Who Gets Your IRA?

Do you have a will, a trust, and retirement accounts? Who will get your retirement assets?

Let’s say that your will says that everything goes to your spouse, your trust says that everything goes to your children, and the beneficiary form for your IRA says that everything goes to your spouse and your children equally. Who gets your IRA? It will go to your spouse and your children equally.

IRAs pass to beneficiaries through the beneficiary form. They don't pass by way of your will unless you name your estate as your beneficiary or sometimes, in what should never be the case, if you fail to name any beneficiaries at all. They also never get to your trust unless you name your trust as your beneficiary. You could have the best trust in the world in place to receive distributions from your IRA after your death, but if you don’t file a beneficiary form naming that trust as your beneficiary, it will never see any IRA distributions.

Whenever there are changes in your family situation, you need to think about whether your beneficiary forms need to be updated. This is especially true after a divorce or a remarriage. If you do not want retirement benefits going to an ex-spouse, then you probably have to update your beneficiary forms. If retirement benefits are meant to go to children and not to a newly married spouse, then you may need to have the new spouse sign a waiver of his or her rights to your retirement benefits. Without a waiver, the benefits might go automatically to your new spouse, cutting out your children. This is almost always true for employer plan benefits.

When there is no beneficiary form on file, you are really taking your chances. Now your retirement assets will go to whoever the company has named for you in the default language in the documents for the account. It could be a spouse; it could be your estate.

Do your loved ones a favor and make sure your retirement assets are going to the right person - the one you planned on receiving the benefits. Check those beneficiary forms.

-By Beverly DeVeny and Jared Trexler

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Using the Internet as Your Financial Planner

The Internet is a great thing. You can probably find any piece of information you want somewhere out there. It is only a matter of asking the right question. My mother thinks I look everything up on the Internet.

However, along with great information available on the worldwide web, there is a lot of misinformation. Some things are just plain wrong and some are very misleading. The Internet is no substitute for expert financial and retirement planning advice - as a recent bankruptcy court case proves.

Mom is 71, still working, and has $200,000 inherited from her husband. She relied on her husband and her daughter for financial advice. In an effort to protect her assets, Mom transferred the $200,000 to a Merrill Lynch account in the name of her daughter.

Then the stock market started to drop and the account was losing value. In an attempt to further protect Mom’s assets, the Daughter did an Internet search and came up with information on the Ultra Trust.

The Ultra Trust was sold as a financial instrument to “avoid creditor claims of fraudulent conveyance and civil conspiracy to divest yourself of valuable assets.” Mom and Daughter transferred the Merrill Lynch assets into the trust and Mom also transferred ownership of her home to the trust.

Then the real estate bubble burst and Daughter found herself in financial difficulties, which lead to her declaring bankruptcy. The Ultra Trust became a disputed asset of the bankruptcy.

To make a long story short, Mom and Daughter claimed that the assets of the trust were Mom’s but the court found that what was left of Mom’s $200,000 had become an asset of Daughter’s at the time of the transfer of the funds to the Merrill Lynch account. The Court also found that the Ultra Trust was not so Ultra and the balance of “Mom’s” funds would be included in Daughter’s assets in the bankruptcy proceedings.

In this case, Mom in Arizona and Daughter in Virginia met up, through the Internet, with a non-attorney financial planner in Massachusetts to implement an estate plan to protect Mom’s assets. Daughter “bought” an Ultra Trust through the Internet. She used the attorney recommended by the planner to draft the trust. There was no independent review of any of the strategies or documents by any independent professional.

When it comes to the tax code, any planning is incredibly complicated. To protect yourself, your loved ones, and your assets, you really need to consult with a competent advisor - a financial planner, attorney, and/or CPA. In many cases you need a specialist, an elder law attorney or a retirement specialist. Do-it-yourselfers oftentimes end up in incredible messes that do not accomplish their goals and that end up costing them a lot of money.

Article Highlights:

• The Internet is a fascinating, informative, yet dangerous substitute for sound financial advice (re: Woodworth - Bankruptcy Court)
• Mom (age 71) wanted to protect her assets
• The Daughter made some unwise moves that cost her Mom  her nest egg

- By Beverly DeVeny and Jared Trexler

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Slott Report Mailbag: Can I Contribute to a Roth IRA?

This week's Slott Report Mailbag includes some of the more popular questions we receive each week. Can I contribute to a Roth IRA? What happens to my deceased parent's required minimum distribution (RMD)? We answer those questions and more in the question-and-answer below.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

Send questions to [email protected]

1.

I made a Roth contribution for this year, but my accountant says I will make too much money to be eligible to make a contribution. What are the rules for making Roth contributions? I thought everyone could make a Roth contribution now.

Answer:
As of 2010, everyone can do a Roth conversion, but the rules for Roth contributions did not change. So, even though you can convert millions in your IRA accounts to a Roth IRA, you may not be able to contribute a mere $5,000.

First of all, you must have earned income or compensation in order to make a Roth contribution. Social Security, pension payments, rental income, interest and dividends are NOT earned income - even if you worked hard to get them.

You can make Roth contributions even after you are 70 ½, as long as you have earned income.

There are income limits for making Roth contributions. For 2013, if you are married filing jointly and your income is more than $188,000 you cannot make a Roth contribution. The ability to make a contribution phases out for income between $178,000 to $188,000. If you file your return as single or head of household, the ability to contribute phases out between $112,000 and $127,000. If you are married, filing separate, the phase-out range is $0 to $10,000. The formula for calculating the amount of your contribution when you are in the phase-out range can be found in IRS Publication 590.You can find that on the IRS website, www.irs.gov. On the left hand side of the screen, click on Forms and Publications.

The numbers for the phase-out ranges are not your gross income; they are your modified adjusted gross income (MAGI).

2.

My mother died this year before taking the full amount of her required minimum distribution (RMD) from her IRA. What happens now?

Answer:
The full amount of the required distribution must be taken in the year of death. The beneficiary named on the beneficiary form for the IRA must take any distribution not taken. It does not go to the decedent or on their return. It does not go to the estate unless the estate is named on the beneficiary form. When there are multiple beneficiaries, generally the RMD amount will be split between them according to the percentages of the account that they inherit. But if one beneficiary wants to take out their share in full, that distribution can be used to satisfy any remaining RMD. The general rule is that the first funds out of the IRA account (that are payable to an individual), will satisfy the RMD.

3.

I have an irrevocable trust named as my IRA beneficiary. Does that mean I can't change my beneficiary?

Answer:
No, you can still change the beneficiary. The trust may be irrevocable, but chances are your beneficiary form is not. So if you are no longer happy with the irrevocable trust as your beneficiary, simply contact your IRA custodian and/or advisor and name a new beneficiary. You can even name a new irrevocable trust.

- By Joe Cicchinelli and Jared Trexler

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Slott Report Mailbag: Can I Perform More Than One Taxable Roth Conversion Per Year?

This week's Slott Report Mailbag comes LIVE from The Cosmopolitan in Las Vegas as we get ready for Ed Slott's 2-Day IRA Workshop this Saturday and Sunday.  We answered questions on Roth conversions, the Roth IRA 5-year rules, and where an IRA goes at your death. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Is it possible to perform more than one taxable Roth conversion during one 12-month period? Thanks you.

Send your questions to [email protected]

Amy Brocious

Answer:
Yes it is. The one-rollover-per-year rule does not apply to conversions to Roth IRAs.

2.

I began my 401(k) Roth deferrals in 2005 and contributed 3,000. In 2010, I put 5,000 in a Roth IRA. I rolled the 401(k) Roth funds into Roth IRA in 2011 (due to loss of job). Then later in 2011, I rolled the entire Roth IRA to another company (where current plan is).

Does the 5-year clock start over in 2010, 2011? Or does each Roth type (IRA and 401(k)) have 2 different 5-year clocks? Thank you.

Answer:
The rules are a bit complicated, but basically the rollover from your Roth 401(k) to your Roth IRA in 2011 was six years from when you contributed in 2005. So if you were age 59 ½ or older when you did the rollover, then the rollover is considered a qualified distribution. For a qualified distribution of a Roth 401(k) to a Roth IRA, the entire amount of the distribution will be treated as a regular contribution (basis) and is available for distribution tax free. The 5-year Roth IRA holding period would not apply to these funds.

If you were not age 59 ½ or older when you did the rollover from the employer plan, then the rollover is considered a non-qualified distribution. When a non-qualified distribution is rolled over to a Roth IRA, the portion of the distribution that constitutes a non-taxable return of investment in the contract (your Roth 401(k) deferrals) is treated as contributions (basis) in the Roth IRA for the purpose of the ordering rules. The 5-year holding period for the distributions of earnings on those funds will be the period applicable to the Roth IRA which started in 2010.

3.

I have a substantial IRA that goes into a trust when I die and whereby my spouse will continue to draw the income from the IRA upon my death and upon her death the IRA goes to my grandchildren. However, I have been told that if I die, the IRA must be liquidated and that the only way it would not be liquidated is if my wife is the sole beneficiary. My question is two fold. Is this correct? Or is there another way that my wife could benefit from the income generated by the IRA without the government taking a big chunk?

Thanks
Pat B

Answer:
No it’s not correct. Remember that your IRA does NOT “go into” a trust at your death. The trust becomes the beneficiary of the IRA and only has to take RMDs (required minimum distributions) from the inherited IRA each year. There is no rule that says that if your wife is not the sole beneficiary, the IRA must be liquidated. If the trust is a look-through trust, then death distributions will be made using your wife’s single life expectancy. If the trust is not a look-through trust, then death distributions will be paid over five years if you die before your required beginning date (RBD, generally April 1 of the year after attaining age 70 ½), or paid over your remaining single life expectancy if you die after your RBD.

- By Joe Cicchinelli and Jared Trexler

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Flexibility in an Uncertain Estate Planning World: IRAs and Trusts

We are in a now all too familiar position. We don't know what the estate tax rules will be in 2013. The exemption amount is scheduled to drop back to $1,000,000 per person, and it will not be portable. We have no idea what Congress may or may not do about the situation. And, because 2012 is an election year, they may not do anything until late in 2013 or perhaps early in 2014. Do you need a trust to protect your estate tax exemption, or don't you? Should you name a trust as the beneficiary of your IRA, or not?

My crystal ball is not working. Is yours?

One way to gain some flexibility is to name both a primary beneficiary and a contingent beneficiary for your IRAs and other retirement accounts. This way, at the death of the IRA owner, the beneficiary can disclaim the IRA and it will pass to the contingent beneficiary. One beneficiary can be the spouse and the other can be the trust. The beneficiary has nine months from the date of death to assess the current estate tax rules and determine which beneficiary will get the most advantages from the inherited IRA. You can look at the income needs of the spouse, sources of income, the estate tax implications of the spouse inheriting the IRA, the income tax implications of required distributions, and how the stretch will work for the beneficiaries involved. Then you can make an informed decision and get the best deal available for the beneficiary.

The spouse can be the primary beneficiary with the trust as contingent, in which case when the spouse disclaims the IRA, the IRA passes to the trust beneficiary. Or, the trust can be the beneficiary with the spouse as contingent. Then if the trust disclaims, the IRA will pass to the spouse.

IRAs, trusts, and disclaimers are complicated estate planning topics. Be sure to consult with knowledgeable advisors before naming a trust as your IRA beneficiary and be sure the beneficiary consults with an attorney before doing a disclaimer. You can find the names of Ed Slott-trained advisors on our website, www.irahelp.com.

-By Beverly DeVeny and Jared Trexler

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Beneficiary Form Mistakes: How to Avoid Losing Your ENTIRE Retirement Fortune

Ed Slott, America's IRA Expert, details the importance of having a current beneficiary form and describes how missing this key point can be costly for your intended retirement account beneficiaries. This IRAtv video goes through naming beneficiaries, using trusts as beneficiaries and lessons to learn to avoid costly mistakes and keep retirement plans updated.



- By Ed Slott and Jared Trexler

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IRA Trust, Transfer and Beneficiary Questions Highlight Mailbag

This week's Slott Report Mailbag really strikes at the importance of proactive planning. One concerned consumer is worried his mother won't receive any of her deceased husband's IRA and others are inquiring on taxes, penalties and transfers.  Retirement planning, IRAs and the nuances that come with them are so important to all families.  We hope you are enjoying the summer and learn something from the questions, answers and situations below.

1.

Send your questions to [email protected]

Presently my spouse and my two children are the beneficiaries of my IRA. I also have a living trust. I would like to make my trust the beneficiary, but my advisors tell me that it will cost more in taxes to do this. My trust would have more control over the inherited money for my children in case of divorce. What do you advise? The IRA is over 2 million with no basis.

Answer:
It depends on what type of trust it is. If the trust is what’s known as an accumulation or a discretionary trust where the trust does not have to pay out all IRA distributions to the trust beneficiaries, then whatever IRA distributions not paid out are accumulated in the trust and taxed to the trust at the higher trust tax rates. However, if the trust is a conduit trust, the trust beneficiaries must receive all IRA distributions from the trust and they are taxed at the beneficiary’s lower personal income tax rates. All required distributions to the trust will be made using the life expectancy of the oldest trust beneficiary. At the death of that beneficiary, required distributions continue to be made to the trust using that life expectancy. The trust would also need to have the appropriate language in it regarding the payment of debts and expenses of the estate and for the Uniform Principal and Income Act (UPAIA) so that it will work with the IRA rules.

2.

Can I transfer money from my IRA to my husband's Roth IRA? I am 35, and he is 36.

Thank you!

Gail Clements

Answer:
No. The only way your IRA funds can be transferred to your husband’s IRA is in a divorce or after your death. Even then, it would have to be transferred to a similar IRA, for example an IRA to IRA or a Roth IRA to another Roth IRA. In this case, you cannot transfer your IRA into your husband’s Roth IRA.


3.

Hi Mr. Slott,

My father just passed away July 10. We are still mourning and trying to put our lives back together following a 10-week hospitalization. I was contacted by my parents’ broker, who told me we had problems with my Dad's IRA. We changed brokerage firms in 2009, the broker came to my parents’ home and we set up their accounts. Both my Mom and Dad have individual IRAs and then a joint account. The call I received was that my sisters and I were beneficiaries on my Dad’s IRA, meaning my mother, (age 81) his surviving spouse, gets nothing. My parents are not wealthy people and that money is needed to secure my mother’s care and future. What do I do? Is the broker accountable at all for setting up a bad account? Do I need a lawyer, if so what type of lawyer?

Any help is greatly appreciated

Respectfully,
Debra Miller

Answer:
You and all your sisters as beneficiaries of the IRA should consider disclaiming the funds. There are special rules for disclaiming an IRA, such as the disclaimer must be filed within nine months of your father’s death, and other rules. Disclaiming an IRA will involve the use of an informed financial advisor and an estate planning attorney. Before you disclaim though, make sure you know who will get the funds. Check the broker’s document to see if it addresses a disclaimer or has a default beneficiary.

-By Ed Slott, Joe Cicchinelli and Jared Trexler

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IRA Beneficiaries, IRA Rollovers, Minor Beneficiaries Highlight Mailbag

Two Slott Report Mailbags in one week?! Yes, we are here a day earlier than normal to answer a few consumer questions (they are piling up) on IRA rollovers, IRA beneficiaries and naming minors as IRA beneficiaries. Remember to send your questions to [email protected]. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Send questions to [email protected]

What is the most tax efficient way to reinvest funds that have been received from a beneficiary IRA account that must be distributed by the 5-year mark. I received a rather large amount from my father in his Traditional IRA, but because I am rather young I would like to preserve as much of the balance of his IRA as I can while still paying out the 20% I will owe on required minimum distributions (RMDs). Any ideas?

Answer:
The death distributions you receive from your dad’s IRA are taxed as ordinary income when received. There is no 10% early distribution penalty on distributions made to beneficiaries. Taking out the funds gradually over 5 years would lessen the taxes you’ll owe versus taking a lump-sum distribution. As a non-spouse beneficiary you cannot avoid the taxes by rolling the funds over to your own IRA.

Because you are young, you might consider using the funds to make annual Roth IRA contributions, limited to $5,000 per year, assuming you have earned income which does not exceed certain limits (e.g., $110,000 for a single filer for 2012). The interest earned by those Roth IRA contributions then would have many years to compound tax-free and would result in a nice nest egg for your retirement. You should consider consulting with a financial advisor for options on investing the balance of the funds you will receive.

Your situation is a reminder that IRA owners should be sure to have named beneficiaries for their accounts. Named beneficiaries have the option to take distributions over their life expectancies and are generally not forced to take out the entire balance over five years.

2.

Hello,

Neither my husband or I are working.

My husband is 61 and we are living primarily on withdrawals from his rollover IRA. I am 57. If my husband were to die before I am 59 1/2, would I owe the 10 percent penalty for money I would need to access from his IRA? I am the sole beneficiary. Would I need to keep it separate from my own IRA?

Thank You!

Jan Schilling

Answer:
You would not owe the 10% penalty so long as you do not make his IRA your own IRA before you turn age 59 ½. After his death, you would leave the IRA in an inherited or beneficiary IRA because death distributions, while taxable, are exempt from the 10% early distribution penalty regardless of your age at the time of the withdrawal. A beneficiary IRA must be kept separate from your own IRA. Once you turn age 59 ½, you could then make that IRA your own IRA.

3.

I would love to leave my Roth IRAs to my grandchildren as stretch IRAs, but I hear that most young people who inherit an IRA cash it out immediately and spend it, thus losing the advantage of the stretch. I guess that the temptation of a quick payout of money is too much for them, or they don't understand or care about the advantage of the stretch IRA. Is there any way to structure a future inherited IRA to prevent this from happening?

Or, is it possible to leave an IRA to a trust that mandates minimum distributions, or defines a payout schedule, thus preserving the concept of a stretch IRA? How would the RMD be calculated, as the trust doesn't have a life expectancy?

Answer:
The law mandates that after you die, your Roth IRA beneficiaries must take death distributions using either the five-year rule or single life expectancy (stretch IRA). They can take a lump-sum withdrawal at any time. The only way to control the disposition of IRA funds after your death is to have a trust named as the beneficiary (like you mentioned). If the trust meets certain rules, called the look-through rules, then the required minimum distribution (RMD) will be calculated using the age of the oldest beneficiary of the trust.

This is a very complicated area of planning. You need to use advisors with knowledge of both the IRA and the trust rules. You can find a listing of Ed Slott- trained advisors on our website, www.irahelp.com.

-By Joe Cicchinelli and Jared Trexler

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IRAs are Not Transferable During Your Lifetime

Can you put your IRA into your trust? NO
Can you transfer it to your spouse? NO

An IRA is an individual retirement arrangement (and you thought the "A" stood for account!). A trust is not an individual - even if it is using your Social Security number as its tax ID number. Transferring the IRA into your trust is a taxable event. You will owe income tax on the account balance transferred to the trust. Then you won’t have to worry about the IRA rules anymore because you won’t have an IRA. Your trust will simply have more assets.

An IRA is not transferable or assignable during your lifetime. You will find this in every IRA agreement, usually on the first or second page. You cannot give it to your trust, your spouse, or anyone else. It is yours until you die.

Of course there is an exception to the rule as there so often is with IRA rules. An IRA can be split between spouses as part of a divorce. The terms must be spelled out as part of the divorce decree or separation agreement. You can read more about how to split IRAs during a divorce in our white paper on the topic, found in our online store.

-By Beverly DeVeny and Jared Trexler

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Minor Beneficiaries Q and A

There are many questions and circumstances to discuss when dealing with minor beneficiaries. This question-and-answer session is aimed to fill in some of the blanks and start a discussion with your financial advisor based on a foundational depth of knowledge.

Question: Can I leave my IRA to a minor beneficiary?
Answer: Yes. There is no minimum or maximum age required to be an IRA beneficiary. In fact, an IRA beneficiary doesn’t even have to be a person. It could be a charity, trust or other entity, though the post-death distribution rules that apply are vastly different.

Question: Should I name a minor child directly or should I name a trust?
Answer: This is a personal decision and depends on a number of factors including the size of your IRA and how much post-death control you want to have over the account. If you only need to have minimal control over the inherited IRA until the beneficiary reaches the age of majority (18 or 21, depending on state law), you can name a UTMA/UGMA account as the beneficiary. If you want to exercise greater levels of post-death control or wish to have some control over the inherited IRA beyond the minor’s age of majority, a trust may be necessary. Using a trust as an IRA beneficiary can be complicated though, and should be discussed with your estate planning attorney, tax professional and financial advisor.

Question: Are there any tax advantages to naming a minor as the beneficiary of my IRA?
Answer: Yes, provided the inherited IRA custodian will allow “stretch” IRA distributions. Beneficiaries named on the beneficiary form and certain trust beneficiaries can stretch distributions from inherited IRA accounts over their life expectancies (stretch IRA). The younger the beneficiary, the longer their life expectancy and therefore, the smaller the annual required minimum distributions (RMDs) and longer the account can grow on a tax-favored basis.

Question: Can I name more than one child as the beneficiary of my IRA?
Answer: Yes, provided your IRA custodian accepts multiple beneficiaries. There is no minimum or maximum number of beneficiaries required under the law. In general, if you have more than one child as the beneficiary of your IRA, all your children must use the age of the oldest child to calculate RMDs. However, there’s an exception to this rule that would allow each of your children to use their own life expectancy to calculate RMDs provided they split the inherited IRA into separate inherited IRAs by December 31st of the year after they inherited the account.

-By Jeff Levine and Jared Trexler

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Beneficiary Issues for the Sandwich Generation

The "sandwich" generation is those who are raising their children and also taking care of their parents. They are sandwiched by their care-taking responsibilities. They are likely to have their own 401(k)s or other employer plans and IRAs, and they are likely to be the beneficiaries of their parent’s retirement assets. Again, they are sandwiched - they are owners with beneficiaries and they are also beneficiaries. Here is what these caretakers need to know about both sides of the equation.

First and foremost, they need to be sure there are beneficiary forms for all retirement assets, both the ones their parents have and for their own assets. They need to make sure that Mom and Dad’s assets have living beneficiaries named and that they do not go through the estate. Retirement assets should never go through an estate. That means they have to go through probate and they could be subject to claims of creditors. Trusts can be problematic and you should talk to an advisor with expertise in distributing retirement assets if you want to name a trust as a beneficiary. On the other hand, for the caretaker’s own assets, a trust may be necessary if their retirement assets are being left to minor children. Minors cannot sign the necessary documents to establish an inherited IRA, they cannot request required distributions and they cannot make investment decisions. Without a trust, or a guardian, a court may need to become involved to determine who is going to manage the assets for the minor.

Divorce rates are rising for those over age 50 and marriage is becoming a thing of the past for younger couples. Again, beneficiary forms are critical in these circumstances. If parents get divorced, the caretaker needs to be sure that the parents update their forms to reflect their new circumstances. If the caretaker gets divorced or never married in the first place, the beneficiary form will ensure that retirement assets are left to the individual they choose. That could be the individual responsible for raising any children or it could be to the children of a previous relationship. In either situation, you generally do not want retirement assets going to ex-spouses in addition to whatever they got during the divorce or the break-up of a relationship.

The beneficiary form is like the will for the retirement assets. You worked hard for that money. Make sure it goes where you want it to go - not where the company, or the courts, or state law says it should go. If the assets are going to minors, make sure there will be a smooth transition.

- By Beverly DeVeny and Jared Trexler

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Ed Slott Video: Naming a Trust as an IRA Beneficiary

Sometimes, you want to leave your IRA to a minor beneficiary but don't trust him or her to leave the inheritance alone once they turn legal age. One way around this is to use a trust. Ed Slott, America's IRA Expert, answers a listener's question about this very topic and provides some information on how to go through the process properly as well as the pros and cons.

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Using Life Insurance to Protect IRA Values

Life insurance is not only the single biggest benefit in the tax code, but it is also the most cost effective way to protect a large-balance IRA. Many owners of large-balance IRAs are concerned about protecting IRA values during volatile markets. Life insurance proceeds can do just that with its incredible leverage.

Life insurance proceeds are, with few exceptions, free of all income tax. Life insurance can also be exempt from federal estate tax when structured properly. If the insured has any rights or powers over the policy (so called, “incidents of ownership”), the proceeds will be included in his or her estate and be subject to federal estate tax and potentially state estate tax as well. In order to avoid estate tax on the proceeds, many individuals have their life insurance policies owned by a spouse, children, or others. In these cases, the policy proceeds are paid to the owner’s beneficiaries free of federal and state estate tax.

However, problems can arise when another person owns your life insurance policy. With full ownership rights, this person could make whatever changes he or she desired to the policy, such as changing the beneficiary or canceling it prematurely. To avoid these problems, the policy can be purchased by, or transferred to, an irrevocable life insurance trust (ILIIT) so that it will not be included in your estate. Of course, in order for this to work you cannot be a trustee or beneficiary of the trust because being either would represent an incident of ownership on your part.

If finding the money to pay the premiums will cause you a financial hardship, consider withdrawing funds from the IRA to make those premium payments. After age 70 ½, mandatory withdrawals from a traditional IRA must begin anyway. Since the money will have to be withdrawn, it may as well be leveraged to pay the life insurance premiums. This works even better with a Roth IRA as you probably won’t have to worry about paying any income tax on the distributions.

As far as the actual payment of the policy premiums is concerned, it should be done by the beneficiaries or by the trustee of an ILIT so that the life insurance proceeds will be estate tax free. The premium payment money may come from you making tax-free gifts either to the beneficiaries or to the trust. You should not make the payments directly to the insurance company.

After the IRA owner’s death, the life insurance proceeds will be available to pay the estate tax or provide other liquidity so that the IRA assets won't have to be used. The idea behind all of this is to keep as much of the IRA money intact as possible at the IRA owner’s death so that the maximum amount is available to be stretched by the beneficiaries. And what if there is no estate tax to be paid? Your beneficiaries receive an income tax- and estate tax-free payout. I don’t think they will complain about that.


-By Marvin Rotenberg and Jared Trexler

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Ed Slott Video: Naming a Minor as an IRA Beneficiary

Ed Slott's video blog answers a consumer question on naming a minor as an IRA beneficiary. America's IRA Expert discusses the pluses and pitfalls of this approach as well as the possibility of using a trust in this process.

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Do You Know the Difference Between a Will and a Trust?

Everyone has probably heard the terms “will” and “trust” but do you know the difference? Both are very useful in estate planning, however they serve different purposes.

One main difference is that a will takes effect only after you die, whereas a trust can take effect as soon as you create it. A will is a document that directs who will receive your property at your death and is where a legal representative is appointed to carry out your wishes. A trust can be used to distribute property both before and after your death.

A trust is a legal arrangement through which an individual or institution, called a “trustee,” holds title to property for the benefit of another person called a “beneficiary.” A trust can have two types of beneficiaries: Those that receive payments from the trust during their lives, and those that receive whatever is left over after the first beneficiary dies. The latter are generally referred to as “remaindermen.”

Additionally, a trust can be structured so that a beneficiary receives only income, only principal, or both.

A will covers any property that is in your name at the time you die that is not provided for through any other means. For instance, it does not cover property held in joint tenancy or in a trust.

Also, a life insurance policy, annuity contract or a retirement plan for which you have completed a designated beneficiary form, or which provides default beneficiary language, will not pass under your will. A trust, on the other hand, covers only property that has been transferred to it, either during your lifetime or upon your death.

You can name a trust as beneficiary of your IRA, but if IRA assets are actually transferred into the trust, either during your lifetime or at your death, a distribution subject to income taxation will be deemed to have occurred.

Another error we see frequently is one that is made by an individual who intends to name a trust as beneficiary of an IRA, but doesn’t quite get the job fully completed. The trust gets established, but the designation of beneficiary form for the IRA is never changed or filled out correctly to name the trust as beneficiary. Doing one without the other accomplishes nothing.

Both a will and a trust are useful estate planning devices that serve different purposes, and can work together to create a complete estate plan. An experienced financial advisor can help insure they are used to the best advantage of you and your family.

-By Marvin Rotenberg and Jared Trexler

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See-Through Trust Deadline Right Around The Corner

October 17th is not the only important date this month for retirement account owners. This past Monday was a date circled on the calendar of many of you. For most of you, that was the final deadline to complete a timely Roth recharacterization of a 2010 Roth IRA conversion (the deadline is now October 31st for certain individuals affected by Hurricanes Irene and Lee, or the wildfires in Texas).

October 31st is also a key deadline to be aware of. Besides being Halloween, it’s also the date by which a copy of a trust that inherited an IRA in 2010 must be delivered to the account’s custodian in order to qualify as a see-through trust. To put that into English for you, if someone died last year (2010) and left their IRA to a trust, a copy of that trust must be delivered to the account’s custodian (typically a bank or brokerage firm) by October 31, 2011 in order for the trust to be considered a see-through trust.

There are also several other requirements for a trust to be considered a see-through trust, but none of them relate to the upcoming deadline, so we’re not going to get into them here (Editor's Note: We promise we will at a more pertinent time).

Suppose this deadline is missed, then what? Well, that would mean the trust fails to qualify as a see-through trust and that could have some pretty serious tax consequences. Normally, only a living, breathing person can “stretch” distributions from an inherited IRA, but a see-through trust allows the trust to stretch RMDs (Required Minimum Distributions) out over the oldest trust beneficiary’s life expectancy. If however, the trust fails to qualify as a see-through trust (which would happen if a copy of the trust were not timely delivered) then it has no life expectancy by itself. In many cases, this could mean the entire IRA must be distributed to the trust within five years.

So just who exactly is responsible for delivering this copy of the trust to the custodian? Is it your CPA? The estate planning attorney handling the estate tax return and/or probate? Your financial advisor? Nope. Although any (or all) of those individuals should be aware of the situation and double check to make sure the trust has been delivered, the ultimate responsibility lies with the trustee. That could be you! And if not you, there’s a good chance it’s some other member of your family, like a brother or sister, who also would typically not know about this deadline.

So make sure to spread the word and get those trusts in by October 31st! This is an easy requirement of see-through trusts, but too often it’s the one that is missed because the responsible party - the trustee - has no clue it even exists. Thankfully though, now that you’ve read this article, that will never happen to you and Halloween will be a little less scary.

-By Jeffrey Levine and Jared Trexler

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IRA Trust October Deadline

Was a trust the beneficiary of a retirement account owner who died last year? Will there be stretch distributions to the trust?

If so, then the trustee of the trust has until October 31 of the year after the death of the IRA owner or plan participant to provide a copy of the trust (or a list of the trust beneficiaries and their entitlements) to the IRA custodian or plan administrator. If this deadline is missed, the trust cannot be treated as a see-through trust.

What does that mean? It means that you cannot do stretch distributions to the trust using the age of the oldest trust beneficiary. It means that the trust will be treated as a non-living beneficiary - like an estate or charity. It means that if the account owner died before age 70 ½ (actually April 1 of the year after attaining age 70 ½), then the total account balance must be distributed to the trust by the end of the fifth year after the account owner’s death. If the account owner died after age 70 ½, then distributions to the trust can only be made over the account owner’s remaining life expectancy.

Most of all, it means that the trustee of the trust needs to be sure to make a copy of that trust and send it off to the IRA custodian or plan administrator right now. Consider using a form of delivery that will provide you with a confirmation - just in case. Things get lost so easily in the world of big companies.


-By Beverly DeVeny and Jared Trexler

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Important October Deadlines for IRAs

October is almost here, and with the turning of the page comes some important IRA deadlines you should add to the calendar.

October 15, 2011
This deadline is actually October 17th since the 15th is on a Saturday this year. It is...
• the last day to complete a Roth recharacterization for a 2010 Roth conversion
• the last day to recharacterize a 2010 contribution
• the last day to remove an excess or unwanted 2010 contribution to avoid the 6% penalty for 2010
The deadline has been extended to October 31st for those taxpayers in federally declared disaster areas for Hurricanes Irene and Lee and for the Texas wildfires.

October 31, 2011
This deadline applies to trust beneficiaries of both IRAs and employer plans. It is the last day to provide an IRA custodian or plan administrator with a copy of the trust document or a listing of the beneficiaries and their entitlements. If this deadline is missed, the trust cannot be treated as a see-through trust.

These are deadlines you do NOT want to miss as they all have serious tax implications for IRA account owners and beneficiaries.


-By IRA Technical Consultant Beverly DeVeny and Jared Trexler

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