March 30, 2003 Estate-Planning With Your IRA Your IRA is a way to save for retirement, and it can also be used as an estate-planning tool. To maximize your IRA investment beyond your lifetime—and give your heirs a chance to benefit from its tax-deferred savings, interest and growth—you must name a beneficiary. Your beneficiary designation is a key factor in affecting the rate at which your IRA will exhaust its assets. The IRS has issued new regulations that simplify the entire process—from choosing a beneficiary to calculating how much your heirs must take from the account each year. In order to properly use an IRA for estate planning you must know the definitions of the following terms: Required Beginning Date (RBD)-The date by which a taxpayer must begin taking Required Minimum Distributions (RMDs) from his or her retirement account. For IRAs, this is April 1 of the year following the year in which the taxpayer turns 70 ½. Primary and Contingent beneficiary—The primary beneficiary is the entity(ies) or person(s) who will receive the assets from a retirement plan upon the taxpayer’s death. The contingent beneficiary is the entity(ies) or person(s) who receives the assets if the primary beneficiary predeceases the original taxpayer. Nonspouse beneficiary—An individual beneficiary who is not the taxpayer’s spouse. Nonindividual beneficiary—A beneficiary that is not a person (ie.: a charity, estate, institution or certain trusts). Now that you know some basic terminology, let us review various scenarios and the options that your potential beneficiaries will have. Keep in mind that these rules apply to the required minimum amount that must be taken from the account. Additional amounts may be taken from your IRA at any time.1 If the taxpayer dies before the required beginning date, A spouse beneficiary may- · roll over the assets to his or her own IRA and assume ownership of them. · deplete the balance of the account by the end of the fifth year of the taxpayer’s death. · take distributions based on his or her own life-expectancy factor as determined by the IRS Uniform Single Life table. · wait until the deceased would have reached his or her RBD and then begin taking distributions based on the surviving spouse’s life-expectancy factor. A nonspouse beneficiary may- · deplete the balance of the account no later than the fifth year following the taxpayer’s death. · take distributions annually based on his or her own life-expectancy factor. Distributions must start in the year following the taxpayer’s year of death. In subsequent years, the minimum distribution will be determined by the previous year’s factor minus one. A nonindividual beneficiary may- · deplete the balance of the account no later that the fifth year following the taxpayer’s death. If the taxpayer dies after the required beginning date, A spouse beneficiary may- · roll over the assets to his or her own IRA and assume ownership of them. · take annual distributions based on his or her own life-expectancy factor each year. A nonspouse beneficiary may- · take distributions annually based on his or her own life-expectancy factor. Distributions must start in the year following the taxpayer’s year of death. In subsequent years, the minimum distribution will be determined by the previous year’s factor minus one. A nonindividual beneficiary may- · take distributions from the account annually based on the deceased’s life-expectancy factor at death minus one, subtracting one for each subsequent year. How to Choose a Beneficiary Your beneficiary selection can have a significant impact on how long your IRA lives—and on the tax implications for your heirs. Selecting an individual rather than your estate or a nonindividual as beneficiary may help maximize your IRA investment. Since the duration of the IRA payout can be based on the beneficiary’s life-expectancy, choosing a younger beneficiary may give your investment even more time to grow. And, the longer your assets compound tax deferred, the more your heirs may benefit. Let’s look at an example: Cain and Abel are 62 year-old twin brothers. Cain decides to name his 32 year-old daughter Esther the primary beneficiary of his IRA, while Abel names his estate the primary beneficiary of his IRA. When Cain dies at age 73, Esther begins taking distributions based on her remaining life expectancy of 40.7 years. At this time Esther is permitted to name another person to receive the distributions in the event that she dies prematurely, and she chooses her 15 year-old son Ben. When Esther passes away at age 50, Ben continues to take distributions based on Esther’s remaining life expectancy. The assets in Cain’s account continue to grow tax deferred, and Ben pays taxes only on the minimum amount he withdraws each year. Meanwhile, Abel passes away at age 67. Since he died prior to his RBD and his primary beneficiary is a nonindividual, the estate may or may not take all of the assets immediately, but the account must be depleted no later than four years after the year Abel passes away. That means Abel’s estate will have to pay taxes on the full amount of his IRA within five years of his death. Talk to Your Financial Advisor Keep in mind that the tax laws related to IRAs are complex, and each investor’s situation is unique. Your IRA is included as part of your taxable estate. Naming your beneficiary can be a tool in your overall estate and financial plan. You should consult with your financial advisor regarding the impact your IRA and other investments may have on your estate-tax scenario. Both you and your beneficiaries may benefit from speaking with your financial advisor about your specific situation. He or she will be able to provide comprehensive assistance with your retirement or estate-planning needs. If you have any questions about the foregoing or any other financial matters, please call us. Remember, We’re Here For You!! 1 If the beneficiary is a spouse who has chosen to assume ownership of the account in his or her own IRA, the spouse would be subject to any applicable withdrawal penalties.