Ch 13 - Estate Planning for Retirement Plans and Employee Benefits Flashcards
●Account balance will generally remain regardless of time of death
●Choices abound at death of participant
●Estate planning is critical
●Beneficiary choices are adjustable if the correct choice is on the menu
●Surviving spouse with rollover has the same options available
What is the MRD RULES EXECUTIVE SUMMARY?
●Often a substantial portion of client’s estate
●Some are cost-effective personal insurance supplements
●Lifetime accumulation is tax-advantaged
●Retirement plans are efficient retirement vehicles
●Retirement plans are inefficient inheritances
What is the impact of Employee Benefits on Estate Planning?
●WHAT DOES THE PLAN OR IRA PERMIT
●GENERAL CONSIDERATIONS
●WHAT DOES THE CLIENT AND HIS OR HER
●FAMILY NEED AT RETIREMENT
●WHAT DOES THE REA PERMIT
What are the 5 steps in PLANNING FOR DISTRIBUTIONS FROM QUALIFIED RETIREMENT PLANS AND IRA
●Client’s financial requirements
●Client’s family situation
●When will client (and spouse) die?
●What will be the S & P 500 at that time?
●What will the marginal income tax rates be for both client and heirs at all relevant times?
WHAT DO YOU NEED TO DESIGN THE PERFECT PLAN?
10 percent penalty applies EXCEPT:
●After Death or Disability
●After Divorce–Ex has no penalty
- •Try recommending first two exceptions!
●Rollover amounts–watch withholding trap
●Substantially equal periodic-
- -Close is not good enough
What are the consequences to Early Distributions—Pre 59 ½
●Lump Sum–if available
●Rollover
●Annuity purchase
●MRD under new rules
What are the options for payment when Planning for Retirement
●Lifetime MRDs Provide Two Choices
- •Most will be based on joint-life table with 10-year age difference
- •Participants Married to Spouse More than 10 years younger can use actual joint ages
●Lifetime planning choices do not alter post-death choices
●Account balances should not run dry during lifetime if MRDs are taken and investment is generally positive
●Estate planning has become more critical!
What are the MINIMUM DISTRIBUTION REGULATIONS DURING LIFETIME
●The new rules permit determination of “applicable distribution period” regardless of how lifetime MRDs were calculated
●The MRD for year of death must be taken as calculated prior to death
●Subsequent payments are based on beneficiary determined 9/30 of the year following the year of the participant’s death
What are the PLANNING steps FOR DISTRIBUTIONS AFTER DEATH OF PARTICIPANT
●New Rules Encourage Account Balances at Death
●No Step-up in basis for IRD
●Estate, GSTT, and Maybe State Death Tax
●Accounts not assignable for gift purposes
What are some of the quirks for Employee Benefits related to ESTATE PLANNING
- Included in the participant’s gross estate and may cause federal estate taxes
- State death taxes may apply
- GST if grandchildren are beneficiaries
- No basis step-up so income taxes apply
- NOTE: there is a deduction for any federal estate tax paid as income taxable distributions are taken
What are the INEFFICIENCY OF RETIREMENT PLANS AS INHERITANCES
Roll over into own account and become IRA owner instead of heir and distribute at surviving spouse’s age 70 1/2 and use joint tables
Non rollover–Distribute IRA annually over spouse’s life beginning by Dec. 31 of the year the owner would have turned 70½.
What happens to Spouse if OWNER DIES BEFORE REQUIRED BEGINNING DATE
Distribute IRA annually over heir’s life expectancy, or faster, beginning by Dec. 31 of the year after the owner’s death.
What happens to Other Named Beneficiary if OWNER DIES BEFORE REQUIRED BEGINNING DATE
Distribute entire IRA by Dec. 31 of the year five years after the owner’s death.
What happens to Estate if OWNER DIES BEFORE REQUIRED BEGINNING DATE
Roll over into own account and become IRA owner instead of heir.
OR Non rollover–Distribute IRA at survivor’s recalculated life expectancy.
What happens to Spouse if OWNER DIES AFTER REQUIRED BEGINNING DATE
Distribute IRA according to fixed life expectancy of heir and perhaps, heirs if separate accounts are used.
What happens to Other Named Beneficiary if OWNER DIES AFTER REQUIRED BEGINNING DATE
Distribute IRA at owner’s remaining fixed life expectancy
What happens to Estate if OWNER DIES AFTER REQUIRED BEGINNING DATE
●MARITAL DEDUCTION IS AVAILABLE
●ROLLOVER PROVIDES DEFERRAL
●FAVORABLE TAX TREATMENT
●SPOUSAL CONSENT REQUIRED OTHERWISE
●DISCLAIMER COULD CHANGE TO TRUSTOR OTHER BENEFICIARY
What are the benefits of NAMING SPOUSE AS BENEFICIARY
●MINIMUM REQUIRED DISTRIBUTION MUST BE TAKEN
●QTIP TRUSTEE HAS RIGHT TO REQUIRE CONVERSION OF NON-INCOME OR LOW INCOME PRODUCING PROPERTY (SPECIAL PROBLEM WITH RESPECT TO DEFINED BENEFIT PLANS)
●TREATMENT OF DISTRIBUTIONS TO QTIP TRUST AS INCOME
●SPOUSE MUST HAVE RIGHT TO REQUIRE INCOME PAYMENTS IF GREATER THAN MRD
●QTIP ELECTION MADE FOR IRA
●ROLLOVER WILL BE UNAVAILABLE
What QUALIFIES INSTALLMENT PAYMENTS TO QTIP TRUST FOR THE MARITAL DEDUCTION
●THE FOLLOWING FOUR REQUIREMENTS MUST BE MET AT THE THE DATE THE TRUST IS NAMED AS A BENEFICIARY (BY 10/31 OF YEAR FOLLOWING THE PARTICIPANT’S DEATH)
- •BENEFICIARIES MUST BE IDENTIFIABLE
- •TRUST MUST BE A VALID TRUST
- •TRUST INSTRUMENT OR BENEFICIARIES PROVIDED TO PLAN ADMINISTRATOR BY 10/31 OF THE YEAR AFTER PARTICIPANT’S DEATH
What are the Requirements for a CREDIT SHELTER TRUST AS BENEFICIARY
●MARITAL DEDUCTION NOT AVAILABLE
●ROLLOVER TREATMENT FORECLOSED
●SPOUSAL CONSENT MAY BE REQUIRED
●DISCLAIMER TO TRUST AN OPTION
●MRDs BASED ON LIFETIME OF OLDEST BENEFICIARY
What is the impact of a CREDIT SHELTER TRUST AS BENEFICIARY
●Beneficiary Determination Date
●Beneficiary Must Have Been Named by Decedent in some Fashion
●Disclaimers
●Early Distribution
●Separate Accounts
What are the POSTMORTEM PLANNING steps
Accumulation taxable to employer Tax-deferred to participant if
●no constructive receipt
●no economic benefit
What are the tax consequences to Nonqualified Deferred Compensation
●excess or supplemental retirement benefits
●death benefit only
What is a Nonqualified Plan
●Employer receives income tax deduction when benefit is paid
●Employee or heir is taxed when benefit is received
How is a NQDC taxed?
●Escapes estate inclusion
●Income taxable to heirs
What are the tax consequences of a Death Benefit Only (DBO) Plans
●No deduction for premiums
●No current income tax to participants for premiums
●Benefits taxed to employee or heirs when paid
●Employer is taxed based on normal rules for receipt of death benefits or cash surrender value
How do you Fund NQDC With Life Insurance
●No income tax for first $50,000 of coverage
●No income tax of death benefits
●Estate taxation unless assigned more than 3 years prior to death
●Coverage generally reduced or eliminated at retirement
What are the tax consequences to Group-term life
●Collateral Assignment Design
●Endorsement Method Design
What are the 2 ways to design a Split Dollar Life Insurance
●Employee or Employee’s ILIT is the policyowner and the policy is assigned as collateral for the employer’s share
What is the Collateral Assignment Design of Split Dollar Life Insurance
•Employer is the policyowner and policy endorsement permits
Employee to designate beneficiary of Employee’s share
What is the Endorsement Method Design of a Split Dollar Life Insurance
●Employee contributes or is taxed on term costs
●Employer “loans” remainder of premium
●Employer is secured in CSV
●Employee’s beneficiary gets net death benefit
How does Split Dollar Life Insurance work?
●Included if employee is party to split $ agreement
●Excluded if ILIT is policyowner
●Third party owner receives gift measured by term costs
What are the Estate Taxation implications of Split Dollar Life Insurance
