2007 E.P. Morrow Edwin P. Morrow III, J.D., LL.M., is VP, Regional Trust and Estate Planning Consultant of Key Private Bank, for Day- ton, Cincinnati and Columbus, Ohio. He can be reached at Edwin_P_Morrow@keybank.com or 937-422-8330. Contrasting Conduit Trusts, Accumulation Trusts and Trusteed IRAs
By Edwin P. Morrow, III
Ed Morrow contrasts conduit trusts, accumulation trusts and trusteed IRAs emphasizing the advantages of each planning method and explaining that one solution cannot be assumed to be the best strategy for every situation. E xperienced estate planning practitioners know that the stretch IRA promise is often decep- tive, if not an outright lie. Beneciaries of IRA or retirement plan assets can and do withdraw more than the minimum required distribution (MRD). Experienced practitioners have traditionally used separate trusts as a beneciary to alleviate this con- cernto keep funds in the family bloodline, ensure maximum tax deferral and provide asset protection benets to the heirs. However, the federal tax rules regarding such use are often unclear and, when clear, can still be problematic. This paper will compare and contrast the three main trust options available when protec- tion of the IRA and retirement assets is paramount: drafting a trust as a conduit trust, drafting a trust as an accumulation trust, or drafting a trusteed IRA beneciary designation that has many traditional trust features built into it. This article assumes the practitioner has a good working knowledge of IRA minimum distribution rules, understands the reality of beneciary with- drawal habits, the advantage of tax deferral and the importance of asset protection. In addition, this paper assumes the practitioner knows the basic differences between a conduit trust and an accumulation trust 1
and when it matters. It also assumes an IRA large enough to justify such planning. First there will be a brief introduction to the trusteed IRA, which may not be well known to many practi- tioners. Second, the article will compare and discuss the advantages and disadvantages of this method versus a conduit trust. The third section will compare and discuss the advantages and disadvantages of this method contrasted with an accumulation trust. Much of this section will simultaneously compare conduit and accumulation trusts. Some points in this article will assume that there is a master testamentary or living trust named as opposed to a specially drafted trust designed to hold only retire- ment benets. The pros and cons of this latter practice will be the subject of a subsequent article. The Trusteed IRA (IRT) Alternative What is a trusteed IRA? Many people are unaware that there are two legal forms of Individual Retirement Accounts (IRAs): a custodial IRA under Code Sec. 408(h) (more com- mon) or a trusteed IRA under Code Sec. 408(a) (rarer). Natalie Choate, probably the nations pre- eminent author in this area, refers to these as IRCAs (custodial IRAs) and IRTs (trusteed IRAs) when dif- ferentiation is needed 2 . This outline will use IRT/IRCA 32
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Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs when differentiation is needed, even though both are equally IRAs. For the beginning investor, the IRCA is usually the cheaper and better choice. Historically most IRAs have been opened as custodial accounts because companies do not want greater legal duties or the ad- ditional burden of qualication under state or federal law as a trust company and the attendant additional regulatory scrutiny that this brings. Difference between a custodial IRA (IRCA) and trusteed IRA (IRT) Under Code Sec. 408, there is no income tax dif- ference whatsoever between the two forms of IRA. While an IRA owner is living, the minor state law differences in the form are unlikely to ever surface, since most litigation surrounding IRAs pertains to the tax treatment and not the form of the agreement 3 . Even after an IRA owners death, many banks and trust companies simply copy the beneciary des- ignation forms and options available to custodial IRAs for their IRT, offering no advantages whatsoever. However, with a more advanced IRA provider, there can be tremendous estate planning advantages to a trusteed IRA after the owners death if the IRA trustee is exible and the owner opts for more robust beneciary designation planning. A trusteed IRA can combine many of the estate and asset protection planning advantages of a trust while ensuring the simplicity, compliance and income tax benets of an ordinary IRA. In essence, it can create a conduit trust without the complexities of a separate instrument. Flexibility of Trusteed IRAs How much exibility you have depends on the IRA provider. Some companies have long, complicated forms with a few boxes to check for different options. Others may expect an attorney to draft one from scratch. KeyBanks forms strike a balance by having a simple Beneciary Designation Form with a separate Attorney Forms Disk given to counsel for examples of additional options for exibility. In theory, payout options for a trusteed IRA can be customized in ways similar to a conduit trust, provided that the strictures of the IRA rules are complied with. Obviously some customizations would be inappropri- ate and rejected by the trustee, such as provisions for an individual co-trustee or investment in insurance. But the most common distribution provisions are prob- ably acceptable: an owner can mandate that only the MRDs be paid to a beneciary until they reach age 40, after which point there are no longer any restrictions, or that only the MRDs be paid out unless additional distributions are needed for the ubiquitous health, education and support. An owner may also limit the ability of a beneciary to name another beneciary, thus keeping funds in the family bloodline. The rest of this article will focus on the planning opportunities, advantages and limitations of this and other IRA and trust planning strategies. Advantages of an IRT over a Separate Conduit Trust In many ways, a well-drafted IRT beneciary des- ignation can offer the exact same advantages of a conduit trust as a ben- eficiary of an IRA, but with less complexity and uncertainty. An IRT offers these advantages over a conduit trust: 1. Easier and less-expen- sive tax accounting. There is not a separate 1099-R going to a trust (and/or subtrusts) and then Forms 1041 led and K-1s going out to the beneciary. There is much less accounting complexity. 2. Less chance that a pecuniary share division in a master living trust will inadvertently trigger the entire IRD built up in the IRA upon funding the subtrust or terminating the trust. This is a clear and present danger for many trusts 4 . 3. Less chance of a negligent trustee improperly administering the income distributions from the conduit trust and botching the qualication as a designated beneciary. Prior tax court cases have disqualied charitable trusts ab initio where the trustee later failed to properly administer the trust (e.g. failing to timely pay the income) 5 . One recent tax court case disregarded an improperly administered bypass trust 6 . It would not be far- fetched to imagine the same disqualication as a designated beneciary if the trustee failed to properly administer a conduit trust by immedi- ately distributing all IRA distributions, especially if the trustee and beneciary were one and the same. This is no small danger. Many attorneys do not have ongoing contact with trustees after Under Code Sec. 408, there is no income tax difference whatsoever between the two forms of IRA. JOURNAL OF RETIREMENT PLANNING 33 May June 2007 the initial administration of the estate and many tax preparers do not read the ne print of the trust (honestly, how likely is it that a tax preparer knows what a conduit trust is?). Thus, nonprofes- sional trustees are very likely to overlook this requirement, especially if the trustee and ben- eciaries are one and the same. 4. Less chance of a trapping distribution where the funds are inadvertently left in the trust or the 65 day election is not properly made so that funds are left taxable in the trust reaching the maximum tax rate after only $10k or so of income. 5. Easier for beneciary to understand common, standard 1099-R versus 1041 and K-1. 6. Easier for attorney to draft or amend other wills/ trusts without having to worry about all of the changing designated beneciary rules and veri- fying their effect on spendthrift clauses, powers of appointment, GST and marital divisions, tax clauses, etc. 7. Less chance for the trustee to botch see-through trust status by failing the documentation require- ment. 7 A trustee must timely provide a copy of the trust or qualifying documentation to the IRA custodian/trustee. With a trusteed IRA, the trustee already has the IRA trust document. A conduit trust trustee would be wise to comply with this well ahead of time in case the IRA custodian/ trustee rejects the attempted documentation (especially when the entire trust is not sent). 8. Danger that the IRA provider may reject an incomplete summary description. When the entire conduit trust document is not sent to the IRA custodian/trustee, a trustee may try to send appropriate certication allowed under the Regs. A conduit trust trustee would be wise to comply with this well ahead of time in case the IRA custodian/trustee rejects the initial attempted documentation. Better yet they should have their tax counsel do so. Some CPAs/attorneys may also worry about Circular 230 and whether their certication of the trust as compliant with the see through trust rules is now a covered legal opinion. 9. Danger that the IRA custodian/trustee does not want the full trust. When the entire conduit trust document is sent to the IRA custodian/trustee, the custodian may still want the summary (so that it does not have the burden of interpretation). Or, it may come to a different conclusion as to des- ignated beneciary see-through trust status than the conduit trustee and beneciaries. If they see the law as unclear, might they require a PLR or indemnication from the conduit trustee to cover their liability? 10. Easier (and less risky) for trustee to administer after death because of fewer chances to com- mit IRA titling gaffes. This is no small risk. A non-professional trustee dealing with an outside, high-volume discount IRA provider may very well mistitle such an account. Form, to the IRS in this instance, often outweighs good intentions. See LTR 200513032 (Jan. 4, 2005) where the trustee of the trust that was beneciary of the IRA was one of the IRA owners children. The child, with incompetent help from the investment rm, subsequently botched the titling. The IRS denied relief and the entire income in the IRA was triggered. Code Sec. 408(d)(3)(C) prohibits rollover of any distributions from an inherited IRA. Innocent mistakes are not tolerated. See also LTR 200228023. 11. Easier and quicker for beneciaries to get initial and subsequent MRDs etc after death, due to less onerous titling and conduit go-between. 12. Less risky for grantor/attorney to use easier- to-administer pecuniary share formulae in the master trust as opposed to fractional share for- mulae needed whenever IRD is payable to such a separate trust. 13. Easier for executor/trustee to make/determine QTIP election. 14. Easier to interpret allocation of income/principal under either the trust instrument or the Uniform Principal and Income Act (UPIA) when IRAs are not payable to separate trusts. This includes confusion and problems allocating trustee fees between income and principal. Non-professional trustees hiring inexperienced tax preparers can easily botch trust accounting with IRAs, leading to litigation from beneciaries as well as tax problems. An IRT might eliminate much of this danger and make tax reporting and explanation easier to beneciaries. 15. A conduit trust provision might inadvertently cover qualied retirement plans or even de- ferred compensation plans and pass those out to beneciaries as well. This is probably not what the grantor/owner would want. Thus, a conduit clause is probably unnecessary or possibly ill- advised to apply to such assets. It remains to be seen whether retirement plan administrators will 34
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take permit application of the non-spousal roll- over opportunity of the Pension Protection Act 8 , but it would be wise to make application of such a clause dependent on the plan administrators allowance of rollover to an inherited IRA, other- wise the conduit clause could force out an entire retirement plan in one year. 16. May allow estate/living trust to be settled or even terminated sooner if the bulk of the estate is in the IRA. This may save signicant accounting and trustee fees. 17. Easier to plan for other, non-stretchable IRD such as installment sale receipts or deferred compen- sation that is not eligible for stretch out but that might easily be caught in a trusts overreaching clause regarding IRD/IRA assets. 18. Easier for attorneys not to redo/rethink/amend provisions that may disqualify a trust as a conduit trust. These may include spend- thrift clauses that may cause forfeiture of interest 9 , hold-back clauses, lifetime pow- ers of appointment, spray provisions, trust protector provision, in terrorem clauses etc. These are all very common trust provisions. 19. Easier to qualify to use the life expectancy of each beneciary of the IRT, as opposed to using the life expectancy of the oldest beneciary of the conduit trust. Conduit subtrusts will have to use the life expectancy of the oldest beneciary of the trust, unless the division is made at the level of the retirement plan/IRA beneciary designation form. For example, if the trust splits into three shares for age 25, 27, 35 year old beneciaries, the life expectancy of the 35 year old may have to be used. If there is a 1 percent share for a 75 year old, that beneciarys life expectancy may have to be used for the entire conduit trust) 10 . 20. Less need to worry about the conduit trust pro- viding for payment of administrative expenses and taxes from the trust. A typical living trust provides for payment of administrative expenses and taxes from the trust, including a decedents nal income taxes as well as estate taxes. This jeopardizes qualifying the trust as a designated beneciary because the IRS may consider the estate as a beneciary. One commonly cited solution is to insert a provision that prohibits the use of retirement assets for such administrative expenses and taxes after September 30 of the year following the year of death (the cut-off date for determining designated beneciary status). This is great for qualifying the trust as a designated beneciary, but not so great for other trust issues and trustee liability, especially where the bene- ciaries of the IRA funds are not the same as the residuary beneciaries of the trust in general. For example, will beneciaries sue the trustee for not getting expenses paid from IRAs before that time? (wouldnt you?). What if litigation or tax disputes hold up such payment? How would that clause mesh with the tax apportionment clauses? 21. Less chance that a conduit trust that denes trust accounting income to include distributions from retirement plans and then mandates all net income to be paid annually may not be sufcient to qualify as a Designated Beneficiary because net income may be less than the full amount of distribution from the IRA (e.g. trust receives $50,000 MRD, after expenses determines net income is $48,000 and pays that out pursuant to the trustthe IRS may not consider this to be a conduit trust be- cause the full MRD does not go to the individual purported to be the Designated Beneciary the K-1 shows only $48,000). Under a strict inter- pretation of the example in the regulations this would be the case, but the IRS may not be as ag- gressive in making such an argument since there is no dreaded accumulation of IRA assets in the trust under such a clause. 22. Less need to worry about a legitimate or even frivolous will or trust contest disqualifying a conduit trust as beneciary because the bene- ciary is not identied by September 30 of the year after death. This is even more problematic with a testamentary conduit trust created by Will. It would not be uncommon for such litigation to extend past this date, and, while a disgruntled party can also contest an IRA beneciary desig- nation, such litigation is generally less common than will or trust contests. 23. Less need to worry about a Code Sec. 645 scal year election (Form 8855) with the estate affect- Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs Conduit trusts named as a beneciary still have to use the life expectancy of the oldest beneciary as the measuring life. JOURNAL OF RETIREMENT PLANNING 35 May June 2007 ing or somehow disqualifying a separate conduit trust. While the IRS has ruled that such an elec- tion does not make a trust an estate for purposes of designated beneciary 11 , it has not ruled on its effect on accounting for conduit trusts. Ideally, the conduit trust should be a subtrust with a separate EIN from the administrative trust combined with the estate and not be eligible to use a scal year. However, it would not be odd or unusual for an inexperienced trustee/tax preparer to think dif- ferently and use a scal year with such election for an attempted conduit trust in order to defer the taxes another year. 24. Less need to worry about what the IRS means by immediate distribution (the language from the example in the Reg) of IRA funds from the conduit trust. Is 30 days fast enough? 180 days? Within the year? With all deliberate speed? Can a trustee wait until February of the following year and make the 65 day election? No one really knows. 25. Less chance at double dipping for trustee and investment fee expenses. For instance, a con- duit trust may be paying load fees or wrap fees for the IRA investment management of 1 percent or more, plus the trustees fee of 1 percent or more. The IRT would only have one fee, which may be less than half the fees for a conduit trust and IRA. 26. Less chance that a client can amend the trust pro se and disqualify the trust for DB status. Every attorney has run across a client that tried to do a simple trust amendment themselves. Conduit trust changes typically require a signa- ture, perhaps witnesses, but very rarely require review of any professional counsel. IRT changes would at least have to be approved by the bank or trust company. 27. Less chance for taxes to inadvertently be ap- portioned to the IRA. 28. Less chance of an individual conduit trust trustee changing citizenship or residence to another country, which may cause the trust to be treated as a foreign trust under Code Sec. 7701(a)(31)(B) and Code Sec. 679. This would dramatically complicate trust compliance and could even trigger additional income taxation under Code Sec. 684. An individual who is trustee and resident of another country may also subject the conduit trust to that foreign countrys income taxes. This is not possible with an IRT. 29. Less chance of an individual conduit trust trustee (or a spouse, friend, employee, etc) embezzling money from the IRA. Since most trusts do not require a bond to be posted, this generally means that beneciaries often have no practical recourse against embezzling individual trustees. Such is not the case for an IRT trustee with multiple levels of internal and OCC oversight worth tens or hundreds of billions of dollars. 30. Less chance for a joint trust between husband and wife being considered revocable by the sur- viving spouse after the rst spouses death and thus disqualifying as a Designated Beneciary un- der the minimum see through trust requirements of Reg. 1.401(a)(9)-4, A-5. The IRS has allowed fully revocable grantor trusts to be considered as beneciaries, so this is probably not a big issue, but joint trusts can still be confusing to administer post-mortem, especially where the schedules are never lled out. 31. Less chance of an inadvertent assignment of IRA to IRA owners trust. An IRA owner might mistakenly ll out the Schedule A of their trust or otherwise notify an IRA provider of a change in ownership as opposed to beneciary status. Although all IRAs probably prohibit such as- signment, it may yet affect ownership and have potentially devastating results. See the Stephen- son case discussed in endnote 3. 32. Easier to execute and qualify disclaimers with an IRT. Using a conduit trust as primary ben- eciary complicates disclaimers in that it may not be legal under state law or the trust instru- ment for a trustee to make a disclaimer. Even if it is permitted, it may be dangerous to do so because of duciary duties to both primary and remainder or more remote beneciaries. Disclaimers are also complicated in that the disclaimant cannot have accepted any benets, and, other than spouses, the disclaimant cannot retain any benets afterwards. Thus, if a conduit trustee disclaims in favor of say, the children as contingent beneciaries, the disclaimer may not be qualied because the children, through the trust as equitable owners, may be deemed to be de facto disclaimants yet are still attempting to accept benetsa denite prohibition for non- spousal beneciaries. Note that this may not be just a gift tax problem; if the disclaimer is not qualied, the IRS may also see this as a transfer that triggers IRD for income tax purposes. For 36
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many families, this would be a much worse tax disaster than imputation of a gift. 33. Easier to draft limited/general powers of ap- pointment. Also, it is easier and more certain for a beneciary to execute/trigger, since it can be done through simple beneciary designation in an IRT rather than through a probated will as is often required for trust POAs. 34. A conduit clause that appears to qualify, such as pay at least the required minimum distribu- tions to the beneciary, may not, because the trustee can accumulate greater than the MRDs in the trust, which may disqualify the trust as a designated beneciary. 35. Having the IRT as a body of assets separate from other non-IRD trust assets makes the allocation of GST exemption much easier. In small estates, the IRT will have GST allocated, but for larger estates it is usually more advantageous to have GST allocated to non-IRD, non-wasting assets. Thus, with the exception of Roth IRTs, GST should usually be allocated to non-IRA assets. This be- comes more complicated, if not impossible, to accomplish with a conduit trust holding IRA and non-IRA assets both, which may lead to wasted GST exemption or even GST taxation. 36. Easier to make amendments/restatements. When you revisit a 30 page conduit trust many years after the drafting, there is a strong likeli- hood that 1) you or your rm did not draft the original trust; 2) your templates have changed so that you barely recognize the trust or 3) you do not remember all the client-specic clauses and provisions that are buried in the trust. This often requires a more extensive reading of the trust and often a full restatement. By contrast, an attorney will often draft the IRT with as little as a one page of customization, since many of the important clauses are either in the IRT prototype or the beneciary designation form. This allows for a much quicker assessment and change of the clients wishes within the IRT. 37. An IRA custodian may not agree to make in-kind transfers of inherited IRAs. Therefore in an IRT it is easier to deal with the situation when the rst beneciary dies and secondary beneciaries inherit. An example is when the IRA goes to the spouse with restrictions, then to the two children equally outright. The spouse dies 2 years later. With an IRT, the two children step in without delay. With a Conduit Trust, the trustee would have to take an extra step of making an in-kind transfer of the IRA to the children (or possibly to subtrusts for the children). Many custodians are very difcult and unreasonable to deal with in making such transfers, even to the point of requir- ing opinion of counsel or private letter rulings or unnecessarily issuing 1099-Rs that may lead to more income tax compliance hassles with the IRS. While one can get around this by making a plan-to-plan transfer to a more reasonable IRA provider, it can still be a hassle and expense 12 . 38. Similar to the point above, an IRT increases the likelihood that the planning will survive later actions by another attorney or advisor who does not understand or appreciate the complexities of estate planning with IRAs. Despite what one hopes, clients move or think they can nd a cheaper attorney to do a simple amendment and do not always go back to the original drafter (who may even be retired). Attorneys routinely revoke, restate or amend old trusts, but would take more care in doing so with an IRT, and many non-spe- cialist attorneys forego responsibility for funding of the trust anyway. 39. An IRT allows the Will and/or Living Trust to be simpler and less confusing to the client. Explain- ing the documents is easier. This is especially true for the engineers and other clients who insist on understanding every word and paragraph of a trust. While it may not seem logical, every attor- ney has had clients (OKIll pick on engineers again) who will go through every last clause of a trust but would never think of reading through their IRA prototype, term insurance contract or other nancial documents. 40. An IRT will never have tracing issues. It may very well be that the IRS does not care that funds from a conduit trust come from other sources than the IRA and are yet counted as IRA distri- butions. Generally, duciary accounting under trust income tax rules under Subchapter J and concepts of DNI do not trace where assets come from. However, a strict reading of the Conduit trust regulation example may easily be construed to require this for purposes of the designated beneciary safe harbor. For example, conduit trust trustee gets $50,000 in income from other sources, pays out $30,000 to the beneciary, and then gets a $40,000 MRD IRA distribution. Does the conduit trust trustee have to strictly follow the safe harbor by immediately distributing the Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs JOURNAL OF RETIREMENT PLANNING 37 May June 2007 $40,000 MRD, or can he satisfy the requirement with only $10,000? It may depend on the nature of the $30,000. Following general Subchapter J principles, the latter should be acceptable as long as the K-1 indicates at least $40,000 of ordinary income passing to the beneciary. But IRA DB rules need not follow Subchapter J or any other income tax principles (or common sense). At the very least, this is yet another question mark that makes the IRT a cleaner choice. 41. An IRT may provide better asset protection to a beneciary than a conduit trust (note that if the IRT has an ordinary beneciary designa- tion like an IRCA the opposite would be true). One would instinctively think they would be identical. Take, for example, a beneciary who inherits $1 million, causes an accident, and has a $1 million judgment entered against him, which is not covered by insurance. A judg- ment creditor will seek to attach the 1 million dollar IRA. Both the conduit trust and the IRT have one level of identical protec- tion in that the spendthrift clause under most state laws should protect the corpus. In many states, such as those passing the Uniform Trust Code, even the mandatory income stream can- not be attached 13 , which allows a trustee to pay bills and expenses for the benet of the ben- eciary to keep it from creditors. However, the IRT may also be additionally protected under the beneciarys state IRA creditor protection exemption. This is probably not true for the conduit trust itself, which would probably not qualify for such exemptions. This may make a difference in states that do allow attachment of a mandatory payment or if the judgment creditor has preferential status that can in some states get around the traditional spendthrift protections. Such may be the case for spousal, child support or intentional tort claims. 42. Planning with signicant Roth IRAs is easier, in that there is a danger in one common conduit trust of having completely inappropriate language and administration for the two completely dif- ferent tax animals. Having an IRT and Roth IRT separate from the master trust makes it easier to use differing powers of appointment, GST and discretionary distribution language that is clearly called for in such situations. 43. An IRT may have less chance of spousal elective shares or community property rights negatively affecting the designated beneciary status when non-spousal beneciaries are named primary beneciaries. Generally, an IRT beneciary des- ignation form will provide a chance for a spouse to waive any such rights. However, in some circumstances a spouse may have rights against a conduit or accumulation trust still outstand- ing as of September 30 of the year after death. If the estate is settled reasonably quickly, this is not an issue. But what if such rights are still in play as of that date? Is the trust to be considered irrevocable? Are the beneciaries truly identi- able as required by Reg. 1.401(a)(9)-4? If they are identiable, must the spouses life expectancy also be considered? Either way would be a tax disas- ter. No cases address these possibilities. But some in- dication as to how the IRS sees this may be seen at Rev. Proc. 2005-24, which purports to disqualify charitable deductions when such elective shares are in play. 14
44. An IRT is unlikely to have trust protector clauses, incentive/disincentive clauses, in terrorem clauses, etc. that may call into question whether the beneciaries are truly identiable accord- ing to the regulation discussed above. 45. A current rollover from qualied plan to IRT is less likely to lead to misplaced reliance on the Pension Protection Acts non-spousal inherited IRA rollover provision. Under Notice 2007-7, the IRS has ruled that plan administrators do NOT have to allow such rollovers, despite the popular press to the contrary. 46. An IRT has less chance of prohibited transactions disqualifying the IRA and therefore triggering the income tax. This is more of a danger when a sibling, spouse, ancestor or descendant is a trustee and takes compensation for their services to a conduit trust. But this is not uncommon. Of course, an individual conduit trust trustee who is also an investment advisor getting commissions would clearly be self-dealing and breaching duciary duties to the trust, and this may be a prohibited transaction endangering the IRA. It is Prohibited transaction risks, when related parties are trustees, are often overlooked. 38
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also unclear whether, if a trustee simply takes a trustee fee from the trust funded indirectly from IRA assets, say 1 percent of the IRA assets, this is also a prohibited transaction. These rules, enforced by both the IRS and the Department of Labor, are often confusing and unclear. While there is no applicable case law and this issue appears well below the radar screen, one distin- guished author recently opined It is not certain if that [IRC 4975(f)(6)] exemption applies to trustee fees where the trust is the beneciary of an IRA and the trustee is a relative of the IRA creator and also a relative of the trust beneciary, but that also might be a prohibited transaction. 15 If the IRS or DOL ever pursued this aggressively it could mean serious problems for many conduit and accumulation trusts with family members as paid duciaries. 47. Should the beneciary designation form need to be court reformed in the event of incapacity or post-mortem, it would probably be easier and quicker to do so with a trusteed IRA than with a custodial IRA or qualied plan payable to a separate conduit or accumulation trust. The IRS has approved this concept in LTR 200616039. In many states a reformation of a custodial IRA contract would come under the jurisdiction of the common pleas rather than the probate court. By contrast, reforming a trusteed IRA beneciary des- ignation form would likely come under the dual jurisdiction of the probate court and common pleas. This allows a practitioner to use the probate court, which is more familiar with trusts and is probably much quicker to reach a decisionan important factor with disclaimer, estate tax and IRA beneciary designation date deadlines. 48. Using a master conduit or accumulation trust may lead to trapped distributions taxed at the highest brackets when pecuniary gifts are made from the trust. Assume, for example, that John Doe has a 2 million dollar estate consisting of a 1million dollar IRA and 1 million dollars in real estate and other assets, all funded and pay- able to the John Doe Trust. The trust makes ve payments of $100,000 each to several friends, and the rest in trust for nieces and nephews. The trustee takes out $500,000 from the IRA to pay expenses and the pecuniary bequests. The trust may yet qualify as a designated beneciary and even as a conduit trust if such payments are made and settled before the September 30 beneciary designation date, but the trust just incurred $500,000 of ordinary income, about $490,000 of which is taxed at the highest pos- sible income tax rate. There is no DNI deduction for payments of pecuniary bequests 16 . 49. Possibility of a beneciary making qualied charitable distributions straight from the IRA. Currently only for 2007, an IRA owner over 70 can make contributions up to $100,000 directly to charity from an IRA and have such distributions count towards their MRD and not be counted as income. This option is available to inherited IRA beneciaries as well 17 . Presumably if the see- through designated beneciary of a trust is over 70 this would also be available. However, this option is not exactly clear and even though the IRS should logically permit this, it becomes more confusing in a conduit trust scenario due to an additional party involved and possible confusion on the part of the IRA custodian. 50. Possibility of a hammer clause eviscerating the IRA. Some conduit trusts may contain what is called a hammer provision that requires a trustee to accelerate and gross up distributions in order to pay the IRAs share of estate and in- come taxes due when an estate is illiquid 18 . As an example, assume the estate owes 750 thousand dollars of estate taxes on illiquid IRA and non-IRA assets. Such a clause would force the trustee to withdrawal over 1million dollars of the 1.5 mil- lion IRA to pay estate taxes and income taxes on the withdrawal. While this may in some rare cases be necessary, such a provision does not take into account an executor/trustees ability to use Code Sec. 6166, Graegin loans, ILIT loans, or even the beneciaries ability to pay or loan funds from their own pockets. Disadvantages of a Trusteed IRA versus a Conduit Trust An IRT does not t every situation. There are many instances when a separate trust should be named as beneciary. A conduit trust provides a safe harbor solution. Here are some factors arguing for a conduit trust over an IRT: 1. Few banks, trust or investment management companies currently provide them. These are typically limited to higher end wealth man- agement firms. Wealth management trust departments from the brokerage world often do not have the years of trust experience to manage Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs JOURNAL OF RETIREMENT PLANNING 39 May June 2007 such a program that requires more due diligence than a traditional IRA. 2. IRTs have larger minimum account sizes (typi- cally over 1 million dollars, but some offer them for as low as $50,000 for qualifying customers). 3. Fees. Do-it-yourself investors picking their own stocks, bonds and no-load mutual funds may not see the value in paying for the wrap-like invest- ment management fee typically associated with such accounts. 4. Beneciaries after death may have limited op- portunities for trustee to trustee rollovers and choosing their own rms for custodial or invest- ment management of the IRA. Because an IRT may limit the beneciaries rights in order to protect the contingent beneciary, only other sophisticated bank and trust companies will be willing to take on such an account. While an IRT can be structured to be self-directed or use outside nancial advisors, there would still be a minimum fee for a directed IRT that makes bun- dling the services together the greater bargain. 5. With an IRT, the bank or trust company could go out of business. While the assets would probably still be protected, this would force a client to nd another rm with similar exibility or use a conduit trust. 6. Deathbed changes may be more problematic in that changing a conduit trust at the last minute can be done easily. Many states even recognize oral trusts and amendments do not generally need witnesses, notary or special ling (although a prudently drafted trust should probably require more formality). An IRT beneciary designation form, like most such forms, must comply with the companys policies and procedures, which may require receipt and acceptance of the ben- eciary designation form before death. This is less of a concern with modern email, internet, and fax capabilities. 7. A client who is still working may not be able to rollover qualied plans at his current employer into an IRT. But sometimes plans will allow in service distributions for those over 59 . Review a copy of the Summary Plan Document or Plan itself to see if this is possible. 8. A client rolling over 403(b) annuity or IRA an- nuities may face surrender charges and give up any incidental death benet of the annuity. One should be careful in drafting the conduit trust clause regarding non-qualied annuities payable to a trust, since most companies and practitioners believe Code Sec. 72 forces such payments to be paid out within ve years of death (not December 31 of the fth anniversary of death). 9. A conduit trust is much easier to use in consoli- dating estate planning for various accounts for those still working and funding employer plans, due to the restrictions on rollover for currently funding retirement plans. 10. Even for retirees, there is sometimes an asset protection reason not to rollover to an IRA during lifetime and have retirement plans payable to a conduit trust. For instance, although most states have state law exemptions for IRAs, the client may live in a state without comprehensive state law creditor protection for IRAs. Some states have a dollar limit, others limit to amounts reasonably necessary. This rationale for not rolling over has been obviated somewhat by the recent 2005 Bankruptcy Act (BAPCPA), P.L. 109-8 that grants unlimited protection in bankruptcy despite state law exemptions to the contrary for rollover IRAs and up to 1 million dollars for non-rollover IRAs. However, invoking this protection for clients in a minority of states that have restrictive state law would require ling for bankruptcy. 11. If the client has asset management with one rm and the IRT through another, there may be higher investment management fees than if they were aggregated together at one rm. Wealth management providers typically have a declining scale so that the average cost to manage larger sums is smaller than the cost to manage smaller accounts. One solution would be to have the wealth management team for the IRT manage a clients other investments as well. 12. A conduit trust may have a trust protector clause that, properly limited in scope, may allow a conduit trust to convert to an accumulation trust after death (LTR 200537044). This might provide some exibility should a drastic situation arise post mortem. Although a similar clause could probably be inserted in an IRT to allow decant- ing MRDs to an accumulation trust in such a situation, this would be slightly different and may entail more issues than the aforementioned private letter ruling. Although the IRS might ultimately allow such post-mortem planning pro- viding it is locked down by September 30 of the year after death, there is not really much authority for such planning other than LTRs, and with an 40
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IRT you have the additional hurdle of convincing the IRA trustee to accept the beneciary designa- tion form. Advantages of Trusteed IRAs over Accumulation Trusts One should quickly realize that most of the pros and cons of an IRT versus a conduit trust apply equally to accumulation trusts as well. Here are some additional and contrasting features of an IRT (and in most cases, a conduit trust) to an accumulation trust: 1. More certain tax treatment. Although many practitioners feel comfortable using accumula- tion trusts, in many instances they are relying on private letter rulings to guide them, which as practitioners are aware, are not citable as precedent. A recent award-winning article in the ABAs Probate and Property magazine warned: Because of the uncertainty in this area of the law, a private letter ruling should be obtained before naming such a trust [an accumulation trust] as a beneciary. 19 Over caut i ous ? As k whether the attorney has notied the client about the dangers of relying on such rulings and if such warnings comply with the requirements of Circular 230? Many attorneys are afraid to state in writing whether the accumulation trust they drafted will qualify as a designated ben- eciary. This in itself should make any reasonable client nervous. 2. Ability to use standard powers of appoint- mentthese are very important tools for increased exibility in trust planning. The most exible - general powers of appointment, are prohibited. While accumulation trusts can perhaps use a carefully drawn limited testamentary power of appointment, such clauses have to be artfully drafted and the limitations caused thereby may contradict the exible provisions the client wants. For instance, a common limitation for accumula- tion trusts is to prohibit appointment to anyone older than the powerholder. Is it fair to allow daughter #1 to appoint to her husband because he is younger but not daughter #2 to appoint to her husband who is older? What if the favorite aunt happens to be the favored alternate beneciary? What if the charity is a favored alternate bene- ciary? Should you have differing limited powers of appointment clauses over different assets in the trust? Does your clause apply to qualied retire- ment plans that may not be permitted by the plan to rollover into an inherited IRA? 3. Uncertainty of future Private Letter Rulings. Ar- ticles regarding new accumulation trust private letter rulings will invariably state that this is- sue is now resolved, the IRS now allows It is tempting to conclude so for an issue such as spousal rollovers that have garnered literally dozens of favorable rulings. But private letter rul- ings resolve nothing (except for the taxpayer who received it, and even then rulings often leave out many issues) 20 . Private letter rulings can always be reversed, but more importantly, there is not even a binding ruling to reverse. Attorneys who routinely warn taxpayers not to rely on private letter rulings in other tax areas inexplicably throw caution to the wind in this area. 4. An IRT or conduit trust allows use of optimal tax table when the spouse, who is more than 10 years younger, is primary beneciary. This provision requires the spouse to be the sole beneficiary, a requirement for which an accumulation trust would not qualify. Although this may not be common, when it does occur it not only affects post-mortem distributions, but it is one of the few occasions where naming a ben- eciary affects pre-mortem distributions after the required beginning date. It is the authors general nding that clients care more about their taxation than their childrens, so, even if this is a minor difference, it is not to be underestimated as to its importance to a client. 5. An IRT or conduit trust for a spouse ironically may lead to longer tax deferral and smaller distribu- tions from the IRA than naming an accumulation trust for the spouse. This is because of an IRT/con- duit trust for spouse need not take distributions until the deceased would have reached 70 and even when MRDs do commence the more advantageous recalculation tables are used. Thus, at least for spousal trusts, IRT/conduit trusts are better for tax deferral of the IRA (though as dis- cussed below, there are other tax aspects arguing against this view). Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs Accumulation trusts are inherently adverse to a clients charitable inclinations. JOURNAL OF RETIREMENT PLANNING 41 May June 2007 6. Less expensive attorney fees for drafting and periodic maintenance through estate planning reviews necessary to keep up with DB cases and rulings. Nearly all of the LTRs and cases on planning with IRAs and trusts since the 2002 regulations have to do with accumulation trusts rather than conduit trusts or IRTs. 7. Less liability for attorneys and other advisors due to the fact that the IRT/conduit trust is a safe harbor. Of course, the accumulation trust is also nominally supported by a regulation, but the real parameters are outlined by private letter rulings that come out several times a year. Does the attorney incur liability for not informing the client of the change (or potential change) in law regarding accumulation trusts and drafting a new amendment accordingly? 8. Less chance of disgruntled beneciaries suing the attorney or trustee over the denition and administration of principal and income distri- butions. There is little chance for such disputes and misunderstandings in an IRT/conduit trust. However, how do you explain to beneciaries (not to mention their advisors or trustee) the dif- ferences in denitions of income that become so complicated in accumulation trusts? Fiduciary accounting income may have little relation to MRDs or IRA distributions that beneciaries commonly understand. 9. IRTs and conduit trusts are much friendlier to charitable intentions. Accumulation trusts are inherently adverse to a clients charitable incli- nations. It is quite common for a client to have a clause in a trust whereby if no descendants survive, funds go to a favorite charity. Such a clause, applied to an accumulation trust, may destroy the designated beneciary status of a trust. Because such accumulations could go to a charity, it must be considered in determining DB status. An IRT/conduit trust naming a charity as contingent beneciary comes within the safe harbor because the contingent beneciaries are not considered when MRDs cannot be accumu- lated for their benet. 10. Accumulation trusts may in rare circumstances incur multiple states income taxation, and can incur state taxation of the IRA distributions even where the beneciary lives in a state without income tax. Assume, for example that a Califor- nia resident leaves his 2 million dollar IRA in an accumulation trust. The trust beneciaries are in Texas and Florida. However, the trust may still be taxed under California state income tax law. Any income trapped in the trust is taxed at both federal and state rates even though the beneciaries are all living in states without a state income tax. This may lead to a signicant additional tax that could easily negate any tax deferral advantages. 11. Accumulation trust trustees can more easily be confused as to the MRD requirements and this may lead to substantial income tax penalties and interest. 12. Accumulation trust trustees can easily miss get- ting a DNI deduction and incur high income tax rates through delay in distributing MRDs. They can easily miss or be confused by the 65-day election under Code Sec. 663(b). Disadvantages of IRTs compared to Accumulation Trusts Most of the disadvantages of an IRT as compared to a conduit trust apply equally when contrasted with an accumulation trust as well. Here are some that additional and contrasting features of an IRT (and probably Conduit Trust) compared to an ac- cumulation trust: 1. Asset protection from creditors. An accumulation trust can offer better protection over not only the principal but the MRDs as well. IRTs and conduit trusts must pay at least the MRD to or for the benet of the beneciary regardless of creditors, lawsuit, divorce or other risks. In most states, a purely discretionary trust with no ascertainable standards provides the highest asset protection available. An accumulation trust with such a standard may even provide protections against preferred creditors that receive exceptions to the general spendthrift protections (spouse, children). This assumes, of course, that the accumulation trust is purely discretionarymany are not. This is more of an issue when the beneciary lives in a state that does not have a broad creditor pro- tection IRA exemption for inherited IRAs and the beneciary is not in bankruptcy (which affords fairly broad IRA protections). All accumulation trusts are not equalones that establish manda- tory income payouts, ve and ve powers or ascertainable standards may have even weaker asset protection than an IRT in some instances. 2. Asset Protection for beneciaries from themselves. IRTs and conduit trusts have less protection for spendthrifts, substance abusers, or other bene- 42
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ciaries from themselves, even aside from creditor issues. Beneciaries and their circumstances change. While pay to or for the benet of language might give some exibility to manda- tory MRD payouts in an IRT or conduit trust, an accumulation trust (properly worded) clearly has the greatest exibility in this regard. 3. Accumulation trusts can be (but more often are not) structured to allow spray income or princi- pal distributions to the next generation. Assuming that GST is allocated to such a trust, it can have a primary beneciary (son, for example), with allowances to spray to others (sons children, for example). This allows income tax planning and it also allows gifting without resort to annual exclusion limitations. 4. Where GST is allocated to the IRA assets, an accu- mulation trust affords greater GST leverage because GST exempt funds can be accumulated for the next generation. An IRT or conduit trust is less advanta- geous as a GST exempt trust because it is a leaky trust that may not accumulate beyond the primary beneciarys lifetime (except in the case of an IRT or conduit trust with a spouse as sole beneciary which may use more optimal tables). 5. Where the IRA is allocated to and is a substantial portion of the B trust, an accumulation trust af- fords greater leverage. Again, an IRT or a conduit trust is a leaky trust that is not designed to ac- cumulate (although a spouse as sole beneciary can use more optimal tables). It becomes more porous as the beneciary gets older. The accumu- lation trust can lead to greater accumulation in the bypass trust once the spouse is older because the MRD increases. This is less of a problem or difference in states such as Ohio that encourage QTIPable bypass trusts for state estate tax reasons. It is also less of a difference where the IRA is a small portion of the bypass. 6. Accumulation trusts have more exibility in tax and investment planning. For instance, an ac- cumulation trust trustee might purposely trigger more income earlier by early IRA withdrawal for fear of future tax increases or for use in other investments not permitted in an IRA, such as insurance or the family business. 7. Accumulation trusts can get a run up in brackets to soak up the rst $10k or so of income in lower tax brackets than might be taxed to high income beneciaries at the maximum rate. This cannot happen in IRTs or conduit trusts. 8. An accumulation trust ling a Form 1041 may be able to get an above the line deduction not subject to the 2 percent haircut for trustee and investment management fees. This may depend on the jurisdiction and circuit 22 . 9. Accumulation trusts can be used to keep assets in trust to help high income beneciaries who do not need the cash and want to lower their adjusted gross income (AGI). Keeping it taxed in trust lowers the beneciaries AGI for AMT, charitable AGI limitations, itemized deduction phase-outs, student loan interest deduction phase outs, oors, Roth conversion limits, or any other reason whereby a taxpayer wants to keep his AGI below a certain amount. Conduit trusts and IRTs cannot help stave off this income. 10. Accumulation trusts are clearly preferred for third- party created supplemental or special needs trust situations. Standard conduit trusts and IRTs would make the MRDs an available resource under Medic- aid or similar law (although perhaps a conduit trust that allowed MRDs to be sprayed to beneciaries at the discretion of the trustee might not cause such disqualication, but that would force the oldest beneciarys life expectancy to be used). 11. An accumulation trust may be able to use a situs to avoid state taxation of the IRA distributions that are accumulated in the trust. Conduit trusts and IRTs can never get around state income taxation if the beneciary resides in a state with an income tax. An example of this would be an accumulation trust that uses Delaware, Florida or another no-income tax state as situs for the trust, but beneciaries are in California and New York, states with an income tax. Any income trapped in the trust may escape state income taxation even though the beneciaries are all living in states with an income tax. 12. If the IRS were to change the tax tables to force accelerated withdrawals in the future, the dis- tributions to a beneciary of an accumulation trust would not be affected (although there may be higher taxation inside the trust). However, if the IRS changed the rules to force out distribu- tions faster, IRTs and conduit trusts would have no recourse but to distribute the required funds to the beneciary, perhaps faster than a grantor had intended. Of course, Congress could also increase the tax rates for non-grantor trusts. 13. In rare instances an individual beneciary of an IRT/conduit trust may be entitled to a deduction Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs JOURNAL OF RETIREMENT PLANNING 43 May June 2007 Table 1 Comparison of IRA and Trust Estate Planning Options Obviously individual situations of products/services below will vary widely: for instance, some custodial IRAs do not permit full stretch out, some trusteed IRAs are so inexible as to be no different than custodial IRAs, some annuity companies do not offer restricted beneciary options, and, of course, individual trusts vary widely as well and scant guidance is available for qualifying accumulation trusts. And many clients may opt not to use the maximum protections below. These are generalizations based on using the maximum capability and exibility of the services. State law and individual plans differ. (N.B. N. Choate uses IRCA/IRTA abbrev.) Characteristics: IRCA Cust. IRA w/ indiv. as bene IRTA Trusteed IRA indiv. as bene IRA payable to Conduit Trust trust as bene IRA payable to Accumul. Trust trust as bene During Owners Lifetime 1 Income Tax Deferral During Owners Life yes yes yes yes 2 Optimal Tax Table if Spouse >10 yrs younger yes yes yes no 3 Ability to Customize Bene. Design. Form very limited yes NA NA 4 Ability to pay MRD in incapacity situation no yes NA NA 5 Any IRA permitted Investment Choices yes yes NA NA 6 Steep Surrender Charges to Owner no no NA NA 7 Appropriate for small Asset Level yes no no no 8 High Internal Investment Fees/Expenses no no no no 9 Attorney fees for drafting/review/updating (of course, depends on amt of customization) low low medium high 10 Appropriate for QRP while owner working (unless or until IRA rollover is available) no no yes yes After Owners Death 11 Allows Beneciaries to Stretch Out MRDs yes yes yes probably 12 Allows Owner to Restrict Bene to MRDs no yes yes yes 13 Can Restrict Bene to MRDs, but more w Disc no yes yes yes 14 Can Restrict trust so that not even MRDs pd no no no yes 15 Allows Owner to Mandate Contingent Benef (keep IRA in the bloodline) no yes yes yes 16 Allows longer inherited spousal tables recalc yes yes yes no 17 Allows special spousal delayed RBD yes yes yes no 18 Uncertainty as to D.B. status of Trust/Bene no no probably not yes 19 Trapping Distribution at highest bracket >10k no no no yes 20 IRA exemptions protect IRA from benes cred (see state statute, assume not in bankruptcy) maybe (not in OH) maybe (not in OH) NA NA 21 Spendthrift protection for IRA from bene cred no yes yes yes 22 Discretionary trust (optimum) protection no no no yes 23 To or for the benet of protection for MRDs? under UTC, creditors generally cannot attach no maybe maybe NA 24 Asset Protection Level for Beneciaries low medium-high medium-high maximum 25 Ability to grant LPOA equivalent no yes yes limited 26 Ability to grant GPOA equivalent default yes yes no 27 Ability to Remove IRA from Benef.s Estate no yes yes yes 28 Can name charitable contingent & stretch yes yes yes maybe 29 Can ensure charitable remainder & stretch no yes yes no 30 Ability to separately pay investment mgt expenses from outside IRA accounts so as to better grow the IRA yes yes yes yes 31 Ability to take above the line deduction for inv. mgt fees, not subject to 67, 68, 2% oor, no no maybe maybe 32 Possibility of multiple states taxation of IRA distributions or state taxation even when the beneciary lives in a state w/o income tax no no no yes 33 Appropriate for GST non-exempt planning maybe yes yes no 34 Possible Pecuniary funding IRD disaster no no yes yes Author: Ed Morrow, J.D., LL.M. edwin_p_morrow@keybank.com 44
2007 CCH. All Rights Reserved.
Contrasting Conduit Trusts, Accumulation Trust and Trusteed IRAs for federal estate taxes paid under Code Sec. 691(c), yet not be able to take advantage of it (e.g., those taking standard rather than itemizing deductions, those affected by Code Sec. 68). In an accumulation trust, if a beneciary cannot take the deduction, the IRD can stay in the trust and the accumulation trust can take the deduction. Of course, the beneciary may not be too happy about not getting any money but they still receive the deduction. Of course, the beneciary may not be too happy about not getting any income distri- bution, but the trust can use the deduction and the beneciary can get the funds in a later year. Conclusion Cookie cutter estate planning can easily create di- sasters for IRA planning. In addition to the above pros and cons, a practitioner should consider the following more subjective factors: the size of the IRA whether it is ordinary, Roth, or whether conver- sion is advantageous the size of the overall estate and whether estate tax and GST is an issue the liquidity of the estate (or, rarely, even the liquidity of the IRA itself) the age, health, maturity and nancial condition of the beneciaries citizenship/residency of proposed successor trustee a clients charitable intentions and inclinations whether there are special needs beneciaries whether generation skipping is desired the clients overall distribution scheme importance of asset protection from outside creditors importance of asset protection in light of the incidence of divorce in families importance of asset protection from beneciaries themselves tax audit risk tolerance the clients desire for simplicity Large IRAs require educated counsel, competent investment advice and competent and exible IRA providers. This article focuses more on Trusteed IRAs simply because they are underused and underappre- ciated (if not completely unknown) by the planning community. All of the three solutions discussed have a place and none will t every situation. Planners lacking vision and energy see this complexity and throw up their hands in favor of always advising outright IRA bequests. This author has been to several meetings with accredited estate planning specialists who always so advise. But well-advised professionals will not so easily abandon the tremendous tax and asset protection benets of trusts simply because it is complicated. ENDNOTES * Opinions expressed herein those of the author and not Key Private Bank or CCH a Wolters Kluwer business. 1 See examples in Reg. 1.401(a)(9)-5 A-7 or consult the many ne articles on naming a trust as a beneciary in previous issues of this Journal. Conduit and accumula- tion are not terms used by the IRS, but are nicknames resulting from the two examples in the Regs that are commonly used in the estate planning community. 2 Natalie Choate, LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS, 6th Ed. (2006), p 288-289, and THE 170 BEST AND WORST PLANNING IDEAS FOR YOUR CLIENTS RETIRMENET BENEFITS (6th Ed #2 (2006), p 70. 3 Although, see the strange case in Ohio of Stephenson v. Stephenson, 163 Ohio App. 109, 2005-Ohio-4358, where a court held that a custodial IRA owners changed owner- ship (whether purposefully or inadvertently) to a living trust by listing it on the Schedule A of his living trust purporting to transfer assets. Changing ownership on an IRA may trigger signicant taxes and penalties. Whether the IRA in the form of a trust would make a dif- ference was not addressed by the court, but it is likely that a trusteed IRAs ownership could not be changed in such a manner, because the legal (as opposed to equitable) owner is not the IRA owner, but the bank as trustee. Using a trusteed IRA (IRT) might be a protec- tion against inadvertent changes in ownership as occurred in the Stephenson case. 4 See the recent IRS Chief Counsel Memo- randum (CCM) 200644020 (Dec. 15, 2005)though highly respected attorneys question its broad reasoning, do you want to be the test case? 5 M.B. Atkinson Est.,CA-11, 2002-2 USTC 60,449, 309 F3d 1290. affing, 115 TC 26, Dec. 53,962, and subsequent enforce- ment action at Dec. 56,900(M), TC Memo 2007-89 (April 18, 2007). A charitable remainder trust was held invalid from its inception because the trustee failed to make the annuity payments within 105 days from the end of the term and corpus was later improperly invaded to pay estate taxes. See also CCA 2006268026. 6 W. Hester Est., DC WVa., 2007-1 USTC 60,537, Docket No. 5:06-cv-0041 (March 2, 2007) 7 Reg. 1.401(a)(9)-4, A-6 8 Pension Protection Act of 2006, P.L. 109- 280, 824,Code Sec. 402(c)(11); Notice 2007-7, IRB 2007-5, Jan. 10, 2007. 9 There is certainly no problem with a spend- thrift clause per seall IRAs have them and it is even a requirement for retirement plans under Code Sec. 401(a)(13). However, these merely prohibit assignment and alienation and do not, as many other trust spendthrift clauses do, potentially cause a withholding or even forfeiture of a partys interest more analogous to an in terrorem clause. All spendthrift clauses are not the same. 10 Reg. 1.401(a)(9)-4, A-5(c). 11 T.D. 8987, 2002-1 CB 852, 857, May 13, 2002 (Trust as Beneciary). 12 See, Michael Jones, Transferring IRAs, 145 Trusts and Estates No. 4 (April 2006). 13 See Ohio R.C. 5805.05 or UTC 506, protecting from attachment except when the trustee has not made the distribution to the JOURNAL OF RETIREMENT PLANNING 45 May June 2007 beneciary within a reasonable time after the designated distribution date. Again, a delay of distribution is generally not a concern with an IRT, but with a Conduit Trust (especially an inexperienced trustee), the issue becomes again, what is immedi- ate under the Regs, or within a reasonable time for asset protection purposes? 14 Rev. Proc. 2006-15, 2006-8 IRB 1. 15 See, Seymour Goldberg, THE ADVISORS GUIDE TO THE RETIREMENT DISTRIBUTION RULES, Oct. 2006,quoted in Ed Slotts IRA Advisor Newsletter, April 2007, page 7. See also a brief discussion in LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS, supra note 2 at 434-435. 16 Code Sec. 663(a) 17 Pension Protection Act of 2006, P.L. 109-280, 1201, Code Sec. 408(d)(8). Also see Notice 2007-7, IRB 2007-5, Jan. 10, 2007. at A-37 18 See, Seymour Goldberg Avoid these Major IRA Trust Mistakes, Ed Slotts IRA Advisor, June 2006. 19 Keith A. Herman, Coordinating Retirement Accounts with Estate Planning 101 (What Every Estate Planner Needs to Know), ABA, Probate and Property Magazine, January- February 2006 at 56 ,winner of Best Overall Article of 2006. 20 Though a LTR might help for purposes of avoiding negligence or other penalties. Reg. 6662-4(d)(3) 21 See Code Sec. 67(e). Most cases and circuits have ruled against trustees on this issue, but see W. J. ONeill Testamentary Trust, CA-6, 994 F2d 302. The U.S. Supreme Court has recently granted cert in a case in order to resolve the circuit split: W.L. Rudkin Testamentary Trust, CA-2, 2006-2 USTC 50,569, 467 F3d 149. ENDNOTES This article is reprinted with the publishers permission from the JOURNAL OF RETIREMENT PLANNING, a bi-monthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publishers permission is prohibited. To subscribe to the JOUR- NAL OF RETIREMENT PLANNING or other CCH Journals please call 800-449-8114 or visit www. CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of CCH.
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