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Mr. Fox then discussed compensation and fees. He noted Model Rule 1.5 on page 14-54 of his materials. The test on reasonableness of fees is based upon numerous factors. He noted that estate planning practitioners must ask themselves what type of fee arrangement makes the most sense. He noted the Estate of Hughes case in his materials on page 14-59.
Mr. Fox concluded with a brief discussion on gifts to lawyers. He noted some of the distinctions. His final thought was (paraphrasing): If you do ethics wrong, you will get screwed!
2:00 - 5:20 Fundamentals Program #3 Our clients are bombarded with schemes to reduce the taxes on their retirement plans. Some are tried and true techniques that should not be overlooked. Others are off the wall and should be avoided. Some definitely don’t work, some definitely do work, and some are yet to be tested...and they’re all here!
Reporter: Bruce A. Tannahill Esq.
Ms. Choate, wearing a button reading “I gave to the IRS”, said that she had collected every idea that she has heard of, read about, or thought about into the written materials for her presentation. She then classified them in the material as “best” and “worst.” The materials are as thorough and easy to read as anyone who has heard her speak or read any of her articles or books would expect.
Her book, Life and Death Planning for Retirement Benefits, now in its 7th Edition, is an essential resource for anyone who has a retirement plan or who has clients with retirement benefits. She mentioned that it is now available to order online at http://www.retirementbenefitsplanning.comwww.retirementbenefitsplanning.com.
For this presentation, Ms. Choate took a “Lifecycle approach” to retirement benefits– from birth to death and beyond with a lot of detours. She said she has no mastermind idea to eliminate taxes. Instead, her goal is to help clients get more benefit from their retirement benefits and keep them out of trouble or get them out of the trouble they are already in.
She reminds us that the rules are full of technical glitches and loopholes. IRS will use them against your clients so use them in favor of your clients.
YOUNG PEOPLE (UNDER 59 ½) During this phase, you should save money for retirement and keep it accessible, even though there’s a 10% tax on early distributions.
She believes that the best retirement plan for young people (other than an employer plan with a match) is a Roth IRA. Unique in the retirement plan universe, it provides the ability to take contributions out at any time without tax or penalty. The earnings on Roth are tied up until 59 1/2. The second best is a 401(k) plan that may permit you to borrow against the plan, which isn’t allowed for IRAs. The worst plan is the traditional IRA because it holds contributions hostage until 59 ½.
She strongly discourages taking money out of an IRA before age 59 ½ due to the 10% penalty tax. The 13 exceptions to the penalty do not offer much opportunity for planning other than the series of substantially equal periodic payments, which is good for people who retire early and need money to live on.
ULTRA-WEALTHY WITH MEGA IRA S (More than $1 million)
These have been in the spotlight lately, because of a Government Accountability Office study. Ms. Choate believes clients with mega IRAs need annual IRA checkups, with a formal agenda. Anyone with an interest in the financial health of the account should attend, including the client, tax preparer or accountant, IRA custodian, estate planning
lawyer, and wealth manager. The Agenda should include:
· Review tax forms filed for the IRA every year o Form 1099-R if a distribution occurred o Form 5498. For 2015, the IRS will require more information on hard-to-value assets owned by IRAs, including non-publicly traded securities and real estate. Ms. Choate suspects the IRS will use this information to audit IRAs with hard-to-value assets. The information is optional for 2014 forms.
o Review IRA compliance: Were RMDs taken? If not, when will they be taken? How will they be taken? Clients may want to distribute hard to value assets as part of their RMD to avoid checking the box next year. Assets may be distributed in kind.
o Look at recent developments in the law and prospective developments.
o Look at family changes.
o How are expenses being paid? IRA account expenses can be paid from the IRA (not considered a distribution) or paid with outside assets (not considered a contribution).
o Income tax returns: Form 1040 and 1041 (if a trusteed IRA) o Want to file return for trust even if its only asset is Roth IRA.
o Include Form 5329 to start the statute running on IRA penalties. IRS has gone after people for IRA penalties 10years later and won because statute never runs if the Form 5329 is not filed.
o File Form 8606 to document after-tax contributions to IRA that produces its basis.
ESTATE PLANNING FOR RETIREMENT BENEFITS
Ms. Choate identified two aspects to estate planning for retirement benefits.
· Choosing the beneficiary. Ms. Choate quoted Jonathan Blattmachr and Howard Zaritsky as believing that what the client wants may be the last thing to consider. The value of an inherited IRA depends on beneficiary.
She identified three good choices and three not-so-good choices.
o Good choices
§ A young individual beneficiary because can take money in installments over their life expectancy, producing long tax-deferral if implemented properly.
§ Surviving spouse outright who can roll it into his/her own IRA, producing a spousal trifecta of no RMDs until 70 ½;
RMDs calculated using the Uniform Lifetime Table instead of the shorter and faster Single Life Table; and the spouse’s beneficiary takes distributions over his/her life expectancy. With portability, there is no reason to name a credit shelter trust for spouse as beneficiary because you lose spousal benefits.
§ Charity, because they are income tax exempt. For Roth IRAs, a charity is not a good choice because qualifying Roth distributions are not subject to tax anyway.
o Bad choices
§ Old person because they don’t have a long life expectancy.§ Trust for spouse because it doesn’t get the spousal rollover and the spousal trifecta. Leaving it to a trust doesn’t preserve it for children but ensures it will be gone sooner, possibly before the spouse dies. Ms. Choate suggested finding another way to preserve the money, such as splitting the IRA among the spouse and children or buy life insurance and name the children as the beneficiaries. If the retirement account is the only asset available to fund a trust to avoid state death taxes, compare the income tax cost to the state death taxes saved.
§ Estate, which is limited to a five-year distribution.
Implementing the plan
o The estate planning lawyer drafts the beneficiary form. Ms. Choate advised not to leave it up to the client because It won’t get done or won’t get done right. To deal with the concern that clients won’t want to pay for this, include a certain number of beneficiary designations in the standard estate planning fee, with each additional form at a specified amount.
o IRA providers have gotten more sophisticated about IRA beneficiary forms and many now cover the necessary things in their forms.
o Ms. Choate did not take a position on whether you should have a separate trust for the retirement benefits. She said both ways work but sometimes one is better than the other.
PEOPLE APPROACHING 70 ½
· IRAs produce RMDs regardless of whether you are working. Company plans do not require RMDs until actual retirement except for a 5% owner. To avoid RMDs, you can roll the IRA into the company plan before the year you turn 70 1/2. You must make sure the plan accepts rollovers from IRAs.
· Consider putting some of the retirement plan into a qualified lifetime annuity contract (QLAC), which can be excluded from the RMD calculation.
· Before rolling over a company plan to an IRA, determine if the plan includes any company stock. If there is, consider whether using the net unrealized appreciation (NUA) rules makes sense. Under new IRS guidelines, you can rollover the taxable part and take the balance outright.
o Tax-free Roth IRA conversion for everyone, which Ms. Choate said is “as close to pornography as we get at Heckerling”. To take advantage of it, you must be a member of a qualified retirement plan that accepts rollovers from IRAs and have some after-tax money in an IRA or qualified plan.
o Ms. Choate said that after-tax money in IRA is a real pain because each distribution carries out some pre-tax and some after-tax money. In 2014, new IRS rules made the path for getting money to Roth IRA clear.
§ Step 1. Have IRA provider send all or almost all of pre-tax money to 401(k) plan.
You must certify to the qualified plan administrator that it is all pre-tax money because plans can’t take rollovers of after-tax money.
§ Step 2. Convert remaining money to Roth IRA.
o For people in a qualified plan, the process is similar. Two checks are used.
§ Step 1. The pre-tax portion becomes a direct rollover to IRA, avoiding income tax.
§ Step 2. The second check is a direct rollover to the Roth IRA.
· Review the state tax situation. Some states have tax benefits for retirement plan benefits.
· Look at the client’s creditor situation. Protection under qualified plans is likely to be better.
· Look at death benefit options. IRAs generally have better death benefit options.
· Evaluate if a company plan may have deals and options you can’t get elsewhere.
TAKING RMDS and ROLLOVERS
· For clients required to take RMDs and to pay estimated taxes, consider having them use their RMD to pay their estimated taxes. Have the IRA provider send the RMD directly to IRS as withheld income taxes, using Form WP.The withheld income taxes are credited to your account as paid throughout the year.
· Don’t ever do 60-day rollover. Always do a direct transfer because there is no limit to the number you can do.
A 60-day rollover is much riskier, especially after the Bobrow case and subsequent IRS announcement limiting you to one 60-day rollover every 12 months.
· A client caught doing a second rollover within 1 year, can roll it to a qualified plan, which is not subject to the limit. Alternatively, convert it to a Roth IRA and then recharacterize it to a traditional IRA.
· Use qualified charitable distribution if over 70 1/2. Since it expired at end of 2014, if a client would give the RMD to charity anyway, send it directly to charity whenever the client wants. If it is not renewed for 2015, the client has income and an itemized deduction. If the choice is donating the RMD or other asset (such as appreciated asset), the client needs to wait for the extension. If done before extension, would need to make sure reported properly on the 1099-R.
Ms. Choate commented on Jonathan Blattmachr’s discussion of transferring an IRA during your life to a grantor trust. She advises not to do it without a PLR. The IRS has never allowed an IRA owner to transfer an IRA to grantor trust, even though it seems contradictory to the normal IRS position on grantor trusts. If the beneficiaries are spouse, children, etc. and you don’t get any benefits from it, the IRS could say it’s a grantor trust, you’re treated as the owner and it violates prohibition on transfer, disqualifying IRA. She advised obtaining a PLR even if you are the only beneficiary of a grantor trust, Clark v. Rameker, holding that inherited IRAs do not qualify for the retirement fund bankruptcy exemption, is irrelevant. If a client is worried about a beneficiary’s creditors, leave the IRA to a trust.
A Roth IRA is not a good asset to leave to a dynasty trust. The Roth IRA is still subject to the RMD rules so the maximum payout period for the Roth IRA is the beneficiary’s life expectancy. In addition, if a dynasty trust doesn’t vest in anyone, she doesn’t see how it would qualify as a see-through trust. IRS tests trusts by going through chain of beneficiaries to first person who gets assets outright at death of the prior beneficiary. If a perpetual trust keeps going with no outright distribution, won’t qualify for stretch payout.
2:00 - 3:30 SPECIAL SESSIONS III Session III-A Curing Obsolete Estate Plans in Light of ATRA 2012 (Focus Series) John F. Bergner, Carol A. Cantrell, Barbara A. Sloan This session will explore how clients can escape from prior planning techniques that are either no longer useful or perhaps harmful in light of ATRA 2012.
Reporter: Carol A. Sobczak, Esq.
The speakers provided thorough materials with examples and footnotes of the items in the discussion. The materials were divided into four main sections: 1) Taxation of Partnership Distributions, 2) Taxation of Trust Distributions, 3) Inter vivos Toggling of Grantor Trusts, and 4) Tax Consequences of Family Settlement Agreements.
The panel opened by discussing the changes that were created by the 2012 act with the increased exemption amounts, reduced estate tax rates, and increased income tax rates. They said that for 99.6% or 99.8% US taxpayers there are no longer any estate tax concerns.
The panel noted that first we must identify plans that don’t makes sense and analyze how to modify them. The panel then discussed some goals for the non-estate taxable client. A few of the ideas mentioned included: 1) avoiding valuation discounts, 2) avoiding the bypass trust planning (try to bring assets back into another parties estate for the basis step up), 3) considering changing the ownership of spousal assets to prevent built in losses from vanishing, 4) avoiding the net investment tax, 5) looking at ways to terminate unnecessary life insurance trusts, and
6) considering ways to toggle on and off grantor status.