Retirement Accounts

Question 1

What is the five-year non-exclusion period for a Roth IRA?

Answer 1

In order to qualify for NO taxable income upon withdraw of Roth IRA, you must be 59 1/2 (for no penalty) AND it must be five years since the INITIAL contribution. If less than 5 years, will be subject to income tax.

Question 2

How does the five-year non-exclusion period apply to a beneficiary of a Roth IRA?

Answer 2

A surviving spouse ONLY can elect to treat the Roth IRA as her own and use the earlier of the decedent’s five-year non-exclusion period OR the surviving spouse’s five-year non-exclusion period. NO other beneficiary can do this – all other beneficiaries must use the decedent’s non-exclusion period.

Question 3

What are surviving spouse’s income deferral options for a deceased spouse’s IRA?

Answer 3

1) Indirect rollover (20% income tax w/holding); 2) Direct rollover, trustee to trustee (no w/holding tax); 3) Remain a beneficiary of spouse’s IRA (inherited or beneficial IRA acct)
For options 1 and 2, the spouse is treated as the owner of the IRA & cannot take distributions until 59 1/2.
For option 3, the surviving spouse can take distributions before 59 1/2 without penalty OR can delay taking distributions until the decedent would have been 72.

Question 4

What is the Required Beginning Date (RBD) for RMDs?

Answer 4

For anyone who was NOT 70½ as of December 31,
2019, the Required Beginning Date under IRC Section 401(a)(9)(c) is generally April 1 of the calendar year following the calendar year when the individual reaches age 72.
For anyone who was 70½ as of December 31, 2019, the Required Beginning Date generally remains April 1 of the calendar year following the calendar year when the individual reached age 70½

Question 5

Are there RMDs for Roth IRAs?

Answer 5

No (exempt from RMDs)

Question 6

What if the decedent had not reached age 72 at death and spouse inherits?

Answer 6

If the sole designated beneficiary is the spouse, distributions must begin by the later of the end of the calendar year following the year in which the participant died or the end of the calendar year in which the employee would have attained age 72. So, can delay distributions if decedent was NOT yet 72 at death.

Question 7

What if the decedent does not have a designated beneficiary?

Answer 7

If there is no designated beneficiary, the entire interest must be distributed within five years after the participant’s death. This means the remaining balance must be distributed by the end of the calendar year that contains the 5th anniversary of the employee’s death. SECURE Act removed the distribution requirement for duration of participant’s life expectancy.

Question 8

What is the 10-year rule for designated beneficiaries under the SECURE act?

Answer 8

A designated beneficiary is an individual designated as a beneficiary by the employee. Individuals who are designated beneficiaries have 10 years to withdraw the decedent’s account balance whether or not the decedent had started distributions before death after reaching RBD

This means that the entire account balance must be distributed by the end of the calendar year in which the 10th anniversary of the decedent’s date of death occurs.

Doesn’t matter if the plan participant was or was not over age 72.

Question 9

What is a designated beneficiary?

Answer 9

A designated beneficiary must be an individual selected by the participant.
The designated beneficiary’s identity is determined as of September 30 following the year of the participant’s death.

Question 10

Who is an “eligible designated beneficiary” under the SECURE act?

Answer 10

An “eligible designated beneficiary” is a designated beneficiary who fits within one of the following categories:

(1) The surviving spouse of the employee
(2) A child of the employee who has not reached the age of majority
(3) A disabled individual within the meaning of IRC Section 72(m)(7)
(4) A chronically ill individual meeting certain requirements
(5) An individual not more than 10 years younger than the employee.

Question 11

How did CARES act impact RMDs?

Answer 11

No RMDs for one year only - 2020.

Question 12

Does the SECURE Act apply to Roth IRAs?

Answer 12

Yes. Same IRA rules for 10 year pay out to designated beneficiaries.

Question 13

How do “eligible designated beneficiaries” take IRA distributions under SECURE Act?

Answer 13

In general, the life expectancy of an eligible designated beneficiary may be used for the distribution of the decedent’s remaining account balance IF distribution begins within 1 year after the employee’s death. So, RMDs based on beneficiary life expectancy. However, different rules for spouse and minor child.

Question 14

How are rules different for surviving spouse under SECURE Act?

Answer 14

If the surviving spouse is the sole beneficiary, the surviving spouse can wait to be begin distributions until the deceased spouse would have been age 72.

Question 15

How are rules different for minor child under SECURE Act?

Answer 15

If the beneficiary is a child of the decedent who has not
reached the age of majority, the entire remaining account balance must be distributed within the 10-year period after such date.
If the child dies after reaching majority but before the entire account balance has been distributed, the child’s beneficiary must receive distribution by the end of the child’s 10-year distribution period. NO tacking on by the subsequent beneficiary.

Question 16

If using trusts to hold IRA interest, is okay to point to one trust which then sub-divides the asset?

Answer 16

No. The separation must occur with the beneficiary designation.
The ability to use the separate accounts rule to calculate the minimum required distributions to multiple trust beneficiaries requires that the separate accounts be established by the terms of the beneficiary designation rather than the terms of the trust instrument.
If only the trust is named as the beneficiary, the separate accounts rule does not apply even though the amounts payable to the trust will be allocated to separate beneficial shares once in the hands of the trustee.

Question 17

Can a charity be a designated beneficiary?

Answer 17

No. Only individuals can be designated beneficiaries whose permitted distribution periods may be used
to compute required minimum distributions.

Can name a charity as a contingent beneficiary of a conduit trust but not of an accumulation trust.

Question 18

What is a multi-beneficiary trust under SECURE act?

Answer 18

The SECURE Act creates a new category of trusts
called “applicable multi-beneficiary trusts” that permit the use of an eligible designated beneficiary’s life expectancy to calculate minimum required
distributions. To be an applicable multi-beneficiary trust, the trust must have more than one beneficiary, all the beneficiaries must be treated as designated beneficiaries, and at least one beneficiary of the trust must be an eligible designated beneficiary who is disabled or chronically ill.

Question 19

What planning options are there for a multi-beneficiary trust that includes a disabled or chronically ill eligible designated beneficiary?

Answer 19

IRC Section 401(a)(9)(H)(iv) permits only two types of
applicable multi-beneficiary trusts:
a. The first type of trust divides into separate shares immediately upon the death of the employee or the IRA owner which results in only the share of the eligible designated beneficiary qualifying for the use of such individual’s life expectancy for calculating the RMD.

b. The second type of trust provides that no individuals other than disabled or chronically ill eligible designated beneficiaries have an interest in the plan of the employee or the IRA until all eligible designated beneficiaries have died which results in each remainder beneficiary of the trust being subject to the 10-year rule in calculating each remainder beneficiary’s RMD.

Question 20

What type of plans does ERISA apply to?

Answer 20

Applies to any employee benefit plan unless a specific exception applies. ERISA Section 514(a) preempts any State laws that “relate to: employee benefit plans covered by ERISA.

No exemption from ERISA preemption exists for the typical private employer “qualified” retirement plan such as a 401(k) plan.

Question 21

Can an attorney face malpractice for failing to include beneficiary designations in estate planning?

Answer 21

Yes, see Vermont case.

Question 22

What are three common types of retirement plans that are exempt from ERISA?

Answer 22

1. Plans sponsored by federal, state, and local governments. See ERISA Section 4(b)(1).
2. IRAs established by individuals rather than as part of an employer plan. (IRAs!!)
3. Retirement plans WITHOUT at least one participant who is a NON-owner common law employee. 29 C.F.R. ‘ 2510.3-3(c). An example would be a self-employed individual’s HR-10 plan in which only the self-employed individual participates.

Question 23

Under IN law, can IRAs be liable for estate allowances or claims?

Answer 23

No. See 2011 amendment to TOD statute. IRAs are excluded from liability for allowed claims and statutory survivor allowances when the probate estate is insufficient to pay such claims and allowances. Ind. Code 32-17-13-1(b)(4); 32-17-13-2.

Question 24

What is the outcome of plans that are exempt from ERISA?

Answer 24

IRAs and state government plans are governed by state law and NOT ERISA law. There are two different sets of applicable law. Non-ERISA plans are governed by state-specific law, and vary state-to-state.

Question 25

What is a 401k plan?

Answer 25

They are defined contribution plans under Federal law.

Question 26

How are qualified (401k) plans biased toward surviving spouses?

Answer 26

The default death benefit is to the surviving spouse.

Question 27

Can the spouse waive death benefits under ERISA?

Answer 27

Yes, but there are specific steps. IRC Section 417(a)(2) mandates the following conditions:

(1) the spouse’s consent must be in writing;
(2) the consent must designate a beneficiary or form of benefits which may not be changed without the spouse’s consent unless the written waiver form says such additional consent is not necessary; and
(3) the consent must acknowledge the effect of the election and must be witnessed by a plan representative or a notary public.

Question 28

Can a premarital agreement waive DEATH benefits to a qualified plan?

Answer 28

Only a spouse can waive the benefit and the people who sign it aren’t married, the waiver under a prenuptial agreement is ineffective as to qualified plans under federal law.

Accordingly, if spouse DIES, the prenuptial will be ineffective under Federal law and the surviving spouse will receive the spousal benefits from the qualified plan.

Question 29

What does IN law say about a prenuptial agreement waiver to rights in a qualified plan in event of a DIVORCE?

Answer 29

IN law says it is enforceable, and accordingly, in a divorce scenario, the spousal waiver under prenupt will be enforced?

Question 30

What happens to beneficiary designation on qualified plan after divorce?

Answer 30

IN TOD law which would strike designation in favor of spouse does NOT apply. However, SOME retirement plans provide that upon divorce, spouse is removed as beneficiary. NOT all. Need to review this with client.

Question 31

What happens if there is a QDRO in favor of former spouse and participant remarries?

Answer 31

To the extent provided in a Qualified Domestic Relations Order (“QDRO”), the former spouse of a participant will be treated as a surviving spouse for purposes of survivor benefits and any current spouse will not be treated as a spouse for such purposes.

Question 32

Is there a deadline to put a QDRO in place?

Answer 32

This is an open question. Some courts have said if the participant spouse has changed position via death or remarriage, it is too late for prior spouse to get a QDRO. Other courts have held differently. See case that allowed QDRO 20 years after divorce.

As practitioner, check to see if there is QDRO that impacts planning for current spouse.

Question 33

What happens if the participant names her kids as beneficiaries and then remarries for less than one year and does not change beneficiary, who receives?

Answer 33

Depends if “one year marriage” exclusion applies. Federal law permits but does not require plans to disregard spouses who have been married to participants for less than one year.

Question 34

Can a spouse have a qualified disclaimer of a qualified account?

Answer 34

Yes, most likely.

Question 35

Are IRAs and Roth IRAs subject to ERISA or Federal law for spousal protections?

Answer 35

No; subject to IN law. An IRA confers no rights upon the
spouse of the IRA owner under federal law even if the funds in the IRA are the result of a permissible rollover from an employee benefit plan that was subject to ERISA.

Question 36

Does IN law bias in favor of spouses in IRAs?

Answer 36

No. It’s wide open for participants to do what they want.

Question 37

Under IN law, what happens if IRA beneficiary designation remains spouse (divorced spouse fails to change after divorce) if other spouse waived rights?

Answer 37

If general waiver to all assets, the former spouse may still take the asset. See Graves v. Summit
If specific waiver to the IRA, it may preclude ability to receive that asset. See Steiner and Hamilton.

Question 38

What is the double taxation issue for retirement asset?

Answer 38

FET, GST and income tax.

Question 39

What is the income tax problem with retirement accounts?

Answer 39

Generally, all the funds from a retirement account (except for Roth-IRAs) are going to be taxed as ordinary income. They are income in respect of a decedent. Subject to Federal and State income tax.

Question 40

What is the income consequence of a trust being the beneficiary of a retirement account?

Answer 40

High fiduciary income tax rate of 37% after first approx $13k in income.

Question 41

What are the requirements for a trust to “see through” to the designated beneficiary?

Answer 41

a. The trust is valid under state law or would be but for the fact that there is no corpus.
b. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
c. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the participant’s benefit are identifiable from the trust instrument.
d. Specified documentation is provided to the plan administrator by the applicable deadline. The plan administrator” of an IRA is the “IRA trustee, custodian, or issuer.”

Question 42

What are the rules on providing documentation of trust to plan administrator AFTER participant’s death?

Answer 42

The rules involving minimum distributions after death require the following to be provided by October 31 of the calendar year following the year of death:

(1) The trustee of the trust provides the plan administrator with a copy of the actual trust document; or

(2) The trustee of the trust:
(i) Provides the plan administrator with a final list of all
beneficiaries as of September 30 of the calendar year
following the calendar year of death;
(ii) Certifies that, to the best of the trustee’s knowledge,
the list is correct and complete and that the trust
satisfies the requirements of validity, irrevocability,
and beneficiary identification as of the date of death;
and
(iii) Agrees to provide a copy of the trust instrument upon the plan administrator=s demand.