Tuesday, January 31, 2012
Retirement Benefits in the Context of Estate Planning
With the permission from our colleague, Lewis J. Saret, J.D., founder and author of Wealth Strategies Journal, we are reposting his articles found in the November 2011 and January 2012 issues of CCH’s Taxes Magazine.
Retirement Benefits in the Context of Estate Planning Part I: Minimum Required Distributions
Introduction
Qualified retirement plans and individual retirement accounts (hereinafter jointly referred to as “QRPs”) typically represent a significant amount of most individuals’ net worth. To illustrate, one study reported that at the end of 2008, individual retirement accounts (IRAs) alone represented 25.4 percent of total U.S. retirement wealth and 8.5 percent of U.S. household financial assets.1 In addition, QRPs often pass outside of an estate by means of beneficiary designations, which name the beneficiary of QRPs upon the death of the participant of the qualified retirement plan or the account owner of the IRA (hereinafter both participants of qualified retirement plans and account owners of IRAs will be referred to as “participants” for the purpose of convenience).
This necessitates that QRP beneficiary designations be coordinated with the overall estate plan. To effectuate the testamentary intent of the participant. This is the first of several columns that will address retirement benefits in the estate planning context. This column focuses on the minimum required distribution (MRD) rules that apply to QRPs because an understanding of the MRD rules is essential in order to incorporate QRPs into an estate plan. Future articles will discuss the income taxation of QRPs; tax issues associated with naming trusts as beneficiaries of QRPs, including both the application of the MRD rules as they apply to trusts named as beneficiaries of QRPs and the income taxation of trusts that receive QRP benefits; and Roth IRAs.
Retirement Benefits in the Context of Estate Planning Part II: Income Taxation of Retirement Benefits
Introduction
This is the second in a series of columns that address retirement benefits in the estate planning context. The first column in this series discussed the minimum required distribution rules that apply to qualified retirement plans and individual retirement accounts (herein jointly referred to as “QRPs”). This column focuses on the income taxation of QRP payments where the participant or account owner has basis associated with his/her QRP interest, which is important because of its economic impact on the QRP beneficiary. Future columns will discuss aspects of the income taxation of retirement benefits that are not covered in this column, including lump-sum distributions, qualified rollovers from one plan to another and income in respect of a decedent, as well as tax issues associated with naming trusts as beneficiaries of QRPs, including both the application of minimum required distribution rules as they apply to trusts named as beneficiaries of QRPs and the income taxation of trusts that receive QRP benefits, and Roth IRAs. Deferral of income taxation is the primary attraction for QRPs for most participants. As discussed in more detail below, taxation of income earned by QRP assets is generally deferred until such income is distributed to the QRP beneficiaries. This deferral benefits participants by allowing them to earn investment income on assets that would otherwise have been paid in taxes on a current basis.
This column first discusses the income taxation of QRP distributions in general terms and then focuses on the income taxation of retirement benefits where the QRP participant or IRA owner (hereinafter both participants of QRPs and IRA account owners will be referred to as participants” for the purpose of convenience, unless otherwise noted) has basis in such QRP or IRA.
You can also subscribe to Lew Saret’s Wealth Strategies Journal directly by going to his website at www.wealthstrategiesjournal.com. This is an excellent resources for estate planning professionals.
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