 1/2 in which the employee was not receiving any benefits under the plan.

(iv) Exception for governmental and church plans. - Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of this clause, the term "church plan" means a plan maintained by a church for church employees, and the term "church" means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).

    48

(D) Life expectancy. - For purposes of this paragraph, the life expectancy of an employee and the employee's spouse (other than in the case of a life annuity) may be redetermined but not more frequently than annually.

(E) Designated beneficiary. - For purposes of this paragraph, the term "designated beneficiary" means any individual designated as a beneficiary by the employee.

(F) Treatment of payments to children. - Under regulations prescribed by the Secretary, for purposes of this paragraph, any amount paid to a child shall be treated as if it had been paid to the surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations).

(G) Treatment of incidental death benefit distributions. - For purposes of this title, any distribution required under the incidental death benefit requirements of this subsection shall be treated as a distribution required under this paragraph.

Reg § 1.401(a)(9)-4

Q-5. If a trust is named as a beneficiary of an employee, will the beneficiaries of the trust with respect to the trust's interest in the employee's benefit be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9)?

A-5.

(a) If the requirements of paragraph (b) of this A-5 are met with respect to a trust that is named as the beneficiary of an employee under the plan, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated as beneficiaries of the employee under the plan for purposes of determining the distribution period under section 401(a)(9).

(b) The requirements of this paragraph (b) are met if, during any period during which required minimum distributions are being determined by treating the beneficiaries of the trust as designated beneficiaries of the employee, the following requirements are met--

(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.

(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.

(3) The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of A-1 of this section from the trust instrument.

(4) The documentation described in A-6 of this section has been provided to the plan administrator.

    49

(c) In the case of payments to a trust having more than one beneficiary, see A-7 of § 1.401(a)(9)-5 for the rules for determining the designated beneficiary whose life expectancy will be used to determine the distribution period and A-3 of this section for the rules that apply if a person other than an individual is designated as a beneficiary of an employee's benefit. However, the separate account rules under A-2 of § 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust's interest in the employee's benefit.

(d) If the beneficiary of the trust named as beneficiary of the employee's interest is another trust, the beneficiaries of the other trust will be treated as being designated as beneficiaries of the first trust, and thus, having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of paragraph (b) of this A-5 are satisfied with respect to such other trust in addition to the trust named as beneficiary.

Q-6. If a trust is named as a beneficiary of an employee, what documentation must be provided to the plan administrator?

A-6.

(a) Required minimum distributions before death. If an employee designates a trust as the beneficiary of his or her entire benefit and the employee's spouse is the sole beneficiary of the trust, in order to satisfy the documentation requirements of this A-6 so that the spouse can be treated as the sole designated beneficiary of the employee's benefits (if the other requirements of paragraph (b) of A-5 of this section are satisfied), the employee must either--

(1) Provide to the plan administrator a copy of the trust instrument and agree that if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator a copy of each such amendment; or

(2) Provide to the plan administrator a list of all of the beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement sufficient to establish that the spouse is the sole beneficiary) for purposes of section 401(a)(9); certify that, to the best of the employee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; agree that, if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide to the plan administrator corrected certifications to the extent that the amendment changes any information previously certified; and agree to provide a copy of the trust instrument to the plan administrator upon demand.

(b) Required minimum distributions after death. In order to satisfy the documentation requirement of this A-6 for required minimum distributions after the death of the employee (or spouse in a case to which A-5 of § 1.401(a)(9)-3 applies), by October 31 of the calendar year immediately following the calendar year in which the employee died, the trustee of the trust must either--

(1) Provide the plan administrator with a final list of all beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their

    50

entitlement) as of September 30 of the calendar year following the calendar year of the employee's death; certify that, to the best of the trustee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of A-5 of this section are satisfied; and agree to provide a copy of the trust instrument to the plan administrator upon demand; or

(2) Provide the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the employee under the plan as of the employee's date of death.

(c) Relief for discrepancy between trust instrument and employee certifications or earlier trust instruments.

(1) If required minimum distributions are determined based on the information provided to the plan administrator in certifications or trust instruments described in paragraph (a) or (b) of this A-6, a plan will not fail to satisfy section 401(a)(9) merely because the actual terms of the trust instrument are inconsistent with the information in those certifications or trust instruments previously provided to the plan administrator, but only if the plan administrator reasonably relied on the information provided and the required minimum distributions for calendar years after the calendar year in which the discrepancy is discovered are determined based on the actual terms of the trust instrument.

(2) For purposes of determining the amount of the excise tax under section 4974, the required minimum distribution is determined for any year based on the actual terms of the trust in effect during the year.

Final Regulation § 1.401(a)(9)-5 Q-7. If an employee has more than one designated beneficiary, which designated beneficiary's life expectancy will be used to determine the applicable distribution period?

A-7.

(a) General rule. (1) Except as otherwise provided in paragraph (c) of this A-7, if more than one individual is designated as a beneficiary with respect to an employee as of the applicable date for determining the designated beneficiary under A-4 of §1.401(a)(9)-4, the designated beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the applicable distribution period.

(2) See A-3 of §1.401(a)(9)-4 for rules that apply if a person other than an individual is designated as a beneficiary and see A-2 and A-3 of §1.401(a)(9)-8 for special rules that apply if an employee's benefit under a plan is divided into separate accounts and the beneficiaries with respect to a separate account differ from the beneficiaries of another separate account.

    51

(b) Contingent beneficiary.

Except as provided in paragraph (c)(1) of this A-7, if a beneficiary's entitlement to an employee's benefit after the employee's death is a contingent right, such contingent beneficiary is nevertheless considered to be a beneficiary for purposes of determining whether a person other than an individual is designated as a beneficiary (resulting in the employee being treated as having no designated beneficiary under the rules of A-3 of §1.401(a)(9)-4) and which designated beneficiary has the shortest life expectancy under paragraph (a) of this A-7.

(c) Successor beneficiary.

(1) A person will not be considered a beneficiary for purposes of determining who is the beneficiary with the shortest life expectancy under paragraph (a) of this A-7, or whether a person who is not an individual is a beneficiary, merely because the person could become the successor to the interest of one of the employee's beneficiaries after that beneficiary's death. However, the preceding sentence does not apply to a 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. Thus, for example, if the first beneficiary has a right to all income with respect to an employee's individual account during that beneficiary's life and a second beneficiary has a right to the principal but only after the death of the first income beneficiary (any portion of the principal distributed during the life of the first income beneficiary to be held in trust until that first beneficiary's death), both beneficiaries must be taken into account in determining the beneficiary with the shortest life expectancy and whether only individuals are beneficiaries.

(2) If the individual beneficiary whose life expectancy is being used to calculate the distribution period dies after September 30 of the calendar year following the calendar year of the employee's death, such beneficiary's remaining life expectancy will be used to determine the distribution period without regard to the life expectancy of the subsequent beneficiary.

(3) This paragraph (c) is illustrated by the following examples:

Example 1. [Accumulation Trust]

(i) Employer M maintains a defined contribution plan, Plan X. Employee A, an employee of M, died in 2005 at the age of 55, survived by spouse, B, who was 50 years old. Prior to A's death, M had established an account balance for A in Plan X. A's account balance is invested only in productive assets. A named a testamentary trust (Trust P) established under A's will as the beneficiary of all amounts payable from A's account in Plan X after A's death. A copy of the Trust P and a list of the trust beneficiaries were provided to the plan administrator of Plan X by October 31 of the calendar year following the calendar year of A's death. As of the date of A's death, the Trust P was irrevocable and was a valid trust under the laws of the state of A's domicile. A's account balance in Plan X was includible in A's gross estate under §2039.

    52

(ii) Under the terms of Trust P, all trust income is payable annually to B, and no one has the power to appoint Trust P principal to any person other than B. A's children, who are all younger than B, are the sole remainder beneficiaries of the Trust P. No other person has a beneficial interest in Trust P. Under the terms of the Trust P, B has the power, exercisable annually, to compel the trustee to withdraw from A's account balance in Plan X an amount equal to the income earned on the assets held in A's account in Plan X during the calendar year and to distribute that amount through Trust P to B. Plan X contains no prohibition on withdrawal from A's account of amounts in excess of the annual required minimum distributions under section 401(a)(9). In accordance with the terms of Plan X, the trustee of Trust P elects, in order to satisfy section 401(a)(9), to receive annual required minimum distributions using the life expectancy rule in section 401(a)(9)(B)(iii) for distributions over a distribution period equal to B's life expectancy. If B exercises the withdrawal power, the trustee must withdraw from A's account under Plan X the greater of the amount of income earned in the account during the calendar year or the required minimum distribution. However, under the terms of Trust P, and applicable state law, only the portion of the Plan X distribution received by the trustee equal to the income earned by A's account in Plan X is required to be distributed to B (along with any other trust income.)

(iii) Because some amounts distributed from A's account in Plan X to Trust P may be accumulated in Trust P during B's lifetime for the benefit of A's children, as remaindermen beneficiaries of Trust P, even though access to those amounts are delayed until after B's death, A's children are beneficiaries of A's account in Plan X in addition to B and B is not the sole designated beneficiary of A's account. Thus the designated beneficiary used to determine the distribution period from A's account in Plan X is the beneficiary with the shortest life expectancy. B's life expectancy is the shortest of all the potential beneficiaries of the testamentary trust's interest in A's account in Plan X (including remainder beneficiaries). Thus, the distribution period for purposes of section 401(a)(9)(B)(iii) is B's life expectancy. Because B is not the sole designated beneficiary of the testamentary trust's interest in A's account in Plan X, the special rule in 401(a)(9)(B)(iv) is not available and the annual required minimum distributions from the account to Trust M must begin no later than the end of the calendar year immediately following the calendar year of A's death. [this last bolded sentence emphasizes the difference between a spousal conduit trust and the spousal accumulation trust].

Example 2. [Conduit Trust]

(i) The facts are the same as Example 1 except that the testamentary trust instrument provides that all amounts distributed from A's account in Plan X to the trustee while B is alive will be paid directly to B upon receipt by the trustee of Trust P.

    53

(ii) In this case, B is the sole designated beneficiary of A's account in Plan X for purposes of determining the designated beneficiary under section 401(a)(9)(B)(iii) and (iv). No amounts distributed from A's account in Plan X to Trust P are accumulated in Trust P during B's lifetime for the benefit of any other beneficiary. Therefore, the residuary beneficiaries of Trust P are mere potential successors to B's interest in Plan X. Because B is the sole beneficiary of the testamentary trust's interest in A's account in Plan X, the annual required minimum distributions from A's account to Trust P must begin no later than the end of the calendar year in which A would have attained age 70½ , rather than the calendar year immediately following the calendar year of A's death.

    54

Exhibit B

Single Life Table59

Age Factor Age Factor Age Factor Age Factor0 82.4 28 55.3 56 28.7 84 8.1 1 81.6 29 54.3 57 27.9 85 7.6 2 80.6 30 53.3 58 27.0 86 7.1 3 79.7 31 52.4 59 26.1 87 6.7 4 78.7 32 51.4 60 25.2 88 6.3 5 77.7 33 50.4 61 24.4 89 5.9 6 76.7 34 49.4 62 23.5 90 5.5 7 75.8 35 48.5 63 22.7 91 5.2 8 74.8 36 47.5 64 21.8 92 4.9 9 73.8 37 46.5 65 21.0 93 4.6

10 72.8 38 45.6 66 20.2 94 4.3 11 71.8 39 44.6 67 19.4 95 4.1 12 70.8 40 43.6 68 18.6 96 3.8 13 69.9 41 42.7 69 17.8 97 3.6 14 68.9 42 41.7 70 17.0 98 3.4 15 67.9 43 40.7 71 16.3 99 3.1 16 66.9 44 39.8 72 15.5 100 2.9 17 66.0 45 38.8 73 14.8 101 2.7 18 65.0 46 37.9 74 14.1 102 2.5 19 64.0 47 37.0 75 13.4 103 2.3 20 63.0 48 36.0 76 12.7 104 2.1 21 62.1 49 35.1 77 12.1 105 1.9 22 61.1 50 34.2 78 11.4 106 1.7 23 60.1 51 33.3 79 10.8 107 1.5 24 59.1 52 32.3 80 10.2 108 1.4 25 58.2 53 31.4 81 9.7 109 1.2 26 57.2 54 30.5 82 9.1 110 1.1 27 56.2 55 29.6 83 8.6 111+ 1.0

59 From Treas. Reg. §1.401(a)(9)-9, A-1.

Edwin P. Morrow III Senior Wealth Specialist 

Key Private Bank Wealth Advisory Services 

937‐285‐5343 edwin_p_morrow@keybank.com edwin.morrow3@gmail.com 

As one of Key’s national estate planning wealth specialists, Ed works with local Key Private Bank teams 

nationwide, advising high net worth clients on how  to preserve and  transfer  their wealth.   He  is also 

national manager of wealth strategies communications for the private bank.  Through a better and more 

thorough review of a client’s estate, trust and tax planning, teams are able to provide more objective, 

comprehensive and valuable advice.  Ed has been with Key since 2005.  He was previously in private law 

practice  in  Cincinnati  and  Springboro,  Ohio  concentrating  in  taxation,  probate,  estate  and  business 

planning.   Other  experience  includes  drafting  court  opinions  for  the  U.S.  District  Court  of  Portland, 

Oregon as a law clerk.  Ed is recent outgoing Chair of the Dayton Bar Association’s Estate Planning, Trust 

and Probate Committee.  He is married and resides in Springboro, Ohio with his wife and two daughters. 

 Education: 

Bachelor of Arts (B.A.), History, Stetson University 

Juris Doctorate (J.D.), Northwestern School of Law at Lewis & Clark College 

Masters of Law (LL.M.) in Tax Law, Capital University Law School 

Masters of Business Administration (MBA), Xavier University  Professional Accreditations: 

Licensed to practice in all Ohio courts, U.S. District Court of Southern Ohio and U.S. Tax Court 

Certified Specialist through Ohio State Bar Assn in Estate Planning, Trust and Probate Law 

Certified Financial Planner (CFP®), Registered Financial Consultant (RFC®) 

Non‐Public Arbitrator for the Financial Industry Regulatory Authority (FINRA)  Recent Speaking Engagements and Published Articles: 

Author, Ferri v. Powell‐Ferri: Asset Protection Pitfalls and Opportunities with Decanting, LISI Asset Protection Newsletter, March 2014 

Author, Leimberg Information Services, March 2013, The Optimal Basis Increase Trust, updates available at  http://ssrn.com/abstract=2436964 

Author, Trusts and Estates, Dec. 2012, Optimizing Trusts to Avoid the New Medicare Surtax 

Speaker, 2010 Ohio Wealth Counsel Quarterly CLE and NBI CLE: Advanced Asset Protection Planning  

Speaker, 2009 Annual Meeting of Cincinnati Financial Planning Association, Roth IRA Conversion Analysis: What Advisors are Missing and Software Won’t Tell You 

Speaker, 2009 Dayton Bar Association CLE, Protecting Trust Assets from Tax Liens  

Co‐Author with Phil Kavesh, Ensuring the Stretch, July/August 2007 issue of Journal of Retirement Planning 

Custodial Trusteed IRA IRA payable to IRA payable toCharacteristics: IRA w/ (aka IRT) IRA Annuity Conduit Trust Accumul. Trust

indiv. as bene indiv. as bene ind. as bene trust as bene trust as beneDuring Owner's Lifetime

1 Income tax deferral during owner's lifetime yes yes yes yes yes

2 Optimal tax table if spouse >10 yrs younger yes yes yes yes no

3 Ability to customize bene. designation form very limited probably no NA NA

4 Ability to pay RMD in incapacity situation no yes no NA NA

5 Any IRA permitted Investment choices yes yes no NA NA

6 Surrender charges to owner no no yes NA NA

7 Appropriate for small asset level yes no yes no no

8 High internal investment fees/expenses no no yes no no

9 Attorney fees for drafting/review/updating low low-medium low medium high(of course, depends on level of customization)

10 Appropriate for QRP while owner working no no no yes yes(unless or until IRA rollover is available)

Obviously individual situations of products/services below will vary widely: for instance, some custodial IRAs do not permit full stretchout, some trusteed IRAs are so inflexible as to be no different than custodial IRAs, some annuity companies do not offer restrictedbeneficiary options, and, of course, individual trusts vary widely as well and scant guidance is available for qualifying "accumulationtrusts". And many clients may opt not to use the maximum protections below. These are generalizations based on using the maximumcapability and flexibility of the services. State law and individual plans differ.

Comparison of IRA and Trust Estate Planning Options

Characteristics: Custodial Trusteed IRA IRA payable to IRA payable to

IRA w/ (aka IRT) IRA Annuity Conduit Trust Accumul. TrustAfter Owner's Death indiv. as bene indiv. as bene ind. as bene trust as bene trust as bene

11 Allows beneficiaries/trust to "Stretch" out RMDs yes yes yes yes yes

12 Allows owner to restrict bene to RMDs no yes yes yes yes

13 Can restrict bene to RMDs, but more w discr. no yes no yes yes

14 Can restrict trust so that not even RMDs paid no no no no yes

15 Allows owner to mandate remainder beneficiary no yes yes yes yes(keep IRA "in the bloodline")

16 Allows longer spousal deferral via LE recalc yes yes yes yes no

17 Allows longer spousal deferral via delay RBD yes yes yes yes no

18 Allows spouse to name new DB for new LE yes yes maybe yes no

19 Bankruptcy protection from bene's creditors probably not probably maybe probably probably(trust & trusteed IRA bene's have 541+522 arg)

20 State exemptions protect IRA from benes' cred probably not probably not probably not NA NA(see state statute, assume not in bankruptcy)

21 State spendthrift protection from bene's cred no yes probably not yes yes

22 Discretionary trust (optimum) protection no no no no if so drafted

23 "To or for the benefit of" protection for RMDs? no probably no probably probably, moot if

under UTC, creditors can't attach unless w/h discretionary

Comparison of IRA and Trust Options - page 2

Custodial Trusteed IRA IRA payable to IRA payable to

Characteristics: IRA w/ (aka IRT) IRA Annuity Conduit Trust Accumul. Trustindiv. as bene indiv. as bene ind. as bene trust as bene trust as bene

24 Simple post-mortem accounting/administration yes yes yes no no(no forms 1041, K-1, $500-$1500/yr. acct fees)

25 Ability to grant LPOA equivalent n/a yes probably not yes limited

26 Ability to grant GPOA equivalent default yes yes yes limited

27 Ability to Remove IRA from Beneficiary's Estate no yes maybe yes yes

28 Can name charitable contingent & stretch yes yes yes yes maybe*

29 Can ensure charitable remainder & stretch no yes yes yes no

30 Ability to separately pay investment management yes yes no yes yesfees from outside IRA accounts (and deduct)

31 Leverage $5.34m exclusion (Bypass/CST, GST) none "leaky" "leaky" "leaky" optimal

32 Possibility of multiple states taxation of IRA no no no no yesor state tax even when bene in no tax state

33 Appropriate for GST non-exempt trust (w/GPOA) no yes maybe yes no

34 Possible Pecuniary funding IRD disaster no no no yes yes(remember to review GST funding, not just A/B)

35 Possibility of income trapped at top rate >$12k no no no yes but unlikely yes

(starting 2013, may indirectly cause 3.8% surtax)

#30, #32, #34, #35 may not apply to Roth IRAs Comments/Criticism welcome, permission to reprint liberally given © Ed Morrow: edwin_p_morrow@keybank.com or edwin.morrow3@gmail.com

Comparison of IRA and Trust Options - page 3

COPYRIGHT © 2013 SALVATORE J. LAMENDOLA, ESQ.

Individuals whose retirement plans (“plans”) comprise a significant part of their estate, who are in second (or later) marriages, and who have children from a previous marriage are often confronted with an estate planning dilemma. On the one hand, they want to provide for their current spouse out of their plans after death. But on the other hand, they want the balance of those same plans to pass on to their children after their spouse’s death. Such plan owners have more options to choose from than they might think. This brochure will cover ten of them, including the advantages and disadvantages of each.

With this option, the plan owner’s spouse is the sole primary beneficiary of the plan and the plan owner’s children (or “stretch-out” trusts1 for their benefit) are the contingent beneficiaries of the plan. Advantages: 1. Maximum spousal deferral. By rolling over a traditional plan, the spouse can defer all distributions until the spouse reaches age 70½. By rolling over a Roth plan, the spouse can defer all distributions indefinitely. Either way, more is left in the plan for the spouse’s later needs or for the plan owner’s children to inherit.

Example 1: Bob, age 73, dies leaving his IRA to Betty, his second wife, age 65. Bob took his required minimum distribution (RMD) before he died. If Betty rolls over, she has no further RMDs to take until she turns age 70½. If this were a Roth IRA, Betty would have no RMD obligation ever.

2. Maximum spousal stretch-out. With a traditional

plan, once the spouse reaches age 70½, the spouse’s RMDs are calculated using the Uniform Lifetime Table (“Uniform Table”) which, except for the Joint and Last Survivor Table (more below), provides the slowest drawdown allowed. This again leaves more in the plan for the spouse’s later needs or more for the plan owner’s children to inherit.

Example 2: Upon turning age 70½, Betty’s first RMD is 1/27.4 (3.65%) of the IRA (27.4 is the divisor for a 70-year-old from the Uniform Table). She withdraws the same to avoid a 50% penalty. The next year Betty’s RMD is 1/26.5 (3.77%) of the IRA (26.5 is the divisor for a 71-year-old from the Uniform Table). She again withdraws the same to avoid penalty. Betty repeats this process every year for as long as she lives. Her RMDs will not exceed 10% of the IRA until she reaches age 93.

3. Maximum children’s stretch-out. After the spouse’s death, the plan owner’s children can stretch-out the balance of the IRA over their own life expectancies. This puts the power of tax-deferred compounding (tax-free compounding if a Roth IRA) to work for the children for decades longer. It also helps reduce the children’s income taxes by keeping the annual income generated by the RMDs as low as possible.

Example 3: At the same time Betty rolls over, she names Bob’s children, Bill and Bonnie, as the equal, primary beneficiaries of the IRA. If Betty dies at age 75, and if Bill is age 46 in the year following the year of Betty’s death, Bill’s first RMD would be a mere 1/37.9 (2.6%) of his half of the account. This is because the corresponding divisor for a 46-year-old (from the Single Life Table) is 37.9. The next year, Bill merely reduces the divisor by one. Thus, Bill’s

ESTATE PLANNING FOR RETIREMENT PLAN OWNERS IN SECOND (OR LATER) MARRIAGES

By Salvatore J. LaMendola, Esq.

SPECIAL REPORT www.disinherit-irs.com

Tenth Floor Columbia Center 101 West Big Beaver Road

Troy, Michigan 48084-5280 (248) 457-7000

Fax (248) 457-7219

Option 1: Outright Bequest to Spouse

1A “stretch-out” trust is either a “conduit trust” (more at Option 5) or an “accumulation trust” (more at Option 7) for children (or other heirs) rather than a spouse. The advantages of “stretch-out” trusts are: (i) they ensure the longest income tax deferral allowed, (ii) they provide superior creditor protection, and (iii) they ensure that inherited retirement plans remain exclusively within the original plan owner’s family. To learn more about “stretch-out” trusts, download the author’s brochure Stretch-Out Trusts from www.disinherit-irs.com.

2

second RMD will be 1/36.9 (2.7%). Unlike a surviving spouse, Bill cannot defer all RMDs until he reaches age 70½. Nonetheless, Bill can still “stretch-out” his RMDs over 38 years total. Bill’s sister Bonnie gets an even longer “stretch” because she is younger than Bill.

4. Maximum plan owner stretch-out. With a more-than-10-years-younger spouse named as the sole primary beneficiary, the more favorable Joint and Last Survivor Table (“Joint Table”) can be used to calculate the plan owner’s RMDs, allowing more to stay in the plan longer during the plan owner’s own lifetime. (This is not applicable to Roth IRAs because there are no RMDs for Roth IRA owners.)

Example 4: If Betty were age 60 instead of age 65 (and thus 13 years younger than Bob rather than 8) and if Bob’s IRA were worth $700,000, Bob could use 26.8 (the divisor for a 73-year-old and 60-year-old from the Joint Table) instead of 24.7 (the divisor for a 73-year-old from the Uniform Table) to calculate his RMD for that year. The larger divisor from the Joint Table allows $2,221 more to stay in the plan in that year alone. For each year Betty remains the sole beneficiary of the plan, the more favorable Joint Table can be used.

Disadvantages: 1. Disinheritance risk. The risk that the spouse rolls over and names someone other than the plan owner’s children as the new beneficiary of the plan.

Example 5: After Bob’s death, Betty names her own children as the primary beneficiaries of the rollover IRA. After Betty’s death, Betty’s children inherit the IRA and Bob’s children can do nothing about it.

2. Spenddown risk. The risk that the spouse spends the plan on luxuries, leaving less (if anything) for the plan owner’s children to inherit.

Example 6: Even if Betty shares Bob’s goal of passing Bob’s IRA on to Bob’s children after her death, still, nothing protects the IRA from Betty’s excessive personal spending, financial inexperience, disability, or any other circumstance that could result in the disinheritance of Bob’s children indirectly.

3. Family discord risk. The risk that the plan owner’s children may quarrel with the spouse over how the spouse is investing and spending “their money.”

Observations:

An outright bequest to the spouse is a two-edged sword. While it can almost always produce significantly greater economic results for all involved, it can also produce the worst economic result for the plan owner’s children: complete disinheritance. Plan owners who would prefer not to take that risk should explore other options.

With this option, the spouse and children (or “stretch-out” trusts for the children’s benefit) are equal or unequal co-primary beneficiaries of the plan. The children (or “stretch-out” trusts for their benefit) are also the contingent beneficiaries of the spouse’s share of the plan.

Advantages:

1. Elimination of disinheritance risk, spenddown risk, and family discord risk (as to the children’s portion).

2. Maximum spousal deferral and maximum spousal stretch-out (as to the spouse’s portion).

3. Maximum children’s stretch-out (as to the children’s portion).

Disadvantages:

1. Insufficiency risk. The risk that the spouse’s portion will not be enough to meet the spouse’s long-term needs.

Example 7: Bob names Betty, Bill, and Bonnie as 1/3 beneficiaries of his IRA. Due to unexpectedly low investment returns, unexpectedly high living expenses, and an unexpected income tax increase, Betty’s rollover IRA is consumed far sooner than originally projected. Unable to turn to Bob’s children for help, Betty wishes Bob had left her a greater portion of the IRA to hedge against these unforeseen events.

2. Elimination of maximum plan owner stretch-out. Because the spouse is not the sole primary beneficiary of the plan, the Joint Table cannot be used to calculate the plan owner’s RMDs (not even with respect to the spouse’s share).

3. Non-Consent Risk. The risk that the spouse will

Option 2: Split Bequest to Spouse and Children

3

COPYRIGHT © 2013 SALVATORE J. LAMENDOLA, ESQ.

refuse to consent to sharing the plan with the children. (Applicable only to employer plans, such as 401(k)s.)

Example 8: Bob estimates that 70% of his 401(k) will more than cover all of Betty's needs, even under the worst assumptions. However, Betty disagrees. Therefore, she refuses to sign the spousal consent form that would allow Bob to name his two children as 15% beneficiaries each. Betty’s having already consented to this change in the couple's pre-nuptial agreement is of no use because Betty was not Bob’s wife then. Thus, unless Bob finds a way to change Betty’s mind, his 401(k) will pass 100% to Betty at his death. Observations: 1. A split bequest to spouse and children can make sense where it is certain that the spouse will never need the entire plan under any circumstance.

2. Where it is not certain that only a portion of the plan will suffice to cover the spouse’s needs, other options should be explored.

With this option, the primary beneficiaries of the plan are the plan owner’s children (or “stretch-out” trusts for their benefit). To “replace” the lost asset, the plan owner acquires a life insurance policy on his/her own life. The primary and contingent beneficiaries of the policy are the spouse and the plan owner’s children, respectively.

Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk.

2. Elimination of insufficiency risk.

3. Maximum children’s stretch-out. Disadvantages: 1. Inefficiency risk. The risk of wasted premiums if the spouse dies first.

Example 9: Bob acquires a life insurance policy on himself for Betty. He names his children as the primary beneficiaries of his IRA (and as the

contingent beneficiaries of the policy). Bob pays his premiums each and every year, but in the seventh year, Betty dies unexpectedly. Bob surrenders the policy, receiving far less in return than the premiums paid.

2. Potential reduced inheritance for the children (and accelerated income taxation) if the insurance premiums must come from the plan.

3. Elimination of maximum plan owner stretch-out.

4. Non-consent risk (employer plans only). Observations: 1. For those who are in good health, this option can produce excellent results.

2. If greater control over how the spouse will manage and spend the insurance death benefit is desired, a trust for the spouse could be named as the policy beneficiary.

This is option 3 in reverse. Thus, the plan owner’s children are the beneficiaries of the policy and the primary and contingent beneficiaries of the plan are the spouse and the plan owner’s children (or “stretch-out” trusts for the children’s benefit), respectively.

Advantages: 1. Maximum spousal deferral, maximum spousal stretch-out, maximum children’s stretch-out (possibly), maximum plan owner stretch-out.

2. Elimination of disinheritance risk, spenddown risk, and family discord risk. Disadvantages: 1. Inefficiency risk.

2. Potential reduced inheritance for the spouse (and accelerated income taxation) if the insurance premiums must come from the plan.

Observations: 1. As with option 3, this option can also produce excellent results.

Option 3: Life Insurance for Spouse

Option 4: Life Insurance for Children

4

2. If greater control over how the children will manage and spend the insurance death benefit is desired, a trust for them could be named as the policy beneficiary.

A “conduit trust” is a special type of “stretch-out” trust that is used only with retirement plans. After the plan owner’s death, the trustee of the conduit trust automatically withdraws and pays the RMD (or more, if authorized) to the primary beneficiary of the trust (the spouse in this context) until the plan is fully distributed. If the primary beneficiary dies before that time, the trustee distributes the plan, in-kind, to the successor beneficiaries of the trust (the children in this context). The in-kind distribution allows the children to continue the spouse’s original stretch. Thus, with this option, a spousal conduit trust is the sole beneficiary of the plan and no contingent beneficiary is needed. Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk.

2. Maximum plan owner stretch-out. The IRS treats a spousal conduit trust the same as if the spouse were the sole primary beneficiary of the plan. Disadvantages: 1. Longevity Risk. The risk the spouse “lives too long”, thereby leaving little if anything in the plan for the plan owner’s children to inherit.

Example 10: Bob leaves his $700,000 IRA to a spousal conduit trust that pays Betty only the RMD each year. Assuming a 5% growth rate, if Betty dies at age 93, Bob’s children will inherit an IRA worth only $105,051 (15% of the original value).

2. Table risk. The risk that the IRS exercises the authority it possesses to change the RMD life expectancy tables, forcing more out of inherited plans faster. With a spousal conduit trust, such a change would increase the odds of there being little or nothing left in the plan for the children to inherit upon the spouse’s death.

3. Elimination of maximum spousal deferral. The spouse can still defer all distributions post-death, but

only until the year the plan owner would have reached age 70½ (not the spouse, as with a rollover).

4. Elimination of maximum spousal stretch-out. The spouse can still stretch-out post-death, but the Single Life Table rather than the Uniform Table must be used. However, unlike with non-spouse beneficiaries (recall the “reduce-by-one” method for Bill in Example 3) the spouse can re-consult the Single Life Table annually. This allows more deferral.

5. Elimination of maximum children’s stretch-out. The children can still stretch-out, but only over the spouse’s remaining life expectancy, not their own.

6. Non-consent risk (employer plans only). Observations: 1. Since the trustee of a conduit trust is never allowed to hold-back (or “accumulate”) a plan distribution (RMD or otherwise), all plan distributions are taxed at more favorable individual income tax brackets. However, the tradeoff is poorer protection of plan distributions against creditors or wasteful spending. (The plan itself is still well protected for as long as it is held by the trust.)

2. Longevity risk suggests that a spousal conduit trust should not be used for older spouses who have “good genes.” A 2006 IRS private letter ruling suggests that a spousal conduit trust should not be used for younger spouses. Thus, this option should be used rarely, if at all.

This is the same as option 5, except that the children do not have to wait until the spouse’s death to receive distributions from the plan (via the trust).

Example 11: Bob leaves his IRA to a split conduit trust for Betty, Bill, and Bonnie. After Bob’s death, the first RMD is $60,000. The trustee withdraws the same, but distributes only $40,000 to Betty because that is all she needs. The trustee distributes the rest to Bill and Bonnie, $10,000 each.

Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk.

Option 6: Split Conduit Trust

Option 5: Spousal Conduit Trust

5

COPYRIGHT © 2013 SALVATORE J. LAMENDOLA, ESQ.

2. Elimination of insufficiency risk.

3. Children benefit sooner.

Disadvantages: 1. Elimination of maximum spousal deferral. With a split conduit trust, because the spouse is not the sole beneficiary, RMDs cannot be deferred at all post-death, not even until the plan owner would have reached age 70½, as with a spousal conduit trust. 2. Elimination of maximum spousal stretch-out. As with a spousal conduit trust, the spouse can still stretch-out post-death, but now the Single Life Table is consulted only once (with reduce-by-one after that). This allows less deferral. 3. Elimination of maximum plan owner stretch-out.

4. Table risk.

5. Elimination of maximum children’s stretch-out.

6. Non-consent risk (employer plans only). Observations: 1. As with the spousal conduit trust, all plan distributions with this option are taxed at more favorable individual income tax brackets, but less creditor protection is a tradeoff. 2. The ability to distribute to the children while the spouse is still alive negates longevity risk as well as the unfavorable IRS ruling mentioned above.

An “accumulation” trust is another type of “stretch-out” trust. In this context, a spousal accumulation trust works the same as a spousal conduit trust, except that distributions from the trust to the spouse are not automatic. Instead, the trustee of a spousal accumulation trust has the discretion to distribute to the spouse, some, all, or none of what is received from the plan each year. Whatever is not distributed is held (accumulated) in trust for later distribution to the spouse (if needed) or to the plan owner’s children (at the spouse’s death).

Example 12: Bob leaves his IRA to a spousal accumulation trust for Betty. After Bob’s death, the

first RMD the trust receives is $60,000. The trustee distributes only $40,000 to Betty because that is all she needs. After paying taxes on the $20,000 retained, the trustee invests the same in a taxable account for potential future distribution to Betty if needed. If not needed, the trustee distributes the taxable account and the IRA (in-kind) outright to Bob’s children at Betty’s death. Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk.

2. Elimination of insufficiency risk.

3. Elimination of table risk. Disadvantages: 1. Elimination of maximum spousal deferral. With this option, even though the spouse is the sole primary beneficiary of the trust, RMDs cannot be deferred at all post-death.

2. Elimination of maximum spousal stretch-out. As with a split conduit trust, the Single Life Table is consulted only once post-death. This allows less deferral.

3. Elimination of maximum plan owner stretch-out.

4. Elimination of maximum children’s stretch-out.

5. Non-consent risk (employer plans only). Observations: 1. Since all accumulated plan distributions are taxed at less favorable trust income tax brackets, this option works better with Roth plans, since Roth plans are not subject to any form of income taxation, trust or otherwise. 2. This option also works better where a substantial portion of the plan consists of employer securities, which, if withdrawn as part of a post-death lump sum distribution, can be sold and taxed at the long-term capital gain rate (the same for trusts and individuals). The after-tax sale proceeds would then be retained and distributed piecemeal by the trust. In contrast, any form of conduit trust would require complete distribution of the lump-sum distribution in

Option 7: Spousal Accumulation Trust

6

Observations:

In the author’s opinion, this is the best trust option of all because of the maximum flexibility provided.

A CRUT is a tax-exempt trust that pays a “unitrust amount” to one or more individuals for life, followed by a lump sum distribution to one or more charities. With a CRUT, all of the complicated post-death RMD rules, tables, penalties, etc. do not apply because the plan is closed out post-death and paid in full to the trust (income tax-free). With a spousal CRUT, the unitrust amount is paid to the spouse for life. After the spouse’s death, it is then paid to the plan owner’s children for their lives. After all of the spouse and children have passed away, the balance of the CRUT is then distributed to the plan owner’s charities. Example 14: Bob dies leaving his $700,000 IRA to a 5% spousal CRUT for Betty and Bob’s children. After receiving the IRA income tax-free, the CRUT pays $35,000 (5% × $700,000) to Betty in year one. Betty pays income tax on that amount. In year two, the CRUT is worth $710,000 and therefore pays Betty $35,500 (5% × $710,000). The same process of re-valuation and payment is repeated each year. If the CRUT is worth $750,000 at the start of the year following the year of Betty’s death, Bob’s children will split that year’s 5% payment ($37,500), receiving $18,750 each. If Bill dies next, Bonnie will continue to receive payments (now the full 5%) for life. After Bonnie’s death, the balance of the CRUT will be paid to Bob’s charities, income tax-free. Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk. 2. Elimination of complicated post-death RMD rules. 3. Assured gift to charity. 4. True lifetime payments for all involved.

Example 15: If Bob leaves his IRA to either type of conduit or accumulation trust described above, Betty

the same year it is received by the trust. 3. This option is preferable where more control over the amount and timing of distributions from any type of plan (Roth or traditional) is desired. By accumulating, the trustee can safeguard both the plan and distributions from the plan from loss.

A split accumulation trust works the same as a spousal accumulation trust, except that the children do not have to wait until the spouse’s death to receive distributions from the plan (via the trust). Example 13: Bob dies leaving his IRA to a split accumulation trust for Betty, Bill, and Bonnie. Five years after Bob’s death, Betty remarries. Seeing that Betty is now well taken care of by her new husband and relying on a trust provision that requires consideration of Betty’s non-trust resources, the trustee distributes none of that year’s $60,000 RMD to Betty. Instead, the trustee distributes $30,000 each to Bill and Bonnie. Advantages: 1. Elimination of disinheritance risk, spenddown risk, and family discord risk. 2. Elimination of insufficiency risk. 3. Children benefit sooner. 4. Elimination of table risk. Disadvantages: 1. Elimination of maximum spousal deferral. With this option, RMDs cannot be deferred at all post-death. 2. Elimination of maximum spousal stretch-out. The Single Life Table is consulted only once post-death. This allows less deferral. 3. Elimination of maximum plan owner stretch-out. 4. Elimination of maximum children’s stretch-out 5. Non-consent risk (employer plans only).

Option 9: Spousal Charitable Remainder Unitrust (CRUT)

Option 8: Split Accumulation Trust

7

COPYRIGHT © 2013 SALVATORE J. LAMENDOLA, ESQ.

will receive payments for life, but Bob's children will not. Instead, after Betty's death, RMDs to Bob’s children from the inherited IRA will continue only over Betty’s remaining life expectancy. In contrast, with a spousal CRUT, after Betty's death, payments to Bob's children will continue for as long as they live. 5. Blended income taxation. After the original plan balance has been paid out, all subsequent CRUT payments are eligible for taxation partly as ordinary income and partly as capital gain. Example 16: Bob dies leaving his $700,000 IRA to a 5% spousal CRUT. Assuming a 1% income rate of return and a 6% growth rate, all CRUT payments for years 1-20 will be taxed to the recipient (Betty or Bob’s children) as ordinary income. However, the year 21 payment and each payment thereafter will be taxed partly as ordinary income and partly as capital gain. This is because by year 21, the CRUT will have paid out the original $700,000 that it received from the IRA. Since capital gain rates are generally lower than ordinary income rates, such “blended” income taxation allows the recipient to keep more of each CRUT payment. In contrast, all distributions from traditional retirement plans are taxed at ordinary income rates, whether such distributions are of capital gains earned in the plan or not.

Disadvantages: 1. Unusable for younger beneficiaries. Because the actuarial present value of the charity’s remainder interest (“APV”) must be at least 10% of the CRUT’s initial value, CRUTs cannot be used with younger beneficiaries. Example 17: If at the time of Bob’s death Betty is age 65, Bill is age 40, and Bonnie is age 38, a 5% spousal CRUT will be a valid CRUT because the APV (10.147%) will be more than 10%. But if Bonnie were only age 37 at Bob’s death, the trust would not be a valid CRUT because the APV (9.889%) would be less than 10%. Lowering the payout rate to raise the APV is not an option here because 5% is the lowest CRUT payout rate allowed. 2. Insufficiency risk. No more than the unitrust amount can be distributed in any given year, regardless of need.

3. Elimination of maximum plan owner stretch-out. 4. Non-consent risk (employer plans only). 5. Early death risk. If the plan owner’s children die soon after the spouse, then the plan owner’s grandchildren will receive nothing.

Observations:

1. Since distributions from Roth retirement plans are not income-taxed, using a spousal CRUT with a Roth plan is not advisable. Otherwise, a spousal CRUT can be an excellent option for all other plans.

2. If early death risk is a concern, the plan owner’s children could use a portion of their CRUT payments to purchase life insurance on themselves in favor of their own children (the plan owner’s grandchildren).

3. If the unitrust amount is thought to be more than needed for the spouse, a spousal “Flip-CRUT” might be used. This type of CRUT pays the spouse only the income of the trust for life, not the unitrust amount. Then, after the spouse’s death, the payment method changes (or “flips”) to the unitrust amount for the plan owner’s children for their lives.

Example 18: Assume the same facts as in Example 16 above, except that a spousal Flip-CRUT is used. In year one, the trust pays Betty $7,000 (1% × $700,000), not $35,000 (5% × $700,000), as with a standard spousal CRUT. If the trust also had $42,000 (6% × $700,000) of capital gains in that year, such would remain in the trust (income tax-free) and grow in the trust (again, income tax-free) until future distribution as part of the 5% unitrust amount payable to Bob’s children after Betty’s death.

4. If family control over the balance of the CRUT is desired, a donor advised fund or family foundation could be named as the remainder beneficiary of the CRUT.

Example 19: Assume the same facts as above. In addition, assume that Bob names his own family foundation as the spousal CRUT’s remainder beneficiary. Upon the death of the last to die of Betty, Bill, and Bonnie, the trustee distributes the balance of the CRUT (assume $1,000,000) to the foundation. As foundation trustees, Bob’s grandchildren get to decide which charities will

8

receive grants of at least 5% ($50,000 in year one) per year. If desired, the grandchildren can pay themselves a reasonable salary for their services. They can also appoint their own children (Bob’s great-grandchildren) as successor trustees of the foundation to pass on the family’s philanthropy.

A split CRUT works the same as a spousal CRUT, except that the plan owner’s children do not have to wait until the spouse’s death to receive distributions from the trust.

Example 20: Bob dies leaving his $700,000 IRA to a split CRUT for Betty and his children. The year one unitrust amount is $35,000. The trustee pays $15,000 to Betty to cover her needs. The trustee pays the rest to Bill and Bonnie, $10,000 each.

Advantages:

1. Elimination of disinheritance risk, spenddown risk, and family discord risk.

2. Elimination of complicated post-death RMD rules.

3. Assured gift to charity.

4. True lifetime payments for all involved.

5. Blended income taxation.

6. Children benefit sooner.

Disadvantages:

1. Unusable for younger beneficiaries.

2. Insufficiency risk.

3. Elimination of maximum plan owner stretch-out.

4. Non-consent risk (employer plans only).

5. Early death risk.

Observations:

1. As mentioned above, CRUTs are not advisable for Roth retirement plans. But when it comes to traditional plans, a split CRUT should be considered alongside the other “split” options, especially if an assured gift to charity is desired.

2. As with the split conduit trust, the trustee’s inability to hold-back payments provides poorer creditor protection for such payments. Trust principal, however, is always protected.

Plan owners in second or later marriages have many options to choose from. An outright bequest to spouse (Option 1) offers the greatest potential financial upside for all involved, but also the greatest potential downside for the plan owner’s children: complete disinheritance. To avoid that, non-trust options are the split bequest (Option 2) and those that involve life insurance (Options 3 and 4). These are the “cleanest” in that the plan owner’s spouse and children each “go their own way” post-death. Though the trust options (Options 5-10) do not provide such complete separation, they do provide a “referee” in the form of the trustee. The best trust options in this author’s opinion are the split accumulation trust (Option 8) and the split conduit trust (Option 6), in that order. The spousal conduit trust (Option 5) and the spousal accumulation trust (Option 7) can also be useful, especially if the plan owner’s children’s needs are not urgent. If an assured gift to charity is desired, and if the spouse and children are old enough, one of the CRUT options (Options 9 and 10) should be explored. Further, nothing prohibits combining options. For example, a plan owner who has a smaller traditional plan and a larger Roth plan, and who wishes to make an assured gift to charity, might use a split CRUT (Option 10) for the traditional plan and a split accumulation trust (Option 8) for the Roth plan. Or, if there is only one plan and the spouse has a history of longevity in his or her family, the plan owner might divide the plan between a split conduit trust (Option 6) and a split accumulation trust (Option 8), equally or unequally, as appropriate.

Finally, it should always be remembered that the retirement plan beneficiary designation form is always amendable. Therefore, the plan owner is always free to change his or her mind, as needed.

Conclusion

Option 10: Split Charitable Remainder Unitrust (CRUT)

9

COPYRIGHT © 2013 SALVATORE J. LAMENDOLA, ESQ.

Summary Chart

The following chart summarizes the more important advantages and disadvantages of each of the options discussed above.

Option Most Important Advantages/Disadvantages

Outright Bequest to Spouse

Advantage: Maximum potential economic benefit to both spouse and children. Disadvantage: Maximum potential economic detriment to plan owner’s children: complete disinheritance.

Split Bequest to Spouse and Children

Advantage: One of the “cleanest” ways to provide for both spouse and children. Disadvantage: Spouse has access to only part of the plan post-death.

Life Insurance for Spouse

Advantage: One of the “cleanest” ways to provide for both spouse and children. Disadvantages: Added cost of premiums and risk that spouse might die first.

Life Insurance for Children

Advantage: One of the “cleanest” ways to provide for both spouse and children. Disadvantages: Added cost of premiums and risk that spouse might die first.

Spousal Conduit Trust

Advantages: Assurance that spouse will have access to full value of plan and that plan owner’s children will receive what’s left. All income taxation at individual brackets.

Disadvantages: Risk that not much will be left in the plan due to the spouse’s long life, the IRS’s changing the RMD tables, or both. Less creditor protection than accumulation trusts.

Split Conduit Trust Advantages: Children can share in benefits while spouse is still alive. All income taxation at individual brackets. Disadvantages: Least post-death income tax deferral of all the options. Less creditor protection than accumulation

trusts.

Spousal Accumulation Trust

Advantages: Maximum control over how plan is distributed, including maximum creditor protection. Disadvantages: Least post-death income tax deferral of all the options. Potential income taxation at worse trust

income tax brackets.

Split Accumulation Trust

Advantages: Maximum control over how plan is distributed, including maximum creditor protection. Children can share in benefits while spouse is still alive.

Disadvantages: Least post-death income tax deferral of all the options. Potential income taxation at worse trust income tax brackets.

Spousal CRUT

Advantages: Elimination of complicated post-death RMD rules, potential “blended” income taxation, distributions for the actual lives of all concerned, and an assured gift to charity.

Disadvantages: Unusable for younger beneficiaries and no more than the “unitrust amount” may be distributed each year.

Split CRUT

Advantages: Elimination of complicated post-death RMD rules, potential “blended” income taxation, distributions for the actual lives of all concerned, ability for children to share in benefits while spouse is still alive, and an assured gift to charity.

Disadvantages: Unusable for younger beneficiaries and no more than “unitrust amount” may be distributed each year.

This special report is designed to provide accurate (at the time of printing) and authoritative information with regard to the subject matter covered. It must not be used as the basis for legal or tax advice. In specific cases, the parties involved must always seek out and rely on the counsel of their own advisors. Thus, responsibility for modifying and guiding any party’s action with respect to legal and tax matters is placed where it belongs – with his or her own advisors. Thus, responsibility for modifying and guiding any party’s action with respect to legal and tax matters is placed where it belongs – with his or her own advisors.

TO THE EXTENT THIS ARTICLE CONTAINS TAX MATTERS, IT IS NOT INTENDED NOR WRITREN TO BE USED AND CANNOT BE USED BY A TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER, ACCORDING TO CIRCULAR 230.

Ed Morrow on Clark v . Rameker: Supreme Court Holds that Inherited IRAs Are Not Protected in Bankruptcy � Are Spousal Inherited IRAs and Even Rollover IRAs Threatened As Well ? Steve Leimberg's Asset Protection Planning Newsletterstevesletters to: Edwin_P_Morrow 06/16/2014 09:10 PMPlease respond to stevesletters

History: This message has been forwarded.

Steve Leimberg's Asset Protection Planning Email Newsletter - Archive Message #248

Date: 16-Jun-14From: Steve Leimberg's Asset Protection Planning Newsletter Subject: Ed Morrow on Clark v. Rameker: Supreme Court Holds that Inherited IRAs Are Not Protected in

Bankruptcy � Are Spousal Inherited IRAs and Even Rollover IRAs Threatened As Well?

“On June 12, 2014, Justice Sotomayor, writing for a unanimous Supreme Court, resolved a split among circuits as to the protection afforded under the Bankruptcy Code for inherited IRAs. The Court affirmed the underlying 7th Circuit decision and held that once such accounts are inherited, they lose their character as “retirement funds” in the hands of the inheriting party within the meaning of 11 U.S.C. §522(b)(3)(C).

The ramifications of the Court’s decision may be broader than you think – it may threaten creditor protection in bankruptcy for surviving spouses as well as other beneficiaries. While inherited spousal IRAs might be protected in bankruptcy under the Supreme Court’s interpretation once they are rolled over, they may not be protected until that time and any spousal rollover may be subject to avoidance under fraudulent transfer law.

The Supreme Court decision in Clark should encourage owners of larger IRAs concerned about asset protection for their beneficiaries, even for their spouse, to reconsider outright bequests of IRAs, especially in blended family situations where there may already be other non-tax reasons to consider a trust.”

Ed Morrow provides members with important commentary on the Supreme Court’s recent decision in Clark v. Rameker.

Ed Morrow, J.D., LL.M., MBA, CFP®, is an Ohio attorney and national wealth specialist with Key Private Bank. His last LISI newsletter, a white paper discussing redesigning trusts for more optimal income tax planning, has been updated (The Optimal Basis Increase Trust, LISI Estate Planning Newsletter #2081, March 20, 2013, updated version at this link). He can be reached at edwin_p_morrow@keybank.com or edwin.morrow3@gmail.com.

Before we get to Ed’s commentary, members should note that a new 60 Second Planner by Michelle Ward was recently posted to the LISI homepage. In her commentary, Michelle reports on the United States Supreme Court decision in Clark v. Rameker, where the Court held that inherited IRAs are not "retirement funds" and therefore are not excluded from the bankruptcy estate of the owner. You don't need any special equipment - just click on this link.

Now, here is Ed Morrow’s commentary:

EXECUTIVE SUMMARY:

On June 12, 2014, Justice Sotomayor, writing for a unanimous Supreme Court, resolved a split among circuits as to the protection afforded under the Bankruptcy Code for inherited IRAs. The Court affirmed the underlying 7th Circuit decision and held that once such accounts are inherited, they lose their character as “retirement funds” in the hands of the inheriting party within the meaning of 11 U.S.C. §522(b)(3)(C).

The ramifications of the Court’s decision are broader than you think – it may threaten creditor protection for surviving spouses as well as other beneficiaries. While inherited spousal IRAs might be protected in bankruptcy under the Supreme Court’s interpretation once they are rolled over, they may not be protected until that time and any spousal rollover may be subject to avoidance under fraudulent transfer law.

FACTS:

This commentary will quickly frame the central issue before the Court, recap the case and the rationale of the Supreme Court’s decision, discuss how the case threatens protection for surviving spouses as well as protection for other beneficiaries and explore solutions to ensure creditor protection.

Issue Resolved by the Supreme Court

After a retirement plan owner dies, are such funds still “retirement funds” for purposes of the Bankruptcy Code, 11 U.S.C. §522(b)(3)(C) and (d)(12), which exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986?”

Answer

No. “Funds held in inherited IRAs are not “retirement funds” within the

meaning of §522(b)(3)(C).”

Facts of Underlying Case

Ruth Heffron died and left her IRA to her daughter Heidi Heffron-Clark as beneficiary, which had dwindled to about $300,000 by the time Heidi and her husband filed bankruptcy. Heidi argued that the bankruptcy statute, 11 U.S.C. §522(b)(3)(C), should exempt those assets from creditor claims against her bankruptcy estate. The bankruptcy court had disagreed and held they were not exempt. The district court reversed and held that such plans were protected but the court of appeals reversed, halting a trend among other circuits and many lower courts to protect inherited IRAs.

Rationale of 7th Circuit and the Supreme Court in Affirming the 7th Circuit:

The bankruptcy code protects “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Sections 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code.” [1] The funds were in an account exempt from taxation under IRC §408 – an IRA. What the Court questioned, and answered in the negative, was whether her account was even a “retirement fund” in Heidi’s hands at all once she inherited the account. The bankruptcy code does not define “retirement fund.” To the Supreme Court, funds cease to be “retirement funds” once the owner dies.

The Supreme Court adopted a narrow view of what “retirement funds” can be, and settled on what it termed the “ordinary meaning” of the term:

The ordinary meaning of “fund[s]” is “sum[s] of money . . . set aside for a specific purpose.” American Heritage Dictionary 712 (4th ed. 2000). And “retirement” means “[w]ithdrawal from one’s occupation, business, or office.” Id., at 1489. Section 522(b)(3)(C)’s reference to “retirement funds” is therefore properly understood to mean sums of money set aside for the day an individual stops working.

The Court cited three legal characteristics of inherited IRAs that helped lead to its conclusion that these are not “sums of money set aside for the day an individual stops working”:

1) the holder of an inherited IRA may never invest additional money in the account

2) holders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement

3) the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty.

The public policy arguments behind the interpretation are clear – why should inherited retirement accounts be creditor protected?

For if an individual is allowed to exempt an inherited IRA from her bankruptcy estate, nothing about the inherited IRA’s legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or

sports car immediately after her bankruptcy proceedings are complete. Allowing that kind of exemption would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a “fresh start,” Rousey, 544 U. S., at 325, into a “free pass,” Schwab, 560 U. S., at 791. We decline to read the retirement funds provision in that manner.

Spousal Inherited IRAs at Risk? Extending the Court’s Rationale to Spouses Who Inherit

Let’s apply the Court’s definition of “retirement funds” and the above rationale to surviving spouses who inherit IRAs. Again, to quote the Court:

An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. See §§408(d)(3)(C)(ii), 408A(a). If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRA.

Thus, spousal rollovers are NOT automatic, though they may be accomplished in rather passive manner, such as not taking an RMD or contributing to the account, and therein lies the rub.

The spouse who inherits an IRA did not set aside his or her own funds, and it’s hard to see how spousal inherited IRAs can achieve protection under the Court’s rationale:

In ordinary usage, to speak of a person’s “retirement funds” implies that the funds are currently in an account set aside for retirement, not that they were set aside for that purpose at some prior date by an entirely different person.

Most people consider their spouse an entirely different person.

Going back to the Court’s three characteristics of inherited IRAs and why they are not “retirement funds,” surviving spouses, like other inheriting parties, cannot add to the inherited IRA without causing or executing a rollover, they may be required to withdraw money earlier than reaching 70 ½, and can withdraw the entire account for a “vacation home or sports car” without penalty as well. The required beginning date for a spousal inherited IRA may depend on whether the spouse is a “sole beneficiary” or not, and the age of decedent.[2]

Financial and estate planners often advise surviving spouses who are under age 59 ½ to delay rollovers, at least in part, and keep funds as an inherited IRA until that age, depending on other liquidity. This is because, while their account enjoys the same tax deferral, in an emergency (unlike a rollover), they could get access to funds without the 10% early withdrawal penalty. There is no hard and fast deadline for a spousal rollover, but now surviving spouses under 59 ½ concerned about creditor protection should more strongly consider earlier rollovers.

Protection for Spousal Rollovers

Once a spouse rolls over the IRA to his or her own, it is unclear whether and how the Bankruptcy Code will protect the funds. The Bankruptcy Code has

a special paragraph to allow spousal rollovers and transfers between different qualified plans to continue to be qualified.[3]

However, this merely begs the question of whether the IRA loses its qualification as a “retirement fund” once inherited. While courts may ultimately carve an exception and protect spousal IRA rollovers, the fact that the Supreme Court has now defined “retirement funds” to exclude funds set aside by a different person merely invites aggressive creditor attorneys to attack any spousal rollovers under this line of argument and it may be years before we get further clarification.

Even if spousal IRA rollovers do not qualify as “retirement funds” under the Supreme Court’s interpretation of §522(b)(3)(C) and (d)(12), a surviving spouse might argue that the funds should be protected under state law, pursuant to §522(b)(3)(A), if the state statute would otherwise protect such funds, and if the state statute requires or allows “opting out” of federal exemptions, and if the debtor/spouse has met the 720-day state residency requirement.

Fraudulent Transfer Surprise and Why Spousal Rollovers May Even Have a 10-Year Statute of Limitations Look Back

So, big deal, every surviving spouse over 59 ½ will likely rollover funds to his or her own IRA, and those who are younger will do so later or at least in part, courts will probably carve out a spousal rollover exception and if they run into creditor problems, they can always roll it all over then, right?

Not so fast. What if the surviving spouse is insolvent or has pending legal/creditor problems at the time? Normally, we don’t think of IRA rollovers as ever implicating the Uniform Fraudulent Transfer Act (“UFTA”), because qualified plans and IRAs are normally exempt and therefore not normally considered an “asset” as defined under §1(2) of the UFTA. Perhaps if the surviving spouse lives in one of the seven states that provide protection for inherited IRAs, this would still be true. However, certainly under most states’ laws, under Clark, a spousal rollover by a debtor could be a fraudulent conversion of non-exempt assets (inherited IRA) to an exempt asset (spouse’s own IRA) and creditor attorneys should pursue that line of attack in the right circumstance as well.

Among the many myths out there about fraudulent transfers are that that you always have to prove malice or that valid “financial or estate planning” reasons prevent the finding of a fraudulent transfer or that “mere retitling” or other more passive actions or inactions that don’t sound like a “transfer” cannot be a fraudulent transfer. All untrue.

“Constructive” fraudulent transfers involve more of an insolvency test at the time of transfer and require no adverse finding of subjective intent whatsoever. Assets that cannot be attached by creditors are not counted for this analysis, so many people who think they are solvent or even moderately wealthy may not be solvent at all, when homestead, insurance, 529 plans, qualified plans, third-party or DAPT trusts and potentially other assets are subtracted from the analysis.

“Actual” fraudulent transfers typically involve analysis of many factors called “badges of fraud,” and actual fraudulent transfers can still be found despite a compelling and legitimate financial or estate planning reason. Furthermore, 11 USC §548(e) of the Bankruptcy Code established a new 10-year statute

of limitations for avoiding transfers to “self-settled trusts or a similar device.” Surprise – courts have found IRAs to be a “similar device” – and no wonder, since they are really just a self-settled trust with special tax characteristics.[4]

Voiding a spousal IRA rollover for “actual” fraud would certainly be more difficult than voiding more egregious transfers, but not impossible. A creditor would undoubtedly prefer to attempt to void a rollover for “constructive” fraud if the facts fit, and this type of avoidance action would not be subject to the additional ten year statute of limitations under §548(e). Some professionals would undoubtedly prefer to avoid either risk.

ERISA or State Law May Still Provide Protection for Inherited Accounts - But May Not

While not at issue in Clark, inherited retirement plans may also receive creditor protection under ERISA, which would not rely on a court’s interpretation of 11 USC §522, but in bankruptcy relies on 11 USC §541 (an exclusion, not an exemption – often these work to the same effect, but there are subtle differences). Many pre-BAPCPA cases (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) held that some 403(b) or other annuity or custodial arrangements under ERISA plans do NOT qualify because there is no “trust.” This difference is one of the reasons Congress amended the Bankruptcy Code to put all retirement plans on equal footing, but debtor and creditor attorneys may now be going back to the Wild West of trying to determine when inherited ERISA plans qualify for exclusion.

However, most ERISA plans do not permit non-employee beneficiaries to remain in the plan to “stretch out” distributions over their lifetimes, so this may only provide protection to spouses who can rollover directly to their own qualified retirement plan without leaving the confines of ERISA, or perhaps those who can file bankruptcy in the short period they are still allowed in the plan. Either case still begs the question of whether the original ERISA plan qualifies for an exclusion rather than exemption.

Lest we conclude that ERISA plan protection is always superior to IRA protection, there are plenty of instances where the exact opposite is the case, most recently, the 9th Circuit decision permitting the IRS to levy on an ERISA plan where the same levy would not have been allowed had the debtor owned a mere IRA.[5] Moreover, many small ERISA plans, similar to SEP-IRAs, do not qualify for creditor protection under ERISA (hence, not eligible for an exclusion) anyway.

A handful of states have added provisions to their creditor/garnishment protection statutes to clarify that inherited IRAs equally qualify, or have a favorable state court decision, but those are a minority.[6] Such protection, if the state allows it, would fall under 11 U.S.C. §522(b)(3)(A), which protects “any property that is exempt under… State or local law that is applicable on the date of the filing of the petition…,” rather than under §522(b)(3)(C). It is difficult to count on these state statutes for long-term planning, however, since beneficiaries are mobile and may change their state of residency years later. Moreover, the debtor/beneficiary cannot simply “pull an O.J.” and move to Florida before filing; Congress added a 730 day pre-filing residency requirement under §522(b)(3)(A).

What Options Are There To Protect Inherited Retirement Plan Accounts and Why Do Options Differ for Spouses?

Naming a separate fully discretionary trust as beneficiary is the best option for creditor protection, and you also have simpler trusteed IRA options for larger IRAs, and IRA annuities with restricted payout options, probably more applicable for smaller IRAs, that might provide alternative protection if the beneficiary lives in a state that protects annuity proceeds.[7] A third party created trust or trusteed IRA should be considered a third-party created spendthrift trust as to a beneficiary, eligible for exclusion under §541 of the Bankruptcy code, rather than an exemption under §522.

Properly drafted, the trust would qualify as a “see through trust” to enable substantial tax deferral as well. But even in the best circumstances, it would not be as advantageous for tax deferral as a rollover: a see through trust would still have to use the single life expectancy table of the spouse, rather than the more advantageous joint life expectancy tables. A conduit trust (or trusteed IRA) in which the spouse is the “sole beneficiary” would get better income tax deferral than an accumulation trust, because the spouse’s life expectancy can be recalculated every year, and there may be a delayed required beginning date, but this is still less advantageous than a rollover. While a conduit trust, which requires minimum distributions to the beneficiary every year, does undercut creditor protection somewhat, it may do so less than people think, since some states would allow such mandatory payments to be paid “for the benefit of” the debtor/beneficiary without creditor attachment.[8]

For those with significant charitable intent as part of their estate plan, someone could simply forget the stretch IRA rules and leave IRA funds to a charitable remainder trust for a spouse or other beneficiary. From an asset protection perspective, CRTs suffer from the same limitations as the conduit trust and trusteed IRA, due to the mandatory annuity or unitrust payout, and have additional ones, in that no discretionary payments can be made beyond the annuity/unitrust.

What about a beneficiary contributing their IRA to a domestic asset protection trust? As discussed above, this would trigger UFTA and §548 concerns, but just as importantly, it would probably trigger income tax if it is a taxable gift, with attendant penalties to boot.[9] If it is structured as an incomplete gift, grantor trust, there is at least a good argument to avoid a taxable event, but it’s still very uncertain. There is scant guidance on such transfers and for any large IRA, practitioners may consider obtaining a PLR.

The Promise (and Dangers) of Relying on Disclaimer-Based Planning for Creditor Protection

A disclaimer-based contingency plan might be considered. In the vast majority of states, qualified disclaimers cannot be considered fraudulent transfers, but even this protection has more holes in it than practitioners realize. Generally, if an owner names the surviving spouse as primary beneficiary and establishes a discretionary “see through trust” as contingent beneficiary, and the surviving spouse has creditor concerns at the time of the owner’s death, he or she might disclaim into the more protected trust without fear of fraudulent transfer under most states’ laws.

This assumes the disclaimant will exercise no prior acceptance or control that might taint a disclaimer. In addition, a handful of states have exceptions for insolvent disclaimant/debtors, and there is a clear exception when the creditor happens to be the IRS with a tax lien.[10] Moreover, in bankruptcy,

the analysis is complicated further, and may depend on whether the disclaimer is pre- or post-petition or made within one year - there is still uncertainty as to whether and when the bankruptcy court must follow state disclaimer “relation back” law, and whether disclaimers made within one year may deny a discharge.[11] Denying a discharge may be even worse than avoiding a transfer! So, the common wisdom that disclaimers to discretionary trusts can work asset protection magic may not be so wise – if asset protection is truly important to the client, do not rely on disclaimer funding.

Note that the typical disclaimer-to-trust strategy does not work for other beneficiaries, since disclaimers causing transfers into a trust for one’s benefit are only “qualified” for surviving spouses, unless the contingent beneficiary trust into which funds are disclaimed is not overly controlled by or benefitting the disclaimant.[12]

Conclusion

The Supreme Court decision in Clark should encourage owners of larger IRAs concerned about asset protection for their beneficiaries, even for their spouse, to reconsider outright bequests. Inheriting spouses now have one more reason to quickly rollover any inherited retirement plan, or consider disclaiming into a trust if one had already been named as a contingent beneficiary.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Ed Morrow

TECHNICAL EDITOR: DUNCAN OSBORNE

CITE AS:

LISI Asset Protection Planning Newsletter #248 (June 16, 2014) at http://www.LeimbergServices.com Copyright 2014 Leimberg Information Services, Inc. (LISI). Reproduction in ANY Form or Forwarding to ANY Person – Without Express Permission – Prohibited.

CITE:

Clark v. Rameker, 573 U. S. ____ (2014).

CITATIONS:

[1] 11 U.S.C. § 522(b)(3)(C) and (d)(12), the former applicable to those required to, eligible for or opting to use state exemptions and the latter

applicable to those debtors who opt-in or are required to use federal bankruptcy exemptions in lieu of state exemptions. While the Court did not address paragraph (d)(12), it has the exact same wording and the Court’s decision should apply equally to that paragraph as well.

[2] For a good overview of spousal rollovers, deemed rollovers, elections and different RMD rules between inherited and rollover IRAs, see ¶3.2, Life and Death Planning for Retirement Benefits, 7th Edition, Natalie Choate.

[3] 11 U.S.C.§522(b)(4)(D)

[4] In re Thomas, 2012 WL 2792348 (Bankr. D. Id., Slip Copy, July 9, 2012).

[5] Gross v. Commissioner, Case No. 12-72279 (9th Cir. Feb. 25, 2014) (unpublished).

[6] Tex. Prop. Code § 42.0021, Fla. Stat. Ann. §222.21, Ohio R.C. §2329.66(A)(10)(e), Ariz. Rev. Stat. §33�1126(B), Mo. Rev. Stat. §513.430.1(10)(f), Alaska Stat. §09.38.017(a)(3), N.C. Stat. §1C-1601(a)(9), In re McClelland, 2008 Bankr. Lexis 41 (Bankr. D. Id. Case 07-40300, 2008), construing Idaho Code Ann. § 11-604A

[7] See Ensuring the Stretch, July/August 2007 Journal of Retirement Planning, Phil Kavesh and Ed Morrow, comparing and contrasting standalone IRA trusts, trusteed IRAs and restrictive IRA annuities.

[8] Ohio R.C. §5805.05(B), modeled on UTC §506, which, while forbidding attachments of mandatory distributions, is nonetheless silent on whether the trustee can make payments for the benefit of a mandatory distribution beneficiary. More specifically, see Ohio R.C. §5815.24(D), modeled in part on Del. C. §3536(a) and SDCL §55-1-42, which are all more specific on such points. If in Bankruptcy, the court should still allow an exclusion for a third party created spendthrift trust with mandatory distribution provisions, depending on state law, but may count any such payments that were made or should have been made pre- or 180 days post-petition. McCauley v. Hersloff, 147 B.R. 262 (Bankr. M.D. Fla. 1992)

[9] Some DAPT statutes are touted as having specific provisions for this, such as Alaska Stat. 34.40.110(b)(3). See Treas. Reg. §1.408A-6, Q&A19

[10] E.g., Fla.Stat. §739.402(2)(d), but the vast majority of states follow something akin to the rule in the Uniform Disclaimer of Property Interests Act § 6,§ 13 at Qualified disclaimers do not defeat tax liens. U.S. v. Drye, 528 U.S. 49 (1999)

[11] See discussion of cases and articles in Gaughan v. Edward Dittlof Revocable Trust (In re Costas), 555 F.3d 790 (9th Cir. 2009), in which the 9th Circuit decided that a pre-petition qualified disclaimer valid under state law to avoid a fraudulent transfer would be honored even in bankruptcy under §548, refusing to extend Drye beyond tax liens, at least for

pre-petition disclaimers. Not all beneficiaries live in the 9th Circuit, and like Nessa and Chilton, even appellate court rulings can be overruled by the Supreme Court. Costas hinted that post-petition disclaimers would be treated differently. More importantly, Caterpillar Fin. Servs. Corp. v. White (In re White), 2014 Bankr. LEXIS 578 (Bankr. Ne. 2014), recently refused to follow the reasoning in Costas where a debtor had disclaimed a $560,000 inheritance within one year of a bankruptcy filing. It found that a disclaimer could be an improper transfer denying discharge and set the case for trial on the debtor’s intent, but importantly noted that, in cases of gratuitous transfer, the burden of proof shifts to the debtor/disclaimant to prove his intent was not to hinder, delay or defraud creditors. A tough burden. The creditor/trustee in White was attempting to deny the debtor a discharge under §727 rather than avoid the transfer under §548. In some cases the effect of this may be the same or even worse than merely avoiding the transfer. If the discharge is denied, the creditor may go after other assets otherwise protected in bankruptcy or continue to garnish wages, etc, thus severely negating the use of a disclaimer to avoid creditors, even if the transfer cannot be voided.

[12] IRC §2518(b). While §2518 is a gift tax section, practitioners should not be lulled into thinking that failure to be “qualified” only has gift tax effects (after all, how many debtors have $5.34 million estates?). It may also cause income tax effects, just like any lifetime transfer of an IRA to another owner.

Click here to comment on this newsletter.

HELP US HELP OTHERS! TELL A FRIEND ABOUT OUR NEWSLETTERS. JUST CLICK HERE.

Click Here for Steve Leimberg and Bob LeClair’s NumberCruncher and Quickview Software, Books, and Other Resources

september 2009 trusts & estates / trustsandestates.com 53

Committee Report: Retirement Benefits

Experienced estate-planning practitioners know that the promise of the stretch IRA—to pro-long the account’s tax-deferred or tax-free status

thereby allowing its assets to grow—often is thwarted if a trust isn’t used to guard against beneficiaries. Too often, beneficiaries who receive retirement plan assets outright sabotage the stretch by withdrawing more than the required minimum distributions (RMDs), if not the entire amount. Trusts are needed to keep larger retire-ment funds in the family bloodline, ensure maximum income tax deferral, use generation-skipping leverage and provide asset protection benefits. Unfortunately, the income tax rules regarding the use of trusts for retire-ment benefit bequests are at times illogical, unclear and, even when clear, sometimes problematic.1

Luckily, another option is increasingly available: the trusteed IRA. After the IRA owner’s death, there can be tremendous estate-planning advantages to a trust-eed IRA—provided the IRA provider is advanced, the IRA trustee is flexible, and the owner opts for robust beneficiary designation planning. Indeed, a trusteed IRA can combine many of the estate and asset protec-

trusteed Iras: an elegantestate-planning Option There are many reasons this choice might work best for your clients

tion planning advantages of a trust while ensuring the simplicity, compliance and income tax benefits of an ordinary IRA. In essence, an IRA owner can create a conduit trust without the complexities of a separate instrument.

Definitions

Recall that the conduit trust example creates a seemingly simple safe harbor for qualifying as a see-through trust:2 If the trust mandates that the trustee pay any distribu-tions from the IRA “immediately” to the designated beneficiary, only that particular beneficiary is considered when determining life expectancy.3 With a conduit trust, the remainder and contingent beneficiaries of the trust are irrelevant—even if they are a charity, an estate or other entity without a life expectancy.

The accumulation trust example is murkier but describes a trust that might “accumulate” IRA distribu-tions in the trust for eventual payout to beneficiaries.4 Absent conduit trust language, most traditional long-term trusts will need to comply with this example. With such trusts, all potential takers to the IRA benefits must be considered to determine the life expectancy payout. It is unclear exactly what the rules are in determining which beneficiaries to consider.

So what exactly is a trusteed IRA?

Edwin P. Morrow III is an estate-planning

wealth specialist with Key Private Bank in

Dayton, Ohio

By Edwin P. Morrow III

Murrow.indd 53 8/26/09 4:06:16 PM

54 trusts&estates/trustsandestates.com september2009

Committee Report: Retirement Benefits

Note: IRA products/services vary widely. For instance, some custodial IRAs do not permit full stretch out; and some trusteed IRAs are so inflexible as to be no different than custodial IRAs. Of course, individual trusts vary even more and many clients may opt not to use the maximum protections. What’s presented here are generalizations based on using the maximum capability and flexibility of the services. State law and individual plans differ. —edwinp.morrowIII

Why I Like Trusteed IRAs Just look at how much more effective it is after an owner’s death for estate planning

IRA Payable To IRA Payable To Custodial IRA Trusteed IRA Accumulation Conduit Trust With Individual With Individual Characteristics Trust Beneficiary As Beneficiary As Beneficiary As Beneficiary

During Owner’s Lifetime Income Tax Deferral During Owner’s Life

Optimal Tax Table if Spouse >10 Years Younger

Can Customize Beneficiary Designation Form

Ability To Pay RMD in Incapacity Situation

Any IRA Permitted Investment Choices

Appropriate for Small Asset Level

Attorney Fees for Drafting/ Review/ Updating (depends on amount of customization)

Appropriate for QRP While Owner Working (unless or until IRA rollover is available)

After Owner’s Death Allows Beneficiaries to Stretch Out RMDs

Owner Can Restrict Beneficiary to RMD Floor

Can Restrict Beneficiary to RMDs, But More With Discretion

Can Restrict Trust So That Not Even RMDs Paid

Allows Owner to Mandate Contingent Beneficiary (keep IRA in the family bloodline)

Allows Longer Tax Deferral Via Dynamic, Unfixed Expectancy Tables

Allows Spousal Delayed Required Beginning Date

Confusion as to Whose Life Expectancy to Use

Distributions Taxed at Highest Bracket > $10k

State Protection of IRA from Beneficiary’s Creditors (see state statute, assume not in bankruptcy)

Spendthrift Protection from Beneficiary Creditors

Pure Discretionary Trust (Optimum) Protection

Ability to Grant LPOA Equivalent

Ability to Grant GPOA Equivalent

Trust Decanting Threatening See-through

Ability to Remove IRA from Beneficiary’s Estate

Can Name Charitable Contingent Beneficiary

Can Ensure Vested Charitable Remainder

Problems for GST Non-exempt Planning

Leverage of $3.5MM ex. eq. (bypass/AB)

Possible Pecuniary Funding IRD Disaster

yes

no

NA

NA

NA

no

high

yes

probably

yes

yes

yes

yes

no

no

yes

potentially

no

yes

potentially

limited

no

possibly

yes

maybe

no

yes

optimal

yes

yes

yes

yes

yes

yes

no

low-medium

no

yes

yes

yes

no

yes

yes

yes

no

no

usually not

yes

no

yes

yes

no

yes

yes

yes

no

leaky

no

yes

yes

very limited

no

yes

yes

low

no

yes

no

no

no

no

yes

yes

no

no

usually not

no

no

no

default

no

no

yes

no

NA

none

no

yes

yes

NA

NA

NA

no

medium

yes

yes

yes

yes

no

yes

yes

yes

no

no

no

yes

no

yes

yes

no

yes

yes

yes

no

leaky

yes

Murrow.indd 54 8/26/09 4:06:40 PM

in ways similar to a conduit trust, provided that one complies with the strictures of the IRA rules. Obviously, IRA trustees would reject some customizations as inap-propriate, such as provisions for an individual co-trustee or for investment in insurance or collectibles, which would disqualify the IRA.9 But the most common dis-tribution provisions are probably acceptable: An owner can mandate that only the RMDs be paid to a benefi-ciary until a certain age, after which point restrictions

become more liberal. Or the owner can state that only the RMDs be paid out unless additional distributions are needed for emergency or for the ubiquitous “health, education and support.” An owner also may limit the ability of a beneficiary to name another beneficiary or define the class of permissible appointees, thus keeping funds in the family bloodline.

Because the RMDs of a trusteed IRA must be paid to the beneficiary after the owner dies, the trusteed IRA essentially is a conduit trust—but without being a separate entity. And not being a separate entity means avoiding significant complexity and uncertainty. What complexities and uncertainties do I mean? They can be broadly divided into several categories: post-mortem tax and trust accounting, triggering income in respect of a decedent (IRD), post-mortem compliance titling and transfer, determining the measuring life expectancy for RMDs, professional management, planning for different IRAs, generation skipping transfer (GST) tax planning

There are two legal forms of individual retirement accounts:5 a “custodial IRA” under Internal Revenue Code Section 408(h) and a “trusteed IRA” under IRC Section 408(a). Historically most IRAs have been opened as custodial accounts. Trusteed IRAs have been much rarer.

There is no federal income tax difference between the two forms.6 While an IRA owner is living, state law differences are unlikely to surface,7 because most litiga-tion surrounding IRAs pertains to the tax treatment rather than the legal form of the agreement.

As an estate-planning vehicle, the effectiveness of the trusteed IRA depends on how flexible the trusteed IRA is, which in turn depends on the IRA provider. Some IRA providers have forms with just a few boxes to check for different options. Some smaller banks may want counsel to come up with the entire designation. Others strike a balance by having a simple beneficiary designation form with the most commonly customized provisions left blank for client’s counsel to choose from additional options for flexibility.

An example may help: Jane Doe is retired and has a $2 million rollover IRA. This is the bulk of her estate. She would like to leave half of the IRA to her daughter and half to her son. Her daughter is nice enough, but on her fifth marriage. Her son is a bachelor and, although hard working, is also hard living. She moves her IRA to a trusteed IRA and checks a box on the beneficiary des-ignation form stating: “I would like to choose restricted payout options for this beneficiary.” An additional form restricts the payout options to the beneficiary to the RMDs and limits the beneficiaries’ ability to appoint remaining funds at their deaths, with room for counsel to add further guidance.

Jane’s attorney helps her customize the two most commonly addressed issues: What additional distribu-tion standards or discretion, if any, to give the trustee to go beyond this floor? And what limited or general pow-ers of appointment to allow the beneficiary?8

Thus, Jane provides for different distribution stan-dards for each beneficiary, ensuring that improvident spending or spousal influence will not blow the stretch income tax deferral possibilities.

Payout options for a trusteed IRA can be customized

Trusteed IRAs avoid tricky titling

changes and in-kind transfers that

often occur between the decedent

and the master trust, substrusts

and beneficiaries when

a separate trust is named.

September 2009 truStS & eStateS / trustsandestates.com 55

Committee Report: Retirement Benefits

Murrow.indd 55 8/26/09 4:31:58 PM

IRA distribution. Does the trustee have to strictly follow the safe harbor by immediately distributing the $40,000 IRA distribution, or is this requirement already satisfied? Does the character of the first $40,000 received matter, such as whether it is ordinary income, qualified divi-dends or tax-exempt interest? Does it matter whether distributions from the IRA are stocks in kind but the trust pays out cash or vice-versa?

If sloppy administration or misunderstandings lead to failed compliance with the conduit trust safe harbor, could the IRS make an argument that the trust never was a see-through trust, similar to the IRS’ successful attack on a mis-administered charitable remainder trust in Estate of Atkinson v. Commissioner?13 In Atkinson, a trustee missed some mandatory charitable remainder trust payments and the tax court disqualified the trust retroactively to its inception. It would not be unheard of for an amateur trustee to do the same for conduit trust payments, especially if the trustee is the beneficiary. Without ongoing contact and review with trustees, this could be a problem. While an Atkinson-type retroactive disqualification seems rather extreme, even a prospec-tive disqualification as a see-through trust could be disastrous.

• Triggering IRD—Leaving retirement plan assets to a separate trust that has a pecuniary share formula may inadvertently trigger the income built up in the IRA upon funding a subtrust. To simplify the IRS position,14 funding a pecuniary obligation (for example, the $3.5 million credit shelter commonly found in a married couple’s trusts) with a $2 million IRA could trigger up to $2 million of income in IRD. Most IRAs (with rare excep-tions such as non-deductible IRAs that have basis or Roth IRAs) are 100 percent IRD, meaning that the beneficia-ries are still liable for income tax on all the distributions when they are received. Needless to say, triggering all this income tax early through a poorly considered AB funding clause could be a complete disaster.

• Post-mortem Compliance, Titling and Transfers—A trustee must timely provide a copy of the trust or quali-fying documentation to the IRA custodian/trustee as a prerequisite for qualification as a see-through trust.15

56 trusts&estates/trustsandestates.com september2009

and prohibited transaction risk. Let’s look at these more carefully.

• Post-mortem Tax and Trust Accounting—A trusteed IRA provider sends one Form 1099-R to each ben-eficiary. This is much cheaper, easier and less complex than even the simplest trust, which would require Forms 1099-R, 1041 and K-1. It is difficult to explain to grantors and beneficiaries the differences in defini-tions of “income” that become so complicated in trusts that receive retirement benefits. Fiduciary accounting income may have little relation to RMDs or IRA distri-butions that beneficiaries commonly understand. The Uniform Principal and Income Act is hardly intuitive and has led to problems with trusts holding IRAs.10

Even conduit trusts that appear simple on the sur-face have unsettled issues. What does the IRS mean by requiring distributions from the IRA go “directly to” the beneficiary?11 Is 60 days fast enough? 180 days? Within the year? Can a trustee wait until March of the following year to distribute and make the 65-day election?12 No one really knows.

Also, must the retirement plan distributions in a conduit trust be traced? Generally, fiduciary income tax rules do not trace income. But a strict reading of the conduit trust example may easily be construed to require tracing for purposes of the designated beneficiary safe harbor. Imagine that a trustee of a conduit trust receives $50,000 in income from non-IRA sources, then pays out $40,000 to a beneficiary, then later gets a $40,000

Because a trusteed IRA is

effectively divided after death into

separate subtrusts at the beneficiary

designation level, the oldest

beneficiary rule is less likely to be

an issue for a trusteed IRA.

Committee Report: Retirement Benefits

Murrow.indd 56 8/26/09 4:07:21 PM

Although the IRS has been liberal in several PLRs and there is yet no adverse case, it remains a danger that advisors should draft to avoid.19

Qualifying a separate trust as an accumulation trust can be dicey. Writing for the February 2006 issue of the American Bar Association’s Probate and Property magazine, Keith A. Herman, an attorney in the St. Louis branch of the law firm Greensfelder, Hemker & Gale, P.C., warned: “Because of the uncertainty in this area of the law, a private letter ruling should be obtained before naming such a trust [an accumulation trust] as a beneficiary.”20 The American College of Trust and Estate Counsel echoed similar fears in an Oct. 23, 2007, letter to the IRS requesting a revenue ruling to clarify many of the issues surrounding accumulation trusts.21 Many experienced attorneys believe this reticence is overcau-tious and that the many PLRs issued, in conjunction with the Regulation, are sufficient to guide them in drafting accumulation trusts. But of course PLRs can always be “reversed.” Witness the IRS’ recent change of mind within only one year as to whether it would honor post-mortem beneficiary designation reformations for see-through trust purposes.22 Building an estate plan on PLRs always should give one pause.

Some attorneys despise the conduit trust model because the assets are forced to be distributed during the beneficiary’s lifetime—and a beneficiary might outlive the distributions. That’s a fair criticism if the goal were long-term protection of the entire principal. But if the IRA were say $1 million of a $4 million estate, the RMD from the entire estate holding a conduit trust or trusteed IRA for a 35-year-old would be about half of 1 percent, or only about 1 percent for a 60-year-old.23

Accumulation trust drafting typically entails restricting use of general powers of appointment or broad limited powers of appointment that may bring older or non-individual beneficiaries into consideration under the designated beneficiary rules. This limitation is especially problematic when you have a GST-exempt and non-GST exempt split when a general power of appointment otherwise would be desirable in the GST-non-exempt share.24

This consideration of all possible beneficiaries required for accumulation trusts could also be a serious

With a trusteed IRA, the trustee already has the IRA trust document.

Every time the titling on an IRA changes, there are more opportunities for disastrous titling gaffes, not to mention ample opportunity for frustration with unco-operative IRA custodians. A non-professional trustee dealing with a high-volume discount IRA provider may very well mistitle such an account. To the IRS, form often outweighs good intentions. In Private Letter Ruling 200513032, a decedent left his IRA at death to his trust as beneficiary. The trustee (his child), with incom-petent help from the investment firm, subsequently botched the titling. The IRS denied relief and the entire income in the IRA was triggered.

Trusteed IRAs avoid these tricky titling changes and in-kind transfers that often occur between the decedent and the master trust, subtrusts and beneficiaries when a separate trust is named.

• Drafting Issues and Determining the Measuring Life Expectancy for RMDs—Even when a trust quali-fies as a see-through trust, it must use the life expectancy of the oldest beneficiary of the trust (for example, if the trust splits into three shares for age 25-, 27-, 35-year-old beneficiaries, the life expectancy of the 35-year-old may have to be used. If there is a 1 percent share for a 75-year-old, that beneficiary’s life expectancy may have to be used for the entire conduit trust).16 But there is a distinction when sub-trusts are named at the level of the retirement plan/IRA beneficiary designation form.17 Because a trusteed IRA is effectively divided after death into separate subtrusts at the beneficiary designation form level, this oldest beneficiary rule is less likely to be an issue for a trusteed IRA. Remember that such qualification (whether naming subtrusts or using a trusteed IRA) is still dependent on establishing separate accounts by December 31 of the year after death.18

There are unanswered issues regarding trust provi-sions that may allow payments for an estate’s debts, expenses and taxes from the trust. The potential threat, envisioned in several PLRs, is that this effec-tively makes the estate a beneficiary of the IRA, thus disqualifying the trust as a designated beneficiary.

Committee Report: Retirement Benefits

September 2009 truStS & eStateS / trustsandestates.com 57

Murrow.indd 57 8/26/09 4:07:40 PM

ance or income tax, or subject the trust to taxation in the foreign country.

• Planning  for  Differences  Between  Different  Types of IRAs—Planning with significant Roth IRAs is easier with trusteed IRAs. There is always a danger that a trust has completely inappropriate language and administra-tion for the two completely different tax animals. Having trusteed IRAs separate from the master trust makes it easier to use differing powers of appointment, GST tax allocation and discretionary distribution language that is clearly called for in such situations. With the income limitations for Roth conversions due to be lifted in 2010, this will be a bigger issue in years to come.

• GST Tax Planning—Roth and traditional IRAs require different planning considerations. A trusteed IRA, by keeping the IRA assets separate, makes GST exemption allocation easier. In small estates under the exemption amount, a trusteed IRA or trust holding IRAs will have GST exemption allocated, but for larger estates it is usu-ally more advantageous to have GST exemption allocated to non-IRD, non-wasting assets. Thus, with the possible exception of Roth IRAs, GST exemption is usually allocat-ed to non-IRA assets. Allocation of exemption becomes more complicated to accomplish with a trust holding IRA, Roth IRA and non-IRA assets together, which may lead to wasted or inefficient use of the exemption.

• Prohibited  Transaction  Risk—There may be a pro-hibited transaction danger lurking when a family member is a trustee and takes a trustee fee for his ser-vices for managing retirement plan assets in trust (which is somewhat common). Prohibited transaction rules, enforced by both the IRS and the Department of Labor, are often confusing and unclear. While there is no on-point case law and this issue appears well below the IRS radar screen, one distinguished commentator, Seymour Goldberg, a lawyer, accountant and MBA who’s a senior partner in the Jericho, N.Y., law firm of Goldberg & Goldberg, P.C., and a professor at Long Island University, recently opined that “It is not certain if that [IRC Section 4975(f)(6) exemption] applies to trustee fees where the trust is the beneficiary of an IRA and the trustee is a relative of the IRA creator and also a relative of the trust beneficiary, but that also might be a prohibited transaction.”27 If the IRS or DOL ever

problem with the increased use of decanting statutes (now in six states), trust protectors and other provisions that allow discretionary accumulation trusts to decant to another dissimilar trust after September 30 of the year after death (the “snapshot” date when the IRS looks to see who the potential beneficiaries are). The possibility of decanting may make the remote trust beneficiaries uncertain rather than “identifiable.”

Caution also should be used when accumulation trusts name charities as potential remainder or even contingent beneficiaries. Unlike trusteed IRAs or con-duit trusts that allow us to ignore contingent beneficia-ries, naming a charity as a beneficiary may disqualify an accumulation trust from qualifying as a designated beneficiary. But excluding charities as contingent ben-eficiaries runs counter to many people’s estate-planning goals.

Another issue, especially for conduit trust drafting, is that, as trusts have become more sophisticated, many have clauses that might interfere with payment of the IRA distributions if not drafted around. Similar to the decanting issue mentioned, provisions such as broad spendthrift clauses that cause a forfeiture of a ben-eficiary’s interest, shifting executory interests, hold-back clauses, lifetime powers of appointment, trust protector provisions, incentive/disincentive clauses and the like may negatively affect the certainty of the “conduit” and thus qualification as a see-through trust.

• Professional Management—Separate trusts risk dou-ble dipping for trustee and investment fee expenses. For instance, a trust may pay load fees or wrap invest-ment management fees of 1 percent or more, plus the trustee’s fee. A trusteed IRA typically has one fee. While trusteed IRAs can use outside investment management like any directed or delegated trust (depending on the provider), it’s generally more economical to combine the two duties.

Having a professional trustee also dramatically reduces the risk of mismanagement or embezzlement.25 Mismanagement can not only cause investment losses, but it can also destroy the asset protection afforded in bankruptcy or state law.26 It also avoids the risk that an individual trustee might change citizenship/residence to another country and cause the trust to be treated as a “foreign trust”— which could trigger additional compli-

58 trusts&estates/trustsandestates.com september2009

Committee Report: Retirement Benefits

Murrow.indd 58 8/26/09 4:07:58 PM

smaller accounts. But it’s no longer uncommon to see rollover IRAs exceeding $1 million. Naturally, many clients want to integrate this asset with the rest of their trust planning.

Trusteed IRAs offer a simpler compliance and admin-istrative solution for the client, beneficiaries and the attorney. Until the IRS clarifies its position on accumula-tion trusts with more than PLRs, trusteed IRAs will con-tinue to increase as an important option for conservative clients and practitioners.

—Portions of this article are taken from the author’s other articles that have appeared in Journal of Retirement Planning or ABA Probate and Property.

Endnotes

1. See, generally, Natalie B. Choate, “Trusts as Beneficiaries of Retirement Plans,” Life and Death Planning for Retirement Benefits, 6th Ed., Chapter 6, (Ataxplan Publications, Boston, Mass., 2006).

2. By “see-through” trust, I mean a trust qualifying to use the life expectan-cies of the beneficiaries, which is usually advantageous; see the four general requirements at Treasury Regulations Section 1.401(a)(9)-4, A-5.

3. See Treas. Regs Section 1.401(a)(9)-5 A-7, Ex 2.4. See Treas. Regs. Section 1.401(a)(9)-5 A-7, Ex 1.5. Not to mention an individual retirement annuity under Internal Revenue Code

Section 408(b).6. IRC Section 408(h).7. Perhaps the form would matter in a breach of fiduciary duty lawsuit or in

“magic wand” trust funding such as in Stephenson v. Stephenson, 163 Ohio App. 109, 2005-Ohio-4358, in which a court held that a custodial IRA’s owner changed ownership (whether purposefully or inadvertently) to a living trust during his lifetime by listing it on the Schedule A of his living trust purporting to transfer assets. The court did not address whether the legal form of the IRA would make a difference, but it’s likely that a trusteed IRA’s ownership could not be changed in such a manner, because the legal (as opposed to equitable) owner is not the IRA owner, but rather the bank as trustee.

8. What, in IRA beneficiary designation parlance, would be a “Beneficiary Des-ignation of Beneficiary.”

9. See, for example, IRC Section 408(a)(3).10. Indeed, there are 2008 amendments to the Uniform Principal and Income Act,

in part to correct the Internal Revenue Service's qualified terminable interest property disqualification ruling regarding default accounting rules in Section 409 in Revenue Ruling 2006-26. See www.nccusl.org.

11. “[A] ll amounts distributed from A’s account in Plan X to the trustee while B is alive will be paid directly to B upon receipt by the trustee of Trust P.” Treas.

pursued this aggressively, it could create serious prob-lems for many trusts with family members as paid trust-ees holding retirement assets.

• Disadvantages of a Trusteed IRA Versus a Conduit or Accumulation Trust—A trusteed IRA cannot fit every situation. While the number of providers is increasing, only a handful of banks and trust companies currently provide them and they generally have larger minimum account sizes: typically $500,000 to $1 million, but perhaps less if other non-IRA assets are managed. Even if a client wants to transfer accounts to a trusteed IRA and meets the minimum requirements, qualified plans generally cannot be rolled over while the owner is still employed (especially if the employee is under 59 ½). And, while the latest federal bankruptcy act largely put IRAs on equal footing with other retirement plans in bankruptcy, in some states protection is more limited for IRAs outside of bankruptcy.28

Purely discretionary trusts have superior asset protec-tion to trusteed IRAs or any trusts that have mandatory payouts.29 Thus, the purely discretionary accumulation trust is ideal for extreme situations such as special needs trusts or beneficiaries with anticipated creditors or spe-cial problems such as tax liens.30 While “pay to or for the benefit of” language might give some flexibility to protect mandatory RMD payouts in a trusteed IRA or conduit trust, and most states still protect mandatory payment spendthrift trusts from garnishment,31 a purely discretion-ary trust still has the greatest flexibility and protection.

Additionally, conduit trusts and trusteed IRAs are not optimal users of GST and estate tax exemption amounts. Due to mandatory payments, they “leak” out distributions that could be better leveraged if left in trust. Of course, retirement plan assets in general are not optimal for funding GST-exempt or bypass trusts, because even if funds are “accumulated,” they have built-in tax depleting their value and risk being taxed at the compressed trust income tax brackets.

Think About It

Nothing is a panacea to the dilemma of estate plan-ning for IRAs—not a trusteed IRA, conduit trust nor an accumulation trust. And none of these is worth the complexity of drafting or explaining to clients for

Committee Report: Retirement Benefits

September 2009 truStS & eStateS / trustsandestates.com 59

Te

Murrow.indd 59 8/26/09 4:08:13 PM

Loopholes, Exceptions or Unique Features in Statute

State State Statute IRA Roth IRA 403(b) (e.g. are inherited IRAs protected, SEP/SIMPLEs?)

Alabama Ala. Code §19‐3B‐508 Yes Yes maybe Updated in 2012 to include Roth IRAs.  Protects 403(b) 

annuities,  but  403(b) accounts?  In Re Navarre ‐ no 

protection for inherited IRAs (spouse unclear)

Alaska Alaska Stat. §09.38.017 Yes Yes Yes Does not apply to amounts contributed within 120 days of 

bankruptcy filing.  Clearly protects inherited retirement 

accounts.  Protects intervivos transfers IRAs

Arizona Ariz. Rev. Stat. 33‐1126(B) Yes Yes Yes Does not apply to amounts  contributed within 120 days 

before bankruptcy filing.  Statute clearly protects inherited 

IRAs as well.  Child support exception in (D)  

Arkansas Ark. Code Ann. §16‐66‐220 Yes Yes Yes Traditional IRA/403b contributions in excess of deductible 

limits, nondeductible IRAs, not protected.

California Cal. Civ. Proc. Code § 704.115, 703.140 No No No Only to the extent necessary to provide for the support of 

debtor, spouse and dependents.  Inherited IRAs no better, 

see In re Greenfield. In re Trawick and Berry

Colorado Co. Rev. Stat. 13‐54‐102(s) Yes Yes probably Child support, felonious killing  exceptions ‐ 403bs not 

mentioned specifically, but are probably protected

Connecticut Conn. Gen. Stat. §52‐321a Yes Yes Yes Includes education ESAs, MSAs. Exceptions for costs/debts 

due crime victims, incarceration costs

Delaware 10 Del. Code §4915 Yes Yes Yes Includes add'l protection for 60 day rollovers.  Child support, 

state tax exception.

Wash. DC D.C. Code § 15‐501(a)(9) Yes Yes Yes Applies to residents or those who "earn livelihood" DC.  

Exceptions for D.C. taxes, nondeductible contribution

Florida Fla. Stat. Ann. §222.21 Yes Yes Yes New statute broadly includes beneficiaries, inherited IRAs 

(2)(c), substantially compliant plans.  Fraudulent transfers 

may be excepted ‐ In re Asunmaa

Chart will note "no" if there are significant limitations on protection, such as only to extent "reasonably necessary" for support, or a dollar amount.

50 State plus D.C. Creditor Exemption Statutes for IRAs, Non‐ERISA 403(b) and Roth Variants

Is Protection Unlimited?

Chart will note "yes" despite minor limitations, such as transfers w/in 90‐120 days of bankruptcy filing, nondeductible IRA, child/alimony/fraudulent transfer.

Note: in some states/circuits, SEP, SIMPLE or "deemed" IRAs may not receive the same level of state law protection, or may be preempted by ERISA.

Georgia Ga. Code Ann. § 44‐13‐100(a)(2) and (2.1) Yes* No No Georgia's statute is more complicated.    Statute divides 

between rights to periodic payments (limited to "reasonably 

necessary") and interests in corpus not yet distributed (not 

limited).  Roth IRA not mentioned in statute, but protected if 

"necessary" by In re Bramlette .  In Bankr, state statute 

exempts IRA ‐ In re McFarland 

Hawaii Hawaii Rev. Stat. § 651‐124 No* No* No* The exemption might be unlimited, but does not apply to 

contributions made to a plan, IRA/403(b) within the three 

years before the date a civil action is initiated against the 

debtor or filing of bankrupcty.

Idaho Idaho Code §11-604A, 55‐1101, 11‐607 Yes Yes Yes Inherited IRAs protected per In re McClelland .  No tracing of 

protection once funds outside ‐ In re Carlson

Illinois 735 I.L.C.S. 5/12‐1006 Yes Yes Yes Even plans "intended in good faith to qualify" protected.  

Inherited plans not protected ‐ In re Taylor

Indiana Ind. Code Ann. § 55‐10‐2(c)(6) Yes Yes Yes Unclear if nondeductible IRAs or back‐door Roth IRAs 

protected. Inherited IRAs unprotected: In re Klipsch

Iowa Iowa Code § 627.8(f) Yes Yes No Requires residency.  Unclear if nondeductible IRAs protected, 

or contributions by spouse.   Non‐ERISA 403(b) not in (f), but 

may be protected in (e).   

Kansas Kan. Stat. Ann. § 60‐2308(b) Yes Yes Yes May appear  to protect inherited retirement plans ("shall be 

exempt from any and all claims of creditors of the beneficiary 

or participant"), but see Commerce Bank v. Bolander  case 

holding contrary.  No tracing protection once out of IRA/plan ‐

In re Carbaugh

Kentucky Ky Rev. Stat. § 427.150(2) Yes Yes Yes Contributions within 120 days of filing bankruptcy excepted, 

alimony/child support

Louisiana La. Rev. Stat. Ann. §§ 20:33(1), 13:3881(D) Yes Yes Yes Contributions within one year of bankruptcy filing, 

alimony/child support

Maine Me. Rev. Stat. Ann. Tit. 14, § 4422(13)(E) No No No $15,000 or only to the extent reasonably necessary for the 

support of the debtor/dependents

Maryland Md. Code Ann. Cts. & Jud. Proc. § 11‐504(h)(1) Yes Yes Yes Exception for state Dept of Health and Mental Hygiene.  

Uncertain protection for nondeductible IRAs.  60‐day 

rollovers protected while outside per In re Gibson.

Massachusetts Mass. Gen. L. Ch. 235 § 34A; 236 § 28 Yes Yes Yes Exceptions for spousal/child maintenance support, crime 

victims, additional exceptions for amounts contributed in 

excess of 7% of income within 5 years of 

bankruptcy/judgment.

Michigan MCLS § 600.5451(1),  § 600.6023(1)(j‐k) Yes Yes No Exceptions for contribution within 120 days of filing for 

bankruptcy. Strangely protects ERISA 403(b)s, which does not 

need state protection, but omits non‐ERISA 403(b)s which do. 

Nondeductible IRAs not protected.  SEP‐IRAs may not be 

protected by case law exception.

Minnesota Minn. Stat. Ann. § 550.37(24) No No No Protection limited to $69,000 (adjusts for inflation), or 

amounts "reasonably necessary" for support of 

debtor/spouse/dependents.

Mississippi Miss. Code Ann. §85‐3‐1(e) Yes No* Yes Statute references IRC 408 (or corresonding provisions of 

successor law), unclear whether 408A Roth qualifies

Missouri Mo. Ann. Stat. § 513.430.1(10)(e‐f) Yes Yes Yes Exceptions for fraudulent conveyance.  Very clear protection 

for inherited accounts

Montana Mont. Code Ann. §§ 25‐13‐608(1)(e), 31‐2‐106 Yes Yes No Exceptions for spousal maintenance/child support.   Non‐

deductible contributions to traditional IRAs may not be 

protected.

Nebraska Neb. Rev. Stat. § 25‐1563.01 No No No Must be reasonably necessary for support of 

debtor/dependents

Nevada Nev. Rev. Stat. § 21.090(r) No No No The exemption is limited to $500,000 for Roth or traditional 

IRAs, but non‐ERISA 403bs may not get that.

New Hampshire N.H. Code Ann. § 511:2, XIX Yes Yes Yes 403b annuities mentioned, but not 403b accounts, though 

statute is very broadly worded.  Exceptions for Pre‐1999 

debts, fraudulent transfers

New Jersey N.J. Stat. Ann. § 25:2‐1(b) Yes Yes Yes Exception for tortious killing, child/spousal support, 

fraudulent transfers.  Exclusion granted ‐ In re Yuhas

New Mexico N.M. Stat. Ann. §§ 42‐10‐1, 42‐10‐2 Yes Yes Yes First statute for married, head of household.  Second for 

single.  Case law exception for fraudulent transfers.

New York N.Y. CLS CPLR § 5205(c) Yes Yes Yes Exceptions for contributions within 90 days, fraudulent 

conveyance, non‐ERISA 403bs not mentioned specifically but 

probably protected.

North Carolina N.C. Gen. Stat. § 1C‐1601(a)(9) Yes Yes Yes Any individual retirement plan "treated in the same manner" 

as IRA, so 403b, 457 should be protected.  Inherited  

accounts have clear protection as well.

North Dakota N.D. Cent. Code § 28‐22‐03.1(3) No No NoMust be resident.  One Year "curing period", must be tax 

qualified accounts, including Roth, traditional IRA and 403b. 

Limited to $100,000 per account up to $200,000, or more if 

"reasonably necessary" for support of debtor/dependents

Ohio Ohio Rev. Code Ann. § 2329.66(A)(10)(c) Yes Yes No SEP IRAs may be denied protection by case law exception, 

non‐ERISA 403bs limited to "reasonably necessary",  

Inherited IRAs clearly protected, along with those disqualified 

through "good faith error", but not inherited 403(b)s.  

Alimony/child support exceptions apply but are, strangely, 

inapplicable to inherited IRA.  Nondeductible IRA protection 

unclear.

Oklahoma 31 Okl. St. § 1(A)(20) Yes Yes Yes Exceptions for fraudulent transfers.  Inherited IRAs not 

protected ‐ In re Sims .

Oregon Or. Rev. Stat. §18.358 Yes Yes Yes Protection specifically includes spouse as beneficiary. 

Exceptions for fraudulent transfer, excess contributions over 

IRS permitted limits, child/alimony

Pennsylvania 42 Pa. C.S. §§ 8124(b)(1)(vii), (viii), (ix) Yes Yes Yes Protected, but one year "curing period" for contributions 

within 1 year (not including rollovers) and debtor 

contributions in excess of $15,000 in a one‐year period.  

Fraudulent transfer exception

Rhode Island R.I. Gen. Laws § 9‐26‐4(11), (12) Yes Yes  No Spousal/child support exceptions, ERISA accounts protection 

but unclear whether non‐ERISA 403b

South Carolina S.C. Code Ann. § 15‐41‐30(13) Yes Yes NoRequires domicile.  Non‐ERISA 403bs not mentioned, but 

probably limited to amounts "reasonably necessary".  2012 

amendment increased IRA protection, presumably including 

inherited IRAs: "The exemption ... shall be available whether 

such individual has an interest in the retirement plan as a 

participant, beneficiary,...or otherwise." Clear enough?

South Dakota S.D. Laws Ann. 43‐45‐16 and 43‐45‐17 No No NoExempts broad category of “retirement benefits”, including 

Roth, IRAs and 403bs, but only up to $1,000,000, with court 

discretion to limit per 43‐45‐18. State/local tax exception

Tennessee Tenn. Code Ann. § 26‐2‐105 Yes Yes Yes Interesting prohibition against creditor subpeonaing 

documents related to plan.  Must be tax qualified, no 

residency required.  State is exception creditor.

Texas Tex. Prop. Code § 42.0021 Yes Yes Yes Specifically includes inherited IRAs as well, and even has 

specific protection for 60 days for 60 day rollovers.Utah Utah Code Ann. §78B‐5‐505, ‐508 Yes Yes Yes One Year "curing" denying protection for contributions within 

one year.  Exceptions for spouse/child support, state/local 

taxes, employee as creditor for 1 mo. wages

Vermont 12 Vt. Stat. Ann. § 2740(16) Yes Yes Yes One year "curing" required for protection of contributions 

within one year of filing bankruptcy.  Protection unclear at 

best for nondeductible IRAs.

Virginia Va. Code Ann. § 34‐34(B) Yes Yes Yes Appears to protect inherited IRA/403bs, but confusingly, 

protection is to the "extent permitted under federal 

bankruptcy law", which begs question what that is after Clark 

v. Rameker .  Does this also limit contributory nonrollover 

IRAs to $1,245,475 limit?

Washington Wash. Rev. Code § 6.15.020 Yes Yes Yes Only for Washington citizens.  Protection extended to tracing 

even after assets distributed outside IRA/plan per recent 

legislation overruling Anthis  case.

West Virginia W.V. Code Ann. 38‐8‐1, 38‐10‐4 (in bankr) Yes Yes No IRAs, including SEP‐IRAs, exempt to extent no excess 

contributions made. Requires residency, tax qualified.  403bs 

protected to extent "reasonably necessary".

Wisconsin Wisc. Stat. Ann. § 815.18(3)(j) Yes* Probably Yes All IRAs/403bs protected, but must be "providing benefits by 

reason of age, illness, disability, death or length of service", 

do Roth IRA/403b qualify?   Also "owner‐dominated plan" 

exception (SEP/SIMPLE?). Inherited IRA not protected: In re 

Clark, In re Kirchen

Wyoming Wyo. Stat. Ann. §1‐20‐110 Yes Yes Yes Must be tax‐qualified, only protected to the extent 

contributions made "while solvent".   

© 2012‐2014 Edwin P. Morrow III, constructive criticism or updates appreciated: edwin_p_morrow@keybank.com or edwin.morrow3@gmail.com 

DEPARTMENT OF THE TREASURYINTERNAL REVENUE SERVICE

WASHINGTON. O .C . 20224

APR I 8 2002 200228025

y-. * (f=p. p&-7--

Legend:

Trustor =

Trust X =

Grandchildren =

Contingent Beneficiaries =

IRA Accounts =

Bank X =

State S =

Bank Y =

This is in response to a request for a private letter ruling dated May 1, 2001, as revised andsupplemented by subsequent letters, submitted on your behalf by your authorized representative.In support of your request, your authorized representative has submitted the following facts andrepresentations.

Trustor was born on May 13, 1933 and died on December 29, 1999. Prior to her death shehad established four IRA accounts (the IRA Accounts) at Bank Y. She named Trust X as thebeneficiary of the IRA Accounts. Upon her death the IRA Accounts are distributable to Trust X.Trust X is valid under state law and became irrevocable upon the death of Trustor. Bank X, astrustee of Trust X. had a complete copy of the original Trust X document and a complete copy ofthe first amendment to Trust X. The primary beneficiaries of Trust X are the Trustor’s two minorgrandchildren, (Grandchildren). Trust X provides that distributions to them will be made in thediscretion of the trustee for their support, health and maintenance until age thirty, at which time,

Page 2 200228025each such beneficiary may withdraw his entire share. If either such beneficiary should die beforeage thirty, the entire amount will be distributed to the other such beneficiary. However, if both suchbeneficiaries die before the age of thirty, Trust X, in its entirety, will be distributed to contingentbeneficiaries (Contingent Beneficiaries) who are much older. As of December 31 of the yearfollowing Trustor’s death, the oldest contingent beneficiary named in the trust was 67 and wasborn July 21, 1933.

Trust X contains provisions for the payment of funeral and last illness expenses as well asprovisions for the payment of taxes and trust administration expenses. It is represented that underthe applicable provisions of the law of State S, the trustee would be precluded from using IRAassets for all such purposes when other assets are available. It is further represented that Trust Xwas vested with substantial non-IRA assets and the trustee has at all times recognized its duty topay all expenses from the non-IRA assets and continues to believe that it must not pay any debtsor expenses from the IRA assets.

The following rulings have been requested:

(1) That a transfer of the IRA Accounts in a custodian to trustee transfer to one or morespecial IRA accounts in the name of Trustor with Bank X as IRA trustee, payable to Bank X astrustee of Trust X for the benefit of all primary and Contingent Beneficiaries thereof is not a taxabledistribution.

(2) That commencing in the year 2000, the required minimum distributions from the IRAAccounts payable to Bank X as trustee of Trust X must be based on the life expectancy of theoldest beneficiary, including Contingent Beneficiaries, named in Trust X.

Section 408(a) of the Internal Revenue Code defines an individual retirement account as atrust which meets the requirements of sections 408(a)(l) through 408(a)(6). Section 408(a)(6) ofthe Code states that under regulations prescribed by the Secretary, rules similar to the rules ofsection 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to thedistribution of the entire interest of an individual for whose benefit the IRA trust is maintained.Section 401(a)(9) of the Code sets forth the general rules applicable to required minimumdistributions from qualified plans.

Section 1.401 (a)(g)-1 of the Proposed Regulations, Q&A D-2A, provided that onlyindividuals may be designated beneficiaries for purposes of section 401(a)(9). A person who is notan individual, such as the employee’s estate, may not be a designated beneficiary. However, Q&AD-5 of section 1.401 (a)(g)-1 provided that beneficiaries of a trust with respect to the trusts interestin an employee’s benefit may be treated as designated beneficiaries if the following requirementsare met::

(1) The trust is valid under state law or would be but for the fact that there is no corpus.

(2) The trust is irrevocable or the trust contains language to the effect it becomesirrevocable upon the death of the employee.

(3) The beneficiaries of the trust who are beneficiaries with respect to the trusts interest inthe employee’s benefit are identifiable from the trust instrument.

(4) The documentation described in D-7 of this section has been provided to the planadministrator.

Page 3 200228025Section 1.401 (a)(g)-1 of the Proposed Regulations, Q&A D-6, provided that in the case in

which a trust is named as the beneficiary of an employee, all beneficiaries of the trust with respectto the trusts interest in the employee’s benefit are treated as designated beneficiaries of theemployee under the plan for purposes of determining the distribution period under section40l(a)(g)(B)(iii) and (iv) of the Code if the requirements in paragraph (a) of D-5 (above) aresatisfied as of the date of the employee’s death, or in the case of the documentation described inD-7 of this section, by the end of the ninth month beginning after the employee’s death.

Section 1.401(a)(9)-1 of the Proposed Regulations, Q&A D-7 provided, in general, that theplan administrator be provided with either a list of all trust beneficiaries as of the date of death orwith a copy of the trust document for the trust which is named as beneficiary of the plan as of theemployee’s date of death. In general, with respect to required distributions which commence afterdeath, the necessary documentation must be furnished no later than the end of the ninth monthbeginning after the death of the employee (IRA holder).

Section 1.401 (a)(g)-1 of the Proposed Regulations Q&A E-5(f), in short, provided that thebeneficiary of a plan or IRA may not change the beneficiary of said plan or IRA. If such a changeoccurs, the employee/plan participant or IRA holder will be treated as not having designated abeneficiary.

The facts of this case summarized above, indicate that Trust X is a valid trust whichbecame irrevocable at the death of Trustor. The beneficiaries of the trust are identified in the TrustX document and Bank X has a copy of Trust X and its first amendment. It is further representedthat Trust X will remain the beneficiary of the IRA Accounts after the proposed transfer andtherefore no change of beneficiary is contemplated. In addition, It is represented that IRA assetsdistributed to Trust X will not be used for the payment of expenses and that all the beneficiaries ofthe payments from the IRA Accounts to Trust X are individuals. Thus, the problem of non-individual beneficiaries does not arise.

Section 408(d)(l) of the Code provides that except as otherwise provided in this subsection, anyamount paid or distributed out of an individual retirement plan, including an IRA, shall be includedin gross income by the payee or distributee in the manner provided under section 72. RevenueRuling 78-406. 1978-2 C.B. 157. provides that the direct transfer of funds from one IRA trustee toanother IRA trustee does not result in such funds being treated as paid or distributed to theparticipant and such transfer does not constitute a rollover. Furthermore, the revenue ruling statesthat its conclusion will apply whether the transfer is initiated by the bank trustee or the IRA holder.However, the application of Revenue Ruling 78-406 to the subject transfer is contingent upon thetransferee IRA being set up in the name of the deceased IRA owner for the benefit of thebeneficiary, as is the case in this request. Accordingly, with respect to ruling request one, it isconcluded that a transfer of the IRA Accounts in a custodian to trustee transfer to one or morespecial IRA accounts in the name of Trustor with Bank X as IRA trustee, payable to Bank X astrustee of Trust X for the benefit of all primary and Contingent Beneficiaries thereof is not a taxabledistribution.

Section 40l(a)(S)(A)(ii) of the Code provides that a trust shall not constitute a qualified trustunder this subsection unless the plan provides that the entire interest of each employee will bedistributed, beginning not later than the required beginning date, in accordance with regulations,over the life of such employee or over the lives of such employee and a designated beneficiary (orover a period not extending beyond the life expectancy of such employee or the life expectancy ofsuch employee and a designated beneficiary).

- . . . ._ - ,,..-

Page 4 2oo228025Under section 40l(a)(S)(B)(ii) of the Code, if an employee dies before distribution has

begun in accordance with section 401 (a)(S)(A)(ii), the entire interest of the employee must bedistributed within five years after the death of the employee.

Section 401 (a)(g)(B)(iii) of the Code provides an exception to the five-year rule if anyportion of an employee’s interest is payable to a designated beneficiary over the life of suchdesignated beneficiary (or over a period not extending beyond the life expectancy of suchbeneficiary) and such distributions begin not later than one year after the date of the employee’sdeath. Section 1.401 (a)(g)-1 of the Proposed Regulations Q&A-C-3 provides that the exceptionprovided in section 40l(a)(g)(B)(iii) of the Code will be satisfied if the distributions to a non-spousebeneficiary begin on or before December 31 of the calendar year immediately following the year inwhich the employee dies.

In this case, benefits were payable to Trust X for the benefit of the designatedbeneficiaries at the date of Trustor’s death and distributions from the IRA Accounts to Trust Xcommenced before December 31, 2000. Therefore distributions to Trust X will qualify for theexception to the five-year rule under section 401(a)(g)(B)(iii) of the Code.

.Section 1.401(a)(9)-1 of the Proposed Regulations, Q&A-E-5(a)(l), provides, generally,that if more than one individual is designated as a beneficiary with respect to an employee as ofthe applicable date for determining the designated beneficiary, the designated beneficiary with theshortest life expectancy will be the designated beneficiary for purposes of determining thedistribution period.

Section 1.401(a)(9)-1, Q&As, of the Proposed Regulations E-5(b) and E-5(e)(l), providerules governing contingent beneficiaries. Pursuant to these sections of the regulations,beneficiaries whose entitlement to the employee’s benefit is contingent on any event other thanthe death of a “prior” beneficiary must be considered for purposes of determining whichbeneficiary has the shortest life expectancy and, as such, who is the designated beneficiary forpurposes of section 401(a)(9) of the Code. In this case, the discretion the trustee of Trust X haswith respect to the payment of trust amounts to the Grandchildren, who are the primarybeneficiaries, is a contingency over and above the death of a prior beneficiary. The Trust Xlanguage does not require that the payments from the IRA Accounts be paid to the Grandchildrenon an annual basis and therefore Trust X language does not preclude there being an accumulationof distributions from the IRA Accounts. Under such circumstances, the Contingent Beneficiariesmust be considered in determining the beneficiary with the shortest life expectancy. Accordingly,with respect to ruling request two, it is concluded that commencing in the year 2000, the requiredminimum distributions from the IRA Accounts payable to Bank X as trustee of Trust X must bebased on the life expectancy of the oldest beneficiary, including Contingent Beneficiaries, namedin Trust X.

The above rulings are contingent upon the continued compliance of the IRA Accounts andany transferee IRAs with section 408 of the Code

This ruling is directed solely to the taxpayer who requested it. Section 6110(k)(3) of theCode provides that it may not be used or cited by others as precedent,

The original of this ruling is being sent to your authorized representative in accordance witha power of attorney on file in this office.

Page 5

The author of this ruling is9632.

200228025who may be reached at (202) 283-

Sincermours. M AA

ErMJloyee Plans Technics-lTax Exempt and Governm2nt

Entities Division

Enclosures:Deleted copyForm 437