100 (or so) DO’s and 40 DON’Ts
WHEN ESTATE PLANNING FOR IRAs and QUALIFIED PLANs AND OTHER EMPLOYEE BENEFITS

ARTICLE 1 Do’s

1.1 Internet and IRS Resources.

1. Do visit http://www.trustsandestates.net/ to find out more about QRPs, Roth IRAs, the new Minimum Required Distribution (MRD) rules, beneficiary designation forms, and more. Visit http://www.trustsandestates.net/iras_and_qualified_plans.htm to narrow your search to qualified plan and IRA issues. Or visit http://www.trustsandestates.net/mrd_regs.htm to narrow the scope still further to articles on the new re-proposed MRD regulations, and regs themselves. This article can be viewed on the web, where you will have free use of the hyperlinks, at http://www.trustsandestates.net/iras_and_qualified_plans.htm

2. Do try out the free Excel Spreadsheet on calculating IRA MRDs found at http://www.trustsandestates.net/Excel.htm [Out of

3. date, but I will add the new table values soon.]

4. Do visit http://www.benefitslink.com/ if you want to know more about qualified plans and IRAs (QRPs).

5. Do visit http://www.rothira.com/ to find out more about Roth IRAs.

6. Do get Natalie Choate’s book. (It’s less technical than mine, but it’s not free either.) Go to http://www.ataxplan.com/

7. Do visit Leimberg’s Information Services, Inc. and consider subscribing to the LISI Employee Benefits Newsletter. It comes via email, and is very inexpensive. Go to http://www.leimbergservices.com/.

8. Do read IRS Publication 590 if you want to know more about IRAs, including Roth IRAs and Education IRAs, which can be found and downloaded at http://www.irs.ustreas.gov/cgi/websys_fmanage.

9. Do Read Notice 2000-11, 2000-6 IRB, the IRS Model Notice explaining distribution options and rules.

1.2 Estate Tax Issues.

10. Do consider the size of qualified plan and IRA (“QRPs”) benefits (“Qualified Benefits”) relative to the rest of the estate.

11. Do realize that Qualified Benefits may be subject to estate taxation and will be subject to income taxes, and plan accordingly.

12. Do consider whether the marital deduction terminable interest rule could apply to Qualified Benefits, if the spouse (S) is a beneficiary (B).

13. Do ask whether or not you will be able to fully fund a credit shelter trust or GSTT trust without resorting to Qualified Benefits.

14. Do at least argue that the right to receive IRD is worth less than face value if liquidation of the Qualified Benefits is certain. (But don’t expect to win.)[1]

15. Do compare the results of liquidating Qualified Benefits shortly before death to stretching payments out after death. (There are pros and there are cons, mostly cons, but run the numbers anyway; in a rare case it might make sense, even after considering IRC[2] §691(c) to liquidate to Qualified Benefits during life to get the income tax out of the estate.)

16. Apropos of the preceding question, do consider the advantage of a death-bed Roth IRA conversion.

1.3 Income Tax Issues.

17. Do consider the availability of 10-year averaging and special capital gain treatment for certain lump sum distributions from qualified plans, if the P was born before January 1, 1936.

18. Do consider that special favorable income tax deferral rules may apply to the distribution of employer stock from a qualified plan, if the stock is not rolled over.

19. Do consider who is taxed on the nonparticipant spouse’s community property interest in a QRP once that interest becomes subject to tax.

1.4 MRD (Minimum Required Distribution) Issues.

1.4(a) Death Before the RBD (Required Beginning Date).

20. Do realize that the new 5-year rule may not be available if there is a designated beneficiary, unless the QRP specifically offers that option.

21. Do realize that if death is before the RBD, Qualified Benefits will have to be distributed (and taxed) before the end of the 5^th year following the year of death, unless a human being (or its equivalent) is the designated beneficiary.

22. Do realize that if death is before the RBD and the spouse is the beneficiary that distributions do not need to begin until P would have been 70½, in the absence of a rollover.

1.4(b) Death After the RBD (Required Beginning Date).

23. Do realize that if death is after the RBD, Qualified Benefits will have to be distributed (and taxed) over the live expectancy of the participant, determined in the year of death and subtracting one for each year thereafter, unless a human being is the designated beneficiary.

1.4(c) Death Whether Before or After the RBD.

24. Do realize that whether death is before or after the RBD, if a human being is the beneficiary, benefits may be paid over the life expectancy of the human being, determined in the year after death, and subtracting one for each year thereafter. (There is a variation on this rule if the beneficiary is the spouse of the participant, however.)

25. Do take the MRD rules into account in planning an estate.

26. Do recognize that the penalty for failing to take a minimum required distribution (MRD) from a QRP is 50% of the MRD not taken.

27. Do recognize that in order to take MRDs over the life expectancy of the beneficiary, all the beneficiaries must be human beings (or their equivalent, e.g., a qualifying trust).

28. Do realize that a person’s estate is not a human being, even if a human being is the beneficiary of the estate.

29. Do recognize that separate shares or accounts under a QRP are treated separately for MRD purposes, but that, absent a separate share or account, all potential beneficiaries (except for certain potential beneficiaries) are considered and that if any beneficiary is not a human being then, absent a separate share for that beneficiary, no beneficiary’s life expectancy may be used to calculate the MRDs.

1.4(d) Trusts as Beneficiaries.

30. If a trust is the beneficiary of a QRP, do make sure that all of the beneficiaries (Bs) under the trust instrument are ascertainable human beings and that there are no contingencies under which someone who is not a human being could become a beneficiary, if you want to take MRDs over the life expectancy of the beneficiary following the death of the participant.

31. Do note that it is impossible to literally comply with the preceding injunction.

32. Do realize that under the new rules, you can always use the life expectancy of the participant, post-death, if death is after the RBD. Thus, if you need to use a trust for the surviving spouse, the harm in failing to qualify the trust may be more or less negligible, if the spouse is about the same age as the participant was at the participants date of death!

1.4(e) Post Mortem MRD Planning.

33. Do recognize that the new MRD rules state that the beneficiary of a QRP is determined on ~~September 30~~ December 31 of the year following the year of death, so there may be some post-mortem opportunities to cure defects in the designations.

34. Do make sure that a copy of the trust instrument is delivered to the plan fiduciary before the end of the year following the year of death, if a trust is the beneficiary of Qualified Benefits, and you want to take MRDs over the life expectancy of the beneficiary following the death of the participant.

35. Do establish separate shares or accounts for different beneficiaries, prior to December 31 of the year following death.

36. Do pay out benefits to (or establish separate accounts for) all non-human beneficiaries prior to October 1 of the year following death, if you want to avoid the adverse consequences of the multiple beneficiary rule.

1.5 Community Property Issues.

37. Do read Land v. Marshall, 426 S.W.2d 841 (Tex. 1968) and tell me whether it applies to IRAs.

38. Do realize that Qualified Benefits may be nonprobate assets in the case of the participant, but be probate assets for the NPS.

39. Do consider where the nonparticipant spouse’s (NPS’s) interest in the participant’s (P’s) QRP is going to go if the NPS dies before P.

40. Do consider where the nonparticipant spouse’s (NPS’s) interest in the participant’s (P’s) QRP is going to go if P dies before the NPS.

1.6 Rollovers and Transfers.

41. Do realize that the first distributions made during a year are considered as MRDs if there is an unsatisfied MRD due at the end of the year, and realize that an MRD cannot be rolled over.

42. Do distinguish rollovers from transfers.

43. Do recognize that a transfer is not a MRD and that this could have consequences for the transferor plan if the transferor plan is under an obligation to make a MRD.

44. Do rollout of a profit sharing plan (assuming it is not subject to J&S) if you do not want all of the proceeds to pass to the surviving spouse.

45. Do rollout of a qualified plan (QP) unless you want your nonspouse beneficiaries to pay income taxes on your QP soon after your death.

46. Do rollover or, better yet, transfer your IRA to a new institutional sponsor if the sponsor you are using will not accept your individually designed beneficiary designation or is otherwise uncooperative.

47. Do not overlook the opportunity to make a spousal rollover of Qualified Benefits.

48. Be aware that the rollover rules have recently been liberalized to allow inadvertent mistakes to be sometimes overlooked by the IRS.

1.7 Joint and Survivor Annuity Issues.

49. Do find out whether your client’s qualified plan is subject to the joint and survivor (J&S) annuity rules.

50. Do take distributions as soon as possible from a profit sharing or 401(k) plan that is not subject to the J&S annuity rules if you want someone other than your spouse to be the beneficiary of the entire account balance at death. Spousal consent during life is not required, but at death, everything in the plan must go to the surviving spouse in the absence of a waiver. If the plan is subject to the J&S rules, then, somewhat ironically, only half the account must go to the spouse in the case of death while still in-service; nevertheless none of the account can be withdrawn (in other than a J&S annuity form) without spousal consent.

1.8 Roth IRAs.

51. Do convert your regular IRAs into Roth IRAs if you can qualify. This option should be considered whenever death is imminent, if the estate is taxable.

1.9 Prohibited Transactions.

52. Do read IRC §4975 some night when you are having trouble sleeping.

1.10 Tax Compliance and Reporting.

53. Do file a notice with the DOL reporting the existence of all nonqualified plans, if you want to be exempt from filing a 5500 or other annual report, else you may be subject to a $1000/day penalty.

1.11 Disclaimers.

54. Do consider where a beneficiary’s Qualified Benefits will go in the event the beneficiary disclaims.

55. Do include special provisions in your governing instrument (the will in the case of the NPS, the beneficiary designation in the case of P) stating clearly where you want Qualified Benefits to go in the case of a disclaimer.

56. Do provide a different disclaimer scheme for a spouse disclaiming (e.g., bypass trust), than in the case of other beneficiaries (e.g., descendants per stirpes).

57. Do consider utilizing cascading disclaimers for a spouse (e.g., first disclaimer into a trust, second disclaimer to descendants).

1.12 ERISA Issues.

58. Do recognize an ERISA welfare benefit plan when you see one.

59. Do realize that IRAs (including SEPs) are almost invariably not subject to ERISA, and are not qualified plans.

60. Do recognize that Texas law, including community property law, may be preempted in the case of an ERISA plan.

61. Do realize that some qualified plans (e.g., plans with no common law employees other than the owner and spouse) are not subject to ERISA. See, however, Raymond B. Yates, M.D., P.C., Profit Sharing Plan v. Hendon, __U.S.__ (2004).

1.13 Death of the Beneficiary.

62. Do consider where undistributed benefits will go if the beneficiary dies before all Qualified Benefits have been distributed.

1.14 Miscellaneous.

63. Do look at the terms of the IRA document or qualified plan before giving an unqualified opinion regarding distribution options.

64. Do review any outstanding beneficiary designations.

65. Do ask for a copy of the Summary Plan Description if you are wondering about the basic terms of a plan.

66. Do realized that proposed regulations are of virtually no authority in court, and may not even bind the IRS, much less the taxpayer. Go to http://www.trustsandestates.net/MRDRegs/IceMRDRegsArt.htm#_Toc516725784 for an in-depth treatment of this issue.

ARTICLE 2 DoN’Ts

2.1 Estate Tax Issues.

1. Don’t use Qualified Benefits to fund trusts except as a last resort, at least until definitive regulations are issued telling us what MRDs rules govern trusts (although if the participant (P) is young, we may not care what the trust rules are).

2. Don’t use Qualified Benefits to pay estate taxes if other assets are available, unless you want to accelerate income taxes and are uninterested in further deferral.

3. Don’t overlook equitable adjustment issues that might arise from using IRD to fund certain obligations of the estate.

2.2 Income Tax Issues.

4. Don’t forget that there are many exceptions to the 72(t) premature distribution tax, for distributions prior to 59½.

5. Don’t forget to take a 691(c) deduction on the income tax return for Qualified Benefits on which estate taxes were paid.

6. Don’t worry about accelerating income tax by funding a trust or making a distribution of a right to receive IRD in satisfaction of a pecuniary gift, if you believe all of the indications coming from the IRS lately and have plenty of E&O coverage.

7. Don’t rollover or sell employer stock received in a distribution from a qualified plan without first considering the special income tax opportunities that may be available.

2.3 MRD Issues.

8. Don’t forget to take the MRD for P for the year of death before the year is out.

9. Don’t forget that an MRD for B may be due in the year after death.

10. Don’t name your “estate” as the beneficiary of Qualified Benefits unless the benefits outweigh the detriment of having to pay income tax within 5-years of death, if death is prior to the RBD, or over the remaining life expectancy of the participant, if death is after the RBD.

11. Don’t name a trust as the beneficiary of Qualified Benefits unless the benefits outweigh the detriment of not knowing what it takes to qualify for “look-through” treatment under the trust.

12. Don’t aggregate MRDs from qualified plans, but don’t forget that you can aggregate IRAs and take your IRA MRDs from some or all of them disproportionately.

2.4 Post Mortem Planning.

13. Don’t distribute Qualified Benefits shortly after death without first becoming acquainted with the applicable MRD rules.

14. Don’t forget that a MRD is due for the beneficiary in the year following death, unless the 5-year rule applies and is elected.

2.5 Community Property Issues.

15. Don’t forget that if employee benefits are community property they may be subject to division on divorce.

16. Don’t forget to look long and hard at a proposed divorce decree to determine compliance with the QDRO rules, before it is submitted to the judge.

17. Don’t forget that the nonparticipant spouse’s community property interest in the participant’s IRA is a nonprobate asset, and should pass under the will of the nonparticipant.

18. Don’t forget that the Boggs case says that the NPS has no power to dispose the NPS’ community property interest in P’s qualified plan (if that plan is subject to ERISA).

2.6 Rollovers and Transfers.

19. Don’t forget that the participant’s spouse is the only beneficiary who can rollover Qualified Benefits.

20. Don’t attempt to rollover an MRD, even if it is not due until the end of the year of the rollover.

21. Don’t try to rollover the Qualified Benefits of a non-spouse beneficiary.

22. Don’t put the title to an IRA that has been “transferred” by a non-spouse beneficiary in the name of the transferee as “owner,” as if the beneficiary had a legal ownership rather than a beneficial ownership interest.

23. Don’t transfer Qualified Benefits that are subject to MRDs without making sure that after the transfer the transferee plan will be able to meet its MRD obligations for the year.

2.7 Joint and Survivor Annuity Issues.

24. Don’t forget to distribute the J&S annuity notice as and if required by law.

25. Don’t make an irrevocable waiver of the J&S annuity options without considering the gift tax implications.

2.8 Roth IRAs.

26. Don’t take a distribution from your Roth IRA during life, except as a last resort.

27. Don’t take more than the MRD from a Roth IRA after death, except as a last resort.

28. Don’t contribute to a regular IRA if you can contribute to a Roth IRA instead.

29. Don’t convert to a Roth in the year you turn 70½ if the MRD that is on “account” of that year will cause AGI to be too large (because the MRD cannot be rolled over.)

2.9 Prohibited Transactions.

30. Don’t self-deal with QRP assets.

31. Don’t invest your IRA in anything other publicly traded securities or other conventional assets without consulting a knowledgeable tax advisor about the possible application of the prohibited transaction rules.

2.10 Tax Compliance and Reporting.

32. Don’t fail to file a 5500 or other annual report due for an ERISA plan, including welfare plans.

33. Don’t forget that IRA sponsors now have to report MRDs for the year, or will shortly..

2.11 Disclaimers.

34. Don’t wait until the 706 is almost due to realize that a disclaimer ought to be considered as an option.

2.12 ERISA Issues.

35. Don’t assume that a nonqualified plan is exempt from ERISA.

36. Don’t assume that a qualified plan of a closely held employer is subject to ERISA.

2.13 Miscellaneous.

37. Don’t forget that employee benefit law changes every day.

38. Don’t assume that the institution handling your QRP is knowledgeable, that it will compute your benefits properly, etc.

[1] Better read The Estate Of Smith v. U.S., Cite as 93 AFTR 2d 2004-556, 01/16/2004 first. You might also want might want to look at, TAM 200247001, TAM 199909001, PLR 9232006, Estate of Welch v. Comm., 208 F.3d 213 (6^th Cir. 2000), 85 AFTR 2d 2000-1200, Estate of Smith v. Commissioner, 198 F.3d 515 (5th Cir. 1999), rev'g 108 T.C. 412 (1997), nonacq. 2000-19 IRB 1 (May 8, 2000), Estate of Jameson v. Comm'r, 267 F.3d 366 [88 AFTR 2d 2001-5922] (5th Cir. 2001); Estate of Eisenberg v. Comm'r, 155 F.3d 50 [82 AFTR 2d 98-5757] (2d Cir. 1998); Estate of Davis v. Comm'r, 110 T.C. 530 (1998) and Estate of Robinson v. Commissioner, 69 T.C. 222, 227 (1977)

[2] All references herein to the “IRC” are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.