We have been examining many fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death. When we last talked, we worked through multiple beneficiaries. But what if it is a sole beneficiary

Surviving Spouse as Sole Beneficiary
Special rules apply if the surviving spouse is the sole beneficiary. For example, if the surviving spouse is more than ten years younger than the participant and the sole beneficiary, the participant’s MRDs are determined by using the Joint and Survivor Table.

If the surviving spouse is the only beneficiary, he or she can roll over the inherited benefits into his or her own retirement plan or elect to treat an inherited IRA as his or her own IRA. There is no deadline by which the spouse must make the rollover decision, but until the rollover is made, MRDs would have to be under the inherited IRA rules based on the spouse’s age unless the plan requires more rapid distributions.

Planning Tip: A spouse who is under 70 1/2 can postpone distributions until reaching his or her own required beginning date, and can take MRDs using the recalculation method from theUniform Lifetime Table. In addition, after rollover the spouse can name his or her own beneficiaries who can then use their own life expectancies after the surviving spouse dies, resulting in the maximum stretch-out.

Planning Tip:  If the surviving spouse is under 59 1/2, special care must be taken in deciding whether and when to do a rollover. This is because distributions taken from the account after rollover and before the survivor reaches age 59 1/2 are subject to the 10% early withdrawal penalty.

If the participant dies before his or her RBD and the spouse does not do a rollover (i.e., treats the plan as an inherited plan), annual distributions to the surviving spouse can be postponed until the end of the latter of the year following the year in which the participant died or the year in which the participant would have reached age 70 1/2. If, after rollover, the surviving spouse dies before his or her RBD, the MRDs for her beneficiaries will not be based on the participant’s remaining life expectancy.  For them, MRDs will be based on either the five-year rule or, if the spouse has a Designated Beneficiary, the life expectancy of that Designated Beneficiary.

While the surviving spouse remains the beneficiary and has reached his or her RBD, following the surviving spouse’s death, distributions may be stretched over the surviving spouse’s hypothetical remaining life expectancy under the fixed-term method (life expectancy rule).

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look. You can find out how to reach us at our website: TheFisherLawOffice.com. You can also find us on Facebook at Facebook.com/FisherLawOffice and Twitter @thefisherlawoffice.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

Instead, I am distracted by the many blessings and hope that they are finding their way to you, as well. Instead of something professional for today’s post, I found something more appropriate.

“…(8)And in the same region there were shepherds out in the field, keeping watch over their flock by night. ⁹ And an angel of the Lord appeared to them, and the glory of the Lord shone around them, and they were filled with great fear. ¹⁰ And the angel said to them, “Fear not, for behold, I bring you good news of great joy that will be for all the people. ¹¹ For unto you is born this day in the city of David a Savior, who is Christthe Lord. ¹² And this will be a sign for you: you will find a babywrapped in swaddling cloths and lying in a manger.” ¹³ And suddenly there was with the angel a multitude of the heavenly host praising God and saying,

¹⁴ “Glory to God in the highest, and on earth peace and goodwill to all!”

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

Yesterday we looked at determining the Minimum Required Distribution (“MRD”) for the beneficiary after the plan participant dies. But what if there are multiple beneficiaries?

Multiple Beneficiaries
If there are multiple beneficiaries, there is no Designated Beneficiary unless all of the beneficiaries are individuals. If all of the beneficiaries are individuals, the Designated Beneficiary is the oldest beneficiary and it is his or her life expectancy that sets all MRDs. There are, however, two “escape hatches:”

(1)  The ability to remove a beneficiary through disclaimer or distribution of that beneficiary’s share. This must be done by September 30 of the year following the year of death.

Example: If the beneficiary designation is to a trust that distributes a specified sum to a charity and splits the balance between Child 1 and Child 2, you can make the distribution to charity prior to the critical date. That would leave you with the two individuals, Child 1 and Child 2, and the older of the two would be the Designated Beneficiary.

Example:  If the beneficiary designation is to a trust that distributes one-third to the participant’s mother and one third each to Child 1 and Child 2, if the beneficiary’s mother disclaims her interest prior to the critical date, the beneficiaries would be Child 1 and Child 2 and the older of the two would be the Designated Beneficiary.

(2)  The separate accounts rule: If the participant’s benefits under a plan are divided into separate accounts with different beneficiaries, the post-death MRD rules apply separately to each account. This allows multiple beneficiaries to each use their own life expectancy in determining post-death MRDs. (The separate account rule is not applicable to multiple beneficiaries who take their interests through a trust that is named as a beneficiary of the plan.)

Planning Tip: In order to satisfy compliance for the separate accounts rule, there must be pro rata sharing in gains and losses, which is normally done by fractional or percentage division. A pecuniary gift would not meet the definition unless (under local law or beneficiary designation) the gift shares in post-death gains and losses pro rata with the other beneficiaries’ shares. However, you can eliminate the recipient of a pecuniary gift from being included in the Designated Beneficiary determination by distributing that gift before September 30 of the year following the year in which the participant died.

Planning Tip: Separate accounts must be established by December 31 of the year following the year of the participant’s death to use separate life expectancies. If established later, the separate accounts are still effective for all other purposes.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look. You can find out how to reach us at our website: TheFisherLawOffice.com. You can also find us on Facebook at Facebook.com/FisherLawOffice and Twitter @thefisherlawoffice.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

The next fundamental we need to look at is determining the Minimum Required Distribution (“MRD”) for the beneficiary after the plan participant dies. Last time we took a brief look at a “Designated Beneficiary”. The thing to remember about designated beneficiaries is that only an individual or a qualified “look through” trust can be a Designated Beneficiary. Estates, partnerships, corporations, LLCs, other trusts, and charities do not qualify. If there are multiple beneficiaries, all must be individuals and the oldest must be identifiable.

Determining the MRD for the Beneficiary after the Participant Dies
When determining the MRD for years after the participant’s death, the critical questions are: (1) Is there a Designated Beneficiary; (2) Did the participant die before or after the Required Beginning Date? and (3) What does the plan provide?

If there is a Designated Beneficiary, regardless of when the participant dies, each beneficiary may use the Designated Beneficiary’s age factor as shown in the government’s Single Life Table to determine his or her MRD unless the plan requires more rapid distribution. Using the Designated Beneficiary’s age is commonly known as a “stretch-out,” and, in most cases, maximum stretch-out results in significantly more wealth passing to the beneficiary.

Using the Life Expectancy Rule, the beneficiary calculates the MRD for the first year by dividing the account balance by the Designated Beneficiary’s life expectancy. Each subsequent year, calculate the MRD by dividing the remaining account balance by the prior year’s divisor minus “1.” Thus, using this method, a beneficiary will withdraw all of the retirement benefits by the life expectancy of the Designated Beneficiary, even if taking only the MRD each year.

Death before Required Beginning Date
If the participant died before his or her RBD and there is no Designated Beneficiary, distributions must comply with the Five-Year Rule unless the plan requires more rapid distribution.  Under the Five-Year Rule, the entire plan balance must be distributed by December 31 of the year containing the fifth anniversary of the participant’s death. Annual distributions are not required. If there is a Designated Beneficiary, use of the Five-Year Rule is optional unless the plan provides otherwise.

Planning Tip: The Five-Year Rule only applies if the participant dies before his or her required beginning date.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look. You can find out how to reach us at our website: TheFisherLawOffice.com.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

The third fundamental we need to look at is who is the plan’s beneficiary. We also need to examine what is a “designated beneficiary” as the government uses that term.

Who is the Participant’s Beneficiary? Is There a “Designated Beneficiary” (DB)?
Beneficiary means those who are entitled to the plan benefits upon the participant’s death. Retirement benefits generally pass as non-probate property, by contract, to the beneficiary named in the participant’s beneficiary designation form or, if there are none, as specified in the plan. The provisions in the participant’s will or revocable living trust are irrelevant as to who receives the benefits, unless the plan or the participant’s beneficiary designation provides otherwise.

“Designated beneficiary” does not mean the beneficiary designated by the participant. It is a legal term and understanding its meaning is crucial to planning and for compliance with post-death MRDs.

There is a Designated Beneficiary for an account if, on September 30 of the year following the year of the participant’s death, there is no beneficiary that has to be considered in making the analysis that is not a human being or a qualified “look-through” trust and the plan administrator or custodian can know, with certainty, the oldest person who has to be considered in making the analysis.

Planning Tip: Now is a good time to work with professionals to figure out what clean-up strategies can be used.  These include removing non-qualified beneficiaries and division into separate shares . Most IRAs and qualified retirement plans have printed beneficiary designation forms they expect the participant to use. Most, but not all, will accept attachments. Some will accept a separate instrument. Due to the limited space on most forms, it will probably be necessary to add an attachment. When drafting beneficiary designations, make sure the plan permits what you are trying to accomplish.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.