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The past year, 2001, saw some dramatic changes in the tax scene regarding IRA distributions and, of course,
the liberalization of the estate and gift tax regime. Does that mean that we, as professional advisers, can
afford to relax our concerns and involvement with IRA planning and the integration of IRA plans into the client’
s overall estate plan? In summary, the answer is an emphatic NO!
New MRD Regulations. By now everyone is familiar with the liberalized MRD (Minimum Required Distribution)
rules. MRD’s have been stretched out, permitting a longer deferral period. The complicated elections,
required to be on file at the RBD (Required Beginning Date) are eliminated.
Mistakes can be corrected and divisions into separate shares can be accomplished by the end of the
calendar year following the date of death. This postmortem planning opportunity has been dubbed the "shake
out period". Thus, inclusion of a charity in either the beneficiary designation or the Trust does not, in and of
itself, knock out an extended distribution.
The Rules Regarding Trusts were not substantially changed, except that the Trust does not have to be filed in
advance with the sponsor.
Is There a Stretch in Your Future? The new regulations have encouraged many financial advisers to focus on
the "stretch" opportunities for IRA distributions. That is, using a designated beneficiary who is much younger
than the participant, such as a grandchild, to be a measuring life with the consequent opportunity for
stretching out distributions over 40 to 60 years.
However, be careful in encouraging your clients to make this the capstone of their IRA planning. Our
experience has been that most younger beneficiaries want the money, and are willing to pay the income tax to
get it. Not too many are in a position to enjoy the tax deferral and small distributions. That may not be the case
where there is a significant amount of wealth involved in the family already. Be cautious about a second
marriage situation where there are many other factors to consider..
Trust Challenges. Using Trusts as a primary or contingent beneficiary continues to offer planning challenges.
Let’s briefly consider some of these:
(1) Estate Tax versus Income Tax. Income tax on distributions will always be a factor under present law.
Estate tax liberalization means that many participants will not have to worry about estate taxes for themselves
or their spouses. However, we still have many clients where the total family assets exceed $1 million and
estate tax planning is still a factor.
(2) Marital Trust versus Credit Shelter Trust. Where does the IRA get allocated, Marital Trust or Credit Shelter
Trust? Are there other assets to use up the lifetime exemption so that the spouse can be the primary
beneficiary, with all of the benefits that are involved?
(3) Who gets the money? If Trusts are involved as a beneficiary, for whatever reason, care must be taken that
the distribution over a period of years goes to the intended parties. The usual distinction between "principal"
and "income" does not really work with an IRA distribution, where trust accounting principles and the Uniform
Principal and Income Act work at cross purposes to good tax planning. Without careful drafting, the Trust can
wind up paying income tax on distributions at a perilously high rate, rather than passing out the IRA
distributions to individual beneficiaries at much lower tax rates.
Income taxes and the intended beneficiaries of IRA distributions are becoming increasingly important as the
balances of the IRA accounts increase and as more individuals and couples are falling outside the scope of
the Federal Estate Tax.
(4) Is the "Stretch" Really Important? If your clients become concerned about the "stretch" of their IRA’s, there
will be important questions to answer before you as an adviser say "yes, I’ll stretch the distributions as long
as possible". The tax issues need to be fairly explored, along with Generation Skipping Transfer Tax (GST),
which might be a factor.
Plan Provisions. With all of the publicity about liberalized distribution rules, Stretch IRA’s, etc., many writers
and observers are neglecting to mention one important factor. Do the plan provisions permit all of these
options, or are immediate distributions or limitations present in the Plan which would defeat the participant’s
intentions and Estate Plan goals? This may be particularly true in the case of various qualified plans such as
401K’s, profit sharing plans, etc. These limitations cannot always be solved by a post death rollover, since
only a surviving spouse has this right. If the Plan documents do not provide the necessary flexibility, it may be
advisable to rollover the account prior to death into a Plan which has the desired provisions. We understand
that some of the Auto Company 401K’s, for example, have very limited options after death, and in some cases
may require prompt distribution of the entire balance.
Freezing Benefits. We find that some clients are concerned about financial responsibility or special needs of
a family member and are therefore seriously interested in some method of "freezing" distributions, or in other
words, limiting distributions to the MRD for the particular family member. There are several ways of doing this,
including Trusts and Fixed Annuities. These options should be thoroughly explored where this situation
exists. Again, this is a complicated financial and legal area where a significant possibility for a malpractice
claim exists, after the participant’s death.
CRT as Beneficiary. The Charitable Remainder Trust, as a Plan beneficiary offers some intriguing planning
possibilities in particular family situations. If an immediate distribution is desired or required, and a particular
level of distributions to a family member are desired, the Charitable Remainder Trust with lifetime payouts
offer a good planning alternative in many situations. This is an option that is often overlooked, particularly if
the client is not particularly charitably inclined. However, family estate planning objectives can be achieved
with what might be a minimum ten percent value of the charitable remainder, alleviating the income tax
burden of increased MRD’s. We find the CRT especially appealing to clients without children, who want to
provide a remembrance and benefit to more remote family members, such as nieces or nephews, but don’t
necessarily want the capital to flow to unknown, remote persons such as spouses.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| April 2002 IRA’S - Are your clients ahead of the wave? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |