ABA RPTE
professors corner
Retirement Accounts:
Planning for a Lifetime ... and More!
PROF. JONATHAN FORMAN
University of Oklahoma College of Law
PROF. CHRISTOPHER HOYT
University of Missouri (Kansas City) School of Law
MODERATOR: PROF. AMY MORRIS HESS
University of Tennessee College of Law
1
Planning FOR
Retirement
2
Longevity Risk
• Risk of outliving your retirement savings
• Life expectancy varies with such demographic
factors as gender, income, educational level &
race
− 65-year-old American man: 50% chance of living to 82; 20%
chance of living to 89
− 65-year-old American woman: 50% chance of living to 85;
20% chance of living to 92
− 65-year-old American couple: 50% chance that at least one
will live to age 88; 30% chance that at least one will live to
92
• Retirements can last for 30 years or more
3
Demographics of Life
Expectancy
• Life expectancy varies with such
demographic factors as gender, income,
educational level & race
− Women live longer than men
− Rich live longer than poor
4
Retirement Income
in the U.S.
• 48.6 million retirees in 2014
− 66.4 million in 2025
− 82.1 million in 2040
• Sources of Retirement Income
− Social Security
− Pensions
− Individual Retirement Accounts (IRAs)
− Annuities
− Individual savings & a savings withdrawal plan
5
Social Security
• Social Security
− Inflation-adjusted pension benefits
− 40.2 million retirees
− $1,344 per month, average benefit
• Supplemental Security Income for the poor
− 2.1 million elderly beneficiaries
− $435 per month, average benefit
6
THREE STAGES OF A
RETIREMENT ACCOUNT
Accumulate
Retirement
Wealth
Withdrawals
Distributions
After Death
7
THREE STAGES OF A
RETIREMENT ACCOUNT
Accumulate
 Retirement
Wealth
Withdrawals
 Distributions
After Death
8
Pensions, IRAs
& Annuities
• $27.3 Trillion Retirement Savings
− $11.3 trillion in defined benefit plans
− $6.3 trillion in defined contribution plans
− $7.4 trillion in IRAs
− $2.3 trillion in annuities
9
A Voluntary Retirement
Savings System
• At any point in time, only about half of
American workers have a pension
− 66% of private-sector workers have access
− 49% participated
− Greater coverage among older workers, whites, highly
educated workers, full-time workers, higher-income
workers & workers at larger firms
• Participation in IRAs is even lower
• Individuals rarely buy annuities
10
Pensions:
Favorable Tax Treatment
• Employer contributions to a pension
are not taxable to the employee
• The pension fund’s earnings on those
contributions are tax-exempt
• Employees pay tax only when they
receive distributions of their pension
benefits in retirement
11
Defined Benefit (DB) Plans
• In a defined benefit plan, an employer
promises employees a specific benefit at
retirement
− e.g., a worker who retires after 30 years of
service with final pay of $50,000 could
receive a pension of $30,000 = 2% × 30 years
× $50,000 final pay
12
Defined Benefit Plans
• Traditional DB plans pay out as lifetime
annuities
− Qualified joint-and-survivor annuity (QJSA)
for married couples
− Lump sums are often available
13
Defined Contribution (DC) Plans
• In a DC plan, the employer & employee can
contribute to an individual investment account
for the worker
− e.g., a worker who earned $50,000 in a given year
might have $5,000 contributed to an individual
investment account for her ($5,000 = 10 percent ×
$50,000).
− Her benefit at retirement would be based on all such
contributions plus investment earnings.
14
Defined Contribution Plans
• Major shift from DB plans to DC plans
• 401(k) plans are the most popular
− Allow individuals to tax-shelter up to $18,000/year
in 2017
●
Workers over the age of 50 can contribute another $6,000
• DC plans usually make distributions as lump
sums or periodic distributions, but lifetime
annuities are possible
15
Individual Retirement
Accounts (IRAs)
• In 2017, individuals can contribute and
deduct up to $5,500 to an IRA (plus $1,000
if over age 50)
− Spouses can do the same
• Like private pensions, IRA earnings are
tax-exempt, & distributions are taxable
16
Roths
• Since 1998, individuals have been permitted to
set up Roth IRAs.
− Unlike regular IRAs, contributions to Roth IRAs are not
deductible. Instead, withdrawals are tax-free. Like
regular IRAs, however, Roth IRA earnings are taxexempt.
• Roth 401(k)s and Roth 403(b)s have similar tax
features:
− No exclusion for contributions, but account earnings &
withdrawals are tax-free
17
Annuities
• Also, annuities get somewhat favorable tax
treatment (IRC § 72)
− No tax until distributions begin, and then only a
portion of each annuity payment is taxable
●
The original investment is recovered tax-free
• Today, a $100,000 would buy a 65-year-old
man a lifetime annuity that paid $6,540 a
year (6.54%)
18
THREE STAGES
 Accumulate
Wealth
Retirement

Withdrawals
Distributions After Death
19
TAXATION OF DISTRIBUTIONS
General Rule
– Ordinary income
– 100% exempt from 3.8% NIIT
Special Rules:
-- Tax-free return of capital
-- NUA for appreciated employer stock
-- Roth distributions are tax-free
20
Objective of Tax Laws:
Provide Retirement Income
Consequently, there are laws to:
 Discourage
distributions before
age 59½
 Force distributions after
age 70½
21
USUAL OBJECTIVE:
Defer paying income taxes in order to get
greater cash flow
Principal
$ 100,000

Pre-Tax Amount

Income Tax
on Distribution (40%)

Amount Left to Invest
10% Yield
$ 10,000
40,000
$ 60,000
$ 6,000
22
REQUIRED MINIMUM
DISTRIBUTION (“RMD”)
BACKGROUND: 50% penalty if not
receive distribution from IRA, 401(k), etc:
#1 – lifetime distributions from own IRA:
beginning after age 70½
#2 – an inherited IRA, 401(k), etc –
 beginning year after death
23
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFETIME DISTRIBUTIONS*
Age of Account Owner Required Payout
70 1/2
3.65%
75
4.37%
80
5.35%
85
6.76%
90
8.75%
95
11.63%
100
15.88%
24
ADVANTAGES OF
ROTH IRAs
 Unlike a regular IRA,
no mandatory lifetime
distributions from a
Roth IRA after age 70½
 Yes, there are mandatory
distributions after death
25
THREE STAGES
 Accumulate
 Retirement
Wealth
Withdrawals
Distributions
After Death
26
Distributions
After Death




Income taxation
Mandatory ERISA distributions
Estate taxation
Asset Protection (Clark v. Ramaker)
Collision of four legal worlds at death
27
Distributions
After Death
>Income taxation

Mandatory ERISA distributions
28
INCOME IN RESPECT OF A
DECEDENT - “IRD” – Sec. 691
No stepped up basis for retirement assets
 After death, payments are income in
respect of a decedent (“IRD”) to the
beneficiaries
 Common mistake in the past: children
liquidate inherited retirement accounts.

29
Distributions
After Death
>Income taxation
> Mandatory ERISA distributions
30
Distributions
After Death
After death, must start liquidating the account
Federal tax law provides that the maximum time
period to liquidate an inherited account is either:
Five years
-- or -• Remaining life expectancy of the beneficiary
•
31
Distributions
After Death
Company policy may require faster liquidation
• Employer might require account of deceased
employee to liquidated in just one year
• No such problem with IRAs
• Beneficiary of employer plan account can
compel transfer to an inherited IRA
32
Distributions
After Death
Tax planning for inherited accounts:
* DEFER distributions as long as possible
– greater tax savings
* Make payments over the beneficiary’s life
expectancy - “Stretch IRA”
33
Distributions
After Death
“ life expectancy“
Oversimplified: Half of population will
die before that age, and half will die after
34
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
Age of Beneficiary
30
40
50
60
70
80
90
83
83
84
85
87
90
96
Life Expectancy
53.3 more years
43.6
34.2
25.2
17.0
10.2
5.5
35
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary
30
40
50
60
70
80
90
Life Expectancy
53.3 more years
43.6
34.2
25.2
17.0
10.2
5.5
36
REQUIRED MIN. DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
“STRETCH IRAS”
Age of Beneficiary
Life Expectancy
30
1.9% 53.3 more years
40
2.3% 43.6
50
2.9% 34.2
60
4.0% 25.2
70
5.9% 17.0
80
10.0% 10.2
90
18.2%
5.5
37
REQUIRED MINIMUM
DISTRIBUTIONS
* DEFINITIONS *
Required Beginning Date (“RBD”)
April 1 in year after attain age 70½
 Designated Beneficiary (“DB”)
A human being. An estate or charity
can be a beneficiary of an account,
but not a DB.
 Determination Date
September 30 in year after death.

38
HOW TO ELIMINATE
BENEFICIARIES BEFORE
DETERMINATION DATE
Disclaimers
 Full distribution of share


Divide into separate accounts
39
REQUIRED DISTRIBUTIONS
IF NO
DESIGNATED BENEFICIARY
Death Before RBD
FIVE
YEARS
Death After RBD
Remaining life
expectancy of
someone who is
decedent’s age at
death
40
REQUIRED DISTRIBUTIONS
IF ALL BENEFICIARIES ARE
DESIGNATED BENEFICIARIES
Death Before RBD
Death After RBD
Maximum term is the life expectancy of the
oldest beneficiary of the account.
 Exception if DB is older than decedent
 If establish separate account for each
beneficiary, then each beneficiary can use
own life expectancy.
41
MARRIED COUPLES:
RETIREMENT ASSETS
Surviving spouse has an option
that no other beneficiary has:
a rollover of deceased spouse’s
retirement assets to her or his own
new IRA (creditor protection, too!)
Other beneficiaries only option:
an inherited IRA
42
REQUIRED DISTRIBUTIONS
IF SOLE BENEFICIARY
IS SURVIVING SPOUSE
 Spouse
can recalculate life expectancy
 IRAs only: Spouse can elect to treat
IRA as her own
 Decedent die before 70½?
 Can
wait for distribution
43
AGE AT DEATH
MEDIAN AGE AT DEATH ON
FEDERAL ESTATE TAX RETURNS:
Age 80 – Men
Age 84 - Women
44
MARRIED COUPLES:
RETIREMENT ASSETS
Should the estate plan provide:
-- a rollover of deceased spouse’s
retirement assets to a new IRA?
-- or --
-- the deceased spouse’s retirement
assets are payable to a trust for the
surviving spouse?
45
FUNDING TRUSTS
General Rule: Trust is not DB
Exception: “Look-through”
trust if four conditions
Types: -- “accumulation trusts”
-- “conduit trusts”
46
USUAL OBJECTIVE:
Defer paying income taxes in order to get
greater cash flow
Principal
$ 100,000

Pre-Tax Amount

Income Tax
on Distribution (40%)

Amount Left to Invest
10% Yield
$ 10,000
40,000
$ 60,000
$ 6,000
47
REQUIRED MINIMUM
DISTRIBUTIONS
*LIFE EXPECTANCY TABLE*
Age of Beneficiary
30
40
50
60
70
80
90
Life Expectancy
53.3 more years
43.6
34.2
25.2
17.0
10.2 more years
5.5 more years
48
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER
Trust
Trust .
80
85
90
91
92
5.35%
9.80%
6.76% 19.23%
8.78%
9.26%
9.81%
100.00%
empty
empty
9.80%
13.16%
18.18%
19.23%
20.41%
49
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER
Trust
Trust .
80
5.35%
9.80%
9.80%
85
6.76%
19.23%
13.16%
90
91
92
8.78%
9.26%
9.81%
100.00%
empty
empty
18.18%
19.23%
20.41%
50
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER
Trust
Trust .
80
5.35%
9.80%
9.80%
85
6.76%
19.23%
13.16%
90
91
92
8.78%
9.26%
9.81%
100.00%
empty
empty
18.18%
19.23%
20.41%
51
MANDATORY DISTRIBUTIONS
[Assume inherit IRA at age 80 and die at 92]
ROLL - Accumulation Conduit
AGE OVER
Trust
Trust .
80
5.35%
9.80%
9.80%
85
6.76%
19.23%
13.16%
90
91
92
8.78%
9.26%
9.81%
100.00%
empty
empty
18.18%
19.23%
20.41%
52
IRS PLRs: Surviving Spouse Rollover
10 IRS Private Letter Rulings - 2015 &2014
Surviving spouse can rollover deceased spouse’s
IRA, even when the account is payable to:



Trust for the spouse
The estate, with estate pour-over into a trust for the
spouse
The estate, where the spouse is the sole or residuary
beneficiary of the estate
53
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARS




2012 – Highway Bill – not enacted
President Obama budget proposal
June, 2014 – Sen. Wyden adds to Highway Bill
Sept, 2016 – Senate finance committee action
EXCEPTIONS
 -- Spouse -- minor child -- disabled
 -- Person not more than ten years younger
.
54
REQUIRED MINIMUM DISTRIBUTIONS
Example: Death at age 80?
CURRENT LAW: *Life Expectancy Table*
Age of Beneficiary
Life Expectancy
30
1.9% 53.3 more years
40
2.3% 43.6
50
2.9% 34.2
60
4.0% 25.2
70
5.9% 17.0
80
10.0% 10.2
90
10.0%
5.5 * [10.2 yrs]
55
REQUIRED MINIMUM DISTRIBUTIONS
Example: Death at age 80?
PROPOSED: FIVE YEARS if >10 yrs younger
Age of Beneficiary
Life Expectancy
30
5 years
40
5
50
5
60
5
70
5.9% 17.0
80
10.0% 10.2
90
10.0%
5.5 * [10.2 yrs]
56
SENATE PROPOSAL:
LIQUIDATE ALL INHERITED
IRAs IN FIVE YEARS
EXCEPTIONS
-- Spouse -- minor child -- disabled
 -- Person not more than ten years younger
TAX TRAP: Does naming a trust for a spouse
(e.g., QTIP trust; credit shelter trust) as an IRA
beneficiary mean required liquidation in 5 years?

57
SENATE PROPOSAL: LIQUIDATE ALL
INHERITED IRAs IN FIVE YEARS
IMPLICATIONS FOR CHARITIES
Donors more likely to consider
 Outright bequests
 Retirement assets to tax-exempt CRT
 Child:
income more than 5 years; then charity
 Spouse
only (marital estate tax deduction)
 Spouse & children (no marital deduction)
58
ABA RPTE
professors corner
Retirement Accounts:
Planning for a Lifetime ... and More!
PROF. JONATHAN FORMAN
University of Oklahoma College of Law
PROF. CHRISTOPHER HOYT
University of Missouri (Kansas City) School of Law
MODERATOR: PROF. AMY MORRIS HESS
University of Tennessee College of Law
59