Upstate Estate Law, P.C. Blog

A part of estate planning that is sometimes overlooked is the naming of beneficiaries for retirement accounts. What may seem like a trivial exercise can have damaging impact if neglected. Be sure to name beneficiaries of your retirement accounts. And be sure to name contingent beneficiaries in case your primary beneficiary dies before you.

In Private Letter Ruling 201612001 (released March 18, 2016), the IRS was asked to provide an opinion on the following situation: Husband died owning an IRA account. His spouse survived him. The primary named beneficiary (not the spouse) died before Husband. There was no contingent beneficiary named. As a result the Husband’s estate became the beneficiary of the retirement account. The Surviving Spouse then requested the IRS’s opinion on whether she could treat the IRA account as her own, thus potentially delaying the payment of income taxes on the account. In this case, the IRS stated that because the Surviving Spouse was both the executor and the sole heir of the estate, she could treat the IRA account as her own.

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Keogh plans are a type of retirement plan for self-employed people and small businesses. They are considered Qualified Plans by the IRS, thus they are subject to a greater amount of administrative overhead and are more difficult to set up and maintain than is an IRA or an IRA-based plan, such as a SEP-IRA. It usually will require professional assistance to set up a Keogh account.

Keoghs come in two flavors: defined contribution and defined benefit. Defined contribution plans are funded with fixed contributions from each pay check, while defined benefit plans are funded through contributions dependent on an IRS formula.

Contributions must be made pre-tax, and income tax is imposed upon withdrawal from the account. The main benefit of the Keogh plan is that it allows for a greater amount of annual contributions to the account, ie, for 2012 the limit is $50,000.00. However, it requires a large amount of business income to be able to reach this maximum contribution as contributions are limited to 25% of gross income.

Keoghs have their place, but for a self employed business owner who does have a large amount of gross income, it would likely be a better choice to use an IRA-based retirement account such as a SEP-IRA, or a SIMPLE 401k.

I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm. The rules regarding retirement accounts do change, are highly fact specific, and errors can be extremely costly. Before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

As you may know, federal tax law allows for the deferral of income taxes for compensation income that is placed into traditional IRAs or into qualified retirement accounts such as 401Ks. While federal law allows this tax deferral for a time, the law does not grant deferral forever. What the law gives it does eventually want to take back.

Participants in these tax advantaged accounts are required to begin taking distributions from these accounts in the year that they reach age seventy and a half years. The distributions thus taken are then subjected to income taxes.

The calculation of these required distributions, officially termed Required Minimum Distributions, is relatively simple to accomplish. You simply obtain a divisor from an IRS published table called the Uniform Lifetime Table and divide the prior year end account balance by the applicable divisor and the result is your Required Minimum Distribution.

For example, suppose I turn 74 years of age in the year 2012, and as of December 31, 2011 the balance in my traditional IRA is $150,000.00. From the Uniform Lifetime Table, the divisor for a person who is age 74 is equal to 23.8. To obtain my year 2012 Required Minimum Distribution, I would divide $150,000.00 by 23.8, for a result of approximately $6,302.00. Thus in the year 2012 I would be required to withdraw $6,302.00 from my traditional IRA account and pay the income taxes on it. If I failed to take the distribution, I would be assessed a penalty excise tax of 50% of the amount not taken, in this instance $3,151, plus have to pay the income taxes when I did eventually take the distribution. Neglecting to take your required minimum distributions can be a costly error.

To learn what the JOINT AND LAST SURVIVOR TABLE is used for, you need to understand what the Uniform Lifetime Table is. The Uniform Lifetime Table is actually obtained from the combined life expectancy of the account participant plus that of a hypothetical beneficiary exactly age ten years younger than the plan participant.

The JOINT AND LAST SURVIVOR TABLE (and you have got to love the optimism of our Congresspeople here) is a table that can be used when the plan participant names as beneficiary his or her spouse who is greater than ten years younger than the participant. For an example of the JOINT AND SURVIVOR TABLE follow this link.

The divisors obtained from this table are more generous than the Uniform Lifetime Table. Let’s see how the use of the JOINT AND LAST SURVIVOR TABLE would have affected my example above. Again, suppose I am 74 in the year 2012, but that my spouse is named as my primary beneficiary and she is age 58. Looking at the table at the link above, we look across the top for age 74, and then go down to find my spouse’s age 58. Here, the divisor would be 28.1. Lets divide $150,000.00 by 28.1 for a Required Minimum Distribution of approximately $5,338.00. Thus, the use of the JOINT AND LAST SURVIVOR TABLE results is a lower Required Minimum Distribution. This table is more generous because it is assumed that because the beneficiary spouse has a much longer life expectancy the account should last for a longer time. Reducing the amount required to be taken from the account will accomplish this goal.

I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm. The rules regarding retirement accounts do change, are highly fact specific, and errors can be extremely costly. Before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Installment I of A to Z is the INHERITED IRA. Sounds pretty self explanatory doesn’t it? An inherited IRA must simply be an IRA account that you have inherited right? Well, sort’ve. An Inherited IRA is an IRA that contains either qualified retirement plan assets or IRA assets that you have inherited. The most important thing to remember is that if you are named as the beneficiary of a qualified retirement plan or IRA of a non-spouse, the use of the Inherited IRA concept can allow for continued deferral of income taxes on the assets held inside the account.

The Inherited IRA, as applied to qualified retirement plans, is a creation of the federal Pension Protection Act of 2006. Prior to that Act, non-spouse beneficiaries of a qualified retirement plan often found that when they inherited a qualified retirement account, they could not defer the income taxes on the assets. This was mostly because the plan administrator would require that the account be liquidated much more quickly than federal tax law required, causing early recognition of income taxes on the pre-tax dollars contained in the account.

Nowadays, qualified plan administrators are required to allow designated beneficiaries to transfer the qualified account assets to Inherited IRAs. The benefit of transferring the assets to an Inherited IRA is that distributions from the account can occur over the beneficiary’s lifetime, spreading the income tax bite over many many years, and retaining the ability to invest pre-tax dollars. IRA accounts can also be transferred to an Inherited IRA.

There are some requirements to be followed when setting up an Inherited IRA. The Inherited IRA account must be titled in the name of the original account owner and the beneficiary, typically written as “IRA f/b/o John Doe, as beneficiary of John Public, Deceased.” The transfer to an Inherited IRA is not a true rollover of the account, it is a trustee to trustee transfer, meaning that the account cannot be paid directly to the beneficiary to then transfer into the inherited IRA. There is no sixty day rollover rule here. The transfer must be made directly to the Inherited IRA or you will have to immediately pay the income taxes. A further requirement is that Inherited IRA assets cannot be commingled with your own assets. Lastly, be sure to name your own beneficiaries for your Inherited IRA. If you pass away prior to withdrawing all of the assets, your named beneficiaries will be able to continue withdrawing the assets on the basis of your life expectancy.

If you are named as a beneficiary of a qualified retirement account or IRA, the decisions you make can have major financial repercussions, and can generate a significant and unnecessary income tax liability. The advice you may be receiving from the qualified plan administrator or IRA custodian may well be incorrect or out of date. In addition, the plan administrator or custodian may be a company that is not friendly to IRA beneficiaries and needlessly advises that plan or IRA accounts must be cashed in right away, without advising of the possibility of transferring the account to another IRA custodian as an Inherited IRA. If you are in this situation, you are strongly advised to consult with your lawyer or accountant as soon as possible. The income tax bite can be many tens of thousands of dollars, depending on the value of the account.

I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm. The rules regarding retirement accounts do change, are highly fact specific, and errors can be extremely costly. Before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.