Mportant Information About Your Revocable Living Trust (Page 7 of 10) in pdf

& F

, P.C.

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OODS

ILL

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If you make your IRA, retirement plan death benefit, or tax-deferred annuity payable to your surviving spouse, it

will usually qualify for the 100% estate tax marital deduction--deferring any estate tax until your spouse’s later

death. In addition, a surviving spouse has a special option to make a “spousal rollover”--the spouse can put the

IRA or retirement plan benefit into an IRA and continue to defer the income tax on the benefit. For a tax-

deferred annuity, the contract usually permits the spouse to simply become the new annuitant, and to continue to

defer tax on the income earned within the annuity. Your spouse is required to begin taking minimum

distributions out of a spousal rollover IRA beginning at age 70-½, just as you would have had to. Only a

surviving spouse may make this spousal rollover election. Any other beneficiary, including your revocable

trust, would have to pay income tax on the benefit as it is received, and minimum required distributions would

have to begin in the year following death.

A surviving spouse’s ability to defer both the estate tax and the income tax on an IRA or retirement plan death

benefit can be quite valuable. However, depending on the size of your and your spouse’s estates, and how much

of your estate is represented by the IRA or retirement plan benefits, there may be estate tax disadvantages to

naming your spouse as the primary beneficiary. If you do not have enough assets other than the IRA, retirement

benefits, or tax-deferred annuities to fully use your “applicable exclusion amount” against gift and estate taxes,

paying the IRA, retirement benefit, or tax-deferred annuity to your spouse can waste your credit, and ultimately

result in higher estate taxes for your family.

If your IRAs, retirement plan benefits and tax-deferred annuities do not constitute a large portion of your estate,

and if your children are all adults, you may want to simply name your children individually as contingent

beneficiaries (if you are married) or primary beneficiaries (if you are not married). Individuals may usually

receive distributions of these types of benefits over their lifetimes, which results in a longer deferral of income

taxes. The 2006 Pension Protection Act authorized non-spouse beneficiaries to transfer their share of retirement

accounts to “inherited IRAs” and take them out over their own life expectancies.

In contrast, if a trust is named as beneficiary, it generally must receive full distribution of the account or benefit

within five years after the date of death, so the income tax deferral is minimal. However, current regulations

permit beneficiaries of trusts to be treated as the beneficiaries of a retirement plan (to use the beneficiaries’ life

expectancies to calculate the minimum distributions required) in certain circumstances. Four requirements must

be met: (a) the trust must be valid under state law; (b) the trust must be irrevocable or will become irrevocable

upon the death of the owner; (c) the beneficiaries of the trust must be identifiable; and (d) certain documentation

must be provided to the plan administrator (a copy of the trust, or a list of beneficiaries with a certification that

the list is complete and an agreement to provide a copy of the trust if the administrator asks for one). The

documentation must be provided to the plan administrator either (i) at the time distributions are required to start,

or (ii) within nine months after the death of the owner. If these requirements are met, then distributions may be

made from the plan to the trust, using the beneficiaries’ life expectancies, as provided in the regulations.

As a result of these complicated rules, the alternatives that should be considered for the beneficiary designations

of IRAs, retirement plan death benefits, and tax-deferred annuities, include the following:

The spouse might be named as beneficiary, to take advantage of the estate tax marital deduction

and the spousal rollover election for income tax purposes.

Mportant Information About Your Revocable Living Trust Page 7