WHO TO CONTACT DURING THE LIVE PROGRAM For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code. • To earn full credit, you must remain connected for the entire program. Estates, IRAs, RMDs, and Beneficiaries: See-Through Trusts, Inherited IRAs, Roth Conversions, and the SECURE Act THURSDAY, NOVEMBER 21, 2019, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY
Transcript
WHO TO CONTACT DURING THE LIVE PROGRAM
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
Estates, IRAs, RMDs, and Beneficiaries: See-Through Trusts,
Inherited IRAs, Roth Conversions, and the SECURE Act
THURSDAY, NOVEMBER 21, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality FOR LIVE PROGRAM ONLY
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
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MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
IRA Planning Pitfalls
Leon LaBrecque, JD, CPA, CFP®, CFA
Planning Considerations
6
Client’s cash flow requirements
Available options
• PRESENT and FUTURE (SECURE)
Tax consequences
Timing of distributions
Beneficiaries (SECURE)
(see next page) →
Participants in qualified plans, §403(b) plans, and owners of IRAs
Required Beginning Date = date
distributions must begin
50% excise tax on shortfalls
Minimum Distributions
7
Minimum Distributions
First distribution by April 1 of year after you reach age 70 ½ (72)
• December 31 subsequent years
• If delayed to April 1, then 2 distributions the 1st year (tax torpedo)
Participant must determine minimum distribution each year
• Participant can always withdraw more
SECURE changes date to age 72
(see next page) →8
Minimum Distributions
Qualified plans and §403(b) plans can defer to April 1 following the year of retirement, if working after age 70 ½ (72). Option is:
• NOT available for IRAs
• NOT available if own 5% or > of the business that sponsors plan
– NOT available for self-employed individuals
• ONLY available for employer’s plan
• “Retirement” is not defined
9
Aggregation Rules
• For IRAs, aggregate accounts, take RMD for all from one or many
• For Qualified Plans, calculate and take RMD from each plan
• Not applicable to Roth IRAs while owner is alive
• Is applicable to DRAC in a 401(k)
10
Subsequent Distributions
“The first dollars distributed are deemed to be part of the minimum required distribution until the minimum required distribution has been entirely distributed.”
• Treas. Regs. §1.402(c)(2), A-7.
11
Waivers of Excise Tax
Taxpayer must establish:
(i) shortfall due to reasonable error; and
(ii) reasonable steps are taken to remedy shortfall
12
Minimum Distribution Rules
Qualified pension and profit-sharing plans
Individual Retirement Accounts
Deferred compensation under §457
§403(b) annuity contracts
Custodial accounts
Retirement income accounts
13
Required Beginning Date
April 1 of the calendar year following the later of
• Year employee (IRA owner) attains age 70 ½ (72), or
• Year employee retires (employee)
14
Death AFTER Required Beginning Date—Non-spouse Beneficiary
• Distribution period = remaining life expectancy of designated beneficiary
• Life expectancy based on age of designated beneficiary in the year following the year of the death
• SECURE eliminates stretch and institutes a 10-year required payout period.
– Will require changes to estate plans and current beneficiary designations
– Will support Roth strategies pre and post retirement
– Will have serious tax consequences to larger IRAs and accounts
– Roths and Traditional IRAs
15
Death AFTER Required Beginning
Date—Spouse
Beneficiary
Surviving spouse - distributions over remaining single-life expectancy, recalculated each year
• Distributions must begin in the year following the year of death.
Can rollover plan balance and wait until age 70 ½ (72) to begin minimum distributions
• Election only if surviving spouse is sole beneficiary
16
Death AFTER Required Beginning Date—No Designated Beneficiary
Distribution over remaining distribution period of deceased owner
17
Death BEFORE Required Beginning Date—Spouse Beneficiary
• Can receive distributions over remaining single-life expectancy
• Can rollover balance and wait until age 70 ½ (72) to begin distributions
18
Death BEFORE Required Beginning Date—Non-Spouse BeneficiaryDistribution period is remaining life expectancy of beneficiary
• life expectancy = age of beneficiary in year following year of death
SECURE changes this to a ten-year rule: all distributions must be made within 10 years
• Will require changes to estate plans and current beneficiary designations
• Will support Roth strategies pre and post retirement
• Will have serious tax consequences to larger IRAs and accounts
• Roths and Traditional IRAs
19
Death BEFORE Required Beginning Date—
NO Designated BeneficiaryAccount must be fully distributed before end of
tenth year following year of death
21
Identifying Designated Beneficiary
Designated by:
• Terms of plan
• Affirmative election by owner
Individuals only (not an entity like a charity)
Must be Identifiable
• By name
• Must be possible to identify member of a class with shortest life expectancy
State law does NOT make designated beneficiary
(see next page) →22
Identifying Designated Beneficiary
Non-Spouse
• As of 9/30 of calendar year following year of death
• May disclaim (might be very good under SECURE)
Surviving Spouse
• Determined by state law
• May treat account as own or defer RBD
Spouse dies before RMD - spouse’s designated beneficiary(s) relevant
(see next page) →23
Identifying Designated Beneficiary
Multiple Beneficiaries
• Shortest life expectancy applies
• With SECURE, life expectancy irrelevant
Trusts
• Treated as designated beneficiaries
– Valid under state law
– Irrevocable
– Trust beneficiaries identifiable
– Required documentation provided to plan administrator
• Under SECURE, much more relevant
Multiple Trusts
• Shortest life expectancy applies
24
Separate IRA Accounts
• RMD from one IRA may be distributed from another IRA
• RMD calculated for each account separately
• Individual owned accounts may be aggregated
• Accounts for beneficiary of same decedent may be aggregated
• Can NOT aggregate owner accounts and beneficiary accounts
25
Miscellaneous Rules
You can delay RMDs from the company QP if still working
• Does not apply if > 5% owner
If you die before RMD in year of death, beneficiary must take and then take RMDs on their life expectancy next year
26
Issues with IRAs
• IRA Trusts: Conduit and Toggles
• Misallocating IRA and Taxable Assets to Beneficiaries
• Roth Conversion and Estate Tax
• Roth Conversions and bracket topping
• Roth Conversions and §199A
• Beneficiary Error: Naming the Estate
• Beneficiary Error: Deceased Beneficiary
• Beneficiary Error: Not Enough Layers
27
Issues with IRAs
• Missing the 60 Day Rule
• Beneficiary Error: Mixing Kids and Charities in the Same IRA
IRA Trusts: Protect the Kids From the Money and the Money From the Kids
• Clark v. Rameker: Assets of inherited IRA are subject to the claims of the beneficiary’s creditors
• Spendthrift clause in IRA beneficiary trust
• Conduit: Pass-through RMD to beneficiaries
• Toggle: trustee can hold RMD or pay more
• SECURE: all will now be toggles
• Tax advantages and creditor protection
29
Misallocating IRA and Taxable Assets to Beneficiaries
Issue: Multiple beneficiaries with completely different tax situations
Example:
• $3M: $1M trust, $1M Roth, $1M Trad IRA
• 1 kid low-bracket, 1 kid high-bracket, charity
• Split three ways, high-bracket kid gets hit with income from IRA, charity wastes Roth
• Optimize: Traditional IRA to charity, Roth and trust to kids
30
Roth Conversion and Estate Tax
On taxable estate, Roth conversion can reduce estate taxes
• Estate is reduced by the income taxes paid on the conversion
• Roth conversion eliminates need for RMD
• Also eliminated IRD on conventional IRA
• Can equalize after-tax distribution to bracket-disparate beneficiaries
SECURE: Roth conversion now much more relevant
31
Roth Conversions and Bracket Topping
Convert enough IRA to Roth to reach the edge of the bracket
Example:
• Couple, over 59 ½ and under 70 ½, have $1M IRA, two pensions, and two Social security payments
• AGI without IRA distributions is $73,251
• 12% bracket
• About $31,400 of room in the 12% bracket
• $3,768 fed tax, possible state tax
• No RMD on Roth, tax free to bennies
32
Roth Conversions and §199A
• New pass-through provisions (§199A) provide a 20% deduction for pass-through income
• Lesser of QBI or Taxable income
• Safe harbor of $157,500 or $315,000 TI
• QBI bigger than TI, use Roth to up TI
Example: Tom has QBI from his proprietorship of $150,000, taxable income of $120,000. Roth conversion increases taxable income, increases QBI deduction
33
Beneficiary Error: Naming the Estate
Naming the estate as a beneficiary is problematic for a variety of reasons
• The Will controls who gets the property
• Current law: no stretch: the 5-year rule applies, beneficiaries pay taxes sooner
• SECURE:eliminates stretch, replaces it with a 10-year rule
• Probate applies
35
Beneficiary Error: Deceased Beneficiary
• Things can get ugly when a beneficiary dies and beneficiary designation is not changed
• PLR from 2015: Son dies before required beginning date, named Dad as beneficiary. Dad had died 19 years earlier. Son married subsequent to Dad’s death
• No named beneficiary so estate is beneficiary
• Spouse asks IRS to rule that she can do a spousal rollover (instead of getting stuck with 5-year rule)
• She gets ruling at a cost of $10,000, plus attorneys’ fees
36
Beneficiary Error: Not Enough Layers
• Some people have no designation, thereby leaving the estate as beneficiary, which is a problem
• Primary: advantage usually for spouse
• Secondary: kids by percentages (not $ unless there is a residual % benny) SECURE: Likely name trust as secondary
• Trusts: RLT needs ‘see-through’ provision
• Ancillary: Issue clause
37
Missing the 60-Day Rule
• IRA withholdings are deemed for the whole year, even though made at the end of the year
• One 60-day rollover in a 365 day period
Example: Leon owes $80K in taxes over estimates, takes $80K distribution, withholds $80K, and pays back the $80K within 60 days
38
Beneficiary Error: Mixing Kids and Charities in the Same IRA
• Mixing charity and individual beneficiaries can be a mistake
• Charitable $ distributions can thwart a stretch on the human beneficiaries
• Better bet is to separate IRAs into a charity IRA and a stretch IRA. Name each child separately or use an IRA trust
• Revocable Living Trusts (not IRA trust) need a ‘see-through’ or ‘pass-through’ provision to allow the stretch of an inherited IRA to the beneficiaries
• Make sure the RLT has an appropriate provision
• Age is the oldest living beneficiary, which can bollox up a trust where you have young and old beneficiaries
• Naming beneficiaries directly may be better bet, or splitting IRAs
40
Likely changes to trusts under SECURE
• Still need See-through
• Asset protection. Need a spendthrift clause due to the Rameker case. (Inherited IRAs subject to claims of beneficiaries’ creditors)
• Allocation of asset provisions
– Roth, traditional and other assets
– Allocation amongst beneficiaries
• Modifying timing of distributions
• Trustee can make disclaimers
41
Opportunity: IRA to HSA Rollover
• You can fund a Health Savings Account (HSA) with an IRA
• Takes assets that would have been taxed and turns them into tax-free assets (as long as you have medical expenses)
• Can do $7,000 for 2019, plus $1,000 if 55 or older (this is for a family, $3,500 for single)
• One time deal
42
Opportunity: Kid Roth
Fund Roth for (with) child
Example:
• Kid is making $6,000 a year in summer jobs (or working for parent’s business)
• Parents contribute (or hide) $6,000 a year to Roth for kid
• Continue through age 25 (10 years)
• Investments make 6%
• Kid has ~$79,000 by age 25
• Leave to 65, over $813,000
• Kid keeps saving: $1.637,000 at 65
• Remember FIFO Rule
43
Opportunity: Mom Roth
Roth IRAs work best when the deposits are from a low tax bracket and withdrawals are from a high tax bracket
Example:
• Roth Conversion from IRA holder (ex. Parent) in a low tax bracket with a beneficiary in a high tax bracket
• Woman in her 80’s in a nursing home (significant long-term expenses)
• Has Conventional IRA taking RMDs with a tax bracket of zero
• Her children were paying taxes. Roth was converted in two steps to gear her into 10% tax bracket
• End result was essentially a tax-free Roth (no more RMDs)
44
Opportunity: Dynasty Roth
Serial Roth conversions to bracket–top, accumulate Roth, leave to second (or third) generation
Example:
• 62 year-old couple, lots of assets, convert $61,000 a year to Roth's to bracket top
• By 70, they stop converting and have accumulated, at 6%, $607,000 (taxes cumulative were $59,200)
• Die at last survivor age 90, with $1,949,000, leave that to twin 18 year-old grandsons in an IRA Trust
• Under current law, grandsons get RMD tax-free, for life. At their age 65, their two Roth's are worth about $9.7M, and they have taken $7.8M of distributions
• SECURE Version: Grandsons leave it in the Roth for 10 years (LOL) and grow it to $3.5M.
45
Opportunity: Qualified Charitable Distribution
• Taxpayers over 70½ with IRAs can make charitable contributions through an IRA
• Up to $100K can be used
• Offsets floors:
– Social Security MAGI
– Medicare B and D floors (IRMAA)
– Medical
• State tax savings
• Superior on most cases to itemized
46
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