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Irs Forms - Can Ira Owner Restrict Beneficiary Distributions

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Irs Forms - Can Ira Owner Restrict Beneficiary Distributions Powered By Docstoc
					Distribution and Estate Planning
For Deferred Co mpensation and IRA Benefits                                           (Printed on Sunday, November 14, 2010 at 6:24 PM )
Noel C. Ice



                                  An Anatomy of a Beneficiary Designation Form.
        We all have clients who have large rollover IRAs or large interests in a qualified plan, or who are
        married to someone who does. It is obvious that the manner in which these benefits pass on death
        can dramatically affect the estate plan. Consider, as a common instance, a joint community estate
        consisting of a $200,000 home, $300,000 in other probate assets, and a $1 million rollover IRA.
        The disposition of the $1 million IRA is not going to be affected by the participant‘s will unless
        the beneficiary of the IRA is the participant‘s probate estate. Rather, this valuable asset,
        representing two-thirds of the estate, is going to pass in accordance with the language found in
        the beneficiary designation, if any, or by the default provisions under the plan or IRA if a
        designation is not completed. The interest is a nonprobate asset.
        The passage of the community property interest of the participant‘s spouse (the nonparticipant
        spouse or NPS), should the spouse predecease the participant, is slightly more problematic. It
        will probably pass under the spouse‘s will, as a probate asset, 1 or it might pass under a
        beneficiary designation, if the spouse has signed one and if the interest is held under an IRA.
        But, if the interest is in a qualified plan the interest may not pass at all, depending on whether the
        qualified plan is subject to ERISA, 2 and if so whether ERISA preempts state probate law. 3
        Of all of the various property interests that can pass to a beneficiary at the death of an
        individual, the one that is the most fraught with complex tax and uncertain property law
        issues is the IRA or qualified plan. There are a number of taxes that can apply to an interest in
        a qualified plan or IRA.
                1.         Income Taxes.
                2.         Premature Distribution Tax. 4
                3.         Estate Tax.
        All of these taxes are affected by the form of the beneficiary designation. In Texas, California,
        New Mexico, Arizona, Louisiana, Washington, Idaho, Nevada (and, to a limited extent, a few
        other states) all of these taxes must be applied with the community property system in mind.
                Consider the following issues:
        Issues Common in All States
        •       Does a beneficiary have the right to withdraw the entire benefit at will? If not, is the
        participant‘s estate entitled to a marital deduction if the beneficiary is the spouse? Does the


                1
                    Allard v. Frech, 754 S.W.2d 111 (Tex. 1988).
                2
                    The Emp loyee Ret irement Income Security Act of 1974, 29 U.S.C. §1001, et seq.
                3
                 Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991). Meek v. Tullis, et. al., 791 F.Supp. 154 (W.D. Lou isiana
        1992). Contra: Boggs v. Boggs , 849 F. Supp. 462 (E.D. Louisiana 1994). The same district court that decided Boggs
        reached a contrary result in Gaudet v. New Orleans Sheet Metal Workers‘ Pension Funds (1994 US Dist Lexis
        8460).

                4
                    IRC §72(t).

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        answer to this question turn on whether the participant elected installment distributions upon
        reaching his required beginning date. (Note now for future reference that the required beginning
        date, or RBD, means April 1 of the calendar year following the calendar year in which the
        participant turned 70 1/2. 5 )
        •       How soon must a participant‘s benefit be paid out following his death?
        •      What happens to the undistributed interest of the participant‘s beneficiary after the
        beneficiary‘s death (following the death of the participant)?
        •       Is a marital deduction available in the participant‘s estate if the spouse is the beneficiary,
        if the undistributed interest can pass to a third party?
        •       Can a trust be named as beneficiary? If a QTIP trust is named as beneficiary, will the
        participant‘s estate be entitled to claim a marital deduction for it? Does the fact that a trust is a
        beneficiary mean that the benefits must be paid out (and taxed) within five years of the
        participant‘s death, or can we look to the life expectancy of the beneficiary of the trust?
        •       Can a beneficiary rollover the participant‘s benefit? Can the beneficiary make a plan to
        plan or IRA to IRA transfer of the benefit?
        •        If the beneficiary is under age 591/ 2 at the time of the distribution, does the beneficiary
        have to pay the 10% early distribution penalty tax under §72(t)? Does it make any difference if
        the beneficiary is the participant‘s spouse, and the spouse either rolled over the benefit or elected
        to treat it as his own, pursuant to IRC §§402(c)(9), 403(b)(8)(B) or 408(d)(3)(C)(ii)(II)?
        •       If the participant‘s estate is the beneficiary, but the beneficiary of the participant‘s estate
        is the participant‘s spouse, can the spouse take the distribution and roll it over?
        Community Property Issues
        •       What happens to the community property interest of the nonparticipant spouse (the
        NPS)— (a) on the spouse‘s death, (b) on the participant‘s death? Does this interest of the NPS
        pass by will or by beneficiary designation or neither? Does this interest qualify for the marital
        deduction if the participant is the beneficiary? Who is taxed for income tax purposes on the
        distribution of the nonparticipant spouse‘s interest, and when is the tax due? If the participant is
        under age 59 1/2 at the time of the distribution, does the 10% early distribution penalty tax under
        §72(t) apply, and if so, who pays it?
                                               *      *      *       *
        Most of these questions and a few more will be addressed below in the context of a clause by
        clause analysis of certain provisions of a model IRA/qualified plan beneficiary designation form.
        The author makes no warranties or representations at all regarding the effect or efficacy of these
        clauses, as they are set forth for discussion purposes only. This form, of which the clauses are a
        part, is intended to be used as an attachment to whatever form (if any) is required by the sponsor
        of a qualified plan or IRA. Whether it is appropriate or acceptable to the sponsor is definitely a
        matter to be considered, but it is the author‘s experience that most sponsors have no problems



                5
                    IRC §401(a)(9)(C).

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        with individually designed forms, in contrast to insurance companies, most of whom do not seem
        to care what problems their forms cause after the policy has been sold.
        The beneficiary designation clauses found below are surrounded by a border. Most word
        processing programs allow the user to define variables the answers to which determine what will
        be inserted in a merged document. I have retained, a few of the variables and conditional
        instructions that I use (indicated within the internatio
         DESIGNATION OF BENEFICIARY and ELECTION AS TO FORM OF BENEFITS UNDER
                                      IRC §401(a)(9)
        This document is an attachment to any beneficiary designation form required by the terms of the
        IRA and is incorporated into such form. If there is no specified beneficiary designation form
        required by the terms of the IRA, then this document shall be the beneficiary designation form.
        If possible, it is best to actually sign any form that the Plan or IRA provides or requires, with the
        words ―see attached‖ filled in appropriately.


        Spousal Rollover. Here, if the original owner is deceased, the owner‘s spouse was the
        designated beneficiary, and the spouse wishes to treat the IRA as his own (pursuant to IRC
        §408(d)(3)(C)(ii)(II)), then this clause manifesting that intent would be appropriate. There are
        many important tax consequences to consider if a spouse is a beneficiary of an IRA or qualified
        plan. Most important is that IRC §§402(c)(9), 403(b)(8)(B) and 408(d)(3)(C)(ii)(II) allow
        spouses, and only spouses, to rollover from qualified plans, tax sheltered annuities and IRAs,
        into an IRA that will become the spouse‘s own IRA (i.e., it will be treated as owned directly
        rather than as a beneficiary). The spousal rollover rule is clearly applicable even after the RBD
        has been reached. 7
        Application of Minimum Distribution Rules. The general rule is that, after death and after the
        RBD—the required beginning date, April 1 of the calendar year following the calendar year in
        which the participant reaches age 70 1/ 2—distributions must continue at least as rapidly as before
        death. Before death, minimum distributions will have commenced as of the RBD, usually over
        the joint life expectancy of the participant and the participant‘s beneficiary. If death occurs
        before the RBD, distributions must either be made (a) over the life expectancy of the beneficiary,
        or (b) within five years, usually at the election of the beneficiary.
        Spousal Rollover Postpones or Suspends IRC §401(a)(9). A post mortem technique that
        effectively suspends or postpones the application of both rules is to name the spouse as
        beneficiary, and then have the spouse rollover the benefit or treat the IRA as his or her own
        under the spousal IRA rules. This is an extremely important planning opportunity and is key to
        most of the various post death distribution strategies. This means, in effect, that the spouse could
        (1) defer distribution until the April 1 of the calendar year following the calendar year in which



                 6
                     All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless otherwise
        indicated.

                 7
                     PLR 9005071.

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        the spouse attained age 701/ 2, and, more importantly, (2) begin a fresh payout period, using a
        new beneficiary as another joint measuring life. 8
        Special Rule For Spouses Delays Application of Minimum Distribution Rules. If the spouse
        desires to be treated as a beneficiary, rather than as an owner, a special exception to the
        exception to the five year rule applies if the surviving spouse is the beneficiary of a participant
        who dies prior to the RBD. In that case, the spouse may delay distributions based upon the
        spouse‘s life or life expectancy until the participant would have attained age 70 1/ 2, and if the
        spouse dies before that date, the minimum distributions are applied as if the spouse were the
        participant.9
        If Spouse is Under Age 591/2 , Premature Distribution Tax May Apply. If a distribution from
        a spousal rollover IRA is made to a spouse who is under age 59 1/2 at the time, it may be that the
        premature distribution tax of IRC §72(t) applies, since the spouse in such case is treated as if he
        were the employee. However, §72(t) expressly does not apply to distributions ―made to a
        beneficiary . . . on or after the death of an employee.‖ 10 Though the question is by no means free
        from doubt, the express exception to the premature distribution tax for distributions on account
        of death ought to apply, even after a spousal rollover.
        Rollover Where Estate is Beneficiary. A question that frequently arises in a post mortem
        setting is whether a spouse may rollover a benefit to which the spouse is only indirectly the
        recipient. For example, the decedent‘s estate, or even a trust, may be the designated beneficiary
        of the benefit, but the spouse is the principal beneficiary of the estate or trust. In such case, can
        the spouse take a distribution to which he is entitled under the estate or trust and roll it over
        under the spousal rollover rules? Surprisingly, there are several private letter rulings that have
        allowed this under appropriate circumstances. 11
        Revocation of Prior Designations. I revoke all previous beneficiary designations. This
        beneficiary designation shall remain in effect until such time as I have filed another designation
        with the trustee or custodian of the IRA, bearing a subsequent date.
        This is a standard provision that can prove helpful on occasion.
        Identification of IRA. The IRA has been described as the Largest Bank in Fort Worth Rollover
        IRA for Moore Money and is believed to have been assigned account no. 123-999-99999. This
        IRA will sometimes be referred to herein simply as ―the IRA,‖ ―this IRA,‖ or ―my IRA.‖ I wish
        to make the beneficiary designation change as set forth herein, even if the foregoing description
        or account no. is incorrect in any respect, so long as the IRA can reasonably be identified.
        Many times a participant will have several IRAs with the same sponsor, or one IRA held in
        several subaccounts, depending upon the nature of the investments. In either case, the identifying


                8
                    Prop. Treas. Reg. 1.408-8, Q&A A-4(b) (Proposed 7/27/87).

                9
                    401(a)(9)(B)(iv)(II).
                10
                     IRC §72(t)(2)(A)(ii).
                11
                  PLR 8351119, 8649037, 8746055, 8920045, 8920060, 8925048 and 9402023. Contrast PLR 9302022
        with PLR 9303031.

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        account numbers may differ. In that case, if the beneficiaries of each are to be the same, then a
        statement to that effect may avoid a construction problem in the future.
        Approximate Value. The approximate value as of June 30, 1996 was $5,456,999. (I may be
        mistaken as to the approximate value of the IRA. Such mistake, if any, shall have absolutely no
        effect on this beneficiary designation.)
        This information will often prove useful in reviewing the file and all of the various IRA and
        qualified plan beneficiary designations, as a reminder of what was intended to go where.
        Identification of IRA Sponsor. The sponsor of the IRA is believed to be Largest Bank in Fort
        Worth (the IRA ―Sponsor‖).
        Identification of Designated Participant/Designated IRA Owne r. I, Moore Money (the
        ―Participant‖ or IRA ―Owner‖), named Morris Edward Money at birth, also know as Mo Money
        and M.E. Money, am the designated owner of the above referenced IRA. I am presently a
        domiciliary and resident of Enterprise County, Texas. My Texas domicile was established at
        birth. I am a citizen of the United States.


        Identification of Spouse. I am married to Lotta Money. All references in this Will to ―my
        Wife‖ or to ―my spouse‖ are to Lotta Money alone. My Wife, Lotta Money, was born on
        October 1, 1929. My Wife is presently a domiciliary and resident of Enterprise County, Texas.
        Her Texas domicile was established at birth. My Wife is a citizen of the United States. I have
        not been previously married to any other person.
        Identification of Children. I have two children, now living.
                                              E.      C.        Money     (Cosmic                 Charlie)
                                              007                   Mars                             Hotel
                                              Worthless,               TX                           76999
                                              SSN                                             449-666-99(9
                                              (415)                                              457-8457

                                              Faith          N.            Money                 (Faithful)
                                              221B          New            Minglewood                 Ave.
                                              Cucamonga,                                               CA
                                              SSN                                             549-666-99(9
                                              (900) 123-4567
                I have no child now deceased leaving descendants now living.
        Definition of the Word “Children”/Children Born or Adopted After Signing of
        Instrument. All references in this instrument to ―the Participant‘s children,‖ ―my children,‖
        ―my child‖ or a ―child of mine‖ include only the above named child and any child or children
        hereafter born to or adopted by me. This provision is to be interpreted literally and strictly.




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        Identification of Descendants. All references in this instrument to ―the Participant‘s
        descendants,‖ "my descendants," a "descendant of mine," or similar designation, shall include
        only "my children" and their descendants and no others. This provision is to be interpreted
        literally and strictly.
        Most of this information, though not necessary, will have to be ascertained sooner or later, and
        might as well be set forth in full in the beneficiary designation. Forcing the draftsperson to
        consider the date Texas domicile was established and the date of marriage is obviously useful in
        determining the portion of the benefit that may be community property. Forcing the draftsperson
        to address the citizenship of the participant and the spouse is very important for a number of
        reasons, one of which is the availability of the marital deduction, in case a trust is a beneficiary.
        Identifying descendants can save a lot of trouble later on. Consider the example of President
        Clinton, who discovered two siblings after being elected. If there are any deceased children who
        are survived by descendants, the beneficiary designation is a good time to recognize the
        situation, and the contrary is equally true. If there are any descendants whom the participant does
        not wish to be considered (illegitimates, perhaps), then the approach taken above is a tactful way
        of dealing with the issue.
        TABLE OF B ENEFICIARIES
                     Class                                           Beneficiary(ies)
        1.      First Beneficiary             Lotta Money if she survives me (my Wife).
        2.      Second Beneficiary            My Descendants who survive me, per stirpes
        3.      Third Beneficiary             My Probate Estate
        4.      Fourth Beneficiary            N/A
        5.      Fifth Beneficiary      N/A
        After quite a bit of experimentation as to how to list primary and contingent beneficiaries, I have
        recently adopted the approach represented by the above table as being the most flexible.
        Except as otherwise designated or provided in this Designation, the following rules of
        construction shall apply:
        •    The Beneficiaries identified above shall be entitled to Death Benefits in ascending numerica l
             order. That is, the person(s) identified as the First Beneficiary shall be entitled to Death
             Benefits first, and the Second Beneficiaries shall be entitled to Death Benefits only if there is
             no First Beneficiary surviving. And so forth. (The lower the number the higher the Class.)
             Beneficiaries below the First Beneficiary level are contingent beneficiaries.
        •• A Beneficiary must survive me in order to be eligible to receive Death Benefits under this
           designation. Further, a Beneficiary must survive all other Beneficiaries of a higher Class in
           order to be eligible to receive Death Benefits. A Beneficiary‘s interest shall vest absolutely at
           my death, whether or not the Beneficiary subsequently survives the complete distribution of
           his benefits under the IRA.
        •• In the case of a gift to a Class ―by right of representation‖ or ―per stirpes,‖ Death Benefits
           shall pass in accordance with the definition of those terms. For example, if a person was

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            survived by four children, and two grandchildren who were the only children (surviving or
            otherwise) of a predeceased child, a division by right of representation would provide two
            equal shares for each child who survived, and one share for each of the children of the
            predeceased child (ten shares in all). This would be true regardless of whether the surviving
            children had children then living, or whether the surviving grandchildren had living
            descendants.
        •   The Death Benefits as to which a trust is the Beneficiary (by virtue of disclaimer) shall be
            paid, in trust, to the person who is the trustee under the trust (at the time the Death Benefits
            are paid), under the trust provisions contained and described in the trust instrument as it may
            exist at the first to occur of (1) my death, (2) my Required Beginning Date or (3) t he date of
            this designation if made after my Required Beginning Date. Unless otherwise clearly
            specified, a reference to a beneficiary is a reference to the person then serving as trustee, if a
            trust is the beneficiary.
        •   A copy of The Credit Shelter Trust Under The Moore Family Trust is delivered to the
            IRA trustee or custodian contemporaneously with the delivery of this instrument. The Credit
            Shelter Trust Under The Moore Family Trust is for some purposes revocable and
            amendable, but my share of the Trust becomes irrevocable upon my death. As a general rule,
            therefore, this Designation shall apply to the Trust as it exists at the date of my death, if my
            death is prior to my Required Beginning Date, whether or not it is amended or restated
            following this Designation. However, if or when I have reached my Required Beginning
            Date, then the trust by its express terms has previously been made irrevocable for purposes of
            Benefits passing pursuant to this Beneficiary Designation, and the trust terms in effect on the
            later of (i) my Required Beginning Date, or (ii) the date I have signed this designation, shall
            apply whether or not the trust has in other respects been thereafter amended. If, for whatever
            reason, The Credit Shelter Trust Under The Moore Family Trust as beneficiary is ineffective,
            such designation shall be ignored (as if the trust were an individual who had predeceased
            me).
        Note that by granting the beneficiaries a right of acceleration and withdrawal, i.e., fully vesting
        the benefit, the beneficiary will have a power of appointment and any undistributed benefits will
        be taxed for estate tax purposes in the beneficiary‘s estate, if the beneficiary is an individual.
        Estate tax exclusion could be arranged, in an appropriate case, by not vesting the bene fit.
        However, if the beneficiary powers are to be limited, one must carefully consider the effect this
        might have on the marital deduction, the possible imposition of the generation skipping tax, and
        the impact on the size of any credit shelter gift under the will. Since an IRA or qualified plan
        benefit is a wasting asset, it will likely end up in the beneficiary‘s estate anyway, wasting either
        the unified credit or the generation skipping transfer tax exemption under IRC §2631 or both.
        Therefore, if plan and IRA benefits are to be excluded from the beneficiary‘s estate, a trust
        should ordinarily be used as a medium. A power of withdrawal and acceleration in the trustee
        should have no adverse estate tax consequences.
        It is generally advisable to leave at least half of the benefits to the surviving spouse, if any. This
        disposes of any problems or inequities in attempting to dispose of the spouse‘s community
        property to someone other than the spouse. Furthe r, the spouse is an ideal beneficiary since all
        of the tax laws (income, excise and estate) favor such a disposition.


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        Although naming the spouse is the ideal, since income taxes, certain excise taxes and estate
        taxes, can all be postponed, sometimes this is just not feasible, either because of family
        circumstances that make naming a QTIP trust desirable, or because the IRA or qualified plan
        assets are the only assets available to fund a credit shelter trust. The main problem here is that
        income taxes will have to be paid upon funding the trust with the benefits upon their distribution,
        and therefore, it is desirable to postpone the actual distribution from the plan or IRA to the trust
        as long as possible without violating the IRC §401(a)(9) minimum distribution rules. This may
        involve funding the trust with the ―right to receive‖ distributions from the plan or IRA. Since the
        distributions concerned are income in respect of a decedent under IRC §691, care must be taken
        regarding phantom income and acceleration issues.
        •       Disposition of State Prope rty Law Interest of Spouse. To the extent that my Wife is a
        designated beneficiary under this instrument, the Benefits to which she is thereby entitled shall
        be satisfied first out of any community property or other legal interest that she may otherwise
        have in my Benefits, and second, out of property in which she does not have such an interest.
        Further, any Benefits passing to my Wife in fee simple and free of trust shall be satisfied first out
        of her community property interest in the Death Benefits before resorting to my separate or
        community property interest.
        These clauses are self-explanatory, but they do bear reflection. If the participant is married, it is
        almost a certainty that a portion of the benefits will be community property. If at all possible, I
        suggest leaving the surviving spouse at least half of the benefit outright. This at once disposes of
        quite a few thorny characterization and control issues.
        For those readers who think it silly to specify that any benefits passing to the spouse are to be
        satisfied first out of the spouse‘s community property, I direct your attention to Employee
        Savings Plan of Mobil Oil Corp. v. Geer,12 where the beneficiary designation left the spouse half
        and the children the other half of the participant‘s pension benefits. The spouse claimed that she
        was entitled to three- fourths of the benefits— her one half, plus half of what was left!
        If my Wife predeceases or has predeceased me, and if she has left her community property
        interest (if any) in my Benefits to someone other than me, then to the extent that this disposition
        was effective as a matter of law, such interest shall pass as she has directed, rather than in
        accordance with this designation. However, the custodian or trustee shall be fully protected in
        paying or withholding payment of Benefits without regard to the preceding sentence.
        Predeceased Spouse           With    Community         Property      Interest in   the    IRA.
        DOUBLECHECKxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx(I acknowledge that as of the
        date I am signing this beneficiary designation, o ne- half of my Benefit is owned by the Moore
        Family Trust. This one- half belonged to my Wife during her lifetime under Texas law, and was a
        part of her probate estate. At my death, the Moore Family Trust terminates and passes to my
        Wife‘s descendants by right of representation. At the present time, the descendants by right of
        representation of my Wife are xxxyyy, whose names are listed above. Therefore, the entire
        Benefit will pass to xxxyyy, if they survive me, whether the interest owned by the trust under
        state law has been completely distributed to it at my death or not.)


                12
                     Employee Savings Plan of Mobil Oil Corp. v. Geer, 535 F. Supp. 1052 (S.D. NY 1982).

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        If a spouse having a community property interest has predeceased the participant, and no
        nonprorata partition of the interest has taken place, then on the participant‘s death it is impor tant
        for practical reasons that the participant‘s beneficiary designation be consistent with the spouse‘s
        will. It may also be important for estate tax reasons to recognize that the spouse‘s interest is not
        to be included in the participant‘s estate. Also, by making the NPS‘s direction the participant‘s
        designation, one may be able to avoid violating the rule that only the participant may designate a
        beneficiary under the minimum distribution rules. 13
        The community property interest of the participant‘s spo use should not be includible in the
        participant‘s gross estate for federal estate tax purposes, any more than such interest would be
        includible if the interest were a life insurance policy. 14 It is well established in Texas that a
        predeceased spouse‘s successors in interest will own half of any community property life
        insurance on the life of the survivor, if that right is not ―settled away.‖ 15 However, because it is
        common for community property estates to be partitioned nonprorata, it may be difficult to te ll
        long after the fact whether assets under the nominal control of a decedent in fact belong to the
        decedent‘s spouse‘s successors in interest, or whether the decedent‘s interest was in effect or in
        actuality transferred to the survivor as a part of a settlement of the first estate. Therefore, it may
        be helpful for the participant to formally recognize the existence and legitimacy of the
        predeceased spouse‘s interest, particularly if it is desired to exclude the interest from the
        participant‘s estate for estate tax purposes. Otherwise, the IRS may attempt to argue that the
        participant converted or ―settled away‖ the spouse‘s interest.
        There are quite a few troubling tax issues associated with the payment of community property
        benefits to the successors in interest of the participant‘s spouse, particularly while the participant
        is still living. To name a few: (1) Who pays the income tax? (2) Who pays the premature
        distribution tax under §72(t) if the participant is still living and is under 59 1/2?
                 (1)    There is some authority that the participant will not have to pay the income
                 tax on distributions to the beneficiaries of the participant’s spouse’s estate, despite
                 the admonition in IRC §408(g) that the IRA rules ―shall be applied without regard to any
                 community property laws.‖ 16
                 (2)     The exception to the 10% premature distribution tax under §72(t)(2)(A)(i), for
                 distributions made on account of death, does not apply here because the death referred to


                 13
                      Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(f) first sentence. (Proposed 7/27/87).
                 14
                      Rev. Rul. 75-100. Treas. Reg. §20.2042-1(b)(5).
                 15
                      Brown v. Lee, 371 S.W.2d 694 (Tex. 1963).

                 16
                    Rodney Powell, et. al. v. Commissioner, 101 T.C. 32 (1993). PLR 8040101. Incidentally, if PLR 8040101
        is right, and if the distribution is subject to income tax liab ility, will the marital deduction be reduced to reflect the
        dimin ished value?

                 TAM 7827008 holds that there is no reduction in the amount of the marital deduction where the marital gift
        was satisfied with income in respect of a decedent. Cf. Estate of G.R. Robinson, 69 T.C. 22 (1977). Further, in PLR
        8929046 the Service ruled that in determining the value of payments receivable fro m an IRA for marital deduction
        purposes, the potential inco me taxes payable by the recipient are not taken into acc ount!

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                is that of the employee. However, the tax does not apply unless the distribution is
                includible in gross income. 17 Further, the tax is on amounts received by the taxpayer.
                Therefore, if the tax applies at all, it is arguable that it is owed by the beneficiary of the
                nonparticipant spouse‘s interest.
        DISCLAIMER PROVISIONS.
        As expressly permitted by Texas Probate Code §37A(c), I make the following provision in this
        instrument for the making of disclaimers by a beneficiary.
        Except where it has been specifically provided to the contrary elsewhere in this designation, if a
        disclaimant disclaims all of his or her interest in all (or any portion) of any trust, the trust (or the
        affected portion) shall be administered and distributed as if the disclaimant died after having
        survived me, even if this results in the acceleration of a remainder interest or closes an otherwise
        open class, and even if this results in the removal of the property from the trust (which in many
        cases it would). Except where it has been specifically provided to the contrary elsewhere in this
        designation, if a disclaimant disclaims less than all of his or her interest in all (or any portion) of
        any trust, the trust (or the affected portion) shall be administered and distributed as if the
        disclaimed interest had been omitted from the terms of the trust.
        Except where it has been specifically provided to the contrary elsewhere in this designation, if
        any property that is not to be held in trust is disclaimed by a beneficiary, other than my Wife,
        such property shall pass to the then living descendants of the disclaimant, by right of
        representation, if any, and if none, then such property shall pass as if the disclaimant predeceased
        me.
        If my Wife disclaims all or a portion of the Death Benefits to which she is otherwise entitled
        under this instrument, the disclaimed portion shall be payable to The Credit Shelter Trust
        Unde r The Moore Family Trust.
        If my Wife makes a further disclaimer of her interest hereunder that is payable to the Credit
        Shelter Trust Under The Moore Family Trust, such interest shall be payable to My Descendants
        Per Stirpes.
        If, as a result of disclaimer, an interest would otherwise pass to The Credit Shelter Trust Under
        The Moore Family Trust, but for the fact that The Credit Shelter Trust Under The Moore Family
        Trust does not exist or is otherwise incapable of taking, the disclaimed interest shall instead pass
        as if the disclaimant had predeceased me.
        At least consider where you wish the benefit to go in the event of disclaimer. This is a very
        important provision. In fact, if one is concerned with using trusts as beneficiaries because of the
        uncertainties regarding the application of the minimum distribution rules during lifetime,
        following the RBD, it may be worthwhile to consider naming the spouse as the beneficiary, with
        the bypass trust (or even the participant‘s estate) as the beneficiary if the spouse disclaims. There
        will be little uncertainty in the use of the joint life expectancy method if the spouse is the
        participant‘s designated beneficiary. If the spouse disclaims, and if the trust is treated as a
        contingent beneficiary as of the RBD (which seems likely), and if recalculation is not involved, it


                17
                     IRC §72(t)(1).

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        would appear that the payout period would be fixed at the RBD, just as if the spouse survived the
        RBD and then predeceased the participant.
        There are a number of issues associated with the disclaimer of qualified plan and IRA benefits.
        First of all, one must consult state law to determine whether the disclaimer of nonprobate assets
        is even contemplated by the applicable disclaimer statute. Other issues that come immediately to
        mind are whether, in the case of a qualified plan, the antialienation rule applies, and whether, in
        the case of an IRA, a disclaimer will be treated as an assignment. Finally, we have a concern as
        to how the minimum distribution rules are to interact with a disclaimer that takes place after the
        required beginning date.
        Another question this technique raises is this: If benefits have begun to be distributed after the
        participant has attained 701/ 2, based upon the joint life expectancy of the participant and the life
        or life expectancy of a designated beneficiary, and following the death of the participant, the
        designated beneficiary disclaims, is the life expectancy of the beneficiary of the disclaimer
        substituted for that of the disclaimant, or is the disclaimant treated as predeceasing the
        participant after having first survived the required beginning date (the RBD)?
        In PLR 9037048 the decedent designated his wife as primary beneficiary and a testamentary trust
        as the contingent beneficiary. Upon reaching his RBD, the decedent elected to take distributions
        over the unrecalculated joint life expectancy of himself and his wife. The facts of the ruling state
        that the trust was a valid trust under state law and was also irrevocable. Of course, since the trust
        was a testamentary trust, it obviously was not irrevocable during the decedent‘s lifetime, much
        less at the RBD.
        The spouse made two disclaimers. She first disclaimed the right to the benefits individually, and
        then disclaimed the right to benefit from the residuary (testamentary) trust. As a result, the
        interest passed to the trustee of the trust for the benefit of the decedent‘s child. The Service
        ruled (a) that the disclaimers were qualified under IRC §2518 and (b) that the original
        payout pe riod established during the lifetime of the decedent, under IRC §§401(a)(9) and
        408(a)(6), continued to gove rn the payout period following the disclaime r. 18
        The ruling specifically states that the disclaimed interest “will be treated for federal tax
        purposes as if that Surviving Spouse never had been named as the IRA beneficiary; rather,
        benefits will be distributed from the Account to the Contingent Beneficiary‘s Trustee according
        to the terms of the Decedent‘s will.‖ 19 However, with regard to the minimum distribution rules, a
        different rule appears to have obtained, since the original payout period remained unchanged.
        This latter treatment is precisely what would have been the result if, in fact, the spouse had died
        (rather than disclaimed) after the RBD, and after having been named as the beneficiary; since in
        that case the payout period is fixed, and even designating a beneficiary with a shorter life
        expectancy will not shorten the payout period. 20



                18
                     PLR 9037048. PLR 9416037.
                19
                     PLR 9037048.

                20
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(c). (Proposed 7/27/87).

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        This technique is apparently effective to preserve the original payout period based upon the life
        expectancy of the disclaimant, rather than the life expectancy of the person who receives the
        benefit as a result of the disclaimer, and presumably, the recipient of the benefits need not even
        be a ―designated beneficiary.‖ I can see no theoretical distinction between the case where an
        estate or nonqualified trust is the ―contingent beneficiary‖ who takes in the event of a disclaimer,
        and anyone else whose life expectancy is ignored, once the original payout period is established.
        The facts of the ruling carefully recite (a) the trust was valid under state law, (b) the trust was
        irrevocable, and (c) a copy of the trust was held by the owner of the account. As pointed out
        above, the trust was revocable on and after the RBD and did not become irrevocable until death.
        The fact that the IRA owner had a copy of his will is hardly surprising, but the fact that the
        Service saw fit to stress this point has caused some people to opine that this is an indication that
        the delivery requirement applicable to trusts under the minimum distribution rules may be
        satisfied by delivery to the IRA owner, rather than the trustee. (The last of the four requirements
        listed in the D-5 Proposed Regulations for a trust to be treated as a designated beneficiary is that
        ―a copy of the trust instrument must be provided to the plan.‖ 21 ) However, one is hard put to see
        the relevance of this point in this context, unless the Service is suggesting that the contingent
        beneficiary must meet the requirements of a ―designated beneficiary.‖ A contingent beneficiary
        need not be a designated beneficiary in the absence of a disclaimer, and in any event, the
        testamentary trust was certainly not a designated beneficiary on the RBD, though perhaps it was
        at death. The only conclusion that I can logically draw is that the particular characteristics of the
        trust were completely superfluous to the ruling— but then again, one never knows for sure in this
        area.
        •       Identification of Form or Time of Payment/Beneficiary Shall Have Draw Down
        Powe r. Benefits payable as a result of my death shall be paid in such form and manner and at
        such time as may be permitted by the IRA or law and as the beneficiary shall elect. If there is
        more than one beneficiary, then each beneficiary may make an election with respect to that
        beneficiary‘s separate account. Further, each beneficiary shall have at all times, the unrestricted
        power and right to draw down and take a distribution to himself of all or any portion of the
        Benefits to which he is entitled under this designation, including the unrestricted power to
        accelerate any installment distributions elected. (If a trust is a beneficiary, the powers described
        under this paragraph shall belong to the trustee of that trust.)
        •       Death of Beneficiary. If an individual who is a beneficiary survives me, but dies prior to
        the complete distribution of his interest in my Benefit, the beneficiary‘s share of any remaining
        interest shall be paid to such secondary beneficiary or beneficiaries as are designated by the
        deceased beneficiary by written instrument delivered to the IRA custodian or trustee. If no suc h
        designation has been made, then the beneficiary‘s share of any remaining interest shall be paid to
        the beneficiary's personal representative to be administered as a part of the beneficiary's general
        probate estate. Such distribution and designation shall be in such form and at such time as may
        be permitted by the IRA or law and as the secondary beneficiary or beneficiary‘s personal
        representative (as the case may be) elects.



                21
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A D-5(a). (Proposed 7/27/ 87).

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        The question of what to do with the beneficiary‘s interest upon the death of the beneficiary can
        be a troubling one. Lest there be a question, I recommend that the beneficiary designation
        address the issue.
        The clauses set forth above clear up a number of questions that may otherwise be in doubt, the
        resolution of some of which directly affect the availability of the marital deduction. For example,
        the existence of an unrestricted draw down power may be crucial if the beneficiary is the spouse
        and if a marital deduction for the interest is needed. If the spouse does not have a draw down
        power, the benefit may be a nondeductible terminable interest, unless any undistributed benefit
        remaining at the spouse‘s death is payable to the spouse‘s estate! My contention is that the
        existence of the draw down power is to be implied (in the absence of a specific direction to the
        contrary), and, also by implication, any undistributed benefits remaining at the spouse‘s death
        should be payable to the spouse‘s estate (likewise in the absence of an affirmative direction to
        the contrary); but not everyone agrees with me. I strongly recommend the use of these clauses in
        the interest of avoiding ambiguity.
        If a spouse has an unrestricted right to draw down all of the income, the interest in the plan or
        IRA should qualify for QTIP treatment, 22 particularly if this right is coupled with the right in the
        spouse or the duty of the trustee/custodian to make the property productive. Further, if the spouse
        has an unrestricted draw down power over corpus and income, the participant‘s estate will be
        entitled to a marital deduction, even if the power lapses at death. 23 Finally, if any undistributed
        benefit remaining at the spouse‘s death is payable to his estate, then the interest qualifies for the
        marital deduction no matter what the lifetime distribution terms, so long as the interest was
        payable to no one other than the spouse during the spouse‘s life. 24
        True, giving the beneficiary an unlimited draw down power places the benefits in the
        beneficiary‘s estate, pursuant to IRC §2041; however, for the reasons previously indicated, I
        believe that if estate tax exclusion in the beneficiaries‘ estate is desired, an accumulation trust
        should be the beneficiary.
        The proposed regulations contain a provision that could conceivably make it dangerous to allow
        a beneficiary to designate who will take the beneficiary‘s interest upon the beneficiary‘s death:
                (f)     Designations by beneficiaries. If the plan provides (or allows the employee to
                specify) that, after the employee‘s death, any person or persons have the discretion to
                change the beneficiaries of the employee, then, for purposes of determining the
                distribution period for both distributions before and after the employee‘s death, the
                employee will be treated as not having designated a beneficiary. 25



                22
                     Treas. Reg. § 20.2056(b)-5(f)(8). Treas. Reg. §20.2056(b)-5(f)(6), last clause.

                23
                     IRC 2056(b)(5) concluding sentence. Treas. Reg. § 20.2056(b)-5(g ).
                24
                  IRC §2056(b)(1)(A) second parenthetical clause. Treas. Reg. §20.2056(e)-2(b) example (1)(iii); Rev. Rul.
        79-240, 1979-2 C.B. 335.

                25
                     Proposed Treas. Reg. §1.401(a)(9)-1, Q&A E-5(f). (Proposed 7/27/87).

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        Does this regulation apply at the beneficiary‘s death, or only so long as the beneficiary is living?
        In any case, would it apply to a distribution to the beneficiary‘s estate, since the beneficiary
        designates the beneficiaries of his will? An affirmative answer to this question would be an
        inappropriate and overbroad reading of the regulation, but not impossible. In a conversation I had
        with the IRS National Office in Washington, I was assured that this regulation was not meant to
        apply to a case where the remainder interest passes to the beneficiary‘s estate or as the
        beneficiary directs upon the beneficiary‘s death. Rather, the intent behind the regulation is that
        the interest not be diverted to someone other than the beneficiary during the beneficiary‘s
        lifetime.
        The regulation provides an exception:
                However, such discretion will not be found to exist merely because the employee‘s
                surviving spouse may designate a beneficiary for distribution purposes pursuant to
                section 401(a)(9)(B)(iv)(II). 26
        The IRC section referred to is an exception to the exception to the five year rule, that applies if
        the surviving spouse is the beneficiary of a participant who dies prior to the RBD; in which case
        the spouse may delay distributions based upon the spouse‘s life or life expectancy until the
        participant would have attained age 70 1/2, but if the spouse dies before that date, the minimum
        distributions are applied as if the spouse were the participant. This exception was thought by the
        Treasury to be a special case worth addressing because in that case the designation would indeed
        establish a new distribution payout period.
        •       Uniform Gifts to Minors Act. Any distribution that would be made to a minor
        beneficiary may be made under the Uniform Gifts (or Transfers) to Minors Act of Texas or any
        other jurisdiction.
        •       Powe r of Legal Representative to Act Under IRA. Any distribution that can be made
        to an individual may be made to the individual‘s legal representative, including the holder of
        such individual‘s power of attorney. Such representative shall also have the power to make (on
        the individual‘s behalf) any elections or designations that the individual is empowered to make,
        to the extent otherwise consistent with the scope of the representative‘s legal authority.
        •      Revocation of This Designation. This designation may be revoked or changed by me at
        any time by written notice to the IRA custodian or trustee, and this beneficiary designation shall
        remain in effect until such time, or until such time as I have filed another designation with the
        IRA custodian or trustee bearing a subsequent signature date.
        These clauses are self-explanatory. I did not include a survivorship period clause (e.g., 90 days)
        because I am unsure of the effect of such a clause under IRC §401(a)(9).
        Elec t io n as to For m o f Be ne fit Under t he M inimum Dis tr ib ut io n Rules. I was born on 10/1/29. I
        believe that my Required Beginning Date will be 4/1/2001, because I will be 701/ 2 in the
        immediately preceding calendar year. In ―the first distribution calendar year,‖ (i.e., in the year
        that I attain age 701/ 2), I elect that distributions shall commence to me over the joint life
        expectancy of myself and my designated beneficiary. If permitted by the IRA, I elect that my life


                26
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(f) last sentence. (Proposed 7/27/87).

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        expectancy shall be recalculated for purposes of complying with the minimum distribution
        rules. However, if my Wife is living on the required beginning date, and is at that time a
        designated beneficiary, then I further direct that my Wife’s life expectancy shall NOT be
        recalculated.
        This forum does not lend itself to a detailed discussion of the §401(a)(9) minimum distribution
        rules, but I encourage the reader to peruse this clause carefully and consider the issues that are
        being dealt with. A decision must be made as to whether or not to recalculate life expectancies
        each year. Life expectancies can only be recalculated in the case of the participant and (or) the
        participant‘s spouse. Although recalculation can result in a longer payout period in some cases, it
        can also result in the rapid acceleration of income following the year of death, because a person
        has a life expectancy of zero upon death, not surprisingly.
        Essentially, distributions where death occurs before the RBD must be made either (a) within five
        years of death, or (b) over the life expectancy of the beneficiary. 27 Once the participant reaches
        the RBD, distributions must begin to be made over the joint life expectancy of the participant
        and the participant‘s beneficiary. 28 Any benefits remaining at the participant‘s death following
        the RBD must continue to be made at least as rapidly as before. 29 The beneficiary designation
        form assumes greater significance once one realizes that the rapidity with which
        distributions must be made (and tax paid) is dependent upon who the participant’s
        beneficiary is.
        Some beneficiaries do not have lives or life expectancies, an estate or a charity, for example.
        Trusts are a special case.
        •       Beneficiary of Trust Is a Designated Beneficiary. If and to the extent that The Credit
        Shelter Trust Under The Moore Family Trust is or beco mes a primary beneficiary, the
        beneficiary The Credit Shelter Trust Under The Moore Family Trust should qualify as a
        ―designated beneficiary‖ for purposes of IRC §401(a)(9) because (1) the trust is a valid trust
        under state law, (2) the trust has expressly been made irrevocable for purposes of Benefits
        passing pursuant to this beneficiary designation, (3) the beneficiaries of the trust who are
        beneficiaries with respect to the trust‘s interest in the Benefit hereunder are identifiable from the
        trust instrument, and (4) a copy of the trust instrument has been provided to the trustee or
        custodian of the IRA contemporaneously with the delivery of this beneficiary designation. The
        beneficiaries of the trust who are beneficiaries with respect to the trust‘s interest in the Benefits
        hereunder are my Wife and my descendants who survive me.
        A trust may, of course, be a beneficiary of an IRA or qualified plan, unless the document for
        some reason does not allow it. The problem is found under IRC §401(a)(9), which provides that
        in the case of the death of the participant before the RBD (the age 70 1/ 2 rule), the entire interest
        must be paid out in five years (the “five year rule”), unless the beneficiary is a ―designated
        beneficiary,‖ in which case the payout can be made over the beneficiary‘s life expectancy (the


                27
                     §401(a)(9)(B)(ii)-(iv).
                28
                     IRC §401(a)(9)(A).

                29
                     §401(a)(9)(B)(i).

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        “life expectancy method”). If the participant survives until the RBD, then distributions must
        begin to be made under one of two life expectancy methods. Under the first option, distributions
        may be made over the participant‘s life expectancy. Under the second option, the participant is
        allowed to use the joint life expectancy of the participant and a ―designated [death benefit]
        beneficiary,‖ subject to the minimum benefit incidental death benefit (MDIB) rule.
        The MDIB rule treats beneficiaries other than spouses as if they were no more than
        approximately ten years younger than the participant. 30 However, this rule is in effect only so
        long as the participant is alive. After the participant‘s death, the unreduced life expectancy of the
        participant can be used. 31 This fact cannot be emphasized too strongly.
        Note that after the RBD, a sixteen year payout can be assured, by reference to the participant‘s
        life alone, even if there is no “designated beneficiary,” provided that recalculation of life
        expectancy is not elected. If one is satisfied with this, one may ignore the special rules applicable
        to trusts, and can even name the estate as beneficiary without shortening the otherwise applicable
        sixteen year payout period. The payout period after death could be as long as sixteen years, or as
        short as one year, depending on the participant‘s age at the time. In contrast, prior to the RBD,
        the absence of a ―designated beneficiary‖ places the outer limit for withdrawal witho ut penalty at
        five years, no matter what the age of the participant at death. In order to lengthen the post death
        payout period either before or after the RBD, the participant must have a ―designated
        beneficiary.‖
        Under the proposed regulations to IRC §401(a)(9), a the beneficiaries of a trust may be treated as
        ―designated beneficiaries‖ —so that the beneficiaries can be used as the measuring lives or joint
        measuring lives— if four conditions are met: (1) The trust is a valid trust under state law, or
        would be but for the fact that there is no corpus. (2) The trust is irrevocable. (3) The beneficiaries
        of the trust who are beneficiaries with respect to the trust‘s interest in the employee‘s benefit are
        identifiable from the trust instrument within the meaning of the regulations. 32 And (4) a copy of
        the trust instrument is provided to the plan. 33 The model clauses quoted above serve as nothing
        more than a reminder of what the requirements are for treating trust beneficiaries as designated
        beneficiaries for purposes of the minimum distribution rules, and indicates compliance with
        those rules.
        The irrevocability problem is a nuisance, and serves no real policy purpose. But since it is there,
        it must be addressed. It is permissible to change beneficiaries. 34 However, the minimum
        distribution period cannot be lengthened by this technique. There therefore appears to be


                30
                     IRC §401(a)(9)(G). Prop. Treas. Reg. §1.401(a)(9) -2, Q&A 4. (Proposed 7/27/ 87).
                31
                   Prop. Regs. §1.401(a)(9)-2, Q&A 3. (Proposed 7/27/87). Prop. Regs. §1.401(a)(9)-1, Q&A F-3A(b).
        (Proposed 7/27/ 87). PLR 9330042.

                32
                  The regulation referred to is Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-2. (Proposed 7/27/87). Query,
        what does ―identifiable‖ mean in this context. The D-2 regulations offer but slight guidance.
                33
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A D-5 and 6. (Proposed 7/27/ 87).

                34
                     This is the primary reason that the irrevocability requirement strikes some as silly.

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        nothing to prevent substituting one irrevocable trust after another, after the RBD, in order
        to work around the irrevocability problem. I have taken a creative approach for dealing with
        this issue. My intervivos revocable trust contains the following clause.

        1.1 Trust Is Irrevocable With Respect to Certain Retirement Plan
        Distributions.
                 Notwithstanding anything else herein to the contrary, if Maker is alive on Maker‘s
                ―required beginning date‖ as that term is used and defined in this document and in IRC
                §401(a)(9) and the regulations under it (―Maker‘s RBD‖), and if Maker has designated
                the trustee as beneficiary of Maker‘s interest in a qualified plan or IRA, then in that
                event, and to that extent, and at the time of such designation (or the RBD if the RBD is
                later), this trust shall be irrevocable and unamendable with respect to the property in such
                qualified plan or IRA as to which this trust is the beneficiary. For this purpose, the trust
                shall be interpreted, and the beneficiaries determined, as if Maker‘s death occurred at the
                time of such designation (or the RBD if the RBD is later). Of course, if the trust is
                otherwise amended or revoked, Maker may change the beneficiary designation, including
                a change in favor of the amended trust, although this ordinarily will not have the effect of
                lengthening the minimum payout period under the IRA or qualified plan. Since this trust
                may not be amended or revoked on or after the time of such designation (or the RBD if
                the RBD is later) with respect to the property in such qualified plan or IRA as to which
                this trust is the beneficiary, then, unless and until Maker changes the beneficiary
                designation, the trust as it existed prior to any amendment or revocation will continue in
                existence in the form it had prior to such amendment or revocation with respect to
                property in such qualified plan or IRA as to which this trust is the beneficiary. The corpus
                of this irrevocable trust shall at all times during Maker‘s life include at least half of the
                ten dollar bill, previously described, that was transferred to the trust estate and that may
                not be expended during Maker‘s lifetime.
        Be wary of the requirement that the beneficiaries of the trust be identifiable from the trust
        instrument. If the beneficiary is a trust that is to split up into several trusts in proportions that are
        within the discretion of the trustee (as in the case of the A-B marital trust/bypass trust plan), it
        may be that the beneficiaries are not ascertainable. On the other hand, it would seem that so long
        as the beneficiary with the shortest measuring life is used, there ought to be no policy against
        such a designation.
        Consider the following suggested trust provision:
                Coordination With Minimum Distribution Rules. If the trustee is named as the
                beneficiary of retirement plan death benefits (―the death benefits‖) that are subject to the
                minimum distribution rules, and if, under the circumstances existing on t he ―applicable
                date‖ (or at the time of such designation if later), the death benefits or the right to receive
                the death benefits are or may be payable to a trustee (and for this purpose the survival of
                the beneficiaries of the trust for any post death survivorship period shall be irrebuttably
                presumed), then if (a) the participant (employee) dies prior to his RBD, or (b) (i) the
                participant dies on or after the RBD and (ii) the beneficiary(ies) of the trust are or are
                intended to be the designated beneficiary(ies) under the minimum distribution rules, then
                (and then only), in either case (a) or (b), the following rules apply:
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                         (1)     So long as the trust beneficiary or beneficiaries are living, such retirement
                         plan benefits (1) shall be used exclusively for the benefit of the ―designated
                         beneficiary(ies)‖ (within the meaning of that phrase under IRC §401(a)(9) and the
                         regulations under it), and (2) shall not be used to pay debts or expenses or
                         pecuniary bequests, or to benefit persons other than the designated
                         beneficiary(ies), if other assets are available for those purposes, notwithstanding
                         the rules otherwise applicable to apportionment, abatement and the payment of
                         debts and expenses. Further, the rules otherwise applicable to apportionment and
                         abatement of death taxes are hereby expressly limited to provide that in no event
                         shall retirement plan benefits be used to pay death taxes that are not directly
                         attributable and proportionate to the estate tax value of the benefits.
                         (2)     If the trust estate of a trust that is the beneficiary of retirement plan
                         benefits is itself to be divided into fractional shares, the interests of the trustee
                         (and the beneficiaries) of that trust in such retirement plan benefits sha ll be
                         likewise divided, proportionately.
                         (3)     Notwithstanding anything else to the contrary, no one other than a
                         beneficiary who is living at the participant‘s death shall be entitled to receive the
                         participant‘s (employee‘s) retirement plan benefits from the trust, unless such
                         beneficiary‘s entitlement to such benefits is contingent on the death of a prior
                         beneficiary who died after the applicable date.
                It is the purpose of these rules to insure that the trust is considered irrevocable and that
                the beneficiaries of the trusts be identifiable, so that the life expectancies of the
                beneficiaries may be used to calculate the minimum distributions required by the IRC,
                and this paragraph shall be interpreted with this intent being paramount to any other
                direction in it, because that is the intent of the Maker.
        These clauses are still evolving, and great care should be taken before using them. Exempting the
        benefits from being used to pay debts, taxes and expenses could place the remaining trust estate
        under considerable strain. On the other hand, using the assets for such purposes may be
        physically incompatible with a long term payout, even if permissible. However, because of the
        possibility that the estate tax burden could be severe, I believe it may be prudent to leave open
        the option to charge the benefits with its proportionate share of those taxes, as more particularly
        specified in the estate tax apportionment provisions of the instrument.
        Perhaps these clauses should be included in the beneficiary designation form too; otherwise the
        size of the gift to the A or the B trust cannot be ascertained without reference to action taken
        outside the designation. It has been suggested to me that leaving open the tax apportionment
        question may be enough to disqualify the trust from being treated as an individual at the RBD. If
        this is true, then presumably leaving this question open ought to disqualify an individual
        beneficiary as well, and here, the politics would be so strong against such a result that I cannot
        take the issue seriously. I certainly hope that the mere possibility of tax apportionment not limit
        one‘s ability to use the joint life expectancy method or escape the application of the five year
        rule, but again, we just do not know.



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        WHICHTRUST=2• The Marital Deduction Trust As Designated Beneficiary. Further,
        notwithstanding anything else herein to the contrary, my Husband, at any and all times, shall
        have the unfettered right to demand from the trustee of the Marital Deduction Trust an
        immediate distribution, from that portion of my Benefits with respect to which the trustee of the
        Marital Deduction Trust is the beneficiary, of all the income from such portion (determined as if
        the portion of IRA in which the trustee is a beneficiary were itself a trust in which my Husband
        had a qualifying income interest for life), and the trustee of the Marital Deduction Trust shall
        comply with such request and shall distribute the income to my Husband. Alternatively, my
        Husband may (in her sole, unrestricted and absolute discretion) demand and receive such
        distributions of income directly from the IRA. The word ―income‖ for this purpose shall be
        construed in a manner that will guaranty that my Husba nd has a ―qualifying income interest for
        life‖ (within the meaning of IRC §2056(b)(7)) in that portion of my Benefits with respect to
        which the Trustee is the beneficiary.
        Returning again to the painful but inescapable problem of what to do with trusts as beneficiaries,
        we consider the particularly delicate issues encountered with marital deduction trusts. The IRS
        has ruled that a QTIP trust may be named as a beneficiary of an IRA or qualified plan, and a
        marital deduction obtained. However, in each case, the facts were so favorable that it would be
        hard to imagine why the ruling would not likewise be favorable. 35 The primary impediment is
        that, even under the minimum distribution rules, there is ordinarily no guarantee that the plan or
        IRA will distribute all of its income or that the income distributed will in turn be distributed by
        the QTIP trust.
        In the case of the marital deduction trust, consideration must be given to the terms of the plan, if
        the benefit is in a qualified plan. An IRA will almost alwa ys allow acceleration of the
        beneficiary‘s benefit (perhaps only by implication), but a plan might or might not. I am hesitant
        to appoint a marital deduction trust as the beneficiary of a qualified plan or IRA because of the
        uncertainties involved and because the state of the law and regulations in this area are still
        undeveloped and primitive. However, if appropriate clauses are also found in the marital trust
        itself, a marital deduction should be available.
        Consider the following provisions found in a marital deduction trust, but not in the beneficiary
        designation itself.
                Provisions Respecting the Marital Deduction. Notwithstanding the following or
                anything else in this instrument to the contrary, a trust in which the Surviving Spouse has
                a qualifying income interest for life may not be funded with property that does not
                constitute Eligible Marital Deduction Property if there is any other alternative available to
                the fiduciary. Subject to this rule, Maker recognizes that there may be situations in which
                a Surviving Spouse has a “qualifying income interest for life in a retire ment plan,” or
                in which The Marital Deduction Trust estate has an interest in a retirement plan. For
                example, the trust may own the right to receive distributions from a retirement pla n that
                constitutes Eligible Marital Deduction Property. In such event, the interest shall be held,
                invested, reinvested and maintained, and income attributable to the interest shall be



                35
                     Rev. Rul. 89-89, 1989-2 C.B. 231. See also PLRs 9320015, 9317025, 9038015 and 8728011.

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                determined, in a manner that guarantees that the Surviving Spouse has a qualifying
                income interest for life with respect to such interest. [But see TAM 9220007.]
                The rule that the Surviving Spouse is guaranteed a qualifying income interest for life in
                such cases is overriding and shall govern in case of conflict with the following rules,
                which Maker nevertheless believes to be consistent with it.
                (1)     Determination of Fiduciary Accounting Income. Subject to the overriding rule
                that the Surviving Spouse is guaranteed a qualifying income interest for life in any
                retirement plan in which the trust has an interest, income from an interest in a retirement
                plan shall be determined by reference to state statutory law, if any, or if none, by
                applying general equitable principles, having due regard for the interest of the income
                beneficiary and the remaindermen.
                Further, in the case of any retirement plan in which the trust has an interest, fiduciary
                accounting income, if greater, shall be determined and distributed in the same manner as
                if the retirement plan in which the trust has an interest was itself ―qualified terminable
                interest property‖ within the meaning of IRC §2056.
                Income is an accounting notion representing a value, and not representing particular
                assets. Therefore, whether or not all of the income from a retirement plan (in which The
                Marital Deduction Trust has an interest) is distributed by the plan in a given year, an
                amount representing the income shall nevertheless be credited to the income account and
                shall be distributable by the trust, in the manner otherwise provided under the terms of
                the trust. If the other assets available for distribution in The Marital Deduction Trust are
                insufficient for that purpose, then the trustee shall compel a distribution from the
                retirement plan of such an amount as is necessary to sa tisfy the obligation to the spouse.
                (2)      Additional Demand Rights Granted to Surviving Spouse . In addition to the
                above, and notwithstanding anything else herein to the contrary, the Surviving Spouse, at
                any and all times, shall have the unfettered right to demand an immediate distribution
                from each retirement plan in which the trustee of The Marital Deduction Trust has an
                interest, of all (or any part of) the income from such plan (determined as if the plan were
                itself a trust in which the Spouse had a qualifying income interest for life), and the trustee
                shall comply with such request. (Any distribution under this Paragraph shall be credited
                against any rights the spouse would otherwise have had to such income, of course.) This
                right shall survive and continue with respect to any assets, including their proceeds,
                distributed from the retirement plan to the trustee of The Marital Deduction Trust, so that
                there will be no question but that the Surviving Spouse at all times has a qualifying
                income interest for life in such retirement plan (and its proceeds) that will continue under
                all events and contingencies.
                [N.B. This paragraph should not really be necessary. It is included as a matter of caution,
                or perhaps overkill. In fact, if this clause is used, the p receding paragraph is probably not
                necessary.]
                (2)    Additional Demand Rights Granted to Surviving Spouse . In addition to the
                above, and notwithstanding anything else herein to the contrary, the Surviving Spouse, at
                any and all times, shall have the unfettered right to demand an immediate distribution

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                from each retirement plan in which the trustee of The Marital Deduction Trust has an
                interest, of all (or any part of) the income from such plan (determined as if the plan were
                itself a trust in which the Spouse had a qualifying income interest for life), and the trustee
                shall comply with such request. (Any distribution under this Paragraph shall be credited
                against any rights the spouse would otherwise have had to such income, of course.) This
                right shall survive and continue with respect to any assets, including their proceeds,
                distributed from the retirement plan to the trustee of The Marital Deduction Trust, so that
                there will be no question but that the Surviving Spouse at all times has a qualifying
                income interest for life in such retirement plan (and its proceeds) that will continue under
                all events and contingencies.
                (3)      Explicit Provisions Regarding Distributions and Acceleration of Installment
                Distributions. For so long as The Marital Deduction Trust has any interest in a
                retirement plan, the trustee shall take whatever steps are required to assure that such
                interest, to the extent not previously distributed, is (and will at all times remain)
                immediately distributable on demand to the trust. Accordingly, the trustee shall retain the
                unrestricted power to accelerate any installment distributions elected under the minimum
                distribution rules or otherwise; otherwise, the trustee shall not make an installment
                distribution election.
                If The Marital Deduction Trust has an interest in a retirement plan, no distribution of all
                or any part of such interest shall be made to anyone other than the Surviving Spouse (or
                to the trustee, as such) during the Surviving Spouse‘s lifetime, and no distribution of all
                or any part of such interest shall be made directly out of the retirement plan to anyone
                else (other than the trustee, as such), following the Surviving Spouse‘s lifetime.
                (4)      Unproductive Prope rty In Retire ment Plan. If the assets of a retirement plan in
                which the Surviving Spouse has (or is treated as having) a qualifying income interest for
                life, or in which The Marital Deduction Trust has an interest, ever include unproductive
                or under productive property, then the Surviving Spouse (or the Surviving Spouse‘s
                guardian or other legal representative) is specifically permitted to require the trustee of
                The Marital Deduction Trust and the trustee or custodian of the retirement plan to either
                make the property productive or convert it within a reasonable time. This right shall
                include the power, to the extent necessary, to cause the retirement plan interest to be
                distributed directly to the trustee, or rolled over or transferred to another eligible
                retirement plan, where, in either case, the property can be made productive.
                                              *       *          *    *
        •       Separate Accounts. If there is more than one beneficiary of my Benefit, at least one of
        whom is a ―designated beneficiary‖ within the meaning of the minimum distribution rules, then,
        as of my Required Beginning Date, or as of my date of dea th if sooner, for purposes of
        complying with the minimum distribution rules described in IRC §401(a)(9), a separate account
        shall be maintained for each such beneficiary in proportion to his or her interest, by initially
        determining the benefits that are or would be owing to such beneficiary under this designation in
        the event of my death at such time. From that time forward, each such account must bear its own
        prorata share of gains and losses and shall otherwise be separately accounted for. It is intended
        that such separate account will be a separate account within the meaning of Prop. Treas. Reg.

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        §1.401(a)(9)-1, Q&A H-2(b) and H-2A. Unless otherwise specified by me, all distributions to me
        after my Required Beginning Date shall be charged against each separate account in the
        proportions that such accounts originally bear to one another.
        In the event of my death after my Required Beginning Date, the beneficiary with respect to
        whom a separate account is being maintained shall be the beneficiary of that account on my
        death, if the beneficiary survives me. If such beneficiary does not survive me, then the
        beneficiary of the separate account shall be the person(s) who is designated above to take the
        share of the predeceasing beneficiary in the event the beneficiary does not survive me. For
        example, in the case of a per stirpital distribution pattern, the beneficiaries of a separate account
        would be the descendants per stirpes (if any) of the predeceased beneficiary. Otherwise, the
        beneficiaries of the account may simply be determined as generally provided above. In the case
        of a trust as beneficiary, the term ―survive me‖ shall mean is in existence as of the date of my
        death.
        Notwithstanding the above, if I am living on my Required Beginning Date, and if all of my
        beneficiaries are designated beneficiaries who are treated as having the same life expectancy for
        purposes of the minimum distribution rules (not including the minimum distribution incidental
        benefit rule), then separate accounts shall not be maintained. For example, if a trust is a
        designated beneficiary, the life expectancy of the oldest beneficiary of the trust is ordinarily used
        to determine the minimum distributions under the minimum distribution rules. If the designated
        beneficiary under the trust is my Wife, and if my Wife is the designated beneficiary with respect
        to any other benefits, then there shall be no necessity for maintaining separate accounts, since the
        joint life expectancy of myself and my Wife are to be used for determining the minimum
        distributions in any event.
        It is my understanding that the minimum incidental benefit rule (MDIB) described in the
        regulations to IRC §401(a)(9) is not applicable after my death. If the IRA indicates that benefits
        be paid out following my death and after the Required Beginning Date as least as rapidly as
        during my life, then, for purposes of this beneficiary designation, I intend that such reference be
        construed in order to comply with the minimum required distributions described in IRC
        §401(a)(9), after taking into account the fact that the MDIB rule no longer applies.
                Consider these clauses as still evolving, as we await final regulations under §401(a)(9).
                The proposed regulations addressing this issue are helpful, but there is room for further
                clarification.
        The Multiple Beneficiary Rule
              The general rule is that if there is more than one death beneficiary, the beneficiary with
              the shortest life expectancy is used as the measuring life or joint measuring life with the
              participant (the “Multiple Beneficiary Rule”).36 There is, however, an important
              exception to this rule. The exception applies where the benefit is held in a separate
              account or segregated share. 37 In that case, the single beneficiary of each separate account
              or segregated share may be used as the measuring life with respect to that share. This


                36
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a). (Proposed 7/27/87).

                37
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2(b). (Proposed 7/27/ 87).

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                avoids application of the otherwise applicable rule that the beneficiary with the shortest
                life expectancy must be used as the measuring life. 38
                The proposed regulations provide rules under which a separate account will qualify
                as an exception to the Multiple Beneficiary Rule . An account under a defined
                contribution plan or IRA must bear its own prorata share of gains and losses and
                otherwise be separately accounted for, 39 and a benefit under a defined benefit plan must
                consist of separate identifiable components which may be separately distributed. 40
                If separate accounts were not maintained during lifetime, and the participant dies after the
                RBD, the separate account rule cannot be applied based on post death segregation.
                However, if separate accounts were not maintained during lifetime, but the participant
                dies prior to the RBD, it is not entirely clear whether or not it is sufficient if the shares are
                thereafter maintained separately. It ought to be sufficient, because before the RBD and
                prior to death, there is no function served by a separate accounting. Further, under normal
                legal principles, if there is more than one beneficiary, a separate accounting from and
                after (―as of‖) date of death will almost certainly be required as a matter of state law (and
                ERISA) as the only method of preserving each beneficiary‘s separate interest.
                If separate accounts are to be established prior to death and after the RBD, it may appear
                at first blush that distributions will have to be taken during the lifetime of the participant
                in differing proportions depending on the age of the beneficiary of each separate account.
                However, if the beneficiaries are each more than ten years younger than the participant
                (as will always be the case where the beneficiaries are descendants, one hopes) then, if
                none of the beneficiaries is the spouse of the participant, the minimum distribution
                incidental death benefit rule (MDIB) will insure that all of the distributions will be based
                on the same joint life expectancy table, 41 since under the MDIB rule each beneficiary will
                be treated as being approximately ten years younger than the participant. The MDIB rule
                does not apply after the death of the participant, 42 and so the longer individualized payout
                periods can then be utilized, which is of course the whole point.
                In applying the Multiple Beneficiary Rule, not only is the beneficiary with the shortest
                life expectancy to be used as the measuring life, but if any beneficiary is not an
                individual or a qualifying trust, then the life expectancy method is not available at




                38
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a). (Proposed 7/27/87).
                39
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2(a). (Proposed 7/27/ 87).

                40
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2A(b). (Proposed 7/27/87).
                41
                     My thanks to Diane Perrin for first calling this to my attention.
                42
                  Prop. Regs. §1.401(a)(9)-2, Q&A 3. (Proposed 7/27/87). Prop. Regs. §1.401(a)(9)-1, Q&A F-3A(b).
        (Proposed 7/27/ 87). PLR 9330042.

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                all! 43 Fortunately, there is another rule, the ―Contingent Beneficiary Rule‖ that provides
                that under certain circumstances contingent beneficiaries can be ignored.
        The Contingent Beneficiary Rule
              If the class of beneficiaries include someone who is not an individual or a qualified trust,
              then the Multiple Beneficiary Rule will provide that no one can be treated as a designated
              beneficiary, unless the (otherwise) nonqualifying beneficiary‘s ―entitlement to an
              employee‘s benefit is contingent on the death of a prior beneficiary.‖ 44
                This Contingent Beneficiary Rule is found in E-5(e)(1) of the proposed regulations 45 :
                (e) Death contingency. (1) If a beneficiary‘s entitlement to an employee‘s benefit is
                contingent on the death of a prior beneficiary, such contingent beneficiary will not be
                considered a beneficiary for purposes of determining who is the designated beneficiary
                with the shortest life expectancy under paragraph (a) or whether a beneficiary who is not
                an individual is a beneficiary. This rule does not apply if the death [of the beneficiary]
                occurs prior to the applicable date 46 for determining the designated beneficiary. 47
                [Emphasis added.]
                We have reason for believing that the Service feels that the Contingent Beneficiary Rule
                does not apply if there is charitable remainderman. The question is ―why?‖
                Perhaps the Service is worried that distributions made from the IRA or Qualified Plan
                will ultimately be enjoyed by someone other than the person whose life expectancy is
                being used to measure the payout period. If that is the case, then we have reason to worry,
                because trusts, by their very nature, are ordinarily designed to make distributions
                (particularly of corpus) on the basis of need, and ultimately to distribute the trust property
                to the remaindermen whose lives were not used to calculate the payout period.
                We know that distributions made to a trust under the minimum distribution rules are not
                required to be redistributed to the trust beneficiaries at the same time received. 48 If trust
                accumulations are simply to be prohibited beyond the life of the beneficiary, the use of
                trusts in this context would be very narrowly circumscribed. Indeed, if this were the rule,
                there would be little point in having a trust as a designated beneficiary! Further, unless
                the Contingent Beneficiary Rule is given literal application to trusts, or unless some
                notion of probability is to be applied, insurmountable difficulties emerge at once.


                43
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a), second sentence. (Proposed 7/27/87).

                44
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a), second sentence. (Proposed 7/27/87).
                45
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(e)(1). (Proposed 7/27/87).
                46
                   The applicable date is presumably either the RBD or the participant‘s date of death if sooner. ―The date
        for determining the designated beneficiary (under D-3 or D-4, whichever is applicable) is the applicable date.‖ Prop.
        Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a)(1), next to last sentence. (Proposed 7/27/ 87).
                47
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(e)(1). (Proposed 7/27/87).

                48
                     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-7, second sentence.

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                All well drafted trusts are going to provide for the contingency that all of the named
                beneficiaries might die prior to the complete distribution of the trust estate. At that point,
                the remaining trust estate could (a) be distributed to the beneficiaries‘ probate estates, (b)
                be distributed as the beneficiaries might appoint, with gift over in default, or (c) be
                distributed to other individuals, such as heirs at law determined under the laws of
                intestate succession. None of these alternatives, with the possible exception of (b), 49 can
                be drafted to assure that no one other than an individual younger than the oldest primary
                beneficiary will ever receive the remainder of the trust estate. Moreover, the rule against
                perpetuities requires that a beneficiary‘s interest in a trust must vest sooner or later, and,
                if the beneficiary has died, the only way it can vest is to be distributed to the beneficiary‘s
                estate or distributed pursuant to a general power of appointment in the beneficiary. The
                fact that it is virtually impossible to draft a trust instrument that will assure that the
                ultimate beneficiary will under every contingency be an individual younger than the
                oldest primary beneficiary is a persuasive reason for believing that the Contingent
                Beneficiary Rule is equally applicable to accumulation trusts as to individual
                beneficiaries.
                Perhaps the Service is merely concerned that there be a ―high probability‖ that
                distributions to a trust will in turn be distributed to the beneficiary whose life expectancy
                is being used to calculate the minimum payout, or to a remainderman who is an
                individual younger than the primary beneficiary. However, the proposed regulations give
                no basis for forming this conclusion, and if the test is ―probability‖ the application of
                such a rule would be very imprecise.
                It may be that the reason a charitable remainderman violates the Contingent Beneficiary
                Rule —if indeed it really does, which is a point not conceded here— is that charities do
                not have limited lives (at least in theory). A charity‘s benefit is not contingent, even if the
                probability of enjoyment is remote. Unlike individuals, charities can theoretically live
                forever and will be presumed to survive.
                Note that the only contingency recognized under the exception is the death of t he primary
                beneficiary, assuming the primary beneficiary is living on the participant‘s date of death
                or the RBD if earlier. Note further, that since the primary beneficiary will be an
                individual, the death of the primary beneficiary is not a contingency, it is a certainty.
                And finally, note that it is entitlement to the benefit, not enjoyment, that must be
                contingent. Entitlement is definitely not the right to present enjoyment nor even the
                certainty of future enjoyment. The focus, therefore, is certainly not on whether the
                primary beneficiary will die; rather, the application of the Contingent Beneficiary Rule
                (literally read) could be said to hinge on whether the secondary beneficiary‘s entitlement
                to any interest remaining at that time is contingent on this death.




                49
                   Perhaps the beneficiaries could be given a nongeneral power to appoint to individuals who are younger
        than the oldest beneficiary, thereby solving the problem. But even then, provision would have to be made for a gift
        over in default of the exercise of the power to persons who could invariably be identified as being younger than the
        oldest primary beneficiary.

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                If the secondary beneficiary is an individual, survivorship will usually be a condition of
                vesting. (An interest in a remainderman that is expressly contingent on surviving the
                holder of a predecessor interest is normally considered contingent.) If this analysis is
                correct, we could frame the Contingent Beneficiary Rule by stating that it will apply if ―a
                beneficiary‘s entitlement to an employee‘s benefit is contingent on [surviving] the death
                of a prior beneficiary.‖
                It is mind boggling to view the contingency from this aspect, given that the death of the
                primary beneficiary is not itself contingent, but it does explain the notion that charitable
                remaindermen are somehow different. Nevertheless, it is not at all clear that such a strict
                construction of the rule was intended.
                We certainly hope that the final regulations will make it clear that we can simply ignore
                secondary beneficiaries altogether, no matter what their nature, provided only that the
                primary beneficiary is an individual (including the life beneficiary of a trust having a
                more than nominal interest). Since distributions, whether made to an accumulation trust
                or not, 50 will be taxed when made, the potential for abuse of such a rule is remote in the
                extreme. If this simple solution is not taken, we will be forced to apply (a) the law of
                future interests (an arcane and feudalistic notion having little to do with policy in this
                context), or (b) some notion of probability which, at a minimum, will at best be awkward
                if not imprecise. This is a perfect opportunity for the Service to choose a simple
                straightforward solution to a problem that is otherwise going to be very difficult to solve.
                And this is an area where further complexity is particularly inappropriate.
                                             *       *       *        *
        Consider the following three clauses. I admit that the first clause raises questions.
        •       Inconsistent Provisions. If any part of this Beneficiary Designation is inconsistent with
        the IRA, the IRA shall be considered amended to the extent that such amendment is permitted b y
        the Sponsor and does not cause the account to cease to be an individual retirement account
        within the meaning of IRC §408(a).
        •       Acceptance of Form By Sponsor. If the IRA Sponsor accepts this instrument without
        change, the Sponsor shall be fully indemnified and protected by the IRA Owner, the Owner‘s
        estate and heirs, from any liability arising by virtue of such acceptance. The Sponsor can
        manifest its acceptance of this Designation by allowing any further transactions in the account or
        by accepting any fees or charges in connection with it, without objecting in writing to this
        Designation. If the objection is only to part of this Designation, the remaining provisions shall be
        effective, as set forth below.
        •       Unenforceable Provisions. If any provision of this Beneficiary Designation or the
        application of it to any person or circumstance is inoperative, illegal, void, invalid or otherwise
        unenforceable, the remainder of this Beneficiary Designation and the application of such
        provision to other persons or circumstances will not be affected thereby and will be enforced to
        the greatest extent permitted unless to do so would clearly be contrary to the overall intent of the
        Participant as evidenced by the provisions of this instrument. Furthermore, in lieu of such invalid


                50
                     One notes that trusts pay taxes at a much higher marg inal rate than individuals similarly situated.

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        provision, there shall be automatically added as a part of this Beneficiary Designation, a
        provision, as similar as, in terms or effect, to the unenforceable provision, as may be possible and
        be legal, valid, and enforceable.
                                                 *       *       *      *
                 In the interest of simplicity, this discussion, and accompanying forms, have so far omitted
                 the effects of the Retirement Equity Act of 1984 (REA). REA considerably complicates
                 matters because the participant is not free to dispose of her benefits in any way she
                 chooses. The situation is particularly acute in a profit sharing plan that has elected out of
                 the joint and survivor annuity rules, because in that case there is only one permissible
                 death beneficiary (in the absence of waiver), and that is the spouse. 51 In most other
                 defined contribution plans, the joint and survivor annuity rules apply. 52 However, in such
                 cases, the law only requires that the preretirement survivor annuity (QPSA) —applicable
                 at the death of the participant before retirement— be paid out of half of the account
                 balance. This is likely to approximate the spouse‘s community one-half interest and can
                 be waived by the spouse post mortem in favor of a single sum distribution. Note, though,
                 that some plans set the QPSA at 100% rather than 50%, either for reasons of simplicity or
                 out of ignorance.
                 In any case, my general recommendation is that clients approaching retirement or having
                 substantial qualified plan benefits withdraw any interests they may have and roll the
                 benefit over into an IRA just as soon as the plan and other circumstances permit. Under
                 the 1992 UCA, direct transfers to IRAs of all or part of a qualified plan benefit are not
                 only permitted but are encouraged. Unlike prior law, there is no longer a requirement that
                 the rollover be of the balance to the credit made in one taxable year. If the plan is a non
                 401(k) profit sharing plan, there are very few legal restrictions against in service
                 distributions, provided only that the plan specifically allows it. For example, a profit
                 sharing plan (other than a 401(k) plan) may provide for in service distributions after as
                 little as two years or the attainment of a specified age. 53 ―Pension plans‖ (e.g., defined
                 benefit plans and money purchase defined contribution plans) and §401(k) plans must
                 restrict in service distributions prior to normal retirement age as a matter of plan
                 qualification.
                 Once the benefit is in an IRA it is exceedingly easier to deal with. The REA rules do not
                 apply. ERISA preemption of the nonparticipant spouse‘s interest need not be considered,
                 and most importantly, the interest will never have to be distributed on account of
                 termination of the plan! Note this last point well because it is an important one. If it is
                 felt desirable to pay income taxes on the benefit later rather than sooner, then an IRA
                 may be preferable to a qualified plan, because of the latter‘s lack of permanency. A


                 51
                      IRC §401(a)(11)(B)(iii)(I).

                 52
                      IRC §§401(a)(11) and 417.
                 53
                   Treas. Reg. §1.401-1(b)(ii) recognizes that a profit sharing plan may provide for distributions after a fixed
        period of years or other stated event. Moreover, Rev. Rul. 68 -24 and Rev. Rul. 71-295 clearly allow in service
        distributions from pro fit sharing plans after a specified nu mber of years, not less than two.

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                qualified plan will not exist forever. Sooner or later it will be terminated, either because
                the employer goes out of existence or for other reasons. It is rare for even large
                corporations to exist for over a lifetime, and small professional corporations are
                usually liquidated at the death of the principal owner. The only death beneficiary that
                can rollover a qualified plan benefit is the participa nt‘s surviving spouse —whether on
                termination of the plan or otherwise; no one else can. However, an IRA can be
                transferred (not rolled over) from sponsor to sponsor by anyone without limit, even if at
                the instigation of the participant or beneficiary. 54
                The distinction between a rollover and a transfer is admittedly becoming blurred of late,
                especially with the advent of the direct rollover rules under the 1992 UCA 55 and the
                direct transfer rules under the IRC §411(d)(6) regulations. 56 Rollovers traditionally
                involved delivery of the funds to the participant, followed by the independent decision of
                the participant to rollover the funds to an IRA or qualified plan within 60 days. Under the
                UCA, a direct rollover can now be made by a qualified plan to another q ualified plan or
                IRA, but this is a special case. A true plan to plan transfer or an IRA to IRA transfer may
                be similar in effect to a rollover, but there are substantive differences. 57 The direct
                rollover rules do not apply to IRAs unless the IRA is a recipient of a rollover from a
                qualified plan. A true non rollover ―transfer‖ can never be made between an IRA and a
                qualified plan. 58
                Finally, the beneficiary‘s distribution options under an IRA are practically unlimited. In
                all but the most unusual of cases, an IRA beneficiary can draw down or transfer to
                another IRA all or any part of his benefit at any time. This is not always the case with a
                qualified plan. As discussed above, the unambiguous existence of such options is quite
                important if the marital deduction is a consideration, or if a trust is to be a beneficiary.
                                                        *     *          *      *




               54
                  IRS Publication 590. Rev. Rul. 78-406, 1978-2 C.B. 157. PLR 9250040. PLR 9106044 (and PLR
        9106045 which is word for wo rd identical to PLR 9106044). PLR 9305025.

                55
                     IRC §401(a)(13) and §403(b)(10).
                56
                     Treas. Reg. § 1.411(d)-4, Q&A 3.
                57
                     Rev. Rul. 78-406, 1978-2 C.B. 157. IRS Publicat ion 590.

                58
                     IRS Publicat ion 590.

                                                                  -28-
Distribution and Estate Planning
For Deferred Co mpensation and IRA Benefits                      (Printed on Sunday, November 14, 2010 at 6:24 PM )
Noel C. Ice



                                              ARTICLE 2 FORMS.
        16.1 A.          A Model Letter To a Client Approaching age 70.




                                                     -29-
                                                                   (Printed on Sunday, November 14, 2010 at 6:24 PM)


Sunday, November 14, 2010
NOEL C. ICE                                                                               METRO LINE 429-3815
                                                                                                TELE X 75-8631
B OARD CERTIFIED                                                                         TELECO PY 817/877-2807
ESTATE PLANNING AND PROB ATE LAW                                                                 FRONT DESK
TEXAS B OARD OF LEG AL S PECIALIZATION                                                            (817) 877-2800
                                                                                     SECRETARY’S DIRECT DIAL
ATTORNEY'S DIRECT DIAL                                                                            (817) 878-2944
(817)                                                                                                   877-2885
ATTORNEY'S DIRECT FA X                                                                              Our File No.
(817)                                                                                                   878-6085
ATTORNEY'S DIRECT E- Mail
Teleice@earthlink.net
CERTIFIED                                                                  MAIL
RETURN RECEIPT NO.: Error! Reference source not found.Error! Reference source not
found.


RE:      Plan
Dear :
RE:      The Minimum-Maximum Distribution Rules.


                  Participant‘s Date of Birth
                  Date of Birth of Spouse
                  Date Participant Turns 70&1/2
                  Minimum Distributions Must Begin
                  Life Expectancy in First Distribution            Error! Reference source not
                  Calendar Year                                    found.Error! Reference source
                                                                   not found.
                  Joint Life Expectancy of Participant             Error! Reference source not
                  and Spouse in First Distribution                 found.Error! Reference source
                  Calendar Year                                    not found.


Dear :
         The following is an abstract of some of the rules governing the distribution requirements
         of qualified plans and IRAs. As complicated as it may appear, it is but an
         oversimplification, believe it or not. I hope that it is adequate and that it addresses the
         relevant issues, but I must caution you that if this letter covered all of the issues and
         contingencies in this area it would be unreadable (and it is difficult enough to read as is).
         D ISTRIB UTIONS M UST BEGIN NO LATER THAN APRIL 1 FOLLOWING THE CALENDAR
         YEAR IN WHICH THE PARTICIPANT ATTAINS AGE 701/2 (THE R EQUIRED B EGINNING
         D ATE OR RBD): Because benefits under a qualified plan, tax sheltered annuity (403(b)
         plan) or IRA (including the income) are not taxed until dis tributed, the tax laws now
         require that distributions must commence to you no later than the April 1 of the
         calendar year following the calendar year in which you attain age 70 1/2 . This is
         known as the required beginning date (RBD). The minimum distribution rules apply to


                                                -Page 30 of 195-
                                                                (Printed on Sunday, November 14, 2010 at 6:24 PM)


qualified plans, SEPs, IRAs, tax sheltered annuities and unfunded deferred compensation
plans under §457. If you are not a ―5% owner‖ 59 of the employer sponsoring the plan, the
law allows you to postpone distributions until retirement (if you retire later than your
normal RBD), 60 but the plan may require earlier distribution notwithstanding this
exception. The exception to the normal distribution rule does not apply to IRAs.
Note at the outset that it is not required that the entire fund be distributed in one year, but
only that distributions begin at that time. The rate at which the distributions must be made
depends on a number of factors. The tax on failure to comply with the rules is 50% of the
amount which should have been distributed.
D ISTRIB UTIONS ARE K EYED TO LIFE EXPECTANCY AFTER THE RBD: Once the
required beginning date has been reached, the Plan or IRA is required to distribute your
benefits ratably over your life or life expectancy, or over the joint life or life expectancy
of you and a designated beneficiary. 62 The beneficiary must be designated by the
require d beginning date, for the joint life approach to work. If your designated
beneficiary is someone other than your , the "incidental death benefit rule" forces you to
use a joint life expectancy table that treats the beneficiary as if he or she were no more
than approximately 10 years younger than you. If you have more than one beneficiary,
the beneficiary with the shortest life expectancy will be the measuring life, unless
separate accounts are maintained.
Subject to the specific terms of the plan or IRA, the life expectancy of you and (or) may
be redetermined annually, if you so elect. 63 You cannot recalculate the life expectancy of
anyone else. Recalculation generally allows for a longer payout if you both live, but
because (not surprisingly) life expectancy is reduced to zero in the year of death,
recalculation will have a pronounced effect upon how long the survivor can defer receipt.
The required minimum is generally determined by taking your account balance for the
preceding year (with certain adjustments) and dividing it by the multiple corresponding
with your age, or the joint ages of you and your designated beneficiary (taking the
incidental death benefit limitation into account if your beneficiary is not ). 64 Each year
the denominator would be reduced by one if recalculation is not used; otherwise, life
expectancies will have to be refigured following special procedures. It is easier not to
recalculate life expectancy, since the table need be consulted only once, instead of each
year. It also means that the payment term can continue on the basis originally determined,
regardless of an intervening death.


59
     As defined in IRC §416
60
     §1404 of the SBJPA, amending IRC §401(a)(9)(C), effective beginning in 1997.

61
     TRA §1852(a)(3)(C). Notice 88-39, I.R.B. 1988-15.
62
     IRC §401(a)(9)(A)(ii).
63
     IRC §401(a)(9)(D)

64
     Preamb le, Prop. Regs. §1.401(a)(9) and Q&A F-1(a). (Proposed 7/27/87).


                                          -Page 31 of 195-
                                                             (Printed on Sunday, November 14, 2010 at 6:24 PM)


If is your beneficiary, then I recommend that you use joint life expectancies and
recalculate your life but not ‘s life. That way, if survives you, will have the option of
treating the plan or IRA benefit as own, under the ―fresh start‖ rule discussed below.
Life expectancy is first determined as of your birthday in the year you turn 70 1/2 .
This is known as the ―first distribution calendar year.‖ You should note that if your
birthday falls within the first half of the year you will be age 70 on your birthday
occurring during the year you turn 70 1/2, but if your birthday is in the last half of the year
you will be age 71 on your birthday occurring during the year you turn 70 1/2.
Under the tables, an individual has a life expectancy at age 70 of 16 years; an individual‘s
life expectancy at age 71 is 15.3 years. Therefore, if you have no designated beneficiary
or elect not use joint life expectancies, and if recalculation is not elected, and if your
birthday occurs in January through June, then, as of the year you turn 70 1/2, you would
draw down 1/16th of your be nefit; the next year 1/15th; 1/14th in the third year, and
so on, until the fund is exhausted in the 16th year (1/1). If recalculation is used the
fund will never be completely exhausted during your life. If Joint tables are used, the
factor cannot be greater than the maximum allowed by the incidental benefit rule, if it is
applicable.
Combining the two rules into the following table, you can see that if your 70th birthday
occurs in the year you reach 70 1/2, you can draw your benefit down in 16 installments, if
only your life is used as the measuring life, without recalculation. If you used 's life and
your own, jointly, the number of installments could be increased according to your joint
life expectancy. But if the joint life was someone other than , 25.3 installments would be
the maximum during your life, because of the minimum distribution incidental death
benefit rule (MDIB). 65 However, at death, the MDIB rule no longer applies and a longer
term payout may be available, based upon the joint life expecta ncy of you and your
beneficiary, determined without regard to the following table. 66
            Life Expectancy                                  Incidental        DB              Limit
            Age          Factor                              Age        Factor
             65               20.0                            70          26.2
             66               19.2                            71          25.3
             67               18.4                            72          24.4
             68               17.6                            73          23.5
             69               16.8                            74          22.7
             70               16.0                            75          21.8
             71               15.3                            76          20.9
             72               14.6                            77          20.1



65
     IRC §401(a)(9)(G). Prop. Regs. §1.401(a)(9)-2.

66
     Prop. Regs. §1.401(a)(9)-2, Q-3.


                                          -Page 32 of 195-
                                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)


             73            13.9                       78           19.2
             74            13.2                       79           18.4
             75            12.5                       80           17.6
             76            11.9                       81           16.8
             77            11.2                       82           16.0
             78            10.6                       83           15.3
             79            10.0                       84           14.5
             80             9.5                       85           13.8
             81             8.9                       86           13.1
             82             8.4                       87           12.4
             83             7.9                       88           11.8
             84             7.4                       89           11.1
             85             6.9                       90           10.5
             86             6.5                       91            9.9
             87             6.1                       92            9.4
             88             5.7                       93            8.8
         89              5.3                          94          8.3
I am attaching as an exhibit a joint life expectancy table (Table VI) taken from the IRS
regulations. 67 This table should give you an idea as to how long distributions can be
deferred, depending upon who your beneficiaries are.
The value of your benefit is generally determined as of the accounting date for the
preceding year, with some adjustments. The distribution attributable to the year you reach
701/2 is based on your benefit on the accounting date in the prec eding year, but certain
anomalies arise since it is not required to be made until April 1 of the following year. For
example, in the year following the year you reach 70 1/ 2 you may be required to take two
distributions, one on account of the preceding year (due by April 1) and one on account
of the immediate year (due by December 31). Each distribution is based upon the value of
your benefit at the end of the year on account of which the distribution is being made.
These years are different, which is the reason for the complication and the anomaly.
Although you may wait until April 1 of the year following the year you reach age 70 1/ 2 to
take your first minimum distribution, you may instead take it in the year you reach 70 1/2
and thus avoid doubling up the distributions.
The beneficiary chosen may be changed after the RBD. If so, the change may result in a
shorter payout period, but it cannot result in a longer payout period. If your beneficiary
predeceases you, and you appoint a new beneficiary, the payout period will not be
affected, unless the beneficiary is your spouse whose life expectancy was being


67
     Treas. Reg. 1.72-9.


                                   -Page 33 of 195-
                                                                   (Printed on Sunday, November 14, 2010 at 6:24 PM)


recalculated. If multiple beneficiaries are used, the oldest beneficiary is the measuring
joint life, unless the separate account rule applies. Generally, to qualify as a separate
account under a defined contribution plan or IRA, the account must bear its own prorata
share of gains and losses and otherwise be separately accounted for, 68 and a benefit under
a defined benefit plan must consist of separate identifiable components which may be
separately distributed. 69
If distributions have begun after age 70 1/2, and you die before your entire interest has
been distributed, the remaining interest must be distributed at least as rapidly as the
method of distribution being used at the time of death, except that the incidental benefit
rule ceases to operate as a limitation.
D ISTRIB UTIONS WHERE D EATH OCCURS BEFORE THE RBD: If you die before the
required beginning date, the general rule is said to be that your entire interest must be
distributed within 5 years of your death, whether or not benefits have commenced.
However, the exceptions swallow the rule. For instance, If any portion of your interest is
payable to (or for the benefit of) a “designated beneficiary,” that portion of the benefits
may be payable over the life or life expectancy of the beneficiary, 70 provided
distributions begin no later than one year after your death. Under an exception to the
exception, if the designated beneficiary is your , distributions need not begin any earlier
than the date at which you would have attained 70 1/2. 71 If your dies before such
distributions begin, the minimum distribution rules are applied as if were the
participant. 72 A "designated beneficiary" is an individual (or individuals) designated as
a beneficiary by you to receive any benefits remaining at your death. 73 However, if the
terms of the plan or IRA specify an individual beneficiary or beneficiaries by default ( in
the event you fail to designate someone yourself), then the specified default beneficiary is
the "designated beneficiary" for purposes of the rule. 74 A trust can be treated as a
designated beneficiary under some circumstances. As discussed below, trust can be
treated as a designated beneficiary under some circumstances.
INHERITED IRAS AND THE FRESH START R ULE: A spouse who is a beneficiary of a
participant‘s interest in a qualified plan, tax sheltered annuity or IRA, may roll it over to
an IRA. 75 In such a case §401(a)(9) will apply solely with reference to the surviving


68
     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2(a). (Proposed 7/27/ 87).

69
     Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A H-2A(b). (Proposed 7/27/87).
70
     IRC §401(a)(9)(B)(iii).
71
     IRC §401(a)(9)(B)(iv)(I).

72
     IRC §401(a)(9)(B)(iv)(II).
73
     IRC §401(a)(9)(E).
74
     Prop. Treas. Reg. § 1.401(a)(9)-1,D-4.

75
     Treas. Reg. 1.408-2(b)(7)(ii). IRC §§ 402(c)(9), 403(b )(8)(B) and 408(d)(3)(C).


                                              -Page 34 of 195-
                                                                  (Printed on Sunday, November 14, 2010 at 6:24 PM)


spouse. 76 This would appear to allow the spouse to defer distribution until the April 1 of
the calendar year following the calendar year in which the spouse attained age 70 1/2. And
it would also appear to allow the spouse to choose new beneficiaries to use as measuring
lives under the joint life expectancy rules. For this reason, the inherited IRA rules must
be considered as a valuable planning opportunity.
An election will be considered to have been made to treat the remaining interest as the
surviving spouse‘s own if (1) the minimum distributions that would otherwise have been
required (in the absence of an election) are not made or (2) if the spouse makes a
contribution to the account that is subject to the minimum distribution rules. 77
D ISTRIB UTIONS TO TRUSTS : A trust may be treated as a designated beneficiary, but only
under certain conditions. The trust must be irrevocable. Prior to the RBD (but not
afterwards), it is sufficient if the trust will become irrevocable at death. This means that a
testamentary trust will not qualify as a ―designated beneficiary‖ after the RBD. The trust
must have identifiable beneficiaries. Finally, the Plan must have a copy of the trust
instrument by the RBD. 78 The life expectancy of the oldest beneficiary of the trust is
generally used to determine the maximum permissible payment period (unless the
separate account rule is applicable). 79 If a trust does not qualify as a designated
beneficiary, the benefit must be paid out no later than 5 years following death, unless
death occurs after the RBD and life expectancy was not being recalculated. 80 There
remain many unanswered questions respecting the application of the rules to irrevocable
trusts.
If life expectancy is not being recalculated, then if death occurs after the RBD, it would
appear that distributions to a trust or to any other beneficiary that is not a ―designated
beneficiary‖ may continue to be made on the same payout schedule without regard to the
five year rule and without regard to any of the other rules applicable to trusts that qualify
as ―designated beneficiaries.‖
SPECIAL TRANSITION R ULES AND ELECTIONS : The minimum distribution rules may not
apply if you made a special written designation before Ja nuary 1, 1984, called a ―TEFRA
242(b)(2) election.‖81 Even if this election was made, it can be lost if the form or timing
of the designated benefit is changed. 82 In the year that the protection is lost, the plan or
IRA may be required to distribute all of the benefits that would have been required to



76
     Prop. Treas. Reg. 1.408-8, Q&A A-4 (Proposed 7/27/ 87).
77
     Prop. Treas. Reg. 1.408-8, Q&A A-4 (Proposed 7/27/ 87). Treas. Reg. 1.408-2(b)(7)(ii).
78
     Prop. Treas. Reg. § 1.401(a)(9)-1,D-5 and D-6.

79
     Prop. Treas. Reg. § 1.401(a)(9)-1,H-7.
80
     Prop. Treas. Reg. § 1.401(a)(9)-1,C-2.
81
     TRA §1121(d)(4)(A).

82
     See Notice 83-23, 1983-2 C.B. 418.


                                              -Page 35 of 195-
                                                                          (Printed on Sunday, November 14, 2010 at 6:24 PM)


        have been distributed in previous years if the election had not been made in the first
        place. 83
        APPLICATION OF R ULES AND R ECOMMENDATIONS : It is difficult for me to recommend a
        definite course of action because there are so many variables to consider. These rules are
        not particularly easy to apply. In general, we may assume that it will probably be
        beneficial to postpone distributions as long as possible in order to postpone paying taxes
        as long as possible. As indicated above, your RBD is (that is the year following the year
        you will reach age 70 1/2), and by this date you will have to make an election that will
        determine the maximum permissible payout period. In the meantime, you should not
        draw down any of your benefits, if you can afford to defer the payment, unless the
        benefits are rolled over.
        Prior to , the maximum payout period in the event of your death will be determined by
        the form of the beneficiary designation. Between now and , any benefits payable as a
        result of your death can be paid out over the life expectancy of the designated
        beneficiary. I do not believe that the trust should be the beneficiary, because of the
        problems indicated above. This leaves your descendants and as potential ―designated‖
        beneficiaries, if deferral is of importance.
        Life expectancies for any given year and for any given beneficiary can be determined by
        reference to the tables that accompany this letter. 85 However, if your children are your
        designated beneficiaries (and if you die prior to the RBD), then benefits must either (a)
        commence within a year of your death or (b) be completely paid out within the five year
        period following your death. But if is your designated beneficiary, would not need to
        begin to receive distributions until . (Prior to , the MDIB rule is not a factor.) Moreover,
        if is your beneficiary can rollover the benefit to an IRA and proceed as if the account is ,
        for all purposes, including, perhaps, 86 establishing a new minimum distribution period
        with new designated beneficiaries.
        Beginning , benefit payments will have to begin, and, after your death following that
        date, distributions will have to continue at least as rapidly as during life, unless the
        spousal rollover rule is invoked and except that the MDIB rule may be disregarded. If
        your life were used as the measuring life, benefits could be distributed over your life
        expectancy, which will be Error! Reference source not found.Error! Reference
        source not found. years in the year you reach age 70 1/ 2. However, the joint life
        expectancy tables allow the distribution to be delayed much longer, again, depending
        upon whom your designated beneficiary is. The joint life expectancy of you and in the
        year you reach age 701/ 2 is Error! Reference source not found.Error! Reference
        source not found. years. The joint life expectancy of you and your children in can be


        83
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A J-4. (Proposed 7/27/ 87).

        84
             TRA §1121(d)(4)(B).
        85
          I am attaching as an exhibit Table V fro m the IRS regulations. This table should give you an idea as to
how long distributions to your children may be deferred.

        86
             Prop. Treas. Reg. 1.408-8, Q&A A-4 (Proposed 7/27/ 87). PLR 9005071.


                                                    -Page 36 of 195-
                                                               (Printed on Sunday, November 14, 2010 at 6:24 PM)


     determined by reference to the Tables, but 25.3 years is the maximum factor that the
     MDIB rule will allow during your life if someone other than is your designated
     beneficiary. After your death, however, the MDIB rule is no longer applicable and the
     child‘s actual life expectancy (which is longer) will govern future distributions. (See
     Table V.)
     If is the beneficiary, distributions (and the income tax thereon) could be postponed for
     almost Error! Reference source not found.Error! Reference source not found. years,
     but probably not for as long as if the children were the beneficiaries. However, it appears
     to be the law that if survives you could rollover the distribution, name the children as
     beneficiaries, and start benefit payment calculations all over, and that this can be done
     even after you have reached 70 1/ 2.
     Deferral is important because the tax free compounding of earnings during the deferral
     period can be very significant. One problem is that distributions to , to the extent not
     consumed during life, will be added to estate, to be taxed for estate tax purposes at
     death. Further, if the assets in your living trust and probate estate are worth less than
     $600,000 at your death, you will be wasting some of your available tax credits if is the
     designated beneficiary.
     If your children were the designated beneficiaries, a long deferral can be guaranteed, and
     your available unified credit could be utilized to avoid estate taxes at your death. In any
     event, great care will have to be taken in executing the beneficiary designation form, and
     I should be involved in reviewing the designation in advance to make sure that the plan or
     IRA allows the form of distribution desired.
                     TABLE V - ORDINARY LIFE ANNUITIES
                   ONE LIFE - EXPECTED RETURN MULTIPLES
                                Treas. Reg. 1.72-9
AGE      MULTIPLE                  AGE              MULTIPLE              AGE
MULTIPLE
 5               76.6               42                  40.6                79               10.0
 6               75.6               43                  39.6                80                 9.5
 7               74.7               44                  38.7                81                 8.9
 8               73.7               45                  37.7                82                 8.4
 9               72.7               46                  36.8                83                 7.9
10               71.7               47                  35.9                84                 7.4
11               70.7               48                  34.9                85                 6.9
12               69.7               49                  34.0                86                 6.5
13               68.8               50                  33.1                87                 6.1
14               67.8               51                  32.2                88                 5.7
15               66.8               52                  31.3                89                 5.3
16               65.8               53                  30.4                90                 5.0


                                         -Page 37 of 195-
                                       (Printed on Sunday, November 14, 2010 at 6:24 PM)


17   64.8   54                  29.5                91                 4.7
18   63.9   55                  28.6                92                 4.4
19   62.9   56                  27.7                93                 4.1
20   61.9   57                  26.8                94                 3.9
21   60.9   58                  25.9                95                 3.7
22   59.9   59                  25.0                96                 3.4
23   59.0   60                  24.2                97                 3.2
24   58.0   61                  23.3                98                 3.0
25   57.0   62                  22.5                99                 2.8
26   56.0   63                  21.6              100                  2.7
27   55.1   64                  20.8              101                  2.5
28   54.1   65                  20.0              102                  2.3
29   53.1   66                  19.2              103                  2.1
30   52.2   67                  18.4              104                  1.9
31   51.2   68                  17.6              105                  1.8
32   50.2   69                  16.8              106                  1.6
33   49.3   70                  16.0              107                  1.4
34   48.3   71                  15.3              108                  1.3
35   47.3   72                  14.6              109                  1.1
36   46.4   73                  13.9              110                  1.0
37   45.4   74                  13.2              111                   .9
38   44.4   75                  12.5              112                   .8
39   43.5   76                  11.9              113                   .7
40   42.5   77                  11.2              114                   .6
41   41.5   78                  10.6              115                   .5




                 -Page 38 of 195-
                                                       (Printed on Sunday, November 14, 2010 at 6:24 PM)



         TABLE VI: ORDINARY JOINT LIFE AND LAST SURVIVOR FACTORS
                              Treas. Reg. §1.72-9
Age                                                                                          of
Benef.                                  Age of Employee
            70   71   72   73    74      75       76   77     78      79     80     81     82
  35       47.5 47.5 47.5 47.5   47.5    47.4   47.4 47.4 47.4 47.4 47.4 47.4 47.4
  36       46.6 46.6 46.6 46.5   46.5    46.5   46.5 46.5 46.4 46.4 46.4 46.4 46.4
  37       45.7 45.6 45.6 45.6   45.6    45.5   45.5 45.5 45.5 45.5 45.5 45.5 45.4
  38       44.7 44.7 44.7 44.6   44.6    44.6   44.6 44.6 44.5 44.5 44.5 44.5 44.5
  39       43.8 43.8 43.7 43.7   43.7    43.6   43.6 43.6 43.6 43.6 43.6 43.5 43.5
  40       42.9 42.8 42.8 42.8   42.7    42.7   42.7 42.7 42.6 42.6 42.6 42.6 42.6
  41       41.9 41.9 41.9 41.8   41.8    41.8   41.7 41.7 41.7 41.7 41.7 41.6 41.6
  42       41.0 41.0 40.9 40.9   40.9    40.8   40.8 40.8 40.7 40.7 40.7 40.7 40.7
  43       40.1 40.1 40.0 40.0   39.9    39.9   39.9 39.8 39.8 39.8 39.8 39.8 39.7
  44       39.2 39.1 39.1 39.0   39.0    39.0   38.9 38.9 38.9 38.9 38.8 38.8 38.8
  45       38.3 38.2 38.2 38.1   38.1    38.1   38.0 38.0 38.0 37.9 37.9 37.9 37.9
  46       37.4 37.3 37.3 37.2   37.2    37.1   37.1 37.1 37.0 37.0 37.0 37.0 36.9
  47       36.5 36.5 36.4 36.3   36.3    36.2   36.2 36.2 36.1 36.1 36.1 36.0 36.0
  48       35.7 35.6 35.5 35.4   35.4    35.3   35.3 35.3 35.2 35.2 35.2 35.1 35.1
  49       34.8 34.7 34.6 34.6   34.5    34.5   34.4 34.4 34.3 34.3 34.2 34.2 34.2
  50       34.0 33.9 33.8 33.7   33.6    33.6   33.5 33.5 33.4 33.4 33.4 33.3 33.3
  51       33.1 33.0 32.9 32.8   32.8    32.7   32.6 32.6 32.5 32.5 32.5 32.4 32.4
  52       32.3 32.2 32.1 32.0   31.9    31.8   31.8 31.7 31.7 31.6 31.6 31.5 31.5
  53       31.5 31.4 31.2 31.1   31.1    31.0   30.9 30.8 30.8 30.7 30.7 30.7 30.6
  54       30.7 30.5 30.4 30.3   30.2    30.1   30.1 30.0 29.9 29.9 29.8 29.8 29.7
  55       29.9 29.7 29.6 29.5   29.4    29.3   29.2 29.1 29.1 29.0 29.0 28.9 28.9
  56       29.1 29.0 28.8 28.7   28.6    28.5   28.4 28.3 28.2 28.2 28.1 28.1 28.0
  57       28.4 28.2 28.1 27.9   27.8    27.7   27.6 27.5 27.4 27.3 27.3 27.2 27.2
  58       27.6 27.5 27.3 27.1   27.0    26.9   26.8 26.7 26.6 26.5 26.4 26.4 26.3
  59       26.9 26.7 26.5 26.4   26.2    26.1   26.0 25.9 25.8 25.7 25.6 25.5 25.5
  60       26.2 26.0 25.8 25.6   25.5    25.3   25.2 25.1 25.0 24.9 24.8 24.7 24.6
  61       25.6 25.3 25.1 24.9   24.7    24.6   24.4 24.3 24.2 24.1 24.0 23.9 23.8
  62       24.9 24.7 24.4 24.2   24.0    23.8   23.7 23.6 23.4 23.3 23.2 23.1 23.0


                                   -Page 39 of 195-
                                                       (Printed on Sunday, November 14, 2010 at 6:24 PM)


  63     24.3 24.0 23.8 23.5    23.3    23.1    23.0 22.8 22.7 22.6 22.4 22.3 22.3
  64     23.7 23.4 23.1 22.9    22.7    22.4    22.3 22.1 21.9 21.8 21.7 21.6 21.5
  65     23.1 22.8 22.5 22.2    22.0    21.8    21.6 21.4 21.2 21.1 21.0 20.8 20.7
  66     22.5 22.2 21.9 21.6    21.4    21.1    20.9 20.7 20.5 20.4 20.2 20.1 20.0
  67     22.0 21.7 21.3 21.0    20.8    20.5    20.3 20.1 19.9 19.7 19.5 19.4 19.3
  68     21.5 21.2 20.8 20.5    20.2    19.9    19.7 19.4 19.2 19.0 18.9 18.7 18.6
  69     21.1 20.7 20.3 20.0    19.6    19.3    19.1 18.8 18.6 18.4 18.2 18.1 17.9
  70     20.6 20.2 19.8 19.4    19.1    18.8    18.5 18.3 18.0 17.8 17.6 17.4 17.3
  71     20.2 19.8 19.4 19.0    18.6    18.3    18.0 17.7 17.5 17.2 17.0 16.8 16.6
  72     19.8 19.4 18.9 18.5    18.2    17.8    17.5 17.2 16.9 16.7 16.4 16.2 16.0
  73     19.4 19.0 18.5 18.1    17.7    17.3    17.0 16.7 16.4 16.1 15.9 15.7 15.5
  74     19.1 18.6 18.2 17.7    17.3    16.9    16.5 16.2 15.9 15.6 15.4 15.1 14.9
  75     18.8 18.3 17.8 17.3    16.9    16.5    16.1 15.8 15.4 15.1 14.9 14.6 14.4
  76     18.5 18.0 17.5 17.0    16.5    16.1    15.7 15.4 15.0 14.7 14.4 14.1 13.9
  77     18.3 17.7 17.2 16.7    16.2    15.8    15.4 15.0 14.6 14.3 14.0 13.7 13.4
  78     18.0 17.5 16.9 16.4    15.9    15.4    15.0 14.6 14.2 13.9 13.5 13.2 13.0
  79     17.8 17.2 16.7 16.1    15.6    15.1    14.7 14.3 13.9 13.5 13.2 12.8 12.5
  80     17.6 17.0 16.4 15.9    15.4    14.9    14.4 14.0 13.5 13.2 12.8 12.5 12.2
                               TABLE VI (continued)
Age                                                                                          of
Benef.                                 Age of Employee
         83   84    85   86      87      88       89   90     91      92     93     94     95
  35     47.4 47.4 47.4 47.3    47.3    47.3    47.3 47.3 47.3 47.3 47.3 47.3 47.3
  36     46.4 46.4 46.4 46.4    46.4    46.4    46.4 46.4 46.4 46.4 46.4 46.4 46.4
  37     45.4 45.4 45.4 45.4    45.4    45.4    45.4 45.4 45.4 45.4 45.4 45.4 45.4
  38     44.5 44.5 44.5 44.5    44.5    44.5    44.4 44.4 44.4 44.4 44.4* 44.4 44.4
  39     43.5 43.5 43.5 43.5    43.5    43.5    43.5 43.5 43.5 43.5* 43.5* 43.5 43.5
  40     42.6 42.6 42.6 42.5    42.5    42.5    42.5 42.5 42.5 42.5* 42.5* 42.5 42.5
  41     41.6 41.6 41.6 41.6    41.6    41.6    41.6 41.6 41.6 41.6* 41.6* 41.6 41.6
  42     40.7 40.7 40.7 40.6    40.6    40.6    40.6 40.6 40.6 40.6* 40.6* 40.6 40.6
  43     39.7 39.7 39.7 39.7    39.7    39.7    39.7 39.7 39.7 39.7* 39.7 39.7 39.7
  44     38.8 38.8 38.8 38.8    38.7    38.7    38.7 38.7 38.7* 38.7 38.7 38.7 38.7
  45     37.9 37.8 37.8 37.8    37.8    37.8    37.8 37.8 37.8 37.8 37.8 37.8 37.8


                                   -Page 40 of 195-
                                                (Printed on Sunday, November 14, 2010 at 6:24 PM)


46   36.9 36.9 36.9 36.9   36.9   36.9    36.9 36.9 36.8 36.8 36.8 36.8 36.8
47   36.0 36.0 36.0 36.0   35.9   35.9    35.9 35.9 35.9 35.9 35.9 35.9 35.9
48   35.1 35.1 35.1 35.0   35.0   35.0    35.0 35.0 35.0 35.0 35.0 35.0 35.0
49   34.2 34.2 34.1 34.1   34.1   34.1    34.1 34.1 34.1 34.1 34.1 34.1 34.1
50   33.3 33.2 33.2 33.2   33.2   33.2    33.2 33.2 33.2 33.2 33.1 33.1 33.1
51   32.4 32.3 32.3 32.3   32.3   32.3    32.3 32.3 32.2 32.2 32.2 32.2 32.2
52   31.5 31.4 31.4 31.4   31.4   31.4    31.4 31.3 31.3 31.3 31.3 31.3 31.3
53   30.6 30.6 30.5 30.5   30.5   30.5    30.5 30.5 30.4 30.4 30.4 30.4 30.4
54   29.7 29.7 29.6 29.6   29.6   29.6    29.6 29.6 29.5 29.5 29.5 29.5 29.5
55   28.8 28.8 28.8 28.7   28.7   28.7    28.7 28.7 28.7 28.6 28.6 28.6 28.6
56   28.0 27.9 27.9 27.9   27.8   27.8    27.8 27.8 27.8 27.8 27.8 27.7 27.7
57   27.1 27.1 27.0 27.0   27.0   27.0    26.9 26.9 26.9 26.9 26.9 26.9 26.9
58   26.3 26.2 26.2 26.1   26.1   26.1    26.1 26.1 26.0 26.0 26.0 26.0 26.0
59   25.4 25.4 25.3 25.3   25.3   25.2    25.2 25.2 25.2 25.2 25.1 25.1 25.1
60   24.6 24.5 24.5 24.5   24.4   24.4    24.4 24.3 24.3 24.3 24.3 24.3 24.3
61   23.8 23.7 23.7 23.6   23.6   23.5    23.5 23.5 23.5 23.5 23.4 23.4 23.4
62   23.0 22.9 22.8 22.8   22.8   22.7    22.7 22.7 22.6 22.6 22.6 22.6 22.6
63   22.2 22.1 22.0 22.0   21.9   21.9    21.9 21.8 21.8 21.8 21.8 21.7 21.7
64   21.4 21.3 21.3 21.2   21.1   21.1    21.1 21.0 21.0 21.0 20.9 20.9 20.9
65   20.6 20.5 20.5 20.4   20.4   20.3    20.3 20.2 20.2 20.2 20.1 20.1 20.1
66   19.9 19.8 19.7 19.6   19.6   19.5    19.5 19.4 19.4 19.4 19.3 19.3 19.3
67   19.2 19.1 19.0 18.9   18.8   18.8    18.7 18.7 18.6 18.6 18.6 18.5 18.5
68   18.5 18.4 18.3 18.2   18.1   18.0    18.0 17.9 17.9 17.8 17.8 17.8 17.8
69   17.8 17.7 17.6 17.5   17.4   17.3    17.2 17.2 17.1 17.1 17.1 17.0 17.0
70   17.1 17.0 16.9 16.8   16.7   16.6    16.5 16.5 16.4 16.4 16.3 16.3 16.3
71   16.5 16.3 16.2 16.1   16.0   15.9    15.8 15.8 15.7 15.7 15.6 15.6 15.6
72   15.9 15.7 15.6 15.5   15.4   15.3    15.2 15.1 15.0 15.0 14.9 14.9 14.9
73   15.3 15.1 15.0 14.8   14.7   14.6    14.5 14.5 14.4 14.3 14.3 14.2 14.2
74   14.7 14.5 14.4 14.2   14.1   14.0    13.9 13.8 13.7 13.7 13.6 13.6 13.5
75   14.2 14.0 13.8 13.7   13.5   13.4    13.3 13.2 13.1 13.1 13.0 12.9 12.9
76   13.7 13.5 13.3 13.1   13.0   12.8    12.7 12.6 12.5 12.5 12.4 12.3 12.3
77   13.2 13.0 12.8 12.6   12.4   12.3    12.2 12.1 12.0 11.9 11.8 11.7 11.7
78   12.7 12.5 12.3 12.1   11.9   11.8    11.6 11.5 11.4 11.3 11.3 11.2 11.1


                             -Page 41 of 195-
                                                                 (Printed on Sunday, November 14, 2010 at 6:24 PM)


  79            12.3 12.0 11.8 11.6       11.4    11.3    11.1 11.0 10.9 10.8 10.7 10.6 10.6
  80            11.9 11.6 11.4 11.2       11.0    10.8    10.7 10.5 10.4 10.3 10.2 10.1 10.1
Yours                                             very                                               truly,



Noel C. Ice
NCI/Error! Reference source not found.Error! Reference source not found.

2.1 A Model Letter Describing Concerns Attendant to the Completion of
the Beneficiary Designation Form.
Sunday, November 14, 2010
NOEL C. ICE *                                                                           METRO LINE 429-3815
                                                                                              TELE X 75-8631
                                                                                       TELECO PY 817/877-2807

* B OARD CERTIFIED                                                                  ATTORNEY'S DIRECT DIAL

ESTATE PLANNING AND PROB ATE LAW                                                                     877-2885
TEXAS B OARD OF LEG AL S PECIALIZATION
                                                                                                  Our File No.


CERTIFIED                                                                  MAIL
RETURN RECEIPT NO.: Error! Reference source not found.Error! Reference source not
found.


RE:       IRA Beneficiary Designations
Dear :
         The Problem: The most beneficial estate tax savings component of your estate plan is
         the ability to shelter up to $600,000 in a trust (the Tax Shelter Trust) which will escape
         estate taxation in the surviving spouse‘s estate. If your net estate subject to estate taxes is
         less than $600,000 (keeping in mind the fact that only 1/2 of the community property is
         initially subject to tax), then this trust will shelter whatever is available.
         However, certain assets pass outside of a person‘s will. These assets are called
         nonprobate assets. Common examples of nonprobate assets include life insurance death
         benefits and payments from an IRA, qualified plan or nonqualified deferred
         compensation plan. If the nonprobate assets pass to your Living Trust, all will be taken
         care of, since so much of this trust as is necessary can be used to fund the Tax Shelter
         Trust. For example, if the beneficiary of your life insurance were , the insurance proceeds
         would be properly coordinated with the estate plan, even tho ugh the assets did not pass
         through your probate estate.
         It would therefore seem at first blush to be appropriate to designate as the beneficiary of
         your IRA. In fact, since your net estate will be less than $600,000 if the IRA is not a part
         of it, there is all the more reason to make the trust a recipient or partial recipient of the
         IRA. On the other hand, there are some very significant income tax savings that will be



                                             -Page 42 of 195-
                                                              (Printed on Sunday, November 14, 2010 at 6:24 PM)


       lost if money is taken out of the IRA earlier than otherwise required. As long as the
       money is in the IRA it is not subject to income taxation.
       Further complicating the analysis is that distributions must be made from the IRA
       beginning April 1 of the calendar year following the calendar year in which the IRA
       owner attains age 701/2. Shortly prior to Error! Reference source not found.Error!
       Reference source not found.‘s 70th birthday he should consult me about the various
       elections that will become irrevocable in the year after he attains age 70 1/2. The proposed
       IRS regulations –dealing with how much needs to be paid out and when– take up more
       than 60 pages of fine print. There are numerous exceptions and special rules, including
       special exceptions and rules applicable if the beneficiary is a trust or if the beneficiary is
       a spouse.
       All of these rules may be affected by any special elections you may have made to
       grandfather certain benefits. I am not aware that any special elections were made by you,
       but you should please let me know if there were any.
       Coordinating all of these rules is a difficult task, particularly since I have to guess at how
       large the IRA balance will be at the relevant period.
       General Advice With Respect to Distributions Following Age 70 1/2 : Beginning April
       1 of the year following the year in which Error! Reference source not found.Error!
       Reference source not found. reaches age 70 1/2, minimum distributions will need to
       begin to be made from the IRA. Prior to that time we will need to revisit the strategy
       outlined in this letter, and perhaps sign new beneficiary designations. If the trust is to be
       a beneficiary at that time, it may be advisable to make the trust (or a part of it)
       irrevocable during life. However, since the law in this area is so volatile and likely to
       change, it may be worthwhile to take a wait and see approach for now.
The Beneficiary Designation
      Recall that the IRA is community property, so the question of whom to name as your
      death beneficiary must be analyzed by considering what will happen on the death of the
      wife and what will happen on the death of the husband.
       There is no ideal solution. By far the simplest most flexible solution for income tax
       purposes is to name Error! Reference source not found.Error! Reference source not
       found. as the beneficiary of Error! Reference source not found.Error! Reference
       source not found.‘s IRA, and for Error! Reference source not found.Error!
       Reference source not found. to name Error! Reference source not found. Error!
       Reference source not found. as the sole beneficiary of her community property interest.
       As indicated above, this may however result in underfunding the Tax Shelter Trust.
       Generally, Error! Reference source not found.Error! Reference source not found.‘s
       interest in the IRA will be a nonprobate asset, the ownership at death of which will be
       controlled by the beneficiary designation form. On the other hand, Error! Reference
       source not found.Error! Reference source not found.‘s community property interest
       will be a probate asset, the ownership at death of which may be controlled by her will.
       This is not always true, however. Some IRA beneficiary designations purport to give the
       spouse of the designated owner beneficiary designation rights applicable on the death of
       the spouse. I am not sure that this is effective. Whether such a designation would be



                                          -Page 43 of 195-
                                                                        (Printed on Sunday, November 14, 2010 at 6:24 PM)


        effective may turn on whether or not it may be construed to be a community property
        survivorship agreement under Part 3 of Chapter XI of the Texas Probate Code. If the
        designation purports to be an agreement, is signed by both of you and clearly states that
        the community property shall pass to the surviving spouse, then it is probably effective;
        otherwise it is very possibly ineffective.
        My general recommendation begins by following the simple solution suggested above,
        with two slightly complicated variations:
        Error! Reference source not found.Error! Reference source not found.’s Inte rest If Error!
        Reference source not found.Error! Reference source not found. Outlives Error!
        Reference source not found.Error! Reference source not found.: In Error! Reference
        source not found.Error! Reference source not found.‘s case, she has left her interest in
        Error! Reference source not found.Error! Reference source not found.‘s IRA to
        Error! Reference source not found.Error! Reference source not found. under her
        will. If we leave it at that, then if Error! Reference source not found.Error! Reference
        source not found. outlives Error! Reference source not found.Error! Reference
        source not found., he can simply continue to maintain and deal with the IRA much as he
        did during Error! Reference source not found.Error! Reference source not found.‘s
        life. However, if it later appears that this will result in underfunding the Tax Shelter
        Trust, Error! Reference source not found.Error! Reference source not found. can
        ―disclaim‖ this gift, in whole or in part. The will provides that if this gift is disclaimed, it
        will become a part of the Tax Shelter Trust. This gives us the flexibility we may need.
        Even better, when the community property in the estate is partitioned, Error! Reference
        source not found.Error! Reference source not found. might exchange his interest in
        other community property belonging to him for the estate‘s interest in the IRA. Does a
        non prorata division result in taxable sale or exchange treatment requiring the estate to
        pay income tax on the estate‘s interest in the IRA? I think not, but there is no authority
        directly on point. What authority there is would seem to support the no taxation theory. 87
        In any event, the partition approach is one that can be reevaluated at the time, and the law
        may be more fully developed by then. Until the law is further clarified, a private letter
        ruling on the question should be obtained if this approach is to be used.
        Error! Reference source not found.Error! Reference source not found.’s Inte rest If Error!
        Reference source not found.Error! Reference source not found. Outlives Error!
        Reference source not found.Error! Reference source not found.: In Error! Reference
        source not found.Error! Reference source not found.‘s case, the beneficiary of the
        IRA will largely be controlled by the beneficiary designation, rathe r than his will. We
        may be able in this case to use a technique similar to the one contemplated if Error!
        Reference source not found.Error! Reference source not found. predeceased Error!
        Reference source not found.Error! Reference source not found.; i.e., Error!


         87
            PLR 8505006, PLR 8037124, PLR 8016050, PLR 8119040 and PLR 8029054. IRC §1041. Rev. Ru l. 76-
83, 1976-1 C.B. 213. Rev. Ru l. 81-292, 1982-1 C.B. 158. Rev. Rul. 74-347, 1974-2 C.B. 26. Beth W. Corporation v.
U.S., 350 F. Supp. 1190 (S.D. Fla. 1972) aff’d per curium, 481 F.2d 1401 (5th Cir. 1973). Cofield v. Koehler, 207 F.
Supp. 73 (D. Kan. 1962). Carriers v. Commissioner, 64 T.C. 959 (1975), acq. in result, 1976-2 C.B. 1, aff’d per
curium, 552 F.2d 1350 (9th Cir. 1977), and Walz v. Commissioner, 32 B.T.A. 718 (1935). But see Rev. Rul. 69-486,
1969-2 C.B. 159.


                                                 -Page 44 of 195-
                                                               (Printed on Sunday, November 14, 2010 at 6:24 PM)


        Reference source not found.Error! Reference source not found. could designate
        Error! Reference source not found.Error! Reference source not found. as the sole
        beneficiary, except that the designation would not be made under his will because the
        interest will not be a probate asset. In this case, Error! Reference source not
        found.Error! Reference source not found. can leave the money in Error! Reference
        source not found.Error! Reference source not found.‘s IRA, or rollover the money to
        an IRA of her own.
        Because the IRA will not be a probate asset, the disclaimer alternative procedure is not as
        straight forward as where Error! Reference source not found.Error! Reference source
        not found. predeceased Error! Reference source not found.Error! Reference source
        not found.. The beneficiary designation could provide that in the event of Error!
        Reference source not found.Error! Reference source not found.‘s disclaimer of all or
        a portion of Error! Reference source not found.Error! Reference source not found.‘s
        community half interest, the disclaimed portion would be payable to Error! Reference
        source not found.Error! Reference source not found.‘s estate. This estate‘s interest
        might be transferred (or more correctly ―partitioned‖) back to Error! Reference source
        not found.Error! Reference source not found. in exchange for other community assets
        belonging to her. Here, however, there may be more of a likelihood that the partition
        would be taxable, and in any event it will be difficult to explain what has transpired to the
        IRA trustee or custodian who would probably not even have to be made aware of what
        we were doing if Error! Reference source not found.Error! Reference source not
        found. predeceased Error! Reference source not found.Error! Reference source not
        found..
        In either case, the disclaimer route at least safely allows the option of using the IRA
        interest to fund the bypass trust. The added technique of subsequently partitioning the
        IRA back to the survivor, with the attendant tax uncertainties, can be availed of or
        avoided by reconsidering these issues at the relevant time.
        The Interest Of The Survivor: In any event, the surviving spouse will end up with all or
        at least half of the IRA. Therefore, it will ultimately be necessary to choose a non-spouse
        beneficiary to take on the death of the survivor. Once Error! Reference source not
        found.Error! Reference source not found. has reached the April 1 following the year
        he reaches age 701/ 2, his options will be fixed and limited. Prior to that time you have
        more flexibility and can change your mind freely. You could, for example name as the
        beneficiary, in the event you are not survived by your spouse. This is what I recommend.
        It will be necessary to give a copy of the trust instrument to the IRA trustee in order
        for this to be effective.
        I am attaching beneficiary designations along the lines suggested above. If you approve
        of them, please have them signed and delivered to XXX and send me a copy of what you
        gave the Bank. If you have any questions or changes, please call.
Yours                                           very                                             truly,



Noel C. Ice



                                           -Page 45 of 195-
                                                                         (Printed on Sunday, November 14, 2010 at 6:24 PM)


NCI/dsb
Enclosures:
<><>

16.3 A Model Beneficiary designation For Participant Naming Spouse As
Beneficiary WITH OPTION TO DISCLAIM INTO CReDIT SHELTER
TRUST-Use With Caution and Extreme Care.
                                             Annotated Sample
DES IGN ATION OF BEN EFICI ARY a nd ELEC TION AS TO FORM OF BEN EFI TS UN DER
                                 IRC §401(a) (9)
By
M OORE                                                                                                    M ONEY

Primary Beneficiary is Wife
       This document is an attachment to any beneficiary designation form required by the
       terms of the IRA and is incorporated into such form. If there is no specified beneficiary
       designation form required by the terms of the IRA, then this document shall be the
       beneficiary designation form. 88
         Identification of Designated Participant/Designated IRA Owne r. I, Moore Money
         (the ―Participant‖ or IRA ―Owner‖), named Morris Edward Money at birth, also know as
         Mo Money and M.E. Money, am the designated owner of the above referenced IRA. My
         social security number is 009-999-9999. I am presently a domiciliary and resident of
         Ripple City, Clear Water County, Texas. My Texas domicile was established at birth. I
         am a citizen of the United States.
         Revocation of Prior Designations. I revoke all previous beneficiary designations. This
         beneficiary designation shall remain in effect until such time as I have filed another
         designation with the trustee or custodian of the IRA, bearing a subsequent date.
         Identification of IRA Sponsor. The sponsor of the IRA is believed to be Infidelity
         Investments (the IRA ―Sponsor‖).
         Identification of IRA. The IRA has been described as the Infidelity Inve stments
         Rollover IRA and is believed to have been assigned account number 1234-5678A. This
         IRA will sometimes be referred to herein simply as ―the IRA,‖ ―this IRA,‖ or ―my IRA.‖
         I wish to make the beneficiary designation change as set forth herein, even if the
         foregoing description or account number is incorrect in any respect, so long as the IRA
         can reasonably be identified. Further, except as otherwise provided by any other
         beneficiary designation signed by me in the future, this designation shall apply to any




         88
           If possible, it is best to actually sign any form that the Plan or IRA provides or requires, with the words
―see attached‖ filled in appropriately.


                                                  -Page 46 of 195-
                                                                         (Printed on Sunday, November 14, 2010 at 6:24 PM)


         other IRA I may now have or later establish with Infidelity Investments, no matter what
         the account number. 89
         Approximate Value. The approximate value as of April 1, 1996 was $900,000. (I may
         be mistaken as to the approximate value of the IRA. Such mistake, if any, shall have
         absolutely no effect on this beneficiary designation.)
         Date of Birth of Designated Participant/Designated IRA Owner. I was born on
         October 5, 1956, in Desert City, Lion‘s Den County, Texas.
         Identification of Spouse. I am married to Lotta Money, named ―Lotta Darlene Cash‖ at
         birth, and also known as Lotta Cash, and Mrs. Moore Money. All references in this Will
         to ―my Wife‖ or to ―my spouse‖ are to Lotta Money alone. My Wife, Lotta Money, was
         born on Tuesday, January 15, 1957 in Terrapin Station, Dark Star County, California. My
         Wife‘s social security number is 007-999-9999. My Wife is presently a domiciliary and
         resident of Ripple City, Clear Water County, Texas. Her Texas domicile was established
         at birth. My Wife is a citizen of the United States. I have not been previously married to
         any other person. 90
         Identification of Children. I have 2 children, now living.
                                             E.      C.              Money     (Cosmic                   Charlie)
                                             007                         Mars                               Hotel
                                             Worthless,                     TX                             76999
                                             SSN                                                     449-666-99(9
                                             (415)                                                      457-8457

                                      Faith           N.            Money          (Faithful)
                                      221B           New            Mingle wood         Ave.
                                      Cucamonga,                                         CA
                                      SSN                                       549-666-99(9
                                      (900) 123-4567
         I have no child now deceased leaving descendants now living.
         Definition of the Word “Childre n”/Children Born or Adopted After Signing of
         Instrument. All references in this instrument to ―the Participant‘s children,‖ ―my
         children,‖ ―my child‖ or a ―child of mine‖ include only the above named children and
         any child or children hereafter born to or adopted by me. This provision is to be
         interpreted literally and strictly.


         89
            Many times a participant will have several IRAs with the same sponsor, or one IRA held in several
subaccounts, depending upon the nature of the investments. In either case, the identifying account numbers may
differ. In that case, if the beneficiaries of each are to be the same, then a stateme nt to that effect may avoid a
construction problem in the future.
         90
            Most of this informat ion, though not necessary, will have to be ascertained sooner or later, and might as
well be set forth in full in the beneficiary designation. Forcing the draftsperson to consider the date Texas domicile
was established and the date of marriage is obviously useful in determin ing the portion of the benefit that may be
community property. Forcing the draftsperson to address the citizenship of the participant and the spous e is very
important for a nu mber of reasons, one of which is the availability of the marital deduction, in case a trust is a
beneficiary.


                                                  -Page 47 of 195-
                                                                            (Printed on Sunday, November 14, 2010 at 6:24 PM)


         Identification of Descendants. All references in this instrument to ―the Participant‘s
         descendants,‖ "my descendants," a "descendant of mine," or similar designation, shall
         include only "my children" and their descendants and no others. This provision is to be
         interpreted literally and strictly. 91
         Identification of Beneficiaries. Pursuant to the provisions of the IRA permitting the
         designation of a beneficiary or beneficiaries by me, I, the undersigned Participant, hereby
         designate the following person or persons, individual or individuals, as the beneficiary or
         beneficiaries of the balance to my credit under the IRA, payable by reason of my death.
TABLE OF B ENEFICIARIES
              Class                                                 Beneficiary(ies)
1.       First Beneficiary            Lotta Money if she survives me (my Wife). 92
2.       Second Beneficiary           My Descendants who survive me, by right of representation
3.       Third Beneficiary            My Probate Estate
4.       Fourth Beneficiary           N/A
5.       Fifth Beneficiary            N/A
DISCLAIMER PROVISIONS.
      As expressly permitted by Texas Probate Code §37A(c), I make the following provision
      in this instrument for the making of disclaimers by a beneficiary.
Except where it has been specifically provided to the contrary elsewhere in this designation, if
any property that is not to be held in trust is disclaimed by a benefic iary, other than my Wife,
such property shall pass to the then living descendants of the disclaimant, by right of
representation, if any, and if none, then such property shall pass as if the disclaimant predeceased
me.
If any property that is not to be held in trust is disclaimed by my Wife, the disclaimed
property s hall be payable to The Credit Shelter Trust Under The Money Family Trust. 93




         91
           Identifying descendants can save a lot of t rouble later on. Consider the examp le of President Clinton, who
discovered two siblings after being elected. If there are any deceased children who are survived by descendants, the
beneficiary designation is a good time to recognize the situation, and the contrary is equally true. If there are any
descendants whom the participant does not wish to be considered , then the approach taken above is a tactful way of
dealing with the issue.
         92
           Naming the spouse is the ideal, since income taxes, certain excise taxes and estate taxes, can all be
postponed. However, sometimes this is just not feasible, either because of family circu mstances that make naming a
QTIP trust desirable, or because the IRA or qualified plan assets are the only assets available to fund a credit shelter
trust. The other sample form names a QTIP trust as the beneficiary, rather than the spouse individually. The main
problem here is that income taxes will have to be paid upon funding the trust with the benefits upon their
distribution, and therefore, it is desirable to postpone the actual distribution from the plan or IRA to the trust as long
as possible without violating the IRC §401(a)(9) minimu m d istribution rules. This may involve funding the trust
with the ―right to receive‖ distributions from the plan or IRA. Since the distributions concerned are income in
respect of a decedent under IRC §691, care must be taken regarding phantom inco me and acceleration issues.


                                                    -Page 48 of 195-
                                                                                (Printed on Sunday, November 14, 2010 at 6:24 PM)




         93
           There are a number of issues associated with the disclaimer of qualified plan and IRA benefits. First of
all, one must consult state law to determine whether the disclaimer of nonprobate assets is even contemplated by the
applicable disclaimer statute. Other issues that come immed iately to mind are whether, in the case of a qualified
plan, the antialienation rule applies, and whether, in the case of an IRA , a disclaimer will be treated as an
assignment. Finally, we have a concern as to how the minimu m d istribution rules are to interact with a disclaimer
that takes place after the required beginning date.

          Fortunately, the Service has informally taken a liberal position on the application of the antialienation rule
(i.e., IRC §401(a)(13) or ERISA § 206(d)) to the exercise of a disclaimer. In General Counsel Memo randum 39858
the position taken was that a spouse was entitled to make a § 2518 qualified disclaimer of death benefits that were
otherwise subject to the joint and survivor annuity rules. GCM 39858. PLR 9016026. Stobnicki v. Textron, Inc., 868
F.2d 1460 (5th Cir. 1989). Treas. Reg. 1.401(a)-13.

         Another issue that might possibly be of concern is whether a disclaimer for estate or gift tax purposes could
generate an income tax under the assignment of income rule. This is particularly important in the case of a
disclaimer of an interest in a qualified plan or IRA because such interest is income in respect of a decedent (IRD)
and has a zero basis. GCM 39858 addressed this issue as well, and held that the disclaimer did not result in an
assignment of inco me. The inco me on the distribution was to be taxed to the recipient (and not to the disclaimant)
when received. GCM 39858.

          The income taxat ion of the disclaimed interest was also specifically addressed in PLR 9037048. In that
ruling, the Service held that the beneficiary of a disclaimed IRA interest was the payee or distributee for purposes of
IRC §408(d)(1), and therefore, the beneficiary of the disclaimed interest —not the disclaimant— would be taxed in
the year the interest was distributed. PLR 9037048. See also PLR 9226058 and 9319029. The problem here is that
IRC § 2518 provides that a disclaimer is not treated as a transfer for gift tax purposes. The statute does not address
income tax issues. However, state law disclaimer statutes affect directly the question of whether or not the
disclaimant ever has a state law property interest in the first place. The effect of a disclaimer statute is generally to
provide that if the disclaimer is made timely and in the manner provided by statute, the disclaimant is treated as
never having had a property interest to assign. A close reading of IRC § 691(a)(1)(B) and 691(a)( 2), together with
GCM 39858 and PLR 9037048, support the idea that a disclaimer is not an assignment because as a matter of state
law (read technically, but precisely) the disclaimant never ―acquired the right‖ to receive the amount. See PLRs
9319029, 7851131 and 7830022.

         See PLR 9450041 fo r a very interesting fact pattern that permitted a rollover following a nonqualified
disclaimer. In the ruling the spouse made a nonqualified disclaimer of her interest in a qualified plan that otherwise
passed to a marital deduction trust. As a result of the disclaimer, the interest passed to a credit shelter trust, as a gift.
The beneficiaries of the credit shelter trust then disclaimed. Their disclaimer was timely because it was made within
9 months of the untimely dis claimer. As a result of the subsequent disclaimer, the interest passed back to the spouse
under the intestate distribution rules. The Service ruled that the spouse could then rollover the proceeds. At first
blush, this ruling is surprising because one would think that the gift fro m the spouse would violate the anti-alienation
rule. However, if the whole picture is viewed at once, the disclaimer of the credit shelter beneficiaries may have
cured the problem, since the effect of the gift and the subsequent disclaimer was merely to return the property to the
donor.
                                               *        *         *         *

         Another question this technique raises is this: If benefits have begun to be distributed after the participant
has attained 701/2 , based upon the joint life expectancy of the participant and the life or life expectancy of a
designated beneficiary, and following the death of the participant, the designated beneficiary disclaims, is the life
expectancy of the beneficiary of the disclaimer substituted for that of the disclaimant, or is the disclaimant treated as
predeceasing the participant after having first survived the required beginning date (the RBD)?


                                                     -Page 49 of 195-
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          A disclaimer made after the RBD is conceptually awkward. To what is it analogous? It might be analogous
to a situation where the beneficiary d ied after the RBD and was automatically replaced by a new beneficiary. This
does not appear to be the approach that the IRS is taking.

         If a beneficiary survives the RBD but predeceases the participant, the original payout period is fixed, and is
unaffected by the choice of successor beneficiary :

                  If the designated beneficiary whose life expectancy is being used to calculate the distribution
         period dies on or after the applicable date, such beneficiary's remain ing life expectancy will be used to
         determine the distribution period whether or not a [new] beneficiary with a shorter life expectancy
         receives the benefits. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(2). (Proposed 7/27/ 87).

          Thus, if the deceased beneficiary‘s life expectancy were not being recalc u lated, then the payout period is
unaffected by the beneficiary‘s death, and the participant can name anyone —whether younger or older and whether
or not the new beneficiary can qualify as a ―designated beneficiary‖— without affecting the original payout period
at all. Even the estate could be named as beneficiary without affecting the original payout period. On the other hand,
if the deceased beneficiary is a spouse whose life expectancy is being recalculated, the choice of a new o r contingent
beneficiary is likewise irrelevant because the life expectancy of the orig inal beneficiary is already zero.

          Practit ioners have been concerned that where a spouse disclaimed, the effect might be to accelerate the
payout period, if the spouse‘s life were being recalculated, since this would have been the result if the spouse had
died. Instead, however, the PLRs appear to treat the situation as analogous to one where the beneficiary was changed
during lifetime —though this analogy is not articulated. When a beneficiary is changed, the original payout period is
preserved, unless the new beneficiary is older than the previous beneficiary, in wh ich case the payout period will be
shortened. It can never be lengthened. The PLRs appear to take this approach. For examp le, if dis tributions were
being made over the recalculated life expectancy of the spouse, and the spouse disclaims into a trust for the spouse,
distributions will continue, using the recalculated life expectancy of the spouse as the measuring life. Presumably,
the same result would obtain if the children were the beneficiaries. However, if the estate were the beneficiary as a
result of the disclaimer, one presumes that the payout period should be accelerated, as would have happened had the
change in beneficiaries been made during life.

          The only concern that one might harbor here is that if the beneficiary were changed fro m the spouse to a
testamentary trust during the decedent‘s life, the distribution period would be accelerated because the testamentary
trust would have been revocable. Fortunately, the analogy has not been applied in this ext reme form, and the Service
appears to be satisfied that in the disclaimer situation, the testamentary trust was irrevocable as of the effective date
of the disclaimer, i.e., the participant‘s date of death.

        A number of private letter rulings now support these conclusions: PLRs 9037048, 9442032, 9450040, and
9537005.

           In PLR 9037048 the decedent designated his wife as primary beneficiary and a testamentary trust as the
contingent beneficiary. Upon reaching his RBD, the decedent elected to take distributions over the unrecalculated
joint life expectancy of himself and his wife. The facts of the ruling state that the trust was a valid trust under state
law and was also irrevocable. Of course, since the trust was a testamentary trust, it obviously was not irrevocable
during the decedent‘s lifetime, much less at the RBD.

          The spouse made two disclaimers. She first disclaimed the right to the benefits individually, and then
disclaimed the right to benefit fro m the residuary (testamentary) trust. As a result, the interest passed to the trustee of
the trust for the benefit of the decedent‘s child. The Service ruled (a) that the disclaimers were qualified under
IRC §2518 and (b) that the original payout peri od established duri ng the lifetime of the decedent, under IRC
§§401(a)(9) and 408(a)(6), continued to govern the payout peri od following the disclai mer.


                                                     -Page 50 of 195-
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         The ruling specifically states that the disclaimed interest ―will be treated for federal tax purposes as if that
Surviving Spouse never had been named as the IRA beneficiary; rather, benefits will be distributed fro m the
Account to the Contingent Beneficiary‘s Trustee according to the terms of the Decedent‘s will.‖ However, with
regard to the min imu m distribution rules, a different ru le appears to have been obtained, since the original payout
period remained unchanged.

         We may presume that the beneficiary of the disclaimed interest was younger than his mother. The issue not
expressly addressed is what if the beneficiary of the disclaimed interest was older than the disclaimant, or what if the
beneficiary o f the disclaimed interest is not a designated beneficiary? Since the beneficiary of the disclaimed interest
was held to be a qualify ing trust for the benefit of a beneficiary younger than the disclaimant, the original payout
period would remain unchanged, whether or not the disclaimant predeceased the participant after the RBD, or
whether the participant simply appointed a new, younger, beneficiary.

          The only factor that would lead one to conclude that in this ruling the disclaimant was treated as having
predeceased the participant after the RBD is that the beneficiary of the disclaimed interest under the facts was a
testamentary trust, and if the part icipant had in fact changed the beneficiary fro m h is spouse to his testamentary trust
shortly before his death, the trust, since it was revocable, would not have qualified as a designated beneficiary, and
the joint life expectancy method would have been inapplicable.

         On the other hand, the IRS may have simply determined to ignore this problem, since the trust was
irrevocable on death, and that is the point in time that the disclaimer became effective.

         The facts of the ruling carefully recite (a) the trust was valid under state law, (b) the trust was irrevocable,
and (c) a copy of the trust was held by the owner of the account. As pointed out above, the trust was revocable on
and after the RBD and did not become irrevocable until death. The fact th at the IRA owner had a copy of his will is
hardly surprising, but the fact that the Service saw fit to stress this point has caused some people to opine that this is
an indication that the delivery requirement applicable to trusts under the min imu m d istrib ution rules may be satisfied
by delivery to the IRA owner, rather than the trustee. (The last of the four requirements listed in the D-5 Proposed
Regulations for a trust to be treated as a designated beneficiary is that ―a copy of the trust instrument must be
provided to the plan.‖ However, one is hard put to see the relevance of this point in this context, unless the Service is
suggesting that the contingent beneficiary must meet the requirements of a ―designated beneficiary.‖ A contingent
beneficiary need not be a designated beneficiary in the absence of a disclaimer, and in any event, the testamentary
trust was certainly not a designated beneficiary on the RBD, though perhaps it was at death.

         PLR 9450040 makes it a little clearer that the IRS ruling position for the moment is that, at least where
state law does not treat a disclaimant as deceased, a disclaimer after the RBD will be treated as if the participant
changed the beneficiary the mo ment before death. Reading PLR 9450040 and 9037048 together, one could further
conclude that, for this purpose, a testamentary trust will be treated as irrevocable. What does it mean for state law
to treat a disclaimant as deceased? Most state disclaimer laws provide that unless the testator provides otherwise,
property disclaimed will pass as if the disclaimant predeceased the testator, but what has that coincidence have to do
with the minimu m distribution ru les?

         In PLR 9450040, the spouse proposed to disclaim an interest in an IRA in favor of the children, after the
RBD. During lifetime the min imu m distribution method elected was joint life expectancy with recalculat ion of both
lives. The IRS first noted that the proposed regulations do not address the problem under consideration. Unlike the
case of PLR 9037048, in this case, if the spouse was treated as predeceased, the payout period would quickly come
to an end, since recalculation was elected.


                                                    -Page 51 of 195-
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        If (as a result of a further disclaimer by my Wife or otherwise) a disclaimant disclaims
        all of his or her interest in all (or any portion) of any trust, the trust (or the affected
        portion) shall be administered and distributed as if the disclaimant died after having
        survived me, even if this results in the acceleration of a remainder interest or closes an
        otherwise open class, and even if this results in the removal of the property from the trust
        (which in many cases it would). If a disclaimant disclaims less than all of his or her
        interest in all (or any portion) of any trust, the trust (or the affected portion) shall be




                 Section 1.401(a)(9)-1, Q&A E-5(e)(2) of the Proposed Regulations provides, in pertinent part, that
        if the designated beneficiary whose life expectancy is being used to calcul ate the distribution period
        dies on or after the applicable date, such beneficiary's remaining life expectancy will be used to
        determine the distributi on peri od, whether or not a beneficiary with a shorter life expectancy
        receives the benefi ts. However, if the designated beneficiary whose life expectancy is being used to
        calculate the distribution period is the employee's spouse, her life expectancy is being recalculated, and she
        dies on or after the applicable date, then, pursuant to Q&A E-8, in the calendar year fo llo wing the year of
        death, her life expectancy will be reduced to zero.

                 Section 1.401(a)(9)-1, Q&A E-8(a) o f the proposed regulations provides, in pertinent part, that,
        where either an emp loyee's life expectancy (or the jo int life and last survivor expectancy of the employee
        and spouse) is being recalculated, upon the death of the employee (or the emp loyee's spouse), the
        recalculated life expectancy of the employee (or his spouse) will be reduced to zero in the calendar year
        following the calendar year of death. In any calendar year in which the last applicable life expectancy is
        reduced to zero, the plan must distribute the employee's entire remaining interest prior to the last day of
        such year in order to satisfy section 401(a)(9).
                                            *        *        *        *

                   In this case, Taxpayer B, the surviving spouse of Taxpayer A, is not deceased. Furthermore,
        under the applicable statutes of State C, Taxpayer B is not to be treated as deceased, even if she
        vali dl y disclaims her right to benefits under IRA D in favor of the secondary beneficiaries thereof.
        Under the facts presented herein, we do not believe that it is appropriate to treat Taxpayer B as
        deceased wi thin the meaning of section 1.401(a)(9)-1 of the Proposed Regulations, Q&A E-5(e)(2)
        [beneficiary survives the RBD but predeceases the participant].

                 We believe that it is appropriate to treat Taxpayer A's children, who will recei ve the
        remaining IRA D account bal ance after Taxpayer B disclaims her right thereto, as new beneficiaries
        wi thin the meaning of section 1.401(a)(9)-1 of the Proposed Regulati ons, Q&A E-5(c)(1) [part icipant
        designates a new beneficiary after the RBD], who become such because of Taxpayer B's disclaimer.
        Furthermore, as noted above, each of Taxpayer A's three children, the new beneficiaries of IRA D, has a
        life expectancy which is longer than that of Taxpayer B. Thus, in accordance with Q&A E-5(c)(1),
        Taxpayer B's life expectancy will be used to determine the remaining IRA D distribution period.
        Furthermore, if d istributions are made over said life expectancy, they will not be subject to the 50 percent
        excise tax imposed by section 4974(a) o f the Code.

         My only concern is what if state law does treat the disclaimant as deceased. For example, what hap pens if
the beneficiary designation provides ―to my wife if she survives me, but if she does not survive me to my
descendants per stirpes,‖ and the wife‘s life is being recalculated and she disclaims? In other words, when is it
―appropriate to treat Taxpayer B as deceased within the meaning of section 1.401(a)(9)-1 o f the Proposed
Regulations, Q&A E-5(e)(2)‖ and when is it not?

        A disclaimer prior to the RBD ought to operate with less complication than after the RBD, since prior to
the decedent‘s RBD the min imu m payout period would not have been established.


                                                 -Page 52 of 195-
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         administered and distributed as if the disclaimed interest had been omitted from the terms
         of the trust. 94
         If, as a result of disclaimer, an interest would otherwise pass to The Credit Shelter Trust
         Under The Money Family Trust, but for the fact that The Credit Shelter Trust Under The
         Money Family Trust does not exist or is otherwise incapable of taking, the disclaimed
         interest shall instead pass as if the disclaimant had predeceased me.
         Except as otherwise designated or provided in this Designation, the following rules of
         construction shall apply:
•   The Beneficiaries identified above shall be entitled to Death Benefits in ascending numerical
    order. That is, the person(s) identified as the First Beneficiary shall be entitled to Death
    Benefits first, and the Second Beneficiaries shall be entitled to Death Benefits only if there is
    no First Beneficiary surviving, existing or otherwise eligible to take. And so forth. (The
    lower the number the higher the Class.) Beneficiaries below the First Beneficiary level are
    contingent beneficiaries.
•   A Beneficiary must survive me in order to be eligible to receive Death Benefits under this
    designation. 95 Further, a Beneficiary must survive all other Beneficiaries of a higher Class in
    order to be eligible to receive Death Benefits. A Beneficiary‘s interest shall vest absolutely at
    my death, whether or not the Beneficiary subsequently survives the complete distribution of
    his benefits under the IRA. If The Credit Shelter Trust Under The Money Family Trust does
    not exist or is otherwise incapable of taking as of the date of my death, the trust shall be
    treated for this purpose as not surviving me.
•   If there is more than one Beneficiary named in the same Class (First Beneficiary Class,
    Second Beneficiary Class, etc.), and one or more fails to survive me, the Death Benefits to
    which members of that Class are entitled shall pass to the remaining members of the Class, if
    any, in the same proportions in which the surviving Class members are otherwise receiving
    benefits. For example, if A, B & C are each to receive a 1/3rd interest if surviving, A & B
    will each be entitled to a 1/2 interest if C does not survive me. If A is to receive half, B is to
    receive 1/4, and C is to receive 1/4, but C does not survive me, A‘s share of the w hole will
    become 2/3rds.
•   In the case of a gift to a Class ―by right of representation‖ or ―per stirpes,‖ Death Benefits
    shall pass in accordance with the definition of those terms. For example, if a person was
    survived by four children, and two grandchildren who were the only children (surviving or
    otherwise) of a predeceased child, a division by right of representation would provide two
    equal shares for each child who survived, and one share for each of the children of the
    predeceased child (ten shares in all). This would be true regardless of whether the surviving


         94
            Have you ever stopped to consider just where a disclaimed interest in a trust goes, if the disclaimant
disclaims less than all of his or her interest in a trust? For instance, suppose a beneficiary is entitled to distributions
for health, maintenance, support and comfort, remainder to descendants in fee, and the disclaimant disclaims the
interest in comfort. In the absence of special direction in the instrument, does that interest pass as if the disclai mant
predeceased, and if so, what does that mean in this context?
         95
          I did not include a survivorship period clause (e.g., 90 days) because I am unsure of the effect of such a
clause under IRC §401(a)(9).


                                                    -Page 53 of 195-
                                                                     (Printed on Sunday, November 14, 2010 at 6:24 PM)


    children had children then living, or whether the surviving grandchildren had living
    descendants.
•   The Death Benefits as to which a trust is the Beneficiary (by virtue of disclaimer) shall be
    paid, in trust, to the person who is the trustee under the trust (at the time the Death Benefits
    are paid), under the trust provisions contained and described in the trust instrument as it may
    exist at the first to occur of (1) my death, (2) my Required Beginning Date or (3) the date of
    this designation if made after my Required Beginning Date. Unless otherwise clearly
    specified, a reference to a beneficiary is a reference to the person then serving as trustee, if a
    trust is the beneficiary.
       A copy of The Credit Shelter Trust Under The Money Family Trust is delivered to the
       IRA trustee or custodian contemporaneously with the delivery of this instrument. The
       Credit Shelter Trust Under The Money Family Trust is for some purposes revocable and
       amendable, but my share of the Trust becomes irrevocable upon my death. As a general
       rule, therefore, this Designation shall apply to the Trust as it exists at the date of my
       death, if my death is prior to my Required Beginning Date, whether or not it is amended
       or restated following this Designation. However, if or when I have reached my Required
       Beginning Date, then the trust by its express terms has previously been made irrevocable
       for purposes of Benefits passing pursuant to this Beneficiary Designation, and the trust
       terms in effect on the later of (i) my Required Beginning Date, or (ii) the date I have
       signed this designation, shall apply whether or not the trust has in other respects been
       thereafter amended. If, for whatever reason, The Credit Shelter Trust Under The Money
       Family Trust as beneficiary is ineffective, such designation shall be ignored (as if the
       trust were an individual who had predeceased me).
             Disposition of State Property Law Inte rest of Spouse. It is my intention to dispose
              of all of the Benefits under the IRA over which I have a power of disposition as a
              result of my death. In this regard, it is my understanding that if any such Benefits are
              community property they are my sole management community property, and, as such,
              I have a limited power of disposition over both halves of such community property. A
              spouse may not accept Benefits under my Will, or under any Trust upon my death, or
              under this instrument, and also claim an interest in my Benefits in excess of that
              otherwise provided by this designation. 96
                  To the extent that my Wife is a Designated Beneficiary under this instrument, the
                  Benefits to which she is thereby entitled shall be satisfied first out of any
                  community property or other legal interest that she may otherwise have in my
                  Benefits, and second, out of property in which she does not have such an interest.
                  If my Wife predeceases or has predeceased me, and if she has left her community
                  property interest (if any) in my Benefits to someone other than me, then to the
                  extent that this disposition was effective as a matter of law, such interest shall
                  pass as she has directed, rather than in accordance with this designation.
                  However, the custodian or trustee shall be fully protected in paying or
                  withholding payment of Benefits without regard to the preceding sentence.



       96
            There may be ―widow‘s elect ion‖ issues here.


                                                  -Page 54 of 195-
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         2.2(a) Identification of Form or Time of Payment/Beneficiary Shall Have Draw
         Down Powe r. 97
                 Benefits payable as a result of my death shall be paid in such form and manner
                 and at such time as may be permitted by the IRA or law and as the beneficiary
                 shall elect. If there is more than one beneficiary, then each beneficiary may make
                 an election with respect to that beneficiary‘s separate account. Further, each
                 beneficiary shall have at all times, the unrestricted power and right to draw down
                 and take a distribution to himself of all or any portion of the Benefits to which he
                 is entitled under this designation, including the unrestricted power to accelerate
                 any installment distributions elected. (If a trust is a beneficiary, the powers
                 described under this paragraph shall belong to the trustee of that trust.)

         2.2(b) Death of Beneficiary.
                If an individual who is a beneficiary survives me, but dies prior to the complete
                distribution of his interest in my Benefit, the beneficiary‘s share of any remaining
                interest shall be paid to such secondary beneficiary or beneficiaries as are
                designated by the deceased beneficiary by written instrument delivered to the IRA
                custodian or trustee. If no such designation has been made, then the beneficiary‘s
                share of any remaining interest shall be paid to the beneficiary's personal
                representative to be administered as a part of the beneficiary's general probate
                estate. Such distribution and designation shall be in such form and at such time as
                may be permitted by the IRA or law and as the secondary beneficiary or
                beneficiary‘s personal representative (as the case may be) elects. 98




          97
             Note that by granting the beneficiaries a right of accelerat ion and withdrawal, i.e., fully vesting the
benefit, the beneficiary will have a power of appointment and any undistributed benefits will be taxed for estate tax
purposes in the beneficiary‘s estate, if the beneficiary is an individual. Estate tax exclusion could be arranged, in an
appropriate case, by not vesting the benefit. However, if the beneficiary powers are to be limited, one must carefully
consider the effect this might have on the marital deduction, the possible imposition of the generation skipping tax,
and the impact on the size o f any credit shelter g ift under the will. Since an IRA or qualified p lan benefit is a
wasting asset, it will likely end up in the beneficiary ‘s estate anyway, wast ing either the unified credit or the
generation skipping transfer tax exempt ion under IRC §2631 or both. Therefore, if plan and IRA benefits are to be
excluded fro m the beneficiary‘s estate, a trust should ordinarily be used as a mediu m. A power of withdra wal and
acceleration in the trustee should have no adverse estate tax consequences.
         98
           The question of what to do with the beneficiary‘s interest upon the death of the beneficiary can be a
troubling one. Lest there be a question, I reco mmend that the beneficiary designation address the issue.

         This clause and the one giving the beneficiary a draw down power, clear up a nu mber of questions that may
otherwise be in doubt, the resolution of some of wh ich direct ly affect the availab ility of the marital deduction . For
example, the existence of an unrestricted draw down power may be crucial if the beneficiary is the spouse and if a
marital deduction for the interest is needed. If the spouse does not have a draw down power, the benefit may be a
nondeductible terminable interest, unless any undistributed benefit remain ing at the spouse‘s death is payable to the
spouse‘s estate! My contention is that the existence of the draw down power is to be implied (in the absence of a
specific direct ion to the contrary), and, als o by imp lication, any undistributed benefits remain ing at the spouse‘s
death should be payable to the spouse‘s estate (likewise in the absence of an affirmative direction to the contrary);
but not everyone agrees with me. I strongly recommend the use of th ese clauses in the interest of avoiding
amb iguity.


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         2.2(c) Inconsistent Provisions.
                 If any part of this Beneficiary Designation is inconsistent with the IRA, the IRA
                 shall be considered amended to the extent that such amendment does not cause
                 the account to cease to be an individual retirement account within the meaning of
                 IRC §408(a).




          If a spouse has an unrestricted right to draw down all of the income, the interest in the plan or IRA should
qualify fo r QTIP treat ment (Treas. Reg. §20.2056(b) -5(f)(8), and Treas. Reg. § 20.2056(b)-5(f)(6), last clause),
particularly if this right is coupled with the right in the spouse or the duty of the trustee/custodian to make the
property productive. Further, if the spouse has an unrestricted draw down power over corpus and income, the
participant‘s estate will be entitled to a marital deduction, even if the power lapses at death. IRC 2056(b)(5)
concluding sentence. Treas. Reg. §20.2056(b )-5(g). Finally, if any undistributed benefit remaining at the spouse‘s
death is payable to his estate, then the interest qualifies for the marital deduction no matter what the lifetime
distribution terms, so long as the interest was payable to no one other than the spouse during the spouse‘s life. IRC
§2056(b)(1)(A) second parenthetical clause. Treas. Reg. §20.2056(e)-2(b ) examp le (1)(iii); Rev. Rul. 79-240, 1979-
2 C.B. 335.

         True, giving the beneficiary an unlimited draw down power places the benefits in the beneficiary‘s estate,
pursuant to IRC §2041; however, for the reasons previously indicated, I believe that if es tate tax exclusion in the
beneficiaries‘ estate is desired, an accumulation trust should be the beneficiary.

         The proposed regulations contain a provision that could conceivably make it dangerous to allow a
beneficiary to designate who will take the beneficiary‘s interest upon the beneficiary‘s death:

                   (f)      Designations by beneficiaries. If the plan provides (or allows the employee to specify)
         that, after the employee‘s death, any person or persons have the discretion to change the beneficiaries of the
         emp loyee, then, for purposes of determining the distribution period for both distributions before and after
         the employee‘s death, the employee will be treated as not having designated a beneficiary. Proposed Treas.
         Reg. §1.401(a)(9)-1, Q&A E-5(f). (Proposed 7/27/ 87).

          Does this regulation apply at the beneficiary‘s death, or only so long as the beneficiary is living? In any
case, would it apply to a distribution to the beneficiary‘s estate, since the beneficiary designates the beneficiaries of
his will? An affirmat ive answer to this question would be an inappropriate and overbroad reading of the regulation,
but not impossible. In a conversation I had with the IRS National Office in Washington, I was assured that this
regulation was not meant to apply to a case where the remainder interest passes to the beneficiary‘s estate or as the
beneficiary directs upon the beneficiary‘s death. Rather, the intent behind the regulation is that the interest not be
diverted to someone other than the beneficiary during the beneficiary‘s lifetime.

         The regulation provides an exception:

                  However, such discretion will not be found to exist merely because the employee‘s surviving
         spouse may designate a beneficiary for distribution purposes pursuant to section 401(a)(9)(B)(iv)(II). Prop .
         Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(f) last sentence. (Proposed 7/27/87).

          The IRC section referred to is an exception to the exception to the five year rule, that applies if the
surviving spouse is the beneficiary of a participant who dies prior to the RBD; in which case the spouse may delay
distributions based upon the spouse‘s life or life expectancy until the participant would have attained age 70 1/2 , but if
the spouse dies before that date, the minimu m d istributions are applied as i f the spouse were the participant. This
exception was thought by the Treasury to be a special case worth addressing because in that case the designation
would indeed establish a new distribution payout period.


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        2.2(d) Acceptance of Form By Sponsor.
               If the IRA Sponsor accepts this instrument without change, the Sponsor is and
               shall be fully indemnified and protected by the IRA Owner, the IRA Owner‘s
               estate and the IRA Owner‘s heirs, from any liability arising by virtue of such
               acceptance. The Sponsor can manifest its acceptance of this Designation by
               allowing any further transactions in the account or by accepting any fees or
               charges in connection with it, without objecting in writing to this Designation. If
               the objection is only to part of this Designation, the remaining provisions shall be
               effective, as set forth below.

        2.2(e) Unenforceable Provisions.
                If any provision of this Beneficiary Designation or the application of it to any
                person or circumstance is inoperative, illegal, void, invalid or otherwise
                unenforceable, the remainder of this Beneficiary Designation and the application
                of such provision to other persons or circumstances will not be affected thereby
                and will be enforced to the greatest extent permitted unless to do so would clearly
                be contrary to my overall intent as evidenced by the provisions of this instrument.
                Furthermore, in lieu of such invalid provision, there shall be automatically added
                as a part of this Beneficiary Designation, a provision, as similar as, in terms or
                effect, to the unenforceable provision, as may be possible and be legal, valid, and
                enforceable.
•       Uniform Transfers to Minors Act. Any distribution that would be made to a minor
beneficiary may be made under the Uniform Transfers (or Gifts) to Minors Act of Texas or any
other jurisdiction.
•       Powe r of Legal Representative to Act Under IRA. Any distribution that can be made
to an individual may be made to the individual‘s legal representative, including the holder of
such individual‘s power of attorney. Such representative shall also have the power to make (on
the individual‘s behalf) any elections or designations that the individual is empowered to make,
to the extent otherwise consistent with the scope of the representative‘s legal authority.
•      Revocation of This Designation. This designation may be revoked or changed by me at
any time by written notice to the IRA custodian or trustee, and this beneficiary designation shall
remain in effect until such time, or until such time as I have filed another designation with the
IRA custodian or trustee bearing a subsequent signature date.
•     Elec t io n as to For m o f Be ne fit Under t he M inimum Dist r ib ut io n Rules. 99 I was born on
October 5, 1956. I believe that my Required Beginning Date (RBD) will be Saturday, April 1,




        99
             See attached Memo: ―The M inimu m Distribution Rules Affecting IRAs and Qualified Plans In a
Nutshell.‖

          A decision must be made as to whether or not to recalculate life expectancies each year. Life expectancies
can only be recalculated in the case of the participant and (or) the participant‘s spouse. Although recalculation can
result in a longer payout period in some cases, it can also result in the rapid acceleration of income following the
year of death, because a person has a life expectancy of zero upon death, not surprisingly.


                                                  -Page 57 of 195-
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2028, because I will be 70 1/2 in the immediately preceding calendar year. In ―the first
distribution calendar year,‖ (i.e., in the year that I attain age 70 1/2), I elect that distributions shall
commence to me over the joint life expectancy of myself and my Designated Beneficiary.
•      Election Regarding Recalculation. If I have a Designated Beneficiary as of my
Required Beginning Date, I elect that my life expectancy shall be recalculated for purposes of
complying with the minimum distribution rules. If my Wife is living on the Required Beginning
Date, and is at that time a Designated Beneficiary, then I furthe r direct that my Wife’s life
expectancy shall NOT be recalculated. If I do not have a Designated Beneficiary as of my
Required Beginning Date, I elect that my life expectancy shall not be recalculated, however.
•       Retention of Draw Down (Withdrawal) Power and Right to Transfer During Life of
IRA Owne r. During my life, my IRA shall be payable to me without restriction, in such form
and manner and at such time as permitted by law and as I elect. Further, unless otherwise
provided below, I shall have at all times, the unrestricted power and right to withdraw or draw
down and take a distribution to myself of all or any portion of my IRA, including the unrestricted
power to accelerate any installment distributions elected. I retain the enforceable right to direct
the Custodian to transfer my IRA to any other IRA as to which I am the owner, provided only
that the custodian or trustee of the transferee IRA agrees to accept the transfer.
•       Beneficiary of Trust Is a Designated Beneficiary. If and to the extent that The Credit
Shelter Trust Under The Moore Family Trust is or becomes a primary beneficiary, the
beneficiary of The Credit Shelter Trust Under The Moore Family Trust should qualify as a
―designated beneficiary‖ for purposes of IRC §401(a)(9) because (1) the trust is a valid trust
under state law, (2) the trust has expressly been made irrevocable for purposes of Benefits
passing pursuant to this beneficiary designation, (3) the beneficiaries of the trust who are
beneficiaries with respect to the trust‘s interest in the Benefit hereunder are identifiable from the
trust instrument, and (4) a copy of the trust instrument has been provided to the trustee or
custodian of the IRA contemporaneously with the delivery of this beneficiary designation. The




          Essentially, distributions where death occurs before the RBD must be made either (a) within five years of
death, or (b) over the life expectancy of the beneficiary. Once the participant reaches the RBD, d istributions must
begin to be made over the joint life expectancy of the participant and the participant‘s beneficiary. Any benefits
remain ing at the participant‘s death following the RBD must continue to be made at least as rapidly as before. The
beneficiary designation form assumes greater significance once one realizes that the rapi dity wi th which
distri butions must be made (and tax pai d) is dependent upon who the partici pant’s beneficiary is.

         Some beneficiaries do not have lives or life expectancies, an estate or a charity, for examp le. Trusts are a
special case.


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beneficiaries of the trust who are beneficiaries with respect to the trust‘s interest in the Benefits
hereunder are my Wife and my descendants who survive me. 100


         100
             A trust may, of course, be a beneficiary of an IRA or qualified plan, unless the document for some reason
does not allow it. The problem is found under IRC §401(a)(9), which p rovides that in the case of the death of the
participant before the RBD (the age 701/2 rule), the entire interest must be paid out in five years (the “five year
rule”), unless the beneficiary is a ―designated beneficiary,‖ in wh ich case the payout can be made over the
beneficiary‘s life expectancy (the “life expectancy method”). If the part icipant survives until the RBD, then
distributions must begin to be made under one of two life expectancy methods. Under the first option, distributions
may be made over the participant‘s life expectancy. Under the second option, the participant is allowed to use the
joint life expectancy of the participant and a ―designated [death benefit] beneficiary,‖ subject to the minimu m
benefit incidental death benefit (M DIB) ru le.

        The MDIB rule t reats beneficiaries other than spouses as if they were no more than approximately ten ye ars
younger than the participant. IRC § 401(a)(9)(G). Prop. Treas. Reg. §1.401(a)(9) -2, Q&A 4. (Proposed 7/27/ 87).
However, this rule is in effect only so long as the participant is alive. After the participant‘s death, the unreduced life
expectancy of the participant can be used. Prop. Regs. §1.401(a)(9)-2, Q&A 3. (Proposed 7/27/ 87). Prop. Regs.
§1.401(a)(9)-1, Q&A F-3A(b ). (Proposed 7/27/ 87). PLR 9330042. This fact cannot be emphasized too strongly.

          Note that after the RBD, a sixteen year payout can be assured, by reference to the participant‘s life alone,
even if there is no “designated beneficiary,” provided that recalculation of life expectancy is not elected. If one is
satisfied with this, one may ignore the special rules applicable to trusts, and can even name the estate as beneficiary
without shortening the otherwise applicable sixteen year payout period. The payout period after death could be as
long as sixteen years, or as short as one year, depending on the participant‘s age at the time. In contrast, prior to the
RBD, the absence of a ―designated beneficiary‖ places the outer limit for withdrawal without penalty at five years,
no matter what the age of the participant at death. In order to lengthen the post death payout period either before or
after the RBD, the part icipant must have a ―designated beneficiary.‖

          Under the proposed regulations to IRC §401(a)(9), a trust beneficiary may be treated as a ―designated
beneficiary‖ —so that the beneficiaries of the trust can be used as the measuring lives or joint measuring lives— if
four conditions are met: (1) The trust is a valid trust under state law, or would be but for the fact that there is no
corpus. (2) The trust is irrevocable. (3) The beneficiaries of the trust who are beneficiaries with respect to the trust‘s
interest in the employee‘s benefit are identifiable fro m the trust instrument within the meaning of the regulations.
(The regulation referred to is Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-2. (Proposed 7/27/87). Query, what does
―identifiab le‖ mean in this context. The D-2 regulat ions offer but slight guidance.) And (4) a copy of the trust
instrument is provided to the plan. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-5 and 6. (Proposed 7/27/ 87). The
model clauses quoted above serve as nothing more than a reminder of what the requirements are for t reating trust
beneficiaries as designated beneficiaries for purposes of the minimu m d istribution rules, and indicates compliance
with those rules.

          Be wary o f the requirement that the beneficiaries of the trust be identifiable fro m the trust instrument. If the
beneficiary is a trust that is to split up into several trusts in proportions that are within the discretion of the trustee
(as in the case of the A-B marital t rust/bypass trust plan), it may be that the beneficiaries are not ascertainable. On
the other hand, it would seem that so long as the beneficiary with the shortest measuring life is used, there ought to
be no policy against such a designation.

         Consider the following suggested trust provision:
         Coordination With Mini mum Distribution Rules . If the trustee is named as the beneficiary of retirement
         plan benefits that are subject to the minimu m distribution rules, and if under the circu mstances existing at
         date of death the benefits or the right to receive the benefits may continue to be held in trust (and for this
         purpose the survival of the beneficiaries for any post death survivorship period shall be presumed), then if
         (a) the participant (emp loyee) dies prior to his required beginning date, or (b) (i) the participant dies on or
         after the required beginning date and (ii) the jo int life expectancies of the then living beneficiaries of the


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•     Separate Accounts. 101 If there is more than one beneficiary of my Benefit, at least one of
whom is a ―Designated Beneficiary‖ within the meaning of the minimum distribution rules, then,




         trust and the participant are being used to calculate the distribution period under the minimu m distribution
         rules, then (and then only), in either case (a) or (b), the following rules apply:
                  (1)       So long as the trust beneficiary or beneficiaries are liv ing, such retirement plan benefits
                  (1) shall be used exclusively for the benefit of the ―designated beneficiary(ies)‖ (within the
                  mean ing of that phrase under IRC § 401(a)(9) and the regulations under it), and (2) shall not be
                  used to pay debts or expenses or pecuni ary bequests, or to benefit persons other than the
                  designated beneficiary (ies), if other assets are available fo r those purposes, notwithstanding the
                  rules otherwise applicable to apportionment, abatement and the payment of debts and expenses.
                  Further, the rules otherwise applicable to apportion ment and abat ement of death taxes are hereby
                  expressly limited to provide that in no event shall retirement plan benefits be used to pay death
                  taxes that are not directly attributable and proportionate to the estate tax value of the benefits.
                  (2)      If the trust estate of a trust that is the beneficiary of retirement plan benefits is itself to be
                  divided into fract ional shares, the interests of the trustee (and the beneficiaries) of that trust in such
                  retirement p lan benefits shall be likewise divided, proportionately .
                  (3)       Notwithstanding anything else to the contrary, no one other than a beneficiary who is
                  liv ing at the participant‘s death shall be entitled to receive the participant‘s (employee‘s)
                  retirement plan benefits fro m the trust, unless such beneficiary‘s entitlement to such benefits is
                  contingent on the death of a prior beneficiary who died after the applicable date.
         It is the purpose of these rules to insure that the trust is considered irrevocable and that the beneficiaries o f
         the trusts be identifiab le, so that the life expectancies of the beneficiaries may be used to calculate the
         minimu m distributions required by the IRC, and this paragraph shall be interpreted with this intent being
         paramount to any other direction in it, because that is the intent of the Maker. These clauses are still
         evolving, and great care should be taken before using them. Exempting the benefits from being used to pay
         debts, taxes and expenses could place the remaining trust estate under considerable s train. On the other
         hand, using the assets for such purposes may be physically incompatib le with a long term payout, even if
         permissible. However, because of the possibility that the estate tax burden could be severe, I believe it may
         be prudent to leave open the option to charge the benefits with its proportionate share of those taxes, as
         more particularly specified in the estate tax apportionment provisions of the instrument.

          Perhaps these clauses should be included in the beneficiary designation form to o; otherwise the size of the
gift to the A or the B trust cannot be ascertained without reference to action taken outside the designation. It has
been suggested to me that leaving open the tax apportionment question may be enough to disqualify the trust fr om
being treated as an individual at the RBD. If this is true, then presumably leaving this question open ought to
disqualify an individual beneficiary as well, and here, the politics would be so strong against such a result that I
cannot take the issue seriously. I certainly hope that the mere possibility of tax apportionment not limit one‘s ability
to use the joint life expectancy method or escape the application of the five year rule, but again, we just do not
know.
         101
             The Multi ple Beneficiary Rule. The general rule is that if there is more than one death beneficiary, the
beneficiary with the shortest life expectancy is used as the measuring life or joint measuring life with the participant
(the “ Mul ti ple Beneficiary Rule”). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a). (Proposed 7/27/87). There is,
however, an important exception to this rule. The exception applies where the benefit is held in a separate account or
segregated share. Prop. Treas. Reg. §1.401(a)(9) -1, Q&A H-2(b ). (Proposed 7/27/87). In that case, the single
beneficiary of each separate account or segregated share may be used as the measuring life with respect to that
share. This avoids application of the otherwise applicable ru le that the beneficiary with the shortest life expectancy
must be used as the measuring life. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a). (Proposed 7/27/ 87).


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         The proposed regulations provi de rules under which a separate account will qualify as an excepti on
to the Multi ple Beneficiary Rule. An account under a defined contribution plan or IRA must bear its own pro rata
share of gains and losses and otherwise be separately accounted for (Prop. Treas. Reg. §1.401(a)(9) -1, Q&A H-2(a).
(Proposed 7/27/87)) and a benefit under a defined benefit plan must consist of separate id entifiab le co mponents
which may be separately distributed. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-2A(b). (Proposed 7/27/ 87).

          If separate accounts were not maintained during lifetime, and the participant dies after the RBD, the
separate account rule cannot be applied based on post death segregation. However, if separate accounts were not
maintained during lifet ime, but the participant dies prior to the RBD, it is not entirely clear whether or not it is
sufficient if the shares are thereafter maintained separately. It ought to be sufficient, because before the RBD and
prior to death, there is no function served by a separate accounting. Further, under normal legal princip les, if there is
more than one beneficiary, a separate accounting from and after (―as of‖) date of death will almost certainly be
required as a matter of state law (and ERISA) as the only method of preserving each beneficiary‘s separate interest.

          If separate accounts are to be established prior to death and after the RBD, it may appear at first blush that
distributions will have to be taken during the lifet ime of the participant in differing proportions depending on the age
of the beneficiary of each separate account. However, if the beneficiaries are each more than ten years younger than
the participant (as will always be the case where the beneficiaries are descendants, one hopes) then, if none of the
beneficiaries is the spouse of the participant, the minimu m distribution incidental death benefit rule (MDIB) will
insure that all of the distributions will be based on the same joint life expectancy table, since under the MDIB rule
each beneficiary will be treated as being approximately ten years younger than the participant. The MDIB rule does
not apply after the death of the participant (Prop. Regs. §1.401(a)(9)-2, Q&A 3. (Proposed 7/27/ 87). Prop. Regs.
§1.401(a)(9)-1, Q&A F-3A(b). (Proposed 7/27/87). PLR 9330042), and so the longer individualized payout periods
can then be utilized, wh ich is of course the whole point.

          In applying the Multiple Beneficiary Rule, not only is the beneficiary with the shortest life expectancy to be
used as the measuring life, but if any beneficiary is not an indi vi dual or a qualifying trust, then the life
expectancy method is not available at all! Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a), second sentence.
(Proposed 7/27/87). Fo rtunately, there is another rule, the ―Contingent Beneficiary Rule‖ that provides that under
certain circu mstances contingent beneficiaries can be ignored.

         The Contingent Beneficiary Rule. If the class of beneficiaries include someone who is not an individual
or a qualified trust, then the Multiple Beneficiary Rule will provide that no one can be treated as a designated
beneficiary, unless the (otherwise) nonqualifying beneficiary‘s ―entitlement to an emp loyee‘s benefit is contingent
on the death of a prior beneficiary.‖ Prop. Treas. Reg. § 1.401(a)(9) -1, Q&A E-5(a), second sentence. (Proposed
7/27/87).

         This Contingent Beneficiary Rule is found in E-5(e)(1) of the proposed regulations:

                  (e) Death contingency. (1) If a beneficiary‘s entitlement to an emp loyee‘s benefit is contingent
         on the death of a prior beneficiary, such contingent beneficiary will not be considered a beneficiary for
         purposes of determin ing who is the designated beneficia ry with the shortest life expectancy under
         paragraph (a) or whether a beneficiary who is not an individual is a beneficiary. This rule does not apply
         if the death [of the beneficiary] occurs prior to the applicable date for determin ing the designated
         beneficiary. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(1). (Proposed 7/27/87). [Emphasis added.] [The
         applicable date is presumably either the RBD or the participant‘s date of death if sooner. ―The date for
         determining the designated beneficiary (under D-3 or D-4, wh ichever is applicable) is the applicable date.‖
         Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(a)(1), next to last sentence. (Proposed 7/27/87).]


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          We know that distributions made to a trust under the minimu m distribution rules are not required to be
redistributed to the trust beneficiaries at the same t ime received. Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-7, second
sentence. If trust accumulations are simp ly to be prohibited beyond the life of the beneficiary, the use of trusts in this
context would be very narrowly circu mscribed. Indeed, if this were the rule, there would be little point in having a
trust as a designated beneficiary ! Further, unless the Contingent Beneficiary Rule is given literal application to
trusts, or unless some notion of probability is to be applied, insurmountable difficult ies emerge at once.

          All well drafted trusts are going to provide for the contingency that all of the named beneficiaries might die
prior to the complete distribution of the trust estate. At that point, the remaining trust estate could (a) be distributed
to the beneficiaries‘ probate estates, (b) be distributed as the beneficiaries might appoint, with gift over in default, or
(c) be distributed to other individuals, such as heirs at law determined under the laws of intestate succession. None
of these alternatives, with the possible exception of (b), can be drafted to assure that no one other than an individual
younger than the oldest primary beneficiary will ever receive the remainder of the trust estate. Moreover, the rule
against perpetuities requires that a beneficiary‘s interest in a trust must vest sooner or later, and, if the beneficiary
has died, the only way it can vest is to be distributed to the beneficiary‘s estate or distributed pursuant to a general
power of appointment in the beneficiary. The fact that it is virtually impossible to draft a trust instrument that will
assure that the ultimate beneficiary will under every contingency be an individual younger than the oldest primary
beneficiary is a persuasive reason for believ ing that the Contingent Beneficiary Rule is equally applicab le to
accumulat ion trusts as to individual beneficiaries.

          Perhaps the Service is merely concerned that there be a ―high probability‖ that distributions to a trust will
in turn be distributed to the beneficiary whose life expectancy is being used to calculate the minimu m payout, or to a
remainderman who is an ind ividual younger than the primary beneficiary. However, the proposed regulations give
no basis for forming this conclusion, and if the test is ―probability‖ the application of such a rule would be very
imprecise.

          Note that the only contingency recognized under the exception is the death of the primary beneficiary,
assuming the primary beneficiary is living on the participant‘s date of death or the RBD if earlier. Note further, that
since the primary beneficiary will be an individual, the death of the pri mary beneficiary is not a contingency, it
is a certainty. And finally, note that it is entitlement to the benefit, not enjoyment, that must be contingent.
Entit lement is definitely not the right to present enjoyment nor even the certainty of future enjoyment. The focus,
therefore, is certainly not on whether the primary beneficiary will die; rather, the application of the Contingent
Beneficiary Rule (literally read) could be said to hinge on whether the secondary beneficiary‘s entitlement to any
interest remaining at that time is contingent on this death.

          If the secondary beneficiary is an individual, survivorship will usu ally be a condition of vesting. (An
interest in a remainderman that is expressly contingent on surviving the holder of a predecessor interest is normally
considered contingent.) If this analysis is correct, we could frame the Contingent Beneficiary Rule by stating that it
will apply if ―a beneficiary‘s entitlement to an employee‘s benefit is contingent on [survi vi ng] the death of a prior
beneficiary.‖

         It is mind boggling to view the contingency from this aspect, given that the death of the primary beneficiary
is not itself contingent, but it does explain the notion that charitable remaindermen are somehow different.
Nevertheless, it is not at all clear that such a strict construction of the rule was intended.


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as of my Required Beginning Date, or as of my date of death if sooner, for purposes of
complying with the minimum distribution rules described in IRC §401(a)(9), a separate account
shall be maintained for each such beneficiary in proportion to his or her interest, by initially
determining the benefits that are or would be owing to such beneficiary under this designation in
the event of my death at such time. From that time forward, each such account must bear its own
prorata share of gains and losses and shall otherwise be separately accounted for. It is intended
that such separate account will be a separate account within the meaning of Prop. Treas. Reg.
§1.401(a)(9)-1, Q&A H-2(b) and H-2A. Unless otherwise specified by me, all distributions to me
after my Required Beginning Date shall be charged against each separate account in the
proportions that such accounts originally bear to one another.
In the event of my death after my Required Beginning Date, the beneficiary with respect to
whom a separate account is being maintained shall be the beneficiary of that account on my
death, if the beneficiary survives me. If such beneficiary does not survive me, then the
beneficiary of the separate account shall be the person(s) who is designated above to take the
share of the predeceasing beneficiary in the event the beneficiary does not survive me. For
example, in the case of a per stirpital distribution pattern, the beneficiaries of a separate account
would be the descendants per stirpes (if any) of the predeceased beneficiary. Otherwise, the
beneficiaries of the account may simply be determined as generally provided above. In the case
of a trust as beneficiary, the term ―survive me‖ sha ll mean is in existence as of the date of my
death.
Notwithstanding the above, if I am living on my Required Beginning Date, and if all of my
beneficiaries are designated beneficiaries who are treated as having the same life expectancy for
purposes of the minimum distribution rules (not including the minimum distribution incidental
benefit rule), then separate accounts shall not be maintained. For example, if a trust is a
Designated Beneficiary, the life expectancy of the oldest beneficiary of the trust is ordinarily
used to determine the minimum distributions under the minimum distribution rules. If the
Designated Beneficiary under the trust is my Wife, then there shall be no necessity for
maintaining separate accounts, since the joint life expectancy of myself and my Wife are to be
used for determining the minimum distributions in any event.
It is my understanding that the minimum incidental benefit rule (MDIB) described in the
regulations to IRC §401(a)(9) is not applicable after my death. If the IRA ind icates that benefits
be paid out following my death and after the Required Beginning Date at least as rapidly as
during my life, then, for purposes of this beneficiary designation, I intend that such reference be
construed in order to comply with the minimum required distributions described in IRC
§401(a)(9), after taking into account the fact that the MDIB rule no longer applies.


         We certainly hope that the final regulations will make it clear that we can simp ly ignore secondary
beneficiaries altogether, no matter what their nature, provided only that the primary beneficiary is an individual
(including the life beneficiary of a t rust having a more than nominal interest). Since d istributions, whether made to
an accumulation trust or not, will be taxed when made, the potential for abuse of such a rule is remote in the
extreme. (One notes that trusts pay taxes at a much higher marginal rate than individuals similarly situated.) If t his
simp le solution is not taken, we will be forced to apply (a) the law of future interests (an arcane and feudalistic
notion having little to do with policy in this context), or (b) some notion of probability which, at a minimu m, will at
best be awkward if not imp recise. Th is is a perfect opportunity for the Service to choose a simp le straightforward
solution to a problem that is otherwise going to be very difficu lt to solve. And this is an area where further
complexity is particularly inappropriate.


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DEFINITIONS
As used in this instrument, the following terms, whether or not capitalized, shall be given the
following meanings, unless the context very clearly indicates otherwise.
•      Participant. All references to the “Participant” are to Moore Money.
•       Estate/Probate Estate. A distribution to the "Estate" or “Probate Estate” of a
deceased individual means a distribution to the deceased individual‘s personal representative, if
any, to be administered and distributed as part of the individual‘s general probate estate; or if
there is no personal representative at the time of distribution, then to the persons entitled under
applicable state law to succeed to the ownership of the deceased individual‘s property as a result
of the death of the individual.
•       Survive/Surviving. Wherever it is provided in this instrument that a person must
"survive" someone, or must be living at the date of a person's death, or where any other
survivorship condition is explicitly expressed, it is intended that such survivorship requirement
override, and be construed without regard to, any anti- lapse or similar statute that would defeat
such express provision. Wherever it is provided in this instrument that a person must "survive"
or must be “surviving” some other person, it means that such person must not have predeceased
such other person, and must be living at the other person‘s death. Other provisions of this
instrument may require survival for an additional specified period. If a beneficiary is not a
human being, the beneficiary must be eligible to take (entitled by law to receive the benefit), and
if not eligible to take, (e.g., if not in existence), the person shall be treated as if not surviving. A
spouse of the IRA Owner shall be treated as having failed to survive the Owner, if at the
Owner‘s death there was pending or in effect a legal or equitable action for, or decree or order of,
annulment, divorce, separation, or separate maintenance (not followed by remarriage).
•       Gende r Pronouns. As used in this instrument, whenever the context so indicates, the
masculine, feminine or neuter gender, and the singular or plural numbe r, shall include the
others.
•       Beneficiary/Beneficiaries. The term ―Beneficiary‖ shall mean ―Beneficiaries‖ and vice-
versa, unless the context clearly indicates otherwise.
•        IRC. Unless otherwise indicated, the references contained in this instrument to the
"Code" or the “IRC” are to the Internal Revenue Code of 1986, as amended, and as may be
from time to time hereafter amended, or any corresponding provisions of any subsequent federal
tax laws. Unless clearly contrary to the manifest intent otherwise expressed in this instrument,
any reference to a specific IRC section or other provision of law shall be interpreted as a
reference to such IRC section or other law as amended, changed or redesignated after the signing
of this instrument.
•      Person/Individual. The term “pe rson” includes an individual, trust, estate, partnership,
association, company or corporation. An “individual,” on the other hand, means a person who is
a human being.
•     Conjunctive/Dis junctive. When the sense so indicates, use of the conjunctive (e.g.,
“and”) may include the disjunctive (e.g., “or”), and vice versa.




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•      Death Benefits. ―Death Benefits‖ or ―Benefits‖ generally include all of my interest in the
IRA over which I have the power to designate one or more Beneficiaries to succeed to such
Benefits upon my death, determined without regard to the community property laws.
•      By Right of Representation-Pe r Stirpes.
       (a)     The term "by right of representation," or “per stirpes” as used in this
       instrument, means per stirpes, as further defined in subsection (b) below. This means that
       lineal descendants shall represent their ancestor, that is, shall stand in the same place
       as such ancestor would have had he been living. For this purpose, a living descendant
       excludes his own descendants, and a dead descendant is represented by his own
       descendants. A division "by right of representation" may sometimes be referred to as a
       division on a "representational basis." The shares created in a division on a
       representational basis may sometimes be referred to as "representational shares." Such a
       division may also be referred to as a "representational division."
       (b)     Unless otherwise clearly indicated, the stirpes (i.e., the roots or stocks selected
       for the purpose of making the first division of the estate on a per stirpital or
       representational basis) are to be those of the generation nearest the decedent of which
       one or more of the members survived the decedent, and for this purpose, a disclaimant
       shall be treated as if he survived. This is not necessarily strict per stirpes and is
       sometimes referred to as ―per capita with right of representation,‖ since, for example, the
       grandchildren of a decedent will take equal shares, if no children were living at the time
       the division is determined.
•     Designated Beneficiary. The term “Designated Beneficiary” shall have the same
meaning as that it has under IRC §401(a)(9).
•      Designation. The term “the Designation” or “Designation Form” means this document
and includes any designation form that incorporates this document or which this document
incorporates.
•       Including. The term "including" means "including but not limited to." The term
"includes" means "includes but is not limited to." The term "include" means "include but are not
limited to." Any “examples” given are by way of illustration and not by way of limitation,
unless otherwise stated.
•      Surviving Spouse. A "Surviving Spouse" is a spouse who is married to a person at such
person's death and who survives such person, whether or not such spouse later remarries.
•        Posthumous Children. A child in gestation who is born alive shall be considered a
child in being throughout the period of gestation, and shall be considered to have been living
throughout the period of gestation. • Required Beginning Date. The term “Required
Beginning Date” or ―RBD‖ shall have the meaning given under IRC §401(a)(9), and generally
refers to the April 1 following the calendar year in which I attain age 70 1/ 2.
•     Minimum Distribution Rules. The minimum distribution rules are the rules described in
IRC §401(a)(9) and §§408(a)(6) or (b)(3), as the case may be.
Date Signed:
Moore Money, Designated IRA Owner/Participant



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                      Witness
                                     *       *       *       *

2.3 D.   A Model Beneficiary designation For Participant Naming QTIP
TRUST As Beneficiary—Use With Caution and Extreme Care.
                              Annotated Sample
                 Sample Form Annotated As to Marital Deduction
DES IGN ATION OF BEN EFICI ARY a nd ELEC TION AS TO FORM OF BEN EFI TS UN DER
                                 IRC §401(a) (9)
By
M OORE                                                                                         M ONEY

Primary Beneficiary is The Marital Deduction Trust Under The Money Family Trust
This document is an attachment to any beneficiary designation form required by the terms of the
IRA and is incorporated into such form. If there is no specified beneficiary designation form
required by the terms of the IRA, then this document shall be the beneficiary designation form.
Identification of Designated Participant/Designated IRA Owne r. I, Moore Money (the
―Participant‖ or IRA ―Owner‖), named Morris Edward Money at birth, also know as Mo Money
and M.E. Money, am the designated owner of the above referenced IRA. My social security
number is 009-999-9999. I am presently a domiciliary and resident of Ripple City, Clear Water
County, Texas. My Texas domicile was established at birth. I am a citizen of the United States.
Revocation of Prior Designations. I revoke all previous beneficiary designations. This
beneficiary designation shall remain in effect until such time as I have filed another designation
with the trustee or custodian of the IRA, bearing a subsequent date.
Identification of IRA Sponsor. The sponsor of the IRA is believed to be Infidelity Investments
(the IRA ―Sponsor‖).
Identification of IRA. The IRA has been described as the Infidelity Investments Rollover IRA
and is believed to have been assigned account number 1234-5678A. This IRA will sometimes be
referred to herein simply as ―the IRA,‖ ―this IRA,‖ or ―my IRA.‖ I wish to make the beneficiary
designation change as set forth herein, even if the foregoing description or account number is
incorrect in any respect, so long as the IRA can reasonably be identified. Further, except as
otherwise provided by any other beneficiary designation signed by me in the future, this
designation shall apply to any other IRA I may now have or later establish with Infidelity
Investments, no matter what the account number.
Approximate Value. The approximate value as of April 1, 1996 was $10,000,000.00. (I may be
mistaken as to the approximate value of the IRA. Such mistake, if any, shall have absolutely no
effect on this beneficiary designation.)
Date of Birth of Designated Participant/Designated IRA Owne r. I was born on Friday,
October 5, 1956, in Desert City, Lion‘s Den County, Texas.
Identification of Spouse. I am married to Lotta Money, named ―Lotta Darlene Cash‖ at birth,
and also known as Lotta Cash, and Mrs. Moore Money. All references in this Will to ―my Wife‖


                                          -Page 66 of 195-
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or to ―my spouse‖ are to Lotta Money alone. My Wife, Lotta Money, was born on Tuesday,
January 15, 1957 in Terrapin Station, Dark Star County, California. My Wife‘s social security
number is 007-999-9999. My Wife is presently a domiciliary and resident of Ripple City, Clear
Water County, Texas. Her Texas domicile was established at birth. My Wife is a citizen of the
United States. I have not been previously married to any other person. 102
Identification of Children. I have 2 children, now living.
                                             E.      C.              Money     (Cosmic                   Charlie)
                                             007                         Mars                               Hotel
                                             Worthless,                     TX                             76999
                                             SSN                                                     449-666-99(9
                                             (415)                                                      457-8457

                                             Faith           N.                   Money                 (Faithful)
                                             221B           New                   Mingle wood                Ave.
                                             Cucamonga,                                                       CA
                                             SSN                                                     549-666-99(9
                                             (900) 123-4567
I have no child now deceased leaving descendants now living.
Definition of the Word “Childre n”/Children Born or Adopted After Signing of Instrument.
All references in this instrument to ―the Participant‘s children,‖ ―my children,‖ ―my child‖ or a
―child of mine‖ include only the above named children and any child or children hereafter born
to or adopted by me. This provision is to be interpreted literally and strictly.
Identification of Descendants. All references in this instrument to ―the Participant‘s
descendants,‖ "my descendants," a "descendant of mine," or similar designation, shall include
only "my children" and their descendants and no others. This provision is to be interpreted
literally and strictly.
Identification of Beneficiaries. Pursuant to the provisions of the IRA permitting the designation
of a beneficiary or beneficiaries by me, I, the undersigned Participant, hereby designate the
following person or persons, individual or individuals, as the beneficiary or beneficiaries of the
balance to my credit under the IRA, payable by reason of my death.
TABLE OF B ENEFICIARIES
              Class                                               Beneficiary(ies)
1.       First Beneficiary           The Marital Deduction Trust Under The Money Family Trust,
                                     but only if my Wife survives me. (The Marital Deduction Trust
                                     is a subtrust of The Money Family Trust.)


         102
             Most of this information, though not necessary, will have to be ascertained sooner or later, and might as
well be set forth in full in the beneficiary designation. Forcing the draftsperson to consider the date Texas domicile
was established and the date of marriage is obviously useful in determin ing the portion of the benefit that may be
community property. Forcing the draftsperson to address the citizenship of the participant and the spouse is very
important for a nu mber of reasons, one of which is the availability of the marital deduction, in case a trust is a
beneficiary.


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2.      Second Beneficiary       My Descendants who survive me, by right of representation
3.      Third Beneficiary        My Probate Estate
4.      Fourth Beneficiary       N/A
5.      Fifth Beneficiary        N/A
DISCLAIMER PROVISIONS.
As expressly permitted by Texas Probate Code §37A(c), I make the following provision in this
instrument for the making of disclaimers by a beneficiary.
If any property that is not to be held in trust is disclaimed by a beneficiary, such property shall
pass to the then living descendants of the disclaimant, b y right of representation, if any, and if
none, then such property shall pass as if the disclaimant predeceased me.
If a disclaimant disclaims all of his or her interest in all (or any portion) of any trust, the trust
(or the affected portion) shall be administered and distributed as if the disclaimant died after
having survived me, even if this results in the acceleration of a remainder interest or closes an
otherwise open class, and even if this results in the removal of the property from the trust (whic h
in many cases it would). If a disclaimant disclaims less than all of his or her interest in all (or any
portion) of any trust, the trust (or the affected portion) shall be administered and distributed as if
the disclaimed interest had been omitted from the terms of the trust.
If, as a result of disclaimer, an interest would otherwise pass to The Marital Deduction Trust
Under The Money Family Trust, but for the fact that The Marital Deduction Trust Under The
Money Family Trust does not exist or is otherwise incapable of taking, the disclaimed interest
shall instead pass as if the disclaimant had predeceased me.
Except as otherwise designated or provided in this Designation, the following rules of
construction shall apply:
•    The Beneficiaries identified above shall be entitled to Death Benefits in ascending numerical
     order. That is, the person(s) identified as the First Beneficiary shall be entitled to Death
     Benefits first, and the Second Beneficiaries shall be entitled to Death Benefits only if there is
     no First Beneficiary surviving, existing or otherwise eligible to take. And so forth. (The
     lower the number the higher the Class.) Beneficiaries below the First Beneficiary level are
     contingent beneficiaries.
•    A Beneficiary must survive me in order to be eligible to receive Death Benefits under this
     designation. Further, a Beneficiary must survive all other Beneficiaries of a higher Class in
     order to be eligible to receive Death Benefits. A Beneficiary‘s interest shall vest absolutely at
     my death, whether or not the Beneficiary subsequently survives the complete distribution of
     his benefits under the IRA. If The Marital Deduction Trust Under The Money Family Trust
     does not exist or is otherwise incapable of taking as of the date of my death, the trust shall be
     treated for this purpose as not surviving me.
•    If there is more than one Beneficiary named in the same Class (First Beneficiary Class,
     Second Beneficiary Class, etc.), and one or more fails to survive me, the Death Benefits to
     which members of that C lass are entitled shall pass to the remaining members of the Class, if
     any, in the same proportions in which the surviving Class members are otherwise receiving



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    benefits. For example, if A, B & C are each to receive a 1/3rd interest if surviving, A & B
    will each be entitled to a 1/2 interest if C does not survive me. If A is to receive half, B is to
    receive 1/4, and C is to receive 1/4, but C does not survive me, A‘s share of the whole will
    become 2/3rds.
•   In the case of a gift to a Class ―by right of rep resentation‖ or ―per stirpes,‖ Death Benefits
    shall pass in accordance with the definition of those terms. For example, if a person was
    survived by four children, and two grandchildren who were the only children (surviving or
    otherwise) of a predeceased child, a division by right of representation would provide two
    equal shares for each child who survived, and one share for each of the children of the
    predeceased child (ten shares in all). This would be true regardless of whether the surviving
    children had children then living, or whether the surviving grandchildren had living
    descendants.
•   The Death Benefits as to which a trust is the Beneficiary shall be paid, in trust, to the person
    who is the trustee under the trust (at the time the Death Benefits are paid), under the trust
    provisions contained and described in the trust instrument as it may exist at the first to occur
    of (1) my death, (2) my Required Beginning Date or (3) the date of this designation if made
    after my Required Beginning Date. Unless otherwise clearly specified, a reference to a
    beneficiary is a reference to the person then serving as trustee, if a trust is the beneficiary.
    A copy of The Marital Deduction Trust Unde r The Money Family Trust is delivered to
    the IRA trustee or custodian contemporaneously with the delivery of this instrument.
    The Marital Deduction Trust Under The Money Family Trust is for some purposes revocable
    and amendable, but my share of the Trust becomes irrevocable upon my death. As a general
    rule, therefore, this Designation shall apply to the Trust as it exists at the date of my death, if
    my death is prior to my Required Beginning Date, whether or not it is amended or restated
    following this Designation. However, if or when I have reached my Required Beginning
    Date, then the trust by its express terms has previously been made irrevocable for
    purposes of Benefits passing pursuant to this Beneficiary Designation, and the trust
    terms in effect on the later of (i) my Required Beginning Date, or (ii) the date I have
    signed this designation, shall apply whethe r or not the trust has in other respects been
    thereafter ame nded.
•       Disposition of State Property Law Inte rest of Spouse . It is my intention to dispose of
all of the Benefits under the IRA over which I have a power of disposition as a result of my
death. In this regard, it is my understanding that if any such Benefits are community property
they are my sole management community property, and, as such, I have a limited power of
disposition over both halves of such community property. A spouse may not accept Benefits
under my Will, or under any Trust upon my death, or under this instrument, and also claim an
interest in my Benefits in excess of that otherwise provided by this designation.
To the extent that my Wife is a Designated Beneficiary under this instrument, the Benefits to
which she is thereby entitled shall be satisfied first out of any community property or other legal
interest that she may otherwise have in my Benefits, and second, out of property in which she
does not have such an interest.
If my Wife predeceases or has predeceased me, and if she has left her community property
interest (if any) in my Benefits to someone other than me, then to the extent that this disposition
was effective as a matter of law, such interest shall pass as she has directed, rather than in


                                            -Page 69 of 195-
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accordance with this designation. However, the custodian or trustee shall be fully protected in
paying or withholding payment of Benefits without regard to the preceding sentence.
•       Identification of Form or Time of Payment/Beneficiary Shall Have Draw Down
Powe r. Benefits payable as a result of my death shall be paid in such form and manner and at
such time as may be permitted by the IRA or law and as the beneficiary shall elect. If there is
more than one beneficiary, then each beneficiary may make an election with respect to that
beneficiary‘s separate account. Further, each beneficiary shall have at all times, the unrestricted
power and right to draw down and take a distribution to himself of all or any portion of the
Benefits to which he is entitled under this designation, including the unrestricted power to
accelerate any installment distributions elected. (If a trust is a beneficiary, the powers described
under this paragraph shall belong to the trustee of that trust.)
•       Death of Beneficiary. If an individual who is a beneficiary survives me, but dies prior to
the complete distribution of his interest in my Benefit, the beneficiary‘s share of any remaining
interest shall be paid to such secondary beneficiary or beneficiaries as are designated by the
deceased beneficiary by written instrument delivered to the IRA custodian or trustee. If no such
designation has been made, then the beneficiary‘s share of any remaining interest shall be paid to
the beneficiary's personal representative to be administered as a part of the beneficiary's general
probate estate. Such distribution and designation shall be in such form and at such time as may
be permitted by the IRA or law and as the secondary beneficiary or beneficiary‘s personal
representative (as the case may be) elects.
•      Inconsistent Provisions. If any part of this Beneficiary Designation is inconsistent with
the IRA, the IRA shall be considered amended to the extent that such amendment does not cause
the account to cease to be an individual retirement account within the meaning of IRC §408(a).
•       Acceptance of Form By Sponsor. If the IRA Sponsor accepts this instrument without
change, the Sponsor is and shall be fully indemnified and protected by the IRA Owner, the IRA
Owner‘s estate and the IRA Owner‘s heirs, from any liability arising by virtue of such
acceptance. The Sponsor can manifest its acceptance of this Designation by allowing any further
transactions in the account or by accepting any fees or charges in connection with it, without
objecting in writing to this Designation. If the objection is only to part of this Designation, the
remaining provisions shall be effective, as set forth below.
•       Unenforceable Provisions. If any provision of this Beneficiary Designation or the
application of it to any person or circumstance is inoperative, illegal, void, invalid or otherwise
unenforceable, the remainder of this Beneficiary Designation and the application of such
provision to other persons or circumstances will not be affected thereby and will be enforced to
the greatest extent permitted unless to do so would clearly be contrary to my overall intent as
evidenced by the provisions of this instrument. Furthermore, in lieu of such invalid provision,
there shall be automatically added as a part of this Beneficiary Designation, a provision, as
similar as, in terms or effect, to the unenforceable provision, as may be possible and be legal,
valid, and enforceable.
•       Uniform Transfers to Minors Act. Any distribution that would be made to a minor
beneficiary may be made under the Uniform Transfers (or Gifts) to Minors Act of Texas or any
other jurisdiction.




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•       Powe r of Legal Representative to Act Under IRA. Any distribution that can be made
to an individual may be made to the individual‘s legal representative, including the holder of
such individual‘s power of attorney. Such representative shall also have the power to make (on
the individual‘s behalf) any elections or designations that the individual is empowered to make,
to the extent otherwise consistent with the scope of the representative‘s legal authority.
•      Revocation of This Designation. This designation may be revoked or changed by me at
any time by written notice to the IRA custodian or trustee, and this beneficiary designation shall
remain in effect until such time, or until such time as I have filed another designation with the
IRA custodian or trustee bearing a subsequent signature date.
•       Elec t io n as to Fo r m o f Be ne fit Unde r t he M inimum D ist r ib ut io n Rules. I was born on
Friday, October 5, 1956. I believe that my Required Beginning Date (RBD) will be Saturday,
April 1, 2028, because I will be 70 1/2 in the immediately preceding calendar year. In ―the first
distribution calendar year,‖ (i.e., in the year that I attain age 70 1/2), I elect that distributions shall
commence to me over the joint life expectancy of myself and my Designated Beneficiary.
•        Election Regarding Recalculation. If I have a Designated Beneficiary as of my
Required Beginning Date, I elect that my life expectancy shall be recalculated for purposes of
complying with the minimum distribution rules. If my Wife is living on the Required Beginning
Date, and is at that time a Designated Beneficiary (as she will be if she is the beneficiary of a
trust that is named as a beneficiary), then I further direct that my Wife’s life expectancy shall
NOT be recalculated. If I do not have a Designated Beneficiary as of my Required Beginning
Date, I elect that my life expectancy shall not be recalculated, however.
•       Retention of Draw Down (Withdrawal) Power and Right to Transfer During Life of
IRA Owne r. During my life, my IRA shall be payable to me without restriction, in such form
and manner and at such time as permitted by law and as I elect. Further, unless otherwise
provided below, I shall have at all times, the unrestricted power and right to withdraw or draw
down and take a distribution to myself of all or any portion of my IRA, including the unrestricted
power to accelerate any installment distributions elected. I retain the enforceable right to direct
the Custodian to transfer my IRA to any other IRA as to which I am the owner, provided only
that the custodian or trustee of the transferee IRA agrees to accept the transfer.
•       Beneficiary of Trust Is a Designated Beneficiary. If and to the extent that The Credit
Shelter Trust Under The Moore Family Trust is or becomes a primary beneficiary, the
beneficiary of The Credit Shelter Trust Under The Moore Family Trust should qualify as a
―designated beneficiary‖ for purposes of IRC §401(a)(9) because (1) the trust is a valid trust
under state law, (2) the trust has expressly been made irrevocable for purposes of Benefits
passing pursuant to this beneficiary designation, (3) the beneficiaries of the trust who are
beneficiaries with respect to the trust‘s interest in the Benefit hereunder are identifiable from the
trust instrument, and (4) a copy of the trust instrument has been provided to the trustee or
custodian of the IRA contemporaneously with the delivery of this beneficiary designation. The
beneficiaries of the trust who are beneficiaries with respect to the trust‘s interest in the Benefits
hereunder are my Wife and my descendants who survive me.




                                             -Page 71 of 195-
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•      The Marital Deduction Trust As Designated Beneficiary. 103 Further, notwithstanding
anything else herein to the contrary, if and to the extent that The Marital Deduction Trust Under




          103
             The IRS has ruled that a QTIP trust may be named as a beneficiary of an IRA or qualified plan, and a
marital deduction obtained. However, in each case, the facts were so favorable that it would be hard to imagine why
the ruling would not likewise be favorable. Rev. Rul. 89-89, 1989-2 C.B. 231. See also PLRs 9320015, 9317025,
9038015 and 8728011. The primary impediment is that, even under the minimu m distribution rules, there is
ordinarily no guarantee that the plan or IRA will distribute all of its income or that the income distributed will in
turn be distributed by the QTIP t rust.

         In the case of the marital deduction trust, consideration must be given to the terms of the plan, if the ben efit
is in a qualified plan. An IRA will almost always allow acceleration of the beneficiary‘s benefit (perhaps only by
implication), but a plan might or might not. I am hesitant to appoint a marital deduction trust as the beneficiary of a
qualified plan or IRA because of the uncertainties involved and because the state of the law and regulations in this
area are still undeveloped and primit ive. Ho wever, if appropriate clauses are also found in the marital t rust itself, a
marital deduction should be available.

         If a spouse has an unrestricted right to draw down all of the income, the interest in the plan or IRA should
qualify for QTIP treat ment (Treas. Reg. §20.2056(b)-5(f)(8), and Treas. Reg. §20.2056(b)-5(f)(6), last clause),
particularly if this right is coupled with the right in the spouse or the duty of the trustee/custodian to make the
property productive.

          Consider the following provisions found in a marital deduction trust, but not in the beneficiary designation
itself.

                    Provisions Res pecting the Marital Deducti on. Notwithstanding the following or anything else in
          this instrument to the contrary, a trust in which the Surviv ing Spouse has a qualifying inco me interest for
          life may not be funded with property that does not constitute Eligib le Marital Dedu ction Property if there is
          any other alternative available to the fiduciary. Subject to this rule, Maker recognizes that there may be
          situations in which a Surviving Spouse has a “qualifying income interest for life in a retirement pl an,”
          or in wh ich The Marital Deduction Trust estate has an interest in a retirement plan. For examp le, the trust
          may own the right to receive distributions from a retirement plan that constitutes Eligib le Marital
          Deduction Property. In such event, the interest shall be held, in vested, reinvested and maintained, and
          income attributable to the interest shall be determined, in a manner that guarantees that the Surviving
          Spouse has a qualifying income interest for life with respect to such interest. [But see TAM 9220007.] The
          rule that the Surviving Spouse is guaranteed a qualify ing income interest for life in such cases is overriding
          and shall govern in case of conflict with the following rules, which Maker nevertheless believes to be
          consistent with it.

                    (1)      Determinati on of Fi duciary Accounting Income. Subject to the overriding rule that the
          Surviving Spouse is guaranteed a qualifying inco me interest for life in any retirement plan in which the
          trust has an interest, income fro m an interest in a retirement plan shall be determined by reference to state
          statutory law, if any, or if none, by applying general equitable principles, having due regard for the interest
          of the income beneficiary and the remaindermen.

                  Further, in the case of any retirement plan in which the trust has an in terest, fiduciary accounting
          income, if greater, shall be determined and distributed in the same manner as if the retirement plan in
          which the trust has an interest was itself ―qualified terminable interest property‖ within the meaning of IRC
          §2056.


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The Money Family Trust is or becomes a beneficiary, my Wife, at any and all times, shall have
the unfettered right to demand from the trustee of the Marital Deduction Trust under The Money
Family Trust an immediate distribution, from that portion of my Benefits with respect to which
the trustee of the Marital Deduction Trust is the beneficiary, of all the income from such portion
(determined as if the portion of the IRA in which the trustee is a beneficiary were itself a trust in
which my Wife had a qualifying income interest for life), and the trustee of the Marital
Deduction Trust shall comply with such request and shall distribute the income to my Wife.
Alternatively, my Wife may (in her sole, unrestricted and absolute discretion) demand and
receive such distributions of income directly from the IRA. The word ―income‖ for this purpose



                Income is an accounting notion representing a value, and not representing particular assets.
       Therefore, whether or not all of the income fro m a retirement plan (in wh ich The Marital Deduction Trust
       has an interest) is distributed by the plan in a given year, an amount representing the income shall
       nevertheless be credited to the income account and shall be distributable by the trust, in the manner
       otherwise provided under the terms of the trust. If the other assets available for distribution in The Marital
       Deduction Trust are insufficient for that purpose, then the trustee shall co mpel a distribution from the
       retirement p lan of such an amount as is necessary to satisfy the obligation to the spouse.

                 (2)      Addi tional Demand Rights Granted to Survi ving S pouse. In addit ion to the above,
       and notwithstanding anything else herein to the contrary, the Surviving Spouse, at any and all times, shall
       have the unfettered right to demand an immed iate distribution, fro m each retirement plan in which the
       trustee of The Marital Deduction Trust has an interest, of all (or any part of) the income fro m such plan
       (determined as if the plan were itself a trust in which the Spouse had a qualifying income interest for life),
       and the trustee shall co mply with such request. (Any distribution under this Paragraph shall be credited
       against any rights the spouse would otherwise have had to such income, of course.) [N.B. This paragraph
       should not really be necessary. It is included as a matter of caution, or perhaps overkill. In fact, if this
       clause is used, the preceding paragraph is probably not necessary.]

                 (3)       Explicit Provisions Regardi ng Distri buti ons and Acceleration of Installment
       Distributions. For so long as The Marital Deduction Trust has any interest in a retirement plan, the trustee
       shall take whatever steps are required to assure that such interest, to the extent not previously distributed, is
       (and will at all t imes remain) immediately distributable on demand to the trust. Accordingly, the trustee
       shall retain the unrestricted power to accelerate any installment distributions elected under the minimum
       distribution rules or otherwise; otherwise, the trustee shall not make an installment d istribution election.

                 If The Marital Deduction Trust has an interest in a retirement plan, no distribution of all or any
       part of such interest shall be made to anyone other than the Surviving Spouse (or to the trustee, as such)
       during the Surviving Spouse‘s lifetime, and no distribution of all or any part of such interest shall be made
       directly out of the retirement plan to anyone else (other than the trustee, as such), following the Surviving
       Spouse‘s lifet ime.

                 (4)       Unproducti ve Property In Retirement Pl an. If the assets of a retirement plan in wh ich
       the Surviving Spouse has (or is treated as having) a qualifying inco me interest for life, or in which The
       Marital Deduction Trust has an interest, ever include unproducti ve or under producti ve property, then
       the Surviving Spouse (or the Surviving Spouse‘s guardian or other legal representative) is specifical ly
       permitted to require the trustee of The Marital Deduction Trust and the trustee or custodian of the
       retirement plan to either make the property productive or convert it within a reasonable time. This right
       shall include the power, to the extent necessary, to cause the retirement plan interest to be distributed
       directly to the trustee, or rolled over or transferred to another eligible retirement plan, where, in either case,
       the property can be made productive.




                                                  -Page 73 of 195-
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shall be construed in a manner that will guaranty that my Wife has a ―qualifying income interest
for life‖ (within the meaning of IRC §2056(b)(7)) in that portion of my Benefits with respect to
which the Trustee is the beneficiary. The determination of what portion of the IRA is ―income‖
or not, shall be made by the trustee of the Marital Deduction Trust under The Money Family
Trust , or by my Wife, as the case may be, and the IRA custodian or trustee shall have no duty
and no power to make or question such determination.
•       Separate Accounts. If there is more than one beneficiary of my Benefit, at least one of
whom is a ―Designated Beneficiary‖ within the meaning of the minimum distribution rules, then,
as of my Required Beginning Date, or as of my date of death if sooner, for purposes of
complying with the minimum distribution rules described in IRC §401(a)(9), a separate account
shall be maintained for each such beneficiary in proportion to his or her interest, by initially
determining the benefits that are or would be owing to such beneficiary under this designation in
the event of my death at such time. From that time forward, each such account must bear its own
prorata share of gains and losses and shall otherwise be separately accounted for. It is intended
that such separate account will be a separate account within the meaning of Prop. Treas. Reg.
§1.401(a)(9)-1, Q&A H-2(b) and H-2A. Unless otherwise specified by me, all distributions to me
after my Required Beginning Date shall be charged against each separate account in the
proportions that such accounts originally bear to one another.
In the event of my death after my Required Beginning Date, the beneficiary with respect to
whom a separate account is being maintained shall be the beneficiary of that account on my
death, if the beneficiary survives me. If such beneficiary does not survive me, then the
beneficiary of the separate account shall be the person(s) who is designated above to take the
share of the predeceasing beneficiary in the event the beneficiary does not survive me. For
example, in the case of a per stirpital distribution pattern, the beneficiaries of a separate account
would be the descendants per stirpes (if any) of the predeceased beneficiary. Otherwise, the
beneficiaries of the account may simply be determined as generally provided above. In the case
of a trust as beneficiary, the term ―survive me‖ shall mean is in existence as of the date of my
death.
Notwithstanding the above, if I am living on my Required Beginning Date, and if all of my
beneficiaries are designated beneficiaries who are treated as having the same life expectancy for
purposes of the minimum distribution rules (not including the minimum distribution incidental
benefit rule), then separate accounts shall not be maintained. For example, if a trust is a
Designated Beneficiary, the life expectancy of the oldest beneficiary of the trust is ordinarily
used to determine the minimum distributions under the minimum distribution rules. If the
Designated Beneficiary under the trust is my Wife, then there shall be no necessit y for
maintaining separate accounts, since the joint life expectancy of myself and my Wife are to be
used for determining the minimum distributions in any event.
It is my understanding that the minimum incidental benefit rule (MDIB) described in the
regulations to IRC §401(a)(9) is not applicable after my death. If the IRA indicates that benefits
be paid out following my death and after the Required Beginning Date at least as rapidly as
during my life, then, for purposes of this beneficiary designation, I intend that such reference be
construed in order to comply with the minimum required distributions described in IRC
§401(a)(9), after taking into account the fact that the MDIB rule no longer applies.
DEFINITIONS



                                           -Page 74 of 195-
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As used in this instrument, the following terms, whether or not capitalized, shall be given the
following meanings, unless the context very clearly indicates otherwise.
•      Participant. All references to the “Participant” are to Moore Money.
•       Estate/Probate Estate. A distribution to the "Estate" or “Probate Estate” of a
deceased individual means a distribution to the deceased individual‘s personal representative, if
any, to be administered and distributed as part of the individual‘s general probate estate; or if
there is no personal representative at the time of distribution, then to the persons entitled under
applicable state law to succeed to the ownership of the deceased individual‘s property as a result
of the death of the individual.
•       Survive/Surviving. Wherever it is provided in this instrument that a person must
"survive" someone, or must be living at the date of a person's death, or where any other
survivorship condition is explicitly expressed, it is intended that such survivorship requirement
override, and be construed without regard to, any anti- lapse or similar statute that would defeat
such express provision. Wherever it is provided in this instrument that a person must "survive"
or must be “surviving” some other person, it means that such person must not have predeceased
such other person, and must be living at the other person‘s death. Other provisions of this
instrument may require survival for an additional specified period. If a beneficiary is not a
human being, the beneficiary must be eligible to take (entitled by law to receive the benefit), and
if not eligible to take, (e.g., if not in existence), the person shall be treated as if not surviving. A
spouse of the IRA Owner shall be treated as having failed to survive the Owner, if at the
Owner‘s death there was pending or in effect a legal or equitable action for, or decree or order of,
annulment, divorce, separation, or separate maintenance (not followed by remarriage).
•       Gende r Pronouns. As used in this instrument, whenever the context so indicates, the
masculine, feminine or neuter gender, and the singular or plural numbe r, shall include the
others.
•       Beneficiary/Beneficiaries. The term ―Beneficiary‖ shall mean ―Beneficiaries‖ and vice-
versa, unless the context clearly indicates otherwise.
•        IRC. Unless otherwise indicated, the references contained in this instrument to the
"Code" or the “IRC” are to the Internal Revenue Code of 1986, as amended, and as may be
from time to time hereafter amended, or any corresponding provisions of any subsequent federal
tax laws. Unless clearly contrary to the manifest intent otherwise expressed in this instrument,
any reference to a specific IRC section or other provision of law shall be interpreted as a
reference to such IRC section or other law as amended, changed or redesignated after the signing
of this instrument.
•      Person/Individual. The term “pe rson” includes an individual, trust, estate, partnership,
association, company or corporation. An “individual,” on the other hand, means a person who is
a human being.
•     Conjunctive/Dis junctive. When the sense so indicates, use of the conjunctive (e.g.,
“and”) may include the disjunctive (e.g., “or”), and vice versa.
•      Death Benefits. ―Death Benefits‖ or ―Benefits‖ generally include all of my interest in the
IRA over which I have the power to designate one or more Beneficiaries to succeed to such
Benefits upon my death, determined without regard to the community property laws.



                                            -Page 75 of 195-
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•      By Right of Representation-Pe r Stirpes.
       (a)     The term "by right of representation," or “per stirpes” as used in this
       instrument, means per stirpes, as further defined in subsection (b) below. This means that
       lineal descendants shall represent their ancestor, that is, shall stand in the same place
       as such ancestor would have had he been living. For this purpose, a living descendant
       excludes his own descendants, and a dead descendant is represented by his own
       descendants. A division "by right of representation" may sometimes be referred to as a
       division on a "representational basis." The shares created in a division on a
       representational basis may sometimes be referred to as "representational shares." Such a
       division may also be referred to as a "representational division."
       (b)     Unless otherwise clearly indicated, the stirpes (i.e., the roots or stocks selected
       for the purpose of making the first division of the estate on a per stirpital or
       representational basis) are to be those of the generation nearest the decedent of which
       one or more of the members survived the decedent, and for this purpose, a disclaimant
       shall be treated as if he survived. This is not necessarily strict per stirpes and is
       sometimes referred to as ―per capita with right of representation,‖ since, for example, the
       grandchildren of a decedent will take equal shares, if no children were living at the time
       the division is determined.
•     Designated Beneficiary. The term “Designated Beneficiary” shall have the same
meaning as that it has under IRC §401(a)(9).
•      Designation. The term “the Designation” or “Designation Form” means this document
and includes any designation form that incorporates this document or which this document
incorporates.
•       Including. The term "including" means "including but not limited to." The term
"includes" means "includes but is not limited to." The term "include" means "include but are not
limited to." Any “examples” given are by way of illustration and not by way of limitation,
unless otherwise stated.
•      Surviving Spouse. A "Surviving Spouse" is a spouse who is married to a person at such
person's death and who survives such person, whether or not such spouse later remarries.
•        Posthumous Children. A child in gestation who is born alive shall be considered a
child in being throughout the period of gestation, and shall be considered to have been living
throughout the period of gestation. • Required Beginning Date. The term “Required
Beginning Date” or ―RBD‖ shall have the meaning given under IRC §401(a)(9), and generally
refers to the April 1 following the calendar year in which I attain age 70 1/ 2.
•     Minimum Distribution Rules. The minimum distribution rules are the rules described in
IRC §401(a)(9) and §§408(a)(6) or (b)(3), as the case may be.
Date Signed:
Moore Money, Designated IRA Owner/Participant
Witness
                                    *       *       *       *




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2.4 E.     FULL FORM FOR USE BY COMPUTER NERDS-Use With
Caution and Extreme Care.

2.5 F.               Memo to Client Explaining Minimum distribution rules in a
Nutshell.
THE M IN IMUM
DIS TRIBUTION        RULES                   AFFEC TING             I RAS        AN D       QUA LIF IED   PLANS
IN                                                  A                                                  NUTSHELL
A Guide for the Perplexed
This brief article is an overview only. I cannot in a few pages possibly explain all the intricacies
of the minimum distribution rules, and so you should not rely on this article alone, without
consulting a competent tax advisor first. Nevertheless, it is my intention that the following brief
explanation will be of benefit in helping you understand generally the issues at stake.
The minimum required distribution rules (the ―MRD‖ rules, for short) are some of the most
complex in the entire Internal Revenue Code, and if you want a more complete and
comprehensive treatment, I refer you to my 530 page outline/book/treatise entitled Distribution
and Estate Planning For Deferred Compensation and IRA Benefits. I am publishing this
document in stages on my website: www.TrustsAndEstates.net (Go to the ―Guides and
Articles‖ page).
When you or your death beneficiary take a distribution from a qualified plan or IRA, it becomes
subject to income tax, usually for the first time. 110 Until distributed, the Government cannot tax
it. 111 This is the reason the minimum distribution rules exist: so that you and your beneficiaries
will not be able to postpone income taxation forever, accumulating income on a tax deferred
compounded basis in the meantime.




         104
            All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless
otherwise indicated.
         105
               IRC §401(a)(9)(B)(ii). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-2. (Proposed 7/27/ 87).
         106
               IRC §401(a)(9)(B)(iv)(I). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(b). (Proposed 7/27/ 87).

         107
               IRC §401(a)(9)(B)(iii)(III). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(a). (Proposed 7/27/87).
         108
             This consent will be either wholly or part ially ineffective if someone other than the Participant‘s spouse
is the primary beneficiary, unless the Participant‘s spouse also signs a separate notarized document waiv ing the
joint and survivor annuity or the preretirement survivor annuity, whichever is applicable.
         109
               An irrevocable beneficiary designation by a spouse may result in a co mpleted gift for gift tax purp oses.
         110
               IRC §§402(a)(1) and 408(d).

         111
               There is an exception at death, in the case of the estate tax.


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Definition of Required Beginning Date or RBD. IRC112 §§401(A)(9)(A), 403(B)(10),
408(A)(6), 457(D)(2) and 4974 require that distributions from qualified plans, IRAs and 403(b)
(tax sheltered annuity plans), etc., begin to be made no later than your ―Required Beginning
Date‖ (or RBD), or within a short time after death, if death occurs prior to the RBD. The RBD is
April 1 of the calendar year following the calendar year you reach age 70 1/2. 113 However,
beginning in 1997, your RBD is extended until retirement, if later, if the plan allows for it, and if
you are not a ―5% owner.‖114 Note that the retirement date, if later, has no application in the case
of an IRA. 403(b) plans may have a special RBD as well.
DISTRIBUTIONS TO YOURSELF AND YOUR BENEFICIARIES AFTER YOU REACH
AGE 70 1/2
Lifetime Minimum Distributions Must Begin After Age 70 1/2
During lifetime, the basic rule is that you need not take any distributions until April 1 of the
calendar year after you reach age 70 1/ 2 (your ―Required Beginning Date‖ or RBD), or retirement
if later and if you are not a 5% owner. The calendar year in which you turn age 70 1/ 2 is called the
“First Distribution Calendar Year.” The next year is the “Second Distribution Calendar
Year.” You should note that your RBD occurs in the Second Distribution Calendar Year (rather
than in the First), which makes it unusual.
The amounts that are required to be distributed are calculated based on the adjusted value of your
accrued benefits as of the last valuation made prior to the beginning of the Distribution Calendar
Year (the ―Valuation Calendar Year). In the case of an IRA, you simply determine its value on
December 31 of the preceding calendar year, in order to determine the minimums. 115 In the case
of other plans, the rules are more complex. 116
Distributions are ordinarily due on December 31 of the Distribution Calendar Year, based on
values as of the preceding year (the Valuation Calendar Year), except in the case of the first
distribution. The first distribution, instead of being due on December 31 of the calendar year
after you reach age 701/ 2, is not due until the following April 1 (your RBD). This means you
may need to take two minimum distributions in the Second Distribution Calendar year: one by
April 1, and the second by December 31. In each year thereafter, you will only need to take one
distribution a year, due no later than December 31.



         112
            All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless
otherwise indicated.
         113
               IRC §401(a)(9).
         114
               §1404 of the Small Business Job Protection Act of 1996 (the SBJPA, H.R. 3448)

         115
               Prop. Treas. Reg. § 1.408-8, A-5. (Proposed 7/27/ 87).
         116
             As a general ru le, in a defined contribution plan (an individual account plan), one looks to the value of
the account balance as of the las t valuation date in the calendar year preceding the distribution calendar year (the
valuation calendar year) (Prop. Treas. Reg. §1.401(a)(9)-1, Q&A F-5(a)) adjusted by increasing the account balance
by any contributions or forfeitures allocated to the account after the valuation date but during the valuation calendar
year, (Prop. Treas. Reg. §1.401(a)(9)-1, Q&A F-5(b)) and decreased by distributions made during this same period.
Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A F-5(c). (Proposed 7/27/ 87).


                                                     -Page 78 of 195-
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So, the first minimum distribution is due no later than the RBD, 117 and the second minimum
distribution is due by December 31 of the same year. 118 This can result in some doubling up or
bunching of income in the year that contains the RBD, so some people take the first distribution
in the year they turn 701/ 2, to keep a more even payout schedule. Thereafter, each minimum
distribution is due by December 31, based upon the value as of the end of the preceding calendar
year. (Phew!) One reason that these rules are important to know is that the penalty for
failure to take the distribution is 50% of the amount required to have been distributed. 119
Special Rule For Roth IRAs
The MRD rules do not apply to Roth IRAs 120 during the life of the IRA owner. This is one of
several advantages that a Roth IRA has over regular IRAs. See the ―Guides and Articles‖ page
on my web site for a detailed (ad nauseam) treatment of the Roth IRA:
www.TrustsAndEstates.net.
Calculating the Minimums After Age 70 1/2
Although you must begin receiving distributions after age 70 1/2, you have some options as to
how rapidly distributions must be taken. These options become more or less limited by the RBD,
and are keyed to whom your death beneficiary is at that time. The most rapid minimum required
payout would be based upon your life expectancy alone. A less rapid required minimum payout
would be one based upon the joint life expectancy of you and your designated death beneficiary.
Life expectancy is first determined as of the last day of the first distribution calendar year, 121
rather than the RBD. 122 So if you turn 701/ 2 in the second half of the year, you would be age 70
in the first distribution calendar year. Contrariwise, if you turn 70 1/2 in the first half of the year,
you would be age 71 in the first distribution calendar year. Put another way, participants with
birthdays during January through June will be 70, and participants with birthdays during July
through December will be 71, in the first distribution calendar year. The life expectancy of a 70
year old under the Governme nt tables is 16 years, and the life expectancy of a 71 year old is
15.3 years.
Each year, you take the closing account balance as of December 31 (in the case of an IRA) and
divide it by your life expectancy. The divisor is your original life expectancy minus the number
of years that have elapsed. So, if your original life expectancy was 16 years at age 70 (the First
Distribution Calendar Year), and if you did not have a ―designated beneficiary‖ on your RBD,



         117
           Based upon the value of the accrued benefit as of the last valuation during the year prior to the year in
which you turn age 701/2 .
         118
               Based upon the adjusted value at the end of the year in wh ich you turned age 70 1/2 .
         119
               IRC §4974.

         120
               IRC §408A.
         121
            Recall that the first distribution calendar year is the year in which the participant attains age 70 1/2 , which
is the same as saying that it is the calendar year immed iately preceding the RBD.

         122
               Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-1(a). (Proposed 7/27/87).


                                                      -Page 79 of 195-
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and were not recalculating your life expectancy on that date, then in the year you reach age 75
the divisor will be 11 (16 minus 5). At age 86, the entire benefit will have to be distributed.
Using the Joint Life Expectancy Method to Calculate the Minimums
If an individual (or a qualified trust with individuals who are beneficiaries) will succeed to your
interest in the event of your death (which is usually the case, unless your estate is the beneficiary,
for example), then you can use the joint life expectancy method to calculate your minimum
distributions. The joint life expectancy of two 70 year olds is 20.6 years. The joint life
expectancy of a 70 year old and a much younger beneficiary (who is not your spouse) is limited
to 26.2 years under a special rule (the Minimum Distribution Incidental Benefit or MDIB rule).
However, the MDIB rule disappears at death, so if your beneficiary were 30 years old at your
death, the beneficiary could stagger distributions for the next 52.2 years!
Recalculation of Life Expectancy
You have the option of recalculating your life expectancy each year. Although a 70 year old has
a life expectancy under the Government Tables of only 16 years, an 87 year old has a life
expectancy of 6.1 years, not zero. Therefore, recalculation can result in a longer payout period
during your lifetime, should you outlive your life expectancy. The problem with recalculation is
that life expectancy drops to zero in the year following death, as you might suspect. If
recalculation was elected, income and estate taxes would have to be paid shortly after death. If
death occurs at age 71, but you previously elected not to recalculate life expectancy, payments
could continue to your designated beneficiaries or even to the beneficiaries of your estate for at
least another 15 years, and the income taxes on those payments would be likewise postponed.
Changing Your Beneficiary After the RBD
Ordinarily the beneficiary may be changed either before or after the RBD. However, if the
change is after the RBD, it may result in a shorter payout period, but it cannot result in a longer
payout period. 123 Therefore, it is critical that by April 1 of the year following your 70 1/2
birthday (your RBD) you have a valid beneficiary designation in place naming either an
individual or a qualified trust as your beneficiary, and electing out of recalculation if
desired and if that option is available. Otherwise, it may be too late to take full advantage of the
significant tax benefits of deferral.
Minimum Distributions At Death After the RBD
If you die after having reached your Required Beginning Date, distributions must continue to be
made at least as rapidly as under the method of distributions being used as of the date of your
death. There is an exception to this rule if your spouse is your beneficiary.
If your spouse is your beneficiary, your spouse can rollover the distribution (if the plan allows
for this), and treat the rolled over distribution as if it belonged to your spouse all along, in which
case, the minimum distribution rules are applied with reference to (a) the age of your spouse at
that time and (b) whether or not your spouse has designated an individual as beneficiary. By use
of this technique, income taxes can be postponed for many, many years.




       123
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A E-5(c). (Proposed 7/27/87).


                                                  -Page 80 of 195-
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Deceased Spouse Leaves IRA to Surviving Spouse, Surviving Spouse Rolls IRA Over to New
IRA Designates Children as Beneficiaries of New IRA
This technique —deceased spouse to surviving spouse, surviving spouse to children— is usually
far and away the most popular and effective way to save income taxes. This technique is possible
because a surviving spouse (and only a spouse) has the right to rollover IRA benefits inherited
from a deceased spouse into a new IRA.
Example. Assume that a participant (P) with $1 million in an IRA turned age 70.5 in the second
half of the year, and named the spouse (B), age 65, as beneficiary as of the RBD. Assume further
that the IRA earns income at the rate of 8% per annum and that P elects not to recalculate life
expectancies.
Under these facts, the payout period under the joint life expectancy method will be 23.1 years at
the RBD. Note that it is not necessary for P to live to age 93 for this method to save income
taxes, because P‘s beneficiaries will benefit from the longer payout period in the case of P‘s
sooner death. Under the single life expectancy method, applicable if P‘s estate were the
beneficiary, the payout period would have been 16 years at the RBD, and the IRA would be
completely paid out by age 86.
The first minimum payment is $1 million divided by 23.1 or $43,290. However, at 8%, the IRA
will have earned $80,000. The next year, the minimum payment will be ($1 million plus $80,000
minus $43,290) divided by (23.1 minus one), i.e., $1,033,246 divided by 22.1, or $46,753. At the
end of year two, the IRA will have grown from $1 million to $1,065,413. Each year the divisor
shrinks by one (assuming no recalculation). Believe it or not, under this set of assumptions,
the IRA will continue to grow until the pa rticipant reaches age 87, because the tax free
compounded earnings will outstrip the minimums required to be paid out until that time.
At age 87, the account balance at the beginning of the year would have dipped to $977,061,
falling below $1 million for the first time. At age 92, the account balance would be $258,882,
and the minimum payout would be $258,882 divided by 1.1, or 235,348. The $25,417 remaining
would have to be paid in the year the participant turns 93.
On the other hand, if the participant died at age 80, the IRA should be worth $1.2 million
under our assumed 8% rate of return. Under the payout schedule elected there would be only
13.1 years left 124 (23.1 minus 10); nevertheless, if the spouse were the participant‘s beneficiary,
and if the spouse rolled over the IRA, named a 45 year old child as beneficiary, and then died the
next year, the child could take distributions over the next 36.9 years. The first year, the child
would be required to take out only $33,000 in distributions. By the 15th year (age 60) the
minimum required distributions will have climbed to almost $100,000 a year. By the time the
child was 70 years old, the earnings (8%) would have so far outstripped the minimums that
the IRA will have grown to $2,745,551! The minimum distribution in that year would be
$212,833, with 12 years of distributions remaining before the IRA has to be paid out. By age 73,
the IRA will begin for the very first time to decline in value. By age 80 the IRA will still be
worth close to $1 million, and the minimum distribution in that year will be close to half that.
Here is another example. If you have $500,000 in an IRA at age 55 earning 8% interest, and if
you never contribute another dime to it, and take only the minimum distributions, naming your


       124
             There would only be six years left if only joint life expectancy was not being used.


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spouse as beneficiary, then, if your spouse is three years younger than you, you will have
$1,064,137 in the IRA on your 88th birthday. In that year, your minimum distribution will be
$266,034. Further, by this time (age 88) our assumption is that you will already have withdrawn
(and been taxed on) $2,822,906 under the minimum distribution rules. In short, if you are able to
accumulate $500,000 in an IRA by age 55 (funded over time with tax deductible dollars yielding
an 8% annual rate of return), you will reap, by the time you are 88, $2,822,906 in taxable
distributions, and will still have over $1 million in your IRA! You can leave that $1 million to
your spouse, not paying either income or estate taxes, and your spouse can leave what is left to
the children, postponing income taxes over their life expectancies, but owing estate tax on the
principal, as in the case of any other asset.
One may quibble with the assumptions, but the principles illustrated are sound. Through proper
planning, your IRA can be sheltered from income taxation for a long time, and need not be taxed
at your death. Postponing income taxation is a substantial advantage, due to the effects of the tax
deferred compounding of interest, as I hope the above example amply illustrates.
                                              *        *        *        *
DISTRIBUTIONS TO YOUR BENEFICIARIES SHOULD DEATH OCCUR PRIOR TO
YOUR RBD
The 5-Year Rule
The IRC states as the general rule (which is really the exception) that if you die prior to your
Required Beginning Date 125 (RBD), your entire interest in the plan must be distributed (and taxes
paid) by December 31 of the calendar year that contains the fifth anniversary of your death. 126
The Exception to the 5-Year Rule
If either an individual or a qualified trust is the beneficiary of your interest (which for most
people is the general rule rather than the exception, the IRC characterization notwithstanding),
then the benefit may be paid over the life or life expectancy of the beneficiary, 127 provided
distributions begin no later than December 31 of the calendar year immediately following the
calendar year of your death. 128
Under the exception to the 5- year rule, a 35 year old beneficiary could receive distributions over
48 years, which will allow for a considerable deferral of income tax.
The Exception to the Exception to the 5-Year Rule
If the designated beneficiary is your spouse, distributions need not begin any earlier than the end
of the calendar year in which you would have attained age 70 1/ 2 (or the end of the calendar year
following the year of death, if later). 129

       125
             Remember the RBD is April 1 of the calendar year fo llo wing the calendar year you turn 70 1/2 .

       126
             IRC §401(a)(9)(B)(ii). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-2. (Proposed 7/27/ 87).
       127
             IRC §401(a)(9)(B)(iii)(II).
       128
             IRC §401(a)(9)(B)(iii)(III). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(a). (Proposed 7/27/87).

       129
             IRC §401(a)(9)(B)(iv)(I). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(b). (Proposed 7/27/ 87).


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The Exception to the Exception to the Exception to the 5-Year Rule
If the designated beneficiary is your spouse, then under IRC §§402(c)(9), 403(b)(8)(B) or
408(d)(3)(C), as the case may be —the spousal rollover/inherited IRA rules,— your spouse may
treat the interest as his or her own (in the case of an IRA) or roll it over in all cases. In such a
case §401(a)(9) will apply solely with reference to the surviving spouse. 130 This should permit
the spouse to defer distribution until the April 1 of the calendar year following the calendar year
in which the spouse attains age 701/ 2. 131
Regulatory Exception For Annuity Distributions Irrevocably Commencing Prior To The RBD
The proposed regulations provide that if distributions irrevocably (except for acceleration)
commence to an employee before the RBD over a period permitted for distributions permitted
after the RBD and the distribution is in the form of a special annuity, then distributions will be
considered to have begun on the actual commencement date, even if the employee dies before
the RBD. 132
What to Do When It Looks as if it is Too Late
What options are available to a 71 year old client with no spouse, who at some time on or after
the RBD was recalculating life expectancy(ies) and who had named his estate, a predeceased
spouse, or a nonqualifying trust as his beneficiary? The entire IRA will have to be paid out in the
year following the participant‘s death, no matter who the new beneficiary, if any, might be. Is
there a solution to this very serious apparent inco me tax nightmare? Very possibly.
Consider naming a charitable remainder trust (CRT) as the beneficiary, with distributions to
children (or possibly grandchildren, spouses, etc., taking the generation skipping tax into account
if applicable) based upon a fixed percentage each year for their lives, or for a 20 year term
certain. The result will be that charity will get the remainder, and the children (et. al.) will
receive in real dollars, taking present values into account, more than if nothing had been done.
Win, win. Actually, this technique is not as good as it used to be. It used to be that charity did not
have to receive anything (much). Now, the charitable remainder interest must at least equal 10%
of the initial value of the of the CRT. But even with charity receiving 10% in value, it is possible
that this technique could still be economically more valuable than doing nothing.
                                            *        *        *       *
Trust As Beneficiary
Trusts (including marital deduction trusts) can be beneficiaries of qualified plans and IRAs, but
here special care is called for, and the area is subject to a number of uncertainties.
As a general rule, in order to use the joint life expectancy method during life, or the life
expectancy method (instead of the five year rule) after death, the benefic iary must, using the
phraseology of the IRC, be a ―designated beneficiary,‖ which basically means that the
beneficiary must be a human being. Thus, an estate is not a ―designated beneficiary‖ nor is a


       130
             PLR 9253052.
       131
             Prop. Treas. Reg. § 1.408-8, Q&A A-4 (Proposed 7/27/87). PLR 9253052.

       132
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A B-5(b). (Proposed 7/27/87).


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charity or other legal entity. Nevertheless, the beneficiaries of a trust can be treated as designated
beneficiaries if the trust meets certain requirements set forth in the proposed regulations. 133
To paraphrase the proposed regulations: ―[A] trust itself may not be the designated beneficiary
even though the trust is named as a beneficiary.‖ 134 However, if the trust is named as the
beneficiary, the beneficiaries of the trust will be treated as designated beneficiaries under certain
conditions:
(1)     The trust must be valid under state law, or would be but for the fact that there is no
corpus.
(2)   The trust is irrevocable or will, by its terms, become irrevocable upon the death of the
employee.
(3)      The beneficiaries of the employee‘s interest under the trust must be identifiable from the
trust instrument.
(4)    Certain documentation (e.g., a copy of the trust itself or a certification as to the terms
and beneficiaries) must be provided to the plan administrator. 135
(5)    Depending on whether the trust agreement itself is delivered or whether a certification of
the beneficiaries is delivered, the employee must “agree” that if the trust instrument is amended
at any time in the future, the employee will, within a reasonable time, provide a copy of each
such amendment, or provide a corrected certification, as the case may be. 136
There are as yet many unresolved issues regarding the use of trusts as beneficiaries, and a trust
should only be named with extreme care and appreciation of the risks. To give just a few of
many problems:
       •           A testamentary trust will become ―irrevocable upon the death of the
                   employee[/IRA owner?],‖ but a testamentary trust is not a trust under state law
                   until death, though perhaps it would be ―but for the fact that there is no corpus.‖
                   In any event we feel that a testamentary trust will qualify (though I RS personnel
                   are somewhat coy on this point when asked, which is frightening). In any event, it
                   would have been nice —and hardly asking too much— if the proposed regulations
                   were more explicit.
       •           It is not clear that the delivery requirements apply to IRAs because (a) the IRA
                   owner is not an ―employee‖; and, more significantly, there is no ―plan
                   administrator‖ of an IRA.
       •           The fact that the beneficiaries must be ascertainable makes the use of formula
                   clauses somewhat problematic, as does the existence of discretion regarding
                   funding.


       133
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A‘s D-5 and 6. (Proposed 7/27/87 and amended 12/30/97).
       134
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A D-5(b), second sentence. (Proposed 7/27/ 87).
       135
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A D-5(a). (Proposed 7/27/ 87).

       136
             Prop. Treas. Reg. § 1.401(a)(9)-1, Q&A‘s D-7A(a). (Proposed 7/27/87 and amended 12/30/97).


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         •          If the IRA proceeds can be used, either directly or through the trust, for the
                    payment of debts, expenses or taxes, then perhaps not all of the beneficiaries of
                    the trust are ―designated beneficiaries‖ (i.e., human beings).
         •          Finally, naming a marital deduction trust as beneficiary invokes not only
                    minimum distribution compliance issues, but marital deduction compliance issues
                    as well. 137
Community Property Considerations
If the money that is in your IRA or qualified plan is community property, which it will be to the
extent earned in a community property state while you were married to your spouse, absent a
marital agreement to the contrary, then your spouse may have the right, exercisable by will, to
dispose of his or her community property interest in the your IRA or qualified plan. This right is
almost certainly present in the case of an IRA, but in the case of a qualified plan the right will be
preempted by ERISA, 138 if ERISA applies, which it usually will.
If your spouse leaves his or her community property interest in your qualified plan or IRA to
someone other than you, there will be questions and issues to address that are not easy to solve.
For instance: Who is taxed for income tax purposes on distributions from your I RA to someone
other than you (e.g., the residuary beneficiary under your spouse‘s will)? Who pays the
premature distribution tax if you are under age 59&1/2 at the time of a distribution to someone
other than you? To what extent is your IRA liable for your spouse‘s estate taxes? If you are over
70&1/2, do you get minimum distribution credit for distributions to your spouse‘s beneficiaries?
                                             *        *        *       *
WARNINGS
Limitations Under The Plan
All of the various options discussed above can be altered or lost, depending on the terms of the
plan or IRA and the form of the beneficiary designation, both of which are critical and require
careful planning.
*An IRA is a Far Superior Source of Payments to Your Beneficiaries Than Is a Qualified Plan
The alternatives available under an IRA are unlimited. And, by making an IRA to IRA transfer,
you can end up in an IRA that offers the distribution alternatives suitable to your needs. An IRA
is not subject to the joint and survivor annuity rules applicable to some qualified plans, and you
can generally name any beneficiary you desire, unlike most qualified plans.
If the beneficiary of your qualified plan is your spouse, your spouse may be able to rollover the
inherited interest to an IRA, 139 but any other beneficiary will be stuck. 140 If the qualified plan



         137
            Rev. Rul. 89-89, 1989-2 C.B. 231. See also PLRs 9320015, 9317025, 9038015 and 8728011. But see
Treas. Reg. § 20.2056(e)-2(b)(1)(ii).
         138
               Boggs v. Boggs, 117 S.Ct. 1754, 138 L.Ed.2d 45, 65 U.S. L.W. 4418 (1997).
         139
            Even in the case of a spouse, rollover may only be an option if the plan offers your spouse an alternative
to installment or annuity distributions.


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does not allow installment distributions to your nons pouse beneficiaries, your beneficiaries
could be facing a tax nightmare. Moreover, consider what happens should the plan terminate or
the employer go out of business. In that case your nonspouse beneficiary may have no choice but
to pay income taxes on the entire benefit in one year! 141
The Assumption of Some Risk is to Be Expected, But You Should First Be Made Aware of Your
Options
Unfortunately, this type of planning, involving as it does, reading the plan or IRA, completing a
beneficiary designation form properly, seeing to it that it is accepted by the sponsor, etc., is very
time consuming, and so many clients assume at least some of the burdens and risks involved in
overseeing these matters themselves, perhaps with the assistance of the plan sponsor and a tax
lawyer or other professional advisor. This is understandable and perhaps necessary, as a matter
of practical economics. Be advised, however, that there are very few people w ho are familiar
enough with this extremely complicated area to give you reliable and informed advice, and so
attempting to arrive at an appropriate decision without competent tax counsel is a decision you
may regret.
Completing the Beneficiary Designation Form
As indicated above, the minimum distribution rules are keyed to your beneficiary designation.
Once you have reached an appropriate decision as to who should be your beneficiary, you may
wish to fill out your own beneficiary designations, or see to it that one is completed with the
assistance and advice of an attorney. You should probably assume the risk that whatever
beneficiary designation is completed may not be accepted by the sponsor. The degree of risk you
wish to assume is up to you. I have, however, found that most form beneficiary designations are
inadequate to cover all contingencies involved, some of which are very important, and therefore
prefer to prepare one of my own, for my clients to sign, with the client doing the leg work
necessary to see to it that the sponsor accepts the designation.
Estate Taxes
The above discussion paid scant attention to the question of estate taxes. If your spouse is your
beneficiary, it may be that you will be entitled to an estate tax marital deduction, but only if it is
clear that the spouse has the right under all contingencies to draw down the benefit, or unless
some other special exception applies. Often times it is not at all clear that a marital deduction
will be available. Also, if the plan or IRA contains community property, which it almost
certainly will in most cases, then if your spouse dies, your spouse‘s interest in your plan or IRA
will pass under the terms of your spouse‘s will, ordinarily, and therefore, whether or not that
entitles your spouse to an estate tax marital deduction may depend on the terms of the will.
Do not overlook the fact that an income tax deduction, under IRC §691(c), may be available for
the estate tax attributable to an IRA or qualified plan. Unfortunately, the deduction does not
cover state inheritance taxes and is not available until the income is recognized.
XVII. TRANSFERS OF Community Property In Qualified Plans and IRAs


        140
              IRC §§402(c)(9), 403(b )(8)(B) and 408(d)(3)(C).
        141
          It may be possible for your beneficiary to take the distribution in the form of a nontra nsferable
commercial annuity in this event, but even if this option is available, it is a ―second best‖ alternative.


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TRANSFERS OF COMMUNITY PROP ERTY IN Q UALIFI ED PLANS AND I RAs
(Not                          in    a                   Nutshell)
A Guide for the Justly Confused
The seven numbered paragraphs below condense the basic rules regarding transfers of a
community property interest in a qualified plan or IRA, primarily at death. Following the
summary is a more detailed description of how the rules were derived.
1.     Unde r Texas law (disregarding ERISA 142 ), an inte rest in a qualified plan or IRA, to
the extent acquired during marriage, is most likely community property of the marriage.
Since, in Texas, the interest on separate property is community property, a por tion of a
retirement plan or IRA may be community property even if originally acquired prior to marriage.
2.     Unde r Texas law (dis regarding ERISA), community property can be awarded to
either spouse on divorce. Under Texas constitutional law, a divorce court cannot divest a
spouse of the spouse‘s separate property.
3.      Unde r Texas law (disregarding ERISA), a participant in a qualified plan or an IRA
owne r may dispose of both halves of the community property inte rest in a plan or IRA at
death, absent ―fraud on the surviving spouse.‖ This is accomplished by beneficiary designation,
and not by a will. (It is remotely possible that a court would hold that a beneficiary designation
purporting to dispose of both community halves of an IRA is an ―illusory trust,‖ under the
rationale of Land v. Marshall. 143 )
4.     Unde r Texas law (dis regarding ERISA), a nonparticipant spouse (the husband or
wife of a participant in a qualified plan or an IRA owner) may dispose of the nonparticipant
spouse’s community one-half inte rest in the surviving spouse’s plan or IRA at death, if the
nonparticipant spouse predeceases the spouse that is the plan participant or IRA owner. This is
accomplished by will or intestate succession, and not by beneficiary designation.
5.      Unde r Federal law, community property that is subject to ERISA is divisible on
divorce only in accordance with certain rules and procedures set forth in ERISA §206(d)(3)
and IRC 144 §414(p). 145 In addition, the interest may be disposed of at death only in
accordance with ERISA §205 and IRC §§401(a)(11) and 417.146 ERISA and the IRC will
require the plan to contain language embodying these restrictions, but ERISA, if it applies, will

         142
               The Emp loyee Ret irement Income Security Act of 1974, 29 U.S.C. §1001, et seq., as amended.
         143
            Land v. Marshall, 426 S.W.2d 841 (Tex. 1968). In that case, any attempt by an IRA owner to dispose of
a nonparticipant spouse‘s community property interest in an IRA at death would be set aside, even in the absence of
―fraud on the spouse.‖ However, it is worth noting that to date no court has exten ded the illusory trust doctrine to
IRAs. Indeed, Land v. Marshall has been cited in only one case since the decision was rendered, and in that case, the
doctrine was held not to apply. Westerfeld v. Huckaby, 462 S.W.2d 324 (Tex. Civ. App.— Houston [1st Dist.] 1971,
affm‘d, 474 S.W.2d 189 (Tex. 1972)).
         144
            All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless
otherwise indicated.
         145
               These are the rules governing qualified do mestic relat ions orders (QDROs).
         146
           For examp le, the participant‘s power to dispose of his or her interest in a plan subject to IRC § 401 or to
ERISA is severely limited by the joint and survivor annuity and rules of §§401(a)(11) and 417.


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apply regardless of the plan language. (Curiously, a qualified plan might be subject to
Subchapter D of the IRC, and yet not be subject to ERISA, 147 in which case, state law would not
be preempted, which could render the plan language meaningless, affecting the plan‘s
qualification we know not how.)
6.      Most, but not all, qualified plans 148 are subject to ERISA. 149
7.      ERISA ordinarily will not apply to an IRA, 150 even a rollover IRA, though some
lawyers are speculating that since the Supreme Court has not addressed the rollover issue
specifically, this issue may be open. Incidentally, a SEP (Simplified Employer Pla n) is a form of
IRA. It is not a qualified plan because it is not described in IRC §401(a). Hence, it too is usually
exempt from ERISA, like any other IRA. 151
The path leading to the conclusions set forth above is a tortured one that took a long time to
blaze; moreover, we may not be at the end of the road, and some of the conclusions may need
qualification. Hence, a more detailed discussion follows.
                                             *       *         *       *
Pension Plan Benefits Are Community Property If Earned in Texas While Married. It is
axiomatic in Texas that compensation earned while married is community property and that the
interest on separate property is community property. Pension benefits are a form of deferred
compensation. Thus, the courts, not just in Texas but in most if not all community property
states, have long held that benefits under a deferred compensation plan or rollover IRA, whether
or not qualified and whether or not vested, are a form of community property, if acquired during
the marriage. 152 Further, the Texas Supreme Court has held that, as a matter of state law,
community property retirement plan benefits (1) are divisible in favor of the nonparticipant
spouse in the case of divorce, 153 and (2) on the death of the nonparticipant spouse, those benefits
are subject to testamentary or intestate disposition. This means that on death the nonparticipant


        147
            For example, a qualified p lan that has no common law emp loyees, or which emp loys only the sole owner
and (or) the owner‘s spouse is not subject to ERISA, according to DOL Reg. § 2510.3-3(c)(1), Meredith v. Time
Insurance Company, 980 F.2d 352 (5th Cir., 1993), 16 EBC 1296, In Re Lane, Jr. (1993, ED NY) 1993 Bankr
LEXIS 103, In Re Branch, Robert L. (1994, CA 7) 1994 US App LEXIS 2870, Robertson v. Alexander Grant & Co.,
798 F.2d 868 (5th Cir. 1986), cert. den. 479 U.S. 1089, 107 S.Ct. 1296 (1987), In re Kaplan, 162 B.R. 684 (Bkrtcy.
E.D. Pa. 1993), In Re Blais, (1994, BC SD FL) 1994 Ban kr Lexis 1427, and Fugarino v. Hartford Life and Accident
Insurance Company, 969 F.2d 178 (6th Cir. 1992).
        148
              ―Qualified‖ means qualified under IRC §401(a).
        149
              ERISA §3(2)(A).

        150
              DOL Reg. §2510.3-2(d).
        151
            Co mpare Taft, Robert In re, (1995, DC NY) 184 BR 189 and Henderson In re, (1993, Bktcy Ct MS) 167
BR 67 [SEPs not ERISA plans], with Schlein In re, (1993, CA11) 8 F3d 745, 17 EBC 2020 and Garratt v. Walker
121 F.3d 565 (10th Cir., 1997), 21 EBC 1444, 1997 US App Lexis 19291 [SEP is governed by E RISA].
        152
            Herring v. Blakeley, 385 S.W.2d 843 (Tex. 1965); Cearley v. Cearley, 544 S.W.2d. 661 (Tex. 1976);
Taggart v. Taggart, 552 S.W.2d 551 (Tex. 1977); Allard v. Frech, 754 S.W.2d (Tex. 1988).

        153
              Berry v. Berry, 647 S.W.2d 945 (Tex. 1983); Grier v. Grier, 731 S.W.2d 931 (Tex. 1987).


                                                  -Page 88 of 195-
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spouse‘s interest in the participant‘s qualified plan or IRA —unless preempted by federal law—
will pass under the spouse‘s will 154 (if the spouse has a will), either as a specific gift if me ntioned
specifically, or as a part of the residuary estate if not mentioned at all. If there is no will, the
interest will pass under the laws of intestate succession. 155 In light of these Texas Supreme Court
cases, it is safe to say that the state law characterization issue is fairly well settled.
Having determined that an interest in a qualified plan may be community property, we might
wish to address here the questions of (a) what value to assign the interest and (b) how to
apportion, between the community and separate property estates, interests acquired in part while
unmarried and in part while married. In the case of an IRA or individual account plan, the value
of the nonparticipant‘s community property interest at any point in time will be roughly half the
value of the then existing account balance if fully vested and if the spouses have been married
since the inception of the plan. However, valuing an interest in a defined benefit plan under any
circumstances, valuing the benefits of a defined contribution plan where the parties have not
been married throughout the period benefits accrued, and valuing interests subject to forfeiture,
are matters far too recondite for consideration here, and accounts, in part, for the fact that
pension and divorce lawyers charge such high fees. It will have to suffice to say that the law is
somewhat unsettled (read, just short of unintelligible), despite the best of efforts, 156 and on this
subject reasonable (and occasionally unreasonable) minds can and do differ.
                                              *       *        *        *
The Distinction Between Probatate and Nonprobate Assets Can be a Source of Confusion For the
Unitiated
A probate assets is property that passes by will or intestacy at the death of the legal owner. a
nonprobate asset is one that passes by contract or by beneficiary designation. Life insurance
proceeds and qualified plan benefits are two common types of nonprobate assets. The
participant‘s interest in a qualified plan or IRA passes by beneficiary designation; whereas, the
nonparticipant spouse‘s community property interest in the participants plan or IRA (if any)
usually passes, if at all, under the will or the laws of intestate distribution, upon the death of the
nonparticipant spouse.
The Participant’s Inte rest is a “Nonprobate Asset.” The interest that a participant has in a
qualified plan or IRA that can be transferred at death is commonly referred to and denominated
by lawyers as a ―nonprobate asset.‖ This term is used because the interest passes by beneficiary
designation rather than by will, in much the same manner as the proceeds of a life insurance
contract pass on the death of the insured. True, the assets can become a de facto probate asset if


         154
               Allard v. Frech, 754 S.W.2d 111 (Tex. 1988).
         155
             In Texas, if a nonpartici pant decedent dies wi thout a will, the surviving spouse (the participant) will
inherit the nonparticipant‘s community property, including any community property interest in the participant‘s plan
(or IRA), if the decedent either had no children or all of the decedent‘s children are the children of the surviving
spouse (the participant). However, if at least one survi vi ng child of the nonparticipant is not the chil d of the
survi vi ng spouse (the participant), then the decedent‘s surviving spouse (the participant) retains one-half of the
community property and, absent ERISA preemption, the chil dren (actually, the descendants per stirpes)
collecti vely di vi de the decedent ’s remaining one -half of the communi ty.

         156
               Berry v. Berry, 647 S.W.2d 945 (Tex. 1983); Grier v. Grier, 731 S.W.2d 931 (Tex. 1987).


                                                   -Page 89 of 195-
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the decedent‘s estate is named as the beneficiary, but, absent that special situation, an attempt by
the participant or IRA owner to dispose of death benefits under a will would be as ineffectual as
an attempt by the insured to do the same with insurance proceeds where someone else was the
named beneficiary. 157
The Nonparticipant’s Interest is a “Probate Asset.” Ironically, the community property
interest of the nonparticipant in the surviving spouse‘s plan or IRA is a ―probate asset‖ —
meaning that it passes by will or intestacy, in the absence of ERISA preemption. This is true, by
the way, even with life insurance, where the insured is not the decedent; though in that case, the
value of the interest passing under the uninsured spouse‘s will is limited by the cash value (or,
perhaps, by the value of the unearned premium in the case of a term policy).
If not altogether mind boggling, it may at least strike some as anomalous that benefits payable on
account of the participant‘s death are nonprobate assets that can pass only by beneficiary
designation or under the terms of the plan —but in any event pass outside of probate and outside
of the will—, whereas the interest of the nonparticipant is a probate asset passing under a will or
the laws of intestate succession.
Occasionally, one will find an IRA contract that gives the nonparticipant spouse death
beneficiary designation rights. Perhaps this makes the nonparticipant a party to the contract and
is both permissible and is desirable, assuming that the IRC allows someone other than the IRA
owner to be a party to the IRA and that under state law the interest would be converted to a
nonprobate asset. My opinion is that neither the IRS nor state law is an impediment in this
context, but my opinion is not without at least some reservation.
                                              *         *        *        *
Death Benefits Payable On Account of the Participant’s Death Will Be Subject to Special
Spousal Benefit Rules, if the Plan is Subject to ERISA. Strictly speaking, death benefits
payable on account of a participant‘s death will be governed by the terms of the plan, whether or
not the plan is subject to ERISA, as a matter of contract law; but if the plan is a qualified plan, it
will contain the spousal benefit rules of REA. 158 REA requires a qualified plan, depending on
its nature and terms, to either require (1) that the nonparticipant surviving spouse be the
beneficiary of the participant’s entire re maining undistributed interest if the participant
dies before the inte rest is entirely distributed; or (2) that the spouse be guaranteed the right
to an annuity for life. The spouse may waive this right if certain detailed procedures are
followed. Absent a qualified waiver, the annuity must either be in the form of a Qualified
Preretirement Survivor Annuity (QPSA), or in the form of a Qualified Joint and Survivor
Annuity (QJSA), depending on whether the participant dies before retirement. 159
In a defined benefit plan, the QJSA is an annuity for the life of the participant with a survivor
annuity for the life of the spouse which is not less than 50% (and is not greater than 100%) of the


         157
               MacLean v. Ford Motor Co., 831 F.2d 723 (7th Cir. 1987).

         158
               The Retirement Equity Act of 1984 (P.L. 98-397, Aug. 23, 1984).
         159
            ―Retirement‖ here is a term of art, the full exp licat ion of which will not be undertaken at this juncture. It
means different things in different contexts. Here, I use the term ―ret irement‖ to mean the first day of the first period
for which the Plan makes a d istribution.


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amount of the annuity that is payable during the joint lives of the participant and the spouse, and
that is the actuarial equivalent of a single annuity for the life of the participant. 160 The QJSA in a
defined contribution plan subject to REA is defined similarly to that of a QJSA in a defined
benefit plan, although the annuity to be provided will be whatever can be purchased with the
participant's nonforfeitable account balance.
In a defined benefit plan, the QPSA is defined as an annuity payable to the surviving spouse in
an amount that is not less than the amounts that would be payable as a survivor annuity under the
QJSA.161 In the case of a defined contribution plan, the IRC contains a special rule that defines
the QPSA as an annuity for the life of the surviving spouse having a value of no less than one-
half the participant's nonforfeitable account balance under the plan, determined at date of
death. 162
The survivor annuity rules apply to all qualified plans except for certain profit sharing plans and
their close kindred (stock bonus plans, 401(k) plans, ESOPs, etc.) that are not subject to the
minimum funding requirements of IRC §412. 163 In order for a profit-sharing type plan to be
exempt, the plan must provide that in the absence of a qualified waiver, the participant's entire
undistributed nonforfeitable account balance under the plan must be payable in full to the
participant's surviving spouse on the death of the participant. 164 Note, however, that under the
profit sharing type plan exception, there are no restrictions on benefits paid out during the
participant’s life!
These rules apply without regard to whether the benefit involved is community property. In a
defined contribution plan subject to the joint and survivor annuity rules, the QPSA need only be
half the participant‘s account balance, and unless the plan provides otherwise, the other half can
be left to someone other than the spouse. Assuming that we can agree that the half that goes to
the spouse represents the spouse‘s community property interest, this works out rather nicely.
What will a court do, however, if the spouse gratefully accepts the benefits guaranteed by
ERISA, and then claims half of the half remaining? This sort of overreaching has been tried, but
failed. 165 Properly argued, the survivor would have to assert the ―fraud on spouse‖ doctrine, and
it is doubtful that a court would be sympathetic. A good beneficiary designation would provide
that ―the interest passing to my spouse under this designation shall be satisfied first out of my
spouse‘s community one half interest (if any) in my death benefits.‖
                                            *        *       *        *




        160
              IRC §417(b).
        161
              IRC §417(c)(1)(A).
        162
              IRC §417(c)(2).

        163
              IRC §401(a)(11)(ii).
        164
            The benefit need not be payable as an annuity, however. The specific requirements for exempt ion from
the survivor annuity rules are set forth in IRC § 401(a)(11)(B).

        165
              See Employee Savings Plan of Mobil Oil Corp. v. Geer, 535 F. Supp. 1052, 1055 (S.D. NY 1982).


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If the Plan is Not Subject to ERISA, the Participant Can Generally Provide That His Or
Her Death Benefits Under The Plan (Or IRA) Will Pass To Anyone, Within Limits, Unless
Land v. Marshall 166 is Extended to Apply He re. Under Texas law, a spouse can give away
during life both halves of the community property subject to the spouse‘s sole management and
control. However, a spouse does not have the power to dispose of the survivor's half of the
community by will, without consent. A nonprobate disposition is treated in the same manner as a
lifetime gift, perhaps because it is not made by will, or perhaps because the gift is considered
made during life, subject to revocation at death. In any event, it is well established in Texas that
a spouse can make a nonprobate disposition of both halves of the spouse‘s sole management
community property by naming someone other than the spouse as the beneficiary, within limits.
Common examples include a gift of death benefits under a life insurance contract or a qualified
plan or IRA.
Property subject to a spouse‘s sole management and control includes property that would have
been the spouse‘s separate property if the spouse were not married, and specifically includes
earnings and wages. Accordingly, a participant’s community inte rest in a qualified plan or
rollover IRA, having been acquired in connection with employment and as compensation,
will almost always be sole management community property.
The Fraud on the Spouse Doctrine. The ability to give away during life or by nonprobate
disposition both halves of community property subject to the donor‘s sole management and
control is limited by the doctrine of ―fraud on the spouse.‖ If, by reason of the size of the gift in
relation to the total size of the community estate, the adequacy of the estate to support the other
spouse, and the relationship of the donor to the donee, the gift constitutes constructive fraud, the
burden will be on the donor to prove that the gifts of his share of the community property are
fair, otherwise the gift will be set aside. 167 In most cases, but not always, if the donee is a related
party, the disposition will be allowed to stand. If the donee is an unrelated party, the gift will
usually be set aside.
        ―The ‗fraud on the community‘ or ‗fraud on the spouse‘ doctrine is a judicially
        created concept based on the theory of constructive fraud. Givens v. Girard Life
        Insurance Company of America, 480 S.W.2d 421, 425 (Tex. Civ. App.--Dallas
        1972, writ ref'd n.r.e.). Constructive fraud is the breach of a legal or equitable
        duty which violates a fiduciary relationship, as exists between spouses. A
        presumption of constructive fraud arises where one spouse disposes of the other
        spouse's one-half interest in community property without the other's knowledge or
        consent. See Redfearn v. Ford, 579 S.W.2d 295, 296-97 (Tex. Civ. App.--Dallas
        1979, writ ref'd n.r.e.). The burden of proof is then on the disposing spouse or his
        donee to prove the fairness of the disposition of the other spouse's one-half
        community ownership. Estate of Korzekwa v. Prudential Insurance Company of
        America, 669 S.W.2d 775, 777 (Tex. App.--San Antonio 1984, writ dism'd);


        166
              Land v. Marshall, 426 S.W.2d 841 (Tex. 1968).

        167
           Marshall v. Marshall, 735 S.W.2d 587 (Tex. App.-Dallas 1987, no writ history to date); Horlock v.
Horlock, 533 S.W.2d 52, 55 (Tex. Civ. App.-Houston [14th Dist.] 1975 writ ref'd n.r.e.); Carnes v. Meador, 533
S.W.2d 365 (Tex. Civ . App.-Dallas 1975, writ ref'd n.r.e.); and Tabassi v. NBC Bank -San Antonio, 737 S.W.2d 612
(Tex. App.-Austin 1987 no writ history to date). See also 29 Bay lor Law Review 608.


                                                  -Page 92 of 195-
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       Redfearn, 579 S.W.2d at 297; Givens, 480 S.W.2d at 425. Where the donee or
       beneficiary is related to the disposing spouse or decedent, the courts look to three
       factors in determining the fairness of the disposition: (1) the relationship of the
       beneficiary to the decedent; (2) whether special circumstances tend to justify the
       gift; and (3) whether the community funds used were reasonable in proportion to
       the remaining community assets. Givens, 480 S.W.2d 421, 426, cited with
       approval in Great American Reserve Insurance Co. v. Sanders, 525 S.W.2d 956,
       958-59 (Tex. 1975); Redfearn, 579 S.W.2d at 297. We hold that the disposing
       spouse or his donee has the burden to prove these three factors in order to rebut
       the presumption of constructive fraud.‖168
Even if the nonprobate disposition would be in fraud on the spouse, if the spouse is left anything
at all under the will, the spouse could be put to an election so that benefits under the will would
be eliminated if the fraud on spouse doctrine were to be asserted.
The Illusory Trust Doctrine—Land v. Marshall.. In 1968 the Texas Supreme Court decided a
case 169 that enunciated a principal which, if extended, could wreak havoc in all sorts of areas.
Fortunately, the case has largely been ignored outside of situations fitting the exact same facts,
and in 30 years has only been cited once in this State. In Land v. Marshall, 426 S.W.2d 841
(Tex. 1968), the husband established a revocable grantor trust during life. At death, the entire
community estate was to continue to be held in trust for the benefit of the wife. Because the wife
was a beneficiary of the trust following the husband‘s death, the doctrine of ―fraud on the
spouse‖ did not apply. The Court, nevertheless, held that the trust was illusory.
       The central question in this case arises out of an apparent conflict in the law and policy of
       our community property system. The husband, unde r Texas law, has managerial
       powe rs over the wife's community interest. However, the hus band's managerial
       powe rs do not extend beyond his death so as to allow the husband to dispose of the
       wife's community interest by his will. The wife, for that reason, has the right to elect to
       take under or against her husband's will when he undertakes to dispose of her community
       share upon his death. Thus, the question is whether the husband can accomplish by inter
       vivos trust what he could not do by a will. The wife contends that her husband could not
       control the disposition of her community share by the trust instrument.
       Conversely, the proponents of the trust point out many situations in which it is sound
       management by the husband to create an inter vivos trust of the wife's community interest
       even though its disposition is effected upon his death. We believe the paradox can be
       resolved by the doctrine of illusory trusts. Under the doctrine, the husband has the
       powe r to create an inter vivos trust as a part of his managerial powers over the
       wife's share; but whe n her community share is involved, the wife can require the
       trust to be real rather than illusory, genuine rather than colorable. 170




       168
             Jackson v. Smith, 703 S.W.2d 791 (Tex. Civ. App.-Dallas 1985, no writ) pp. 795-796.
       169
             Land v. Marshall, 426 S.W.2d 841 (Tex. 1968).

       170
             Land v. Marshall, 426 S.W.2d 841 (Tex. 1968).


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Because the entire interest was left in trust for the wife, the Court set the entire trust aside, since,
in the context, to set only half aside would have defeated the apparent intent of the grantor.
No one and no case, so far as I know, has ever suggested that the Land v. Marshall illusory trust
doctrine applies to IRAs, though on the surface it would appear that it could, and the decision has
been cited in only one case in the 30 years since it was decided. 171 There are perhaps reasons for
this.
Land v. Marshall has been frequently criticized by the commentators, and there a re several
factors that militate against its extension to IRAs or other forms of nonprobate dispositions. First,
the case was decided prior to the advent of the Family Code, at a time when the husband had sole
control and management over the entire community, no matter the source of the funds. The
Family Code has changed this rule, so that a husband can no longer divest a wife, by use of a
revocable trust, of property acquired by the wife‘s earnings. To the extent that Land v. Marshall
was decided on public policy grounds, that foundation is no longer as sure as it was at the time.
Two other legislative changes that have occurred since Land v. Marshall might arguably change
the outcome of that case were it decided today, or at least would be persuasive that the doctrine
not be extended. The Texas Trust Code now contains language that explicitly sanctions self-
settled grantor controlled revocable trusts in Texas. 172 Further, the enactment of Chapter XI of
the Probate Code ―Nontestamentary Transfers,‖ also weake ns the public policy arguments
otherwise supportive of the case —the legislature having the primary jurisdiction to determine
what is or is not the public policy.
         Sec. 450. Provisions for Payment or Transfer at Death.
         (a)      Any of the following provisions in an insurance policy, contract of employment,
         bond, mortgage, promissory note, deposit agreement, employees' trust, retirement
         account, deferred compensation arrangement, custodial agreement, pension plan, trust
         agreement, conveyance of real or personal p roperty, securities, accounts with financial
         institutions as defined in Part 1 of this chapter, or any other written instrument effective
         as a contract, gift, conveyance, or trust is deemed to be nontestamentary, and this
         code does not invalidate the instrume nt or any provision:
                    (1)    that money or other benefits theretofore due to, controlled, or owned by a
                    decedent shall be paid afte r his death to a person designated by the
                    decedent173 in either the instrument or a separate writing, including a will,
                    executed at the same time as the instrument or subsequently;



         171
           Westerfeld v. Huckaby, 462 S.W.2d 324 (Tex. Civ. App.— Houston [1st Dist.] 1971, affm‘d, 474 S.W.2d
189 (Tex. 1972)).

         172
               Tex. Trust Code §112.033.
          173
              Query whether or not §450 could be construed to apply to the nonparticipant (NPS) where the NPS is not
a party to the contract. §450(a)(1) states that "benefits . . . due to a . . . decedent . . . shall be paid after his death to a
person designated by the decedent in a . . . will . . . " A co mmon sense reading would be that the decedent referred to
is the decedent who is the party to the contract. On the other hand, "decedent" is not defined, and it is technically
true that the NPS is a decedent and that there are benefits under the contract or account that are "due to" (in some
sense) "the decedent" under state law if the benefits are co mmun ity property.


                                                      -Page 94 of 195-
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               (2)    that any money due or to become due under the instrument shall cease to
               be payable in event of the death of the promisee or the promisor before payment
               or demand; or
               (3)     that any property which is the subject of the instrument shall pass to a
               person designated by the decedent in either the instrument or a separate writing,
               including a will, executed at the same time as the instrument or subsequently.
       (b)    Nothing in this section limits the rights of creditors unde r other laws of this
       state.
       (c)     In this section:
                                      *        *       *       *
               (2)   "Individual retirement account" means a trust, custodial arrangement,
               or annuity under Section 408(a) or (b), Internal Revenue Code of 1954 (26
               U.S.C.A. Sec. 408 (1986)).
               (3)    "Retirement account" means a retirement-annuity contract, an
               individual retire ment account, a simplified employee pension, or any other
               retirement savings arrangement.
                                      *        *       *       *
       Added by Acts 1979, 66th Leg., p. 1756, ch. 713, Sec. 31, eff. Aug. 27, 1979. Subsec. (a)
       amended by Acts 1987, 70th Leg., ch. 94, Sec. 1, eff. Aug. 31, 1987; Subsec. (c) added
       by Acts 1987, 70th Leg., ch. 94, Sec. 2, eff. Aug. 31, 1987. Subsection (a) amended by
       SB 506, enacted June 20, 1997, effective September 1, 1997.
Land v. Marshal does not impose a facts and circumstances test. Therefore, unless §450
overrules Land v. Marshal in the case of a trusteed IRA, then the statute would be virtually
meaningless in the case of a married participant. And this hardly seems likely. On the other hand,
I would not go so far as to say that the statute eliminates the fraud on the spouse doctrine, since
that is a subjective test. A defrauded spouse would be a creditor or sorts and ―nothing . . . [under
the statute] limits the rights of creditors under other laws of this state.‖ I take a moderate position
on this issue, and would argue that by declaring that an IRA is a nonprobate asset §450 overrides
the illusory trust doctrine if it would otherwise be applicable, but leaves the fraud on the spouse
doctrine intact. We shall see.
At the very least, I would expect that the payor (IRA-trustee) can rely on 450 as giving the
married participant the prima facie power to designate a death beneficiary with respect to both
halves of the community. If the spouse has any rights in proceeds that are payable to another
distributee, these rights would have to be established in an action against the distributee rather
than against the payor.
Finally, it is worth noting that in reaching its opinion the Court prominently cited Newman v.
Dore, 275 N.Y. 371, 9 N.E.2d 966, 112 A.L.R. 643 (1937), a case that had been repealed by
statute in New York where the case was decided, a point overlooked by the Texas Court.
                                      *        *       *       *




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If The Plan Or IRA Is Not Subject To ERISA, The Nonparticipant Spouse Can Freely
Dispose Of One-Half Of The Community Property Inte rest Under The Plan Or IRA. 174 The
Texas Supreme Court in the seminal decision of Allard v. Frech has made it clear that under state
law the nonparticipant can transfer by will or intestate succession his or her community property
interest in the participant spouse‘s retirement plan. If the transfer is back to the participant, life is
simplified. If, however, the interest is transferred to persons other than the participant, there are
some pesky tax problems to consider.
Who is Taxed on What When the Nonparticipant’s Interest is Distributed to Someone
Other than the Participant During the Participant’s Lifetime? Obviously, if the beneficiary
of the nonparticipant‘s interest is not the participant, the situation is awkward at best. A few of
the more obvious questions are: (1) When must the interest be paid out? (2) When the interest is
paid out, who owes the income tax on it? (3) When the interest is paid out, who pays the
premature distribution excise tax on it, if any is due? There are no clear answers to these
questions, and in any event I won‘t fully explore them here; but I will, nevertheless, hazard an
opinion.
(1)     I don‘t think there is any time limit per se on when the nonparticipant‘s interest must be
paid out. It would have to be paid out immediately if demand were made, but in the absence of a
demand by the nonparticipant‘s beneficiaries or executor, it ought to be paid out when the parties
agree. The IRC §401(a)(9) minimum required distribution (MRD) rules will require that
distributions be made sooner or later, but I believe that the fact that the nonparticipant‘s estate
has an interest will be largely (though perhaps not completely) irrelevant in determining the time
and amounts of the MRDs.
(2)     There is almost no law on the question of who is taxed on the income when a distribution
is made from a living participant‘s IRA to the estate or beneficiaries of predeceased spouse,
whose interest was acquired as a result of the community property laws. Presumably, if IRC
§408(g) were literally applied, the participant would have to foot the income tax bill, although an
equitable right of recovery might also obtain. However, the Service has held in a private letter
ruling that beneficiaries owe the income tax on amounts distributed to them during the life of the
participant/IRA owner, and that the statement found in IRC §408(g) that the IRA rules ―shall be
applied without regard to any community property laws,‖ relates solely to t he deduction rules
found in IRC §219. 175 Like Alice in Wonderland, sometimes words mean what the IRS says they
mean.
(3)     The exception to the 10% premature distribution tax under §72(t)(2)(A)(i), for
distributions (prior to age 59 1/2 ) made on account of death, does not apply here because the death
referred to is that of the employee. However, the tax does not apply unless the distribution is
includible in gross income. 176 Further, the tax is on amounts received by the taxpayer. Therefore,
if the tax applies at all, it is arguable that it is owed by the beneficiary of the nonparticipant
spouse‘s interest.



        174
              Allard v. Frech, 754 S.W.2d 111 (Tex. 1988).
        175
              PLR 8040101. See also, Rodney Powell, et. al. v. Commissioner, 101 T.C. 32 (1993).

        176
              IRC §72(t)(1).


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                                             *        *        *        *
If the Plan is Subject to ERISA, the Nonparticipant Spouse May Be Unable to Transfer His
or Her Community Property Interest in the Participant’s Plan. If the issue were solely one
of Texas law, the spouse (the nonparticipant spouse) of an IRA owner or qualified plan
participant would be able to dispose of that interest on the death of the nonparticipant spouse.
However, if the qualified plan is subject to ERISA, federal law will preempt the spouse’s
powe r of testamentary disposition.
The problem is not with state law but with federal law, which is to say that the problem is with
ERISA §514(a), which provides:
       Except as provided in subsection (b) of this section, the provisions of this title and title IV
       shall supersede any and all State laws insofar as they may now or hereafter relate to any
       employee benefit plan described in section 4(a) and not exempt under section 4(b).
ERISA §206(d)(1) is also a problem—
       Each pension plan shall provide that benefits provided under the plan may not be
       assigned or alienated. [Emphasis added.]
Having lost the Civil War, we are not in much of a position to question the authority of Congress
in matters governing interstate commerce to enact such a law. But we can and do argue
frequently about what the statute means, the term ―relate to‖ being the most common bone of
contention. Intellectuals will argue that everything relates to everything else, but as a
metaphysical interpretation of the term deprives it of any meaning, 177 the Supreme Court has
been more or less forced to make up the rules as it goes along, with the result that the question of
whether or not ERISA preemption will apply in a given instance is often a matter o f pure guess
work, if not happenstance. (As the poet says ―[I]t‘s got no signs or dividing lines and very few
rules to guide.‖178 )
Despite the prolixity of the preemption cases, in which underlying principals are
sanctimoniously, vigorously, and (in my opinion) often absurdly asserted as justifying the result,
the plain truth is there are no rules so clear as to cause the outcomes of many of the preemption
cases to be predictable. This is amply illustrated by the inordinate number of five to four
Supreme Court decisions involving ERISA preemption. One case, in particular —another five to
four decision— is directly concerned with the issue at hand, and it is to this case that we will
now turn our attention: Sandra Jean Dale Boggs v. Thomas F. Boggs, et al. 179 But first some
background.
The Rules Governing the Division of The Community Property Interest of a
Nonparticipant Spouse On Divorce Are Now Provided By ERISA and the IRC. Until 1986,




       177
             Like Kant, the Court is perhaps justly skeptical of metaphysical reasoning.
       178
             Robert Hunter, A Box of Rain.

       179
             Boggs v. Boggs, 117 S.Ct. 1754, 138 L.Ed.2d 45, 65 U.S. L.W. 4418 (1997).


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there was controversy in most all of the community property states 180 regarding the division on
divorce of pension benefits subject to ERISA. §204(b) of the 1984 Retirement Equity Act, P. L.
98-397 amended ERISA (by adding §206(d)(3)) and the Internal Revenue Code (by adding IRC
§414(p)) to provide that pension benefits could be awarded in a domestic relations action, if
otherwise awardable under state law, despite the federal preemption provision of ERISA
§514(a), if certain procedures —spelled out clearly(?) in two and a half pages of fine print— are
followed. Thus was born the QDRO, the qualified domestic relations order. State and federal
courts will continue to stay busy for the foreseeable future, interpreting §414(p) and wrestling
with the proper methodology for valuing pension benefits, but we are not going to concern
ourselves overmuch with these issues here. Dividing pension benefits in divorce is now more of
a question of applying the law than it is of figuring out what it is.
At the beginning of 1997, the last major unanswered question of law remaining in this area was
whether state probate laws affecting a participant‘s interest in a plan were preempted, assuming
the plan was subject to ERISA. In this area there is no federal law similar to the QDRO
procedures. Prior to the Supreme Court decision in Boggs, all we had to go by was the
preemption section of ERISA, as variously interpreted by conflicting circuit courts.
The Boggs Case. In the late spring of 1997, the United States Supreme Court, in Boggs v.
Boggs, 181 gave us some needed answers. Whether the answers given raise more questions than
they solved remains to be seen. Before discussing the Boggs decision in any length, a few brief
remarks regarding the history leading up to the decision are in order. These remarks will be kept
very brief, because now that the Supreme Court has spoken, most of what went on in the past
leading up to the decision is of academic interest only. However, a quick review of some of the
cases preceding Boggs should be enlightening.
Employee Savings Plan of Mobil Oil Corp. v. Geer. One of the earliest cases recognizing that
the nonparticipant spouse had a community property interest in the participant‘s plan at death
was a 1982 New York Federal District Court case, Employee Savings Plan of Mobil Oil Corp. v.
Geer.182 The case is interesting for a number of reasons, chief among which is the spouse‘s legal
theory as to why she was entitled to three-quarters of the community benefit rather than half. The
decedent —in this case the participant— left half of his pension plan benefits to his wife, and the
other half to the children. The wife (who can fairly be described as grasping) maintained that she
was entitled (a) first of all to her one- half community property interest, and (b) secondly, to the
one-half that would then pass by the husband‘s beneficiary designation —―thank you so much‖!
Of course, under Texas community property law, since the husband died first, his interest would
be a nonprobate asset, and in the absence of fraud, he had the power to dispose of the wife‘s half.
Further, even if he did not have this power, it would certainly be overreaching to leave the wife
three- fourths of the benefit. The case did not dispose of the spurious state law claims, but did
hold, in denying a motion for summary judgment, that ERISA did not preempt the mat ter.



        180
              Texas, California, New Mexico, Arizona, Louisiana, Washington, Idaho, Nevada, and to a limited extent
Oklaho ma.
        181
              Boggs v. Boggs, 117 S.Ct. 1754, 138 L.Ed.2d 45, 65 U.S. L.W. 4418 (1997).

        182
              Employee Savings Plan of Mobil Oil Corp. v. Geer, 535 F. Supp. 1052, 1055 (S.D. NY 1982).


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ERISA preemption in this context could still be an issue in the future, because here the
participant predeceased the nonparticipant spouse, rather than the other way around as in Boggs.
MacLean v. Ford Motor Co. As to the issue of whether or not ERISA preempts the participant‘s
state law rights to dispose of an employee pension benefit, we have the case of MacLean v. Ford
Motor Co.183 This case involved the testamentary rights of a participant in a plan to direct, by
will, where his death benefits were to go. The court took for granted that state law conferred
upon the decedent the power to do this, but found that Federal preemption prevented state law
from controlling. Accordingly, the decedent's death benefits under the Ford Motor Company
plan passed in accordance with the terms of the plan, rather than in accordance with the state
testamentary transfer act.
Allard v. Frech. The first case in Texas to deal with the nonparticipant‘s interest in a private
retirement plan, where the nonparticipant spouse predeceased the participant, was Allard v.
Frech.184 This case, which arose in Fort Worth, held that half of the husband's General Dynamics
pension passed under the wife's will to a trust for the benefit of the couple's adult children.
ERISA preemption was not placed in issue before the court, and so after this case, though we
now had a pretty good idea what the state law on the subject was, we really didn‘t have any idea
whether ERISA would have preempted the award of benefits to the children, since it was not
argued.
Ablamis v. Roper. The next significant case to wrestle prominently with the issue arose in the
Ninth Circuit, Ablamis v. Roper. 185 The 9th Circuit has squarely held that in a fact pattern
virtually identical to Allard the California community property interest of the predeceasing
nonparticipant spouse in the participant‘s plan was not a probate asset because ERISA preempted
state law. Finally —it was only a matter of time—, the Fifth Circuit was faced with the
question. 186 The Fifth Circuit reached a conclusion contrary to the Ninth. This case was Boggs v.
Boggs, a case that made its way eventually to the United States Supreme Court where the Fifth
Circuit was reversed in 1997.
The Boggs Facts. This case was originally decided by applying Louisiana law, since the
decedent and his wives lived and (with the exception of wife two who is still living) died in
Louisiana. The decedent, Isaac Boggs, was an employee of South Central Bell from 1949 until
he retired in 1985. Isaac Boggs was married to Dorothy Boggs when he began employment until
Dorothy‘s death in 1979. Three children were born of this marriage. Dorothy‘s will gave her
husband a usufruct interest (similar to a life estate) in two-thirds of her estate, with the remainder
to go to her three sons. Mr. Boggs married Sandra Boggs in 1980, and died in 1989. In 1985, Mr.
Boggs received a distribution of a portion of his retirement plan benefits, which he rolled over to
an IRA. The opinion does not indicate whether this portion of the plan was subject to the joint
and survivor annuity rules. If it was, then Sandra must have waived her rights, or the proceeds


         183
               MacLean v. Ford Motor Co., 831 F.2d 723 (7th Cir. 1987).

         184
               Allard v. Frech, 754 S.W.2d 111 (Tex. 1988).
         185
               Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991).
         186
               Sandra Jean Dale Boggs vs. Thomas F. Boggs, Harry P. Boggs and David B. Boggs, 82 F.3d 90 (5th Cir.
1996).


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could not have been rolled over into an IRA. Of course, the IRA, presumably, would not have
been subject to ERISA or to the joint and survivor annuity rules, in any event. Another portion of
the Bell plan was distributed in the form of AT&T stock and a life insurance policy naming
Sandra as the beneficiary. Finally, Isaac was receiving a joint and survivor annuity, to which
Sandra succeeded at the time of his death.
The 5th Circuit Decision. The 5th Circuit, like the majority of the Supreme Court, made no real
distinction between any of these benefit forms. This may have been appropriate, since when
Dorothy Boggs died in 1979, Isaac‘s benefits were no t in pay status. So, the form that the benefit
payments actually took may have been irrelevant to the analysis of whether the Boggs children
had rights in the benefits to begin with.
It is important to note that, unlike Ablamis, 187 this was not an action brought against the plan
itself. Rather, the action was in the nature of an accounting against Sandra. One consequence of
this posture was that it allowed the Boggs children to contend that the court lacked jurisdiction to
decide the case. The court dispensed with this argument summarily. However, the Fifth Circuit
did conclude that the children were entitled to the benefits in which their mother had a state law
community interest, despite the preemption and the anti-alienation provisions of ERISA. The
United State Supreme Court, however, reversed.
Is Boggs Important? As recited in the facts of the Supreme Court opinion, ―The nine
community property States have some 80 million residents, with perhaps $1 t r ill io n [that‘s with a
―t‖] in retirement plans.‖ A billion here and a billion there, and pretty soon you‘re talking about
real money. 188
The Supreme Court Decision. Five of the nine judges squarely held that Dorothy Boggs had no
power to transfer at death her interest in her husband‘s undistributed benefits under a pension
plan subject to ERISA. To the extent state law would have provided a contrary result, it is
preempted. Further, citing Free v. Bland, 189 the state of Louisiana could not make an end run
around the federal rule by seeking an accounting from Isaac Boggs‘ beneficiary, his new wife
Sandra.
Free v. Bland involved the right of a surviving spouse to succeed to an interest under a U.S.
Savings bond held in joint tenancy with right of survivorship. At the time the case was decided,
Texas law did not recognize joint and survivorship provisions between husband and wife in
community property. The Supreme Court held that Texas law was preempted in this regard in the
case of survivorship rights in United States Savings Bonds. Furthe r —and this is the point—,
the effect of granting survivorship rights could not be circumvented by ordering that the
community be reimbursed out of the owner’s separate estate.190




         187
               Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991).

         188
               A corruption of a statment of form Senator Everett Dirkson regarding budget appropriations, adjusted for
inflation.
         189
               Free v. Bland, 369 U.S. 663, 669.

         190
               Free v. Bland, 369 U.S. 663, 668-670, 82 S.Ct. 1089, 8 L.Ed .2d 180 (1962).


                                                    -Page 100 of 195-
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       Notwithstanding this [survivorship] provision, the State [Texas] awarded full title to the
       co-owner but required him to account for half of the value of the bonds gto the decedent‘s
       estate. Viewed realistically, the State has rendered the award of title meaningless. Making
       the bonds security for the payment confirms the accuracy of this view. If the State can
       frustrate the parties‘ attempt to use the bonds‘ survivorship provision through the simple
       expedient of requiring the survivor to reimburse the estate of the deceased co-owner as
       matter of law, the State has interfered directly with a legitimate exercise o f the power of
       the Federal Government to borrow money. 191
The Seven to Two Decision. Two of the otherwise dissenting judges (Rehnquist and Ginsburg)
agreed with the five majority Justices to the extent that Sandra (the second wife) had rights
guaranteed under ERISA as a result of the Retirement Equity Act (REA). 192 Therefore, they
joined in Part III of the majority opinion, the part concerned solely with the surviving spouse‘s
REA rights:
       Even a plan participant cannot defeat a nonparticipant surviving spouse's statutory
       entitlement to an annuity. It would be odd, to say the least, if Congress permitted a
       predeceasing nonparticipant spouse to do so. Nothing in the language of ERISA supports
       concluding that Congress made such an inexplicable decision.
Point well taken! It is probable that the only reason the other two Justices (Breyer and O‘Connor)
did not join in Part III is that, under the facts, there was enough money involved so that Sandra
(Wife number two) could have received her full undiminished annuity under REA, even if forced
to give up Dorothy‘s portion out of the remainder. It would be astonishing if state community
property law could effectively place a surviving spouse in an overall worse position than that
minimally mandated by REA, without being preempted. In order to give effect to state law in this
context, one must be able to say (presumably with a straight face) that even if state law deprives
a surviving spouse of Congressionally mandated guaranteed benefits, the law does not ―relate‖ to
the plan that guaranteed those benefits.
The Five to Four Decision. In the words of the Court:
       Beyond seeking a portion of the survivor's annuity, respondents claim a percentage
       of: the monthly annuity payme nts made to Isaac Boggs during his retire ment; the
       IRA; and the ESOP shares of AT&T stock. As before, the claim is based on Dorothy
       Boggs' attempted testamentary transfer to the sons of her community interest in Isaac's
       undistributed pension plan benefits. Respondents argue further--and somewhat
       inconsistently--that their claim again concerns only what a plan participant or beneficiary
       may do once plan funds are distributed, without imposing any obligations on the plan
       itself. Both parties agree that the ERISA benefits at issue here were paid after
       Dorothy's death, and thus this case does not present the question whether ERISA
       would pe rmit a nonparticipant spouse to obtain a devisable community property
       interest in benefits paid out during the existence of the community between the
       participant and that spouse.



       191
             Free v. Bland, 369 U.S. 663, 668-670, 82 S.Ct. 1089, 8 L.Ed .2d 180, 185 (1962).

       192
             The Retirement Equity Act of 1984 (P.L. 98-397, Aug. 23, 1984).


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                                      *       *        *       *
       We conclude the sons have no claim under ERISA to a share of the retirement benefits.
       To begin with, the sons are neither participants nor beneficiaries.
                                      *       *        *       *
       Dorothy's 1980 testamentary transfer, which is the source of respondents' claimed
       ownership interest, is a prohibited "assignment or alienation."
                                      *       *        *       *
       As was true with survivors' annuities, it would be inimical to ERISA's purposes to permit
       testamentary recipients to acquire a competing interest in undistributed pension benefits,
       which are intended to provide a stream of income to participants and their beneficiaries.
                                      *       *        *       *
       Respondents contend it is anomalous and unfair that a divorced spouse, as a result of a
       QDRO, will have more control over a portion of his or her spouse's pension benefits than
       a predeceasing spouse. Congress thought otherwise. The QDRO provisions, as well as the
       surviving spouse annuity provisions, reinforce the conclusion that ERISA is concerned
       with providing for the living. The QDRO provisions protect those persons who, often as a
       result of divorce, might not receive the benefits they otherwise would have had available
       during their retirement as a means of income. In the case of a predeceased spouse, this
       concern is not implicated. The fairness of the distinction might be debated, but Congress
       has decided to favor the living over the dead and we must respect its policy.
       The axis around which ERISA's protections revolve is the concepts of participant and
       beneficiary. When Congress has chosen to depart from this framework, it has done so in a
       careful and limited manner. Respondents' claims, if allowed to succeed, would depart
       from this framework, upsetting the deliberate balance central to ERISA. It does not
       matter that respondents have sought to enforce their rights only after the retirement
       benefits have been distributed since their asserted rights are based on the theory that they
       had an interest in the undistributed pension plan benefits. Their state- law claims are pre-
       empted. The judgment of the Fifth Circuit is Reversed. [Emphasis added.]
The Undoubted Law. Five to four decision or not, we must assume that Boggs is now the law,
and that if a plan is governed by ERISA, and if the nonparticipant spouse dies first, the
community property interest of the nonparticipant spouse is not transferable to the spouse‘s
beneficiaries. Further, a state court cannot rectify the situation indirectly by seeking an
accounting or restitution or set off of the participant‘s other assets not in the plan. This much is
clear.
Unresolved Problems in the Law Post Boggs.
Is the Nonparticipant’s Interest to be Included as Part of the Nonparticipant’s Estate If it
Cannot Be Transferred? The answer to this question has marital deduction implications,
among other things. It also affects the characterization of the asset at the time of the participant‘s
death.
If the predeceasing nonparticipant spouse has no testamentary power to transfer his or her
interest, should that interest be included in the spouse‘s estate. According to PLR 8943006 the


                                           -Page 102 of 195-
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Service apparently thinks that the value of a spouse’s community property inte rest in a
plan is includible in the spouse’s gross estate unde r §2039(a) even if the spouse cannot
dispose of the interest by testamentary disposition, but had a beneficial interest in the plan
prior to death. 193
PLR 8943006, citing Allard, 194 but relying on Ablamis 195 (Boggs had yet to be decided) and
apparently misinterpreting Louisiana law, held:
       It appears that no interest in W and H's pension benefits in the present case could
       have passed under W's will or otherwise to W's children. Thus, W's community interest
       in the pension benefits passed to H by operation of law pursuant to the provisions of the
       joint and survivor annuity described in the plan.
The PLR concluded that—
       [T]he value of W's community property interest in the plan is includible in her gross
       estate under section 2039(a) of the Code.
In my opinion, §2039 is the wrong statute. I believe the Service failed to pay adequate attention
to §2039(b). Even if §2039(a) would on its face cause inclusion, there is §2039(b) to consider:
       ―(b) AMOUNT INCLUDIBLE-Subsection (a) shall apply to only such part of the value of the
       annuity or other payment receivable under such contract or agreement as is proportionate
       to that part of the purchase price therefor contributed by the decedent. For purposes of
       this section, any contribution by the decedent‘s employer or former employer to the
       purchase price of such contract or agreement (whether or not to an employee‘s trust for
       fund forming part of a pension, annuity, retirement, bonus or profit-sharing plan) shall be
       considered to be contributed by the decedent if made by reason of his employment.‖
The problem with treating the predeceased nonemployee‘s community property interest as
includible under §2039 is that although it might be said that under §2039(a) the employee is a
beneficiary who will receive an interest under the plan by reason of surviving the nonparticipant
(assuming the interest cannot be disposed of by the nonparticipa nt), the amount includible is
limited under §2039(b) to the proportionate value of the interest contributed by the decedent (in
this case the decedent is the ―nonemployee spouse‖) or by the decedent‘s employer. The
decedent, in this case the nonemployee spouse, contributed nothing to the plan (at least not
directly), and, for that matter, neither did the employee spouse (arguably). Why do I say the
decedent contributed nothing? Because the decedent is not the employee. Why do I go further
and suggest that the employee contributed nothing? Because technically it is the employer that
makes the contribution, not the employee (ordinarily). It is the last sentence of 2039(b) that
attributes contributions of the ―decedent‘s‖ employer to the decedent.
If §2039 does not apply, what section does? §2041? Not if the nonemployee has no powe r of
disposition. Under the Boggs 196 case, the nonemployee has no such power if the interest is under
a plan subject to ERISA!


       193
             PLR 8943006.
       194
             Allard v. Frech, 754 S.W.2d 111 (Tex. 1988).

       195
             Ablamis v. Roper, 937 F.2d 1450 (9th Cir. 1991).


                                                 -Page 103 of 195-
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§2033? Whether or not the spouse can dispose of the interest by testamentary disposition, the
Service has held that the interest is includible under §2033. 197 (§2041 would suffice to bar any
argument if the spouse does have a testamentary power.) But under Boggs, as already mentioned,
the spouse lacks this power. Moreover, if §2033 were sufficient to cause inclusion in the case of
a nonemployee, it would presumably never have been necessary to enact §2039 to cover the
employee‘s interest, now would it. It is because it is the employer, rather than the employee, that
owns and operates and contributes to the plan that Congress felt compelled to enact §2039 in the
first place; otherwise, §2033 would presumably have sufficed.
If the spouse lacks the power to transfer the interest, it is arguable that the interest is not
includable in the estate, as a matter of Constitutional law, since the estate tax is an excise tax on
the power to transfer property. If it were a direct tax, other than an income tax, it would be
prohibited by the Constitution unless apportioned in accordance with the census:
       ―No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or
       Enumeration herein before directed to be taken.‖ 198
The example I have heard used is that if an individual owns the formula to make Coca Cola TM ,
and, instead of transferring the formula to someone at death, instead instructs the executor to
burn it, the value of the formula is not includible in the gross estate for estate tax purposes
because it is not being transferred. This is also the reason that a burial plot is not taxed.
If the Nonparticipant’s Interest Is Includible in the Nonparticipant’s Estate, Does it
Qualify For the Marital Deduction? It is clear that a marital deduction will not be available if
the interest is a nondeductible ―terminable interest.‖ What is a terminable interest? A "terminable
interest" in property is:
       ―An interest which will terminate or fail on the lapse of time or on the occurrence or the
       failure to occur of some contingency. Life estates, terms for years, annuities, patents, and
       copyrights are, therefore, terminable interest.‖ 199
A property interest which constitutes a terminable interest is non-deductible if:
       ―(i)   another interest in the same property passed from the decedent to some other
       person for less than an adequate and full consideration in money or money's worth, and
       (ii)   by reason of its passing, the other person or his heirs or assigns may possess or
       enjoy any part of the property after the termination or failure of the spouse's interest.‖ 200
Under a qualified plan, an interest that passes from the nonparticipant spouse to the participant
will terminate or fail if the participant remarries, since, under that ―contingency,‖ the new spouse
would have REA survivorship rights. The interest that would pass to the new spouse would pass


       196
             Boggs v. Boggs, 117 S.Ct. 1754, 138 L.Ed.2d 45, 65 U.S. L.W. 4418 (1997).

       197
             Rev. Rul. 67-278, 1967-2 C.B. 323. Made obsolete by 88-85. C f. PLR 8943006.
       198
             U.S. Constitution, Article I, Sec. 9.
       199
             Treas. Reg. § 20.2056(b)-1(b).

       200
             Treas. Reg. § 20.2056(b)-1(c)(i).


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for less than full consideration and by reason of its passing the new spouse may ―enjoy any part
of the property after the termination or failure of the spouse's interest.‖ I am tempted to say at
this point, ―Draw your own conclusions! “, but before doing so, consider IRC §2056(b)(7)(C).
Does 2056(b)(7)(C) Apply to the Nonparticipant’s Interest “Passing” to the Participant?
IRC §2056(b)(7)(C) does not require that all of the income be payable to the surviving spouse in
order to obtain a marital deduction under the QTIP (qualified terminable interest property trust)
rules, but only requires that no payments can be made to the surviving spouse so long as the
spouse is living:
        (C) Treatment of survivor annuities.--In the case of an annuity included in the gross
        estate of the decedent under section 2039 (or, in the case of an annuity arising under the
        community property laws of a State, included in the gross estate of the decedent under
        section 2033) 201 where only the surviving spouse has the right to receive payments before
        the death of such surviving spouse--
              (i) the interest of such surviving spouse shall be treated as a qualifying income interest
              for life, and
              (ii) the executor shall be treated as having made an election under this subsection with
              respect to such annuity unless the executor otherwise elects on the return of tax
              imposed by section 2001.
        An election under clause (ii), once made, shall be irrevocable.
Is this section meant to apply to the nonparticipant? The addition of the italicized language by
the Taxpayer‘s [Sigh] of Relief Act makes it clear that answer is now clearly yes. Moreover, the
IRS apparently believes that it was not so intended originally. 202 The only problem with
§2056(b)(7)(C) in this context, as originally enacted, is that it required that the interest be
includible under §2039, which is of dubious application in view of §2039(b) as argued above. 203
The recent amendment shifts the focus from §2039 to §2033. As previously discussed, it is
arguable that §2033 can not apply to an asset that the decedent (in this case the nonparticipant
spouse) did not and cannot transfer.
What is the Interest of the Participant, On the Participant’s Death. If the participant
inherited an interest from the spouse by virtue of the automatic QTIP treatment mandated by
§2056(b)(7)(C), first sentence, flush parenthetical language, then inclusion in the participant‘s
estate would be under §2044, for whatever difference that makes. If forwhatever reason, the
nonparticipant spouse does not get a marital deduction, is the nonparticipant‘s interest included
in the participant‘s estate, if the participant dies last, and if so, under what statute?



         201
             The italicized parenthetical language was added by the Taxpayer‘s [Sigh o f] Relief Act, P.L. 105-34
1997, § 1311(a) effective for estates of decedents dying after August 5, 1997.

        202
              PLR 8943006 indicates that the IRS thinks it has always applied to the nonparticipant.
        203
            Another problem, wh ich we will conveniently ignore, is that on the contingency of remarriage fo llo wed
by divorce, the QDRO rules would permit a subsequent spouse to succeed to the interest of the participant during the
participant‘s life, but I suppose this would be true of any gift.


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If the participant survives the nonparticipant, and if §2044 is inapplicable, we could theoretically
have inclusion under §2041, if that the participant has the power, at any time (including death),
to appoint the interest to himself, herself, or to his or her estate or creditors. That right may come
at some point, but won‘t exist during lifetime (ordinarily) prior to retirement; and again, if the
participant remarries, the right might never exist. Ponder that, if you will.
If the participant predeceases the nonparticipant, it would be reasonable to assume that if the
participant can appoint the property to creditors or the estate, then 2041 would apply here too. As
previously discussed, the participant can probably appoint all sole management community
property to creditors or the estate, at leaset to the extent that REA does not give the spouse an
inalienable interest. In the context of a qualified plan, the participant cannot appoint the
nonparticipant‘s interest to creditors or the estate, to the extent the surviving spouse has REA
rights. It is worth noting that the Service has never raised the 2041 specter in other cases
involving conventional sole management community property (thank goodness) —perhaps
because if 2041 applied an offsetting 2053 deduction would be available (to which my comment
is: not necessarily).
If Pension Benefits Subject to ERISA are Distributed During the Lives of Both Spouses,
Will the Nonparticipant Spouse Then Have a Testamentary Power of Disposition? This is
the $64,000204 question. M y op inio n is t ha t t he spo use will ha ve s uc h a po wer. I suppose that
what to me would be a nightmare scenario of ERISA preemption never going away, haunting the
recipient like a specter for so long as the assets distributed can be traced, could be a good thing,
depending on one‘s perspective. But it will make estate planning for the medium sized estate
much more difficult than it already is.
I assume that once pension benefits are distributed they are alienable, and can be reached by
creditors. On divorce, one also assumes that the QDRO rules need not be complied with respect
to plan benefits that have already been distributed, which is helpful, since in that case the QDRO
rules could not be complied with and in that context do not make sense.
One could argue that if the beneficiaries of a predeceased nonparticipant spouse step into the
spouse‘s shoes, and yet, upon ultimate distribution from the plan they are not entitled to the share
of the benefits that the predeceased spouse would have been entitled to if living, then it follows,
as a matter of very compelling logic, that the fact that the spo use outlived the distribution ought
not to be of special relevance. Indeed, the majority opinion in the Boggs case suggests that this
could be an issue for future resolution:
       Both parties agree that the ERISA benefits at issue here were paid after Dorothy's death,
       and thus this case does not present the question whethe r ERISA would permit a
       nonparticipant spouse to obtain a devisable community property interest in benefits
       paid out during the existence of the community between the participant and that
       spouse.
This is a rather ominous comment. It is worth noting at the onset that if, in fact, plan proceeds are
always protected against testamentary transfer by the spouse, even after distribution, we will be
faced with an accounting nightmare for which most wo rk-a-day participants and their lawyers
will be generally unprepared. In such a case, it would matter not whether the interest were placed


       204
             Unadjusted for inflation.


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in a rollover IRA, a shoebox, a passbook savings account, or invested in the stock market, it
would still be treated as the participant‘s separate property, in effect. (Presumably the income on
the distribution would be transferable by the nonparticipant spouse without regard to preemption
issues.)
My own opinion is that when next faced with this question the Supreme Court will back away
from an extension of Boggs, and will give common sense precedence over strict logic. This is,
after all, not unknown at the Supreme Court level. It has been observed so frequently by so many
that it is by now a commonplace (and even if you are not a lawyer you‘ve probably noticed) that
the Supreme Court will often do what it thinks is the right thing, whether or not strictly called for
by the law. Though I think the practice insidious in general, here the Court frequently has no
choice but to give policy its due, within limits, simply because if ―relate to‖ were literally the
test, everything would be preempted, because everything relates to everything else (at least
according to philosophers and physicists).
There are in fact good legal reasons for making a distinction between those cases where the
nonparticipant dies prior to a distribution and those cases where death occurs later. The majority
opinion was based largely on the anti-alienation provision of ERISA §206(d), the IRC corollary
of which is §401(a)(13). I am not aware of any cases holding that the anti-alienation rule
survives a distribution of plan assets. One may surely transfer pension plan benefits that have
been distributed, as surely as one is prohibited from transferring benefits that have not.
Technically, a testamentary ―transfer‖ takes place takes place at death, if successful. It is
reasonable to interpret Boggs as involving an attempted “transfer” at death by Dorothy
Boggs of plan assets, a transfer clearly prohibited by ERISA §206(d)! However, once the
assets are no longer in the plan, the anti-alienation rule would not prohibit the transfer.
Therefore, if the nonparticipant spouse makes a testamentary ―transfer‖ of the assets after they
have been distributed, there is no longer any ERISA impediment to the alienation, or so I would
argue. True, Dorothy‘s children made much the same argument by contending that although the
transfer at death was admittedly ineffectual at that time, it ought to be given effect after death,
when and if the assets are distributed. My response is that this is like arguing that I am entitled to
irrevocably assign you my interest in my pension plan now, as long as it is understood that you
are to receive those benefits only when distributed by the plan. There is no question whatsoever
that any attempt to do this would be ineffectual in addition to being prohibited.
Given the vigorous nature of the dissent in Boggs, and the desirability of limiting it to
undistributed pension benefits only, I think it all but certain that at least one additional
Justice will join the four dissenting Justices that did not agree with Boggs to begin with,
and if faced with the question would decide that Boggs only applies to benefits that were
undistributed at the time of the nonparticipant’s death. This is simply the most practical
solution to the problem, even if a rigorously logical (hidebound?) extension of Boggs would
make no distinction as to whether death occurs before or after distribution.
How Does Boggs Affect Estate Planning? I agreed with the result in Boggs, not because I think
it a desirable outcome, but because I could not see how one could, in good conscience, argue that
state law, if allowed to operate unfettered, would not ―relate‖ to an employee be nefit plan when
it deprives both the participant and the participant‘s (new) spouse of rights specifically granted
under the federal law. I say this being mindful of state‘s rights concerns, with which I am




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generally sympathetic; but whatever my personal opinion, I cannot ignore the commerce clause
either.
One reason I think that ERISA preemption in this area is unfortunate is that it will interfere with
bypass trust planning for all but the very wealthy and the very not so wealthy. Persons with
combined estates under $625,000, and persons with combined estates of over $1.2 million
exclusive of qualified plan benefits, may not be affected much by Boggs. But the many people in
between may be unable to shelter the unified credit exemption equivalent (approximately
$625,000) without resorting to the assets in a qualified plan. And if the nonparticipant spouse
dies first, Boggs says that these benefits are unavailable for that purpose if subject to ERISA.
Possible Solutions to the Boggs Dilemma. If the pension plan assets are distributed, the
problem goes away —that is, it goes away unless the logic of Boggs is extended to transfers
taking place after distribution. If the assets are distributed, they could be rolled into an IRA.
IRAs are not subject to ERISA —again, unless the logic of Boggs is unreasonably extended,
which it presumably will not be. Life insurance is certainly a viable solution here if the
nonparticipant is healthy and not too old.
Are There Other Reasons, Besides Boggs, for Rolling Qualified Plan Benefits Into an IRA?
There are other reasons besides Boggs for getting assets out of a qualified plan and into an IRA.
True, qualified plans can permit loans, the investment of plan assets in life insurance, and in a
few cases 5/10 year forward averaging can produce an income tax savings at the expense of long
term deferral. (IRAs are exempt from creditors under Texas law, just as qualified plans are
exempt under ERISA, so this is not of great concern.) There are, however, advantages afforded
by an IRA that are not available under a qualified plan. One very important advantage an IRA
has over a qualified plan is that an IRA does not require a plan sponsor. If the plan sponsor goes
out of business, or the plan is terminated by the sponsor, a non spouse be neficiary is not
permitted to rollover plan benefits and will face the prospect of immediate income taxation. This
cannot happen in an IRA. Another advantage —at least to the participant— is that an IRA is not
subject to the spousal annuity rules of REA, and this permits a great deal more estate planning
flexibility.
Conclusion. In estate planning for married persons, one must be mindful that qualified plan and
IRA benefits are likely to be made of community property in whole or in part. If the interest is
subject to ERISA, federal law will preempt state community property law to an extent that in
many contexts can be uncertain. These considerations are going to affect bypass trust planning
and marital deduction planning, among other things. In any event, o ne must consider:
       •       Are we planning the participant‘s estate, or the nonparticipant‘s estate?
       •       Is the interest involved community property, and if so, to what extent?
       •       Does ERISA preempt state community property law, and if so, what can be done
               about it?
       •       Will the nonparticipant‘s interest pass to the participant or to a trust for the
               participant, or to someone else entirely?
       •       If the nonparticipant‘s interest does not pass to the participant (e.g., it passes to a
               bypass trust for the participant), when must it be distributed and what are the tax
               consequences upon distribution?


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These are just a few of the many considerations confronting a person doing estate planning for
persons with large community property interests in a qualified plan or IRA.
XVI.    1996 Legislative Changes.
1996 Tax La w Cha nge s Affe cti ng Pe ns ion Pla ns and IRAs
By Noel C. Ice
1996 saw the passage of a number of federal laws affecting pension plans and IRAs. Most of the
changes are found in the Small Business Job Protection Act of 1996 205 (the SBJPA). Other
changes are found in the Health Reform Act. 206 True, the 1996 changes may not be as profound
and as far reaching as the changes made during the years between 1981 and 1986, which saw the
Economic Recovery Tax Act of 1981 (ERTA), 207 the Tax Equity and Fiscal Responsibility Act
of 1982 (TEFRA), 208 the Deficit Reduction Act (DEFRA) 209 and the Retirement Equity Act
(REA), 210 both in 1984, and the 1986 Tax Reform Act (TRA ‗86), 211 not to mention various
Omnibus Budget Reconciliation Acts in the intervening odd years. Nonetheless, the 1996
changes are pervasive, affecting a wide range of matters. Most of the changes are favorable to
the taxpayer and long overdue.
The following is a brief overview of some of the more significant changes.
5-Year Forward Averaging is Repealed Beginning in the Year 2000.
Prior to 1987, a participant who received a qualifying ―lump sum distribution‖ from a retirement
plan could (with some adjustments) pay income tax at the income tax rate that would have
applied if a taxpayer‘s total taxable income were one-tenth of the amount distributed. This was
sometimes referred to as 10-year forward averaging. In addition, the portion of the distribution
that was attributable to pre-1974 years of participation was eligible for capital gains treatment.
Effective for years beginning after 1986, the TRA 212 amended IRC 213 §402(d) and (e) to provide
for 5-year averaging instead of 10, and phasing out the capital gains provisions from 1987
through 1991. The Small Business Job Protection Act of 1996 repealed the 5-year averaging
provisions (presently found in §402(d)), effective for tax years beginning after 1999.


        205
              H.R. 3448.
        206
              H.R. 3103.
        207
              P.L. 97-34.

        208
              P.L. 97-248 is TEFRA.
        209
              P.L. 98-369.
        210
              P.L. 98-397.

        211
              P.L. 99-514.
        212
              The Tax Refo rm Act of 1986, P.L. 99-514.
        213
            All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless
otherwise indicated.


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Participants Born Before January 1, 1936 May Still Use 10-Year Averaging Under the 1986 Tax
Rates.
Sections 1122(h)(3) and (5) of the TRA contained special grandfathering rules not found in the
Internal Revenue Code, that allowed participants born before January 1, 1936 to elect 10-year
averaging under the old rules, using 1986 tax rates, and preserving forever the right to capital
gain treatment attributable to pre-1974 years of participation. Section 1401(a)(c)(2) of the
SBJPA makes it clear that the TRA grandfather rule will continue to apply, except that only 10-
year averaging, and not 5- year averaging, may be elected. To say that the old rules were
complicated is an understatement, as even a cursory review of IRC §402(d) will make readily
apparent. It is therefore unfortunate that practitioners must continue to be aware of (if not
familiar with) the old rules, so long as there are any participants still living to whom the old rules
might apply.
Distributions No Longer Required For Participants Who Are Not Five Percent Owners and Who
Have Not Retired
Under current law, minimum distributions are required to begin by April 1 of the calendar year
following the calendar year the participant reaches age 70 1/2. 214 This is called the required
beginning date or RBD. Under §1404 of the SBJPA, IRC §401(a)(9)(C) is amended, effective
beginning in 1997, to provide that a person who is not a 5% owner (as defined in IRC §416) is
not required to begin receiving distributions until the later of retirement or the person‘s RBD.
Note that this rule will not apply to a participant‘s interest in an IRA.
A plan would not have to implement this new provision, but the Committee Reports indicate that
the plan may be amended so that minimum distributions to less than 5% owners who are still
employed are no longer required, even if such payments have already begun. The amendment
requires that when distributions begin, ―the employee‘s accrued benefit shall be actuarially
increased to take into account the period after age 70 1/ 2 in which the employee was not receiving
any benefits under the plan.‖ The Conference Agreement to the Committee Reports confirm that
the actuarial adjustment does not apply to defined contribution plans.
Annuity Distribution Tax Rules Simplified
When a participant who has a basis in a qualified plan or tax deferred annuity (usually because of
after tax employee contributions) begins to receive distributions, it is necessary to determine how
much of the distribution is income and how much represents a tax free return of basis. IRC
§72(d), as in effect under prior law, specifies that the portion representing tax free return of basis
was usually determined by dividing the investment in the contract (basis) by the total expected
return. SBJPA §1403(a) amends IRC §72(d) to offer a simpler approach, effective for annuity
starting dates beginning 90 days after August 20, 1996. Under the new rule, a factor is assigned
(in five year increments for ages between 55 and 70) representing the approximate number of
payments that may be expected at the stated age. The investment in the contract (reduced each
year until it reaches zero) is divided by this factor to determine the portion that is not subject to
tax. The statutory approach is similar to the one provided by the IRS in Notice 88-118.
Temporary Regulations Regarding Waiver of the Time Periods Under the Joint and Survivor
Annuity Rules Enacted Into Law


       214
             IRC §401(a)(9).


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As a general rule, all qualified pension plans, and some 401(k) and profit sharing plans, are
required to distribute benefits in joint and survivor annuity form, absent a waiver by the
participant and the participant‘s spouse. Further, notice of the right to waive the annuity is to be
given no more than 90 and no less than 30 days prior to the ―annuity starting date.‖ For years
beginning after 1996, SBJPA §1451(a), amends IRC §417(a)(7)(A) and ERISA 215 §205(c) to
provide (1) the joint and survivor annuity notice may be given after the annuity starting date, and
that (2) a plan may permit a participant (with spousal consent) to elect to waive the 30 day
notice, provided that the distribution commences more than 7 days after the explanation is given.
The new law is in keeping with recently promulgated temporary regulations. 216
IRS To Develop Sample Language
Section 1457 of the SBJPA requires the IRS to develop sample language for spousal consent
forms waiving the qualified joint and survivor annuity (QJSA), 217 and for qualified domestic
relations orders (QDROs). 218
Exception to Premature Distribution Tax
IRC §72(t) provides that most distributions prior to age 59 1/2 from a qualified plan or IRA will
be subject to a 10% early withdrawal penalty (the premature distrib ution tax). This general rule
is, however, riddled with exceptions. For years beginning after 1996, §361(a) of the Health
Reform Act 219 adds yet another exception by amending IRC §72(t) to provide that the tax will
not apply to withdrawals or distributions made to certain unemployed persons to the extent such
distributions do not exceed the amount paid during the taxable year for health insurance.
Rural Cooperatives
Several new provisions under SBJPA §1443 amend 401(k)(7) to make the distribution rules
applicable to cash or deferred plans maintained by rural cooperatives more closely conform to
the rules applicable to other 401(k) plans, effective with respect to distributions made after
August 20, 1996.
Simplified Definition of Highly Compensated Employee
Effective in years beginning after 1996, SBJPA §1431(a) amends the definition of ―highly
compensated employee‖ found in IRC §414(q). This definition is of wide ranging application,
and anything to make it simpler to apply will be eagerly welcomed. Under the new rules, the
term "highly compensated employee" means any employee (a) who was a 5-percent owner at any
time during the year or the preceding year, or (b) for the preceding year had compensation from
the employer in excess of $80,000 (adjusted for COLA), and, if the employer so elects, was in
the top 20% of employees based on compensation for such preceding year.


       215
             The Emp loyee Ret irement Income Security Act of 1974, 29 U.S.C. §1001, et seq., as amended.

       216
             Temp Treas. Reg. §1.417(e)-1T(b)(3).
       217
             See IRC § 401(a)(11) and §417.
       218
             See IRC § 414(p).

       219
             H.R. 3103.


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Repeal of Family Aggregation Rules
Unde r prior law, IRC §414(q)(6)(A) provided:
       If any individual is a member of the family of a 5-percent owner or of a highly
       compensated employee in the group consisting of the 10 highly compensated employees
       paid the greatest compensation during the year, then (i) such individual shall not be
       considered a separate employee, and (ii) any compensation paid to such individual (and
       any applicable contribution or benefit on behalf of such individual) shall be treated as if it
       were paid to (or on behalf of) the 5-percent owner or highly compensated employee.
Under prior law, §414(q)(6)(A) was to be ―applied in determining the compensation of (or any
contributions or benefits on behalf of) any employee for purposes of any section [of the IRC]
with respect to which a highly compensated employee is defined by reference to
[414(q)].‖220 Under §414(q)(6)(B), prior to its amendment, ―the term ‗family‘ [as used in
subparagraph (A)] meant, with respect to any employee, such employee's spouse and lineal
ascendants or descendants and the spouses of such lineal ascendants or descendants.‖
The term ―highly compensated employee‖ is used throughout Subchapter D of the IRC. It is a
term that is used in applying the ADP and ACPs tests of 401(m) and (k) respectively. The
regulations, under prior law, therefore, applied the ACP and ADP tests employing the family
aggregation principles:
       (C) Employees subject to family aggregation rules.
       (1)     Aggregation of elective contributions and othe r amounts. For plan years
       beginning after December 31, 1986, or any later date provided in paragraph (h) of this
       section, if an eligible highly compensated employee is subject to the family aggregat ion
       rules of section 414 (q)(6) because that employee is either a five-percent owner or one of
       the 10 most highly compensated employees, the combined actual deferral ratio for the
       family group (which is treated as one highly compensated employee) must be determined
       by combining the elective contributions, compensation, and amounts treated as elective
       contributions of all the eligible family members. 221
Under IRC §401(a)(17)(A) a plan may take into account no more than $150,000 (adjusted for
inflation) for purposes of determining benefits to which a person is entitled. Prior to the SBJPA,
the last sentence of §401(a)(17)(A) provided that in applying this limit, the spouse of the
employee and any lineal descendants under age 19 had to be treated as one person. The last
sentence of IRC §404(l) contained a similar definition of ―family‖ for purposes of applying the
deduction rules.
Effective for plan years beginning in 1997, SBJPA §1431(b), has repealed IRC §414(q)(6),
the general family aggregation rule, and has also excised the last sentence of §401(a)(17)(A)
and §404(l), respectively. Presumably, the regulations applying family aggregation principles to
the ACP and ADP tests under §401(k) and (m) plans are no longer applicable.
Combined Plan Limitations Under §415 Repealed


       220
             IRC §414(q)(6)(C).

       221
             Treas. Reg. § 1.401(k)-1(g)(1)(ii)(C)(1).


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In a rule that may come as a surprise, SBJPA §1452 has repealed the combined plan limitation
found in IRC §415(e). IRC §415(e) is an average person‘s nightmare and a mathematician‘s
dream. The intent was to place limits on persons who partic ipated in defined contribution and
defined benefit plans of the same (or related) employer. The repeal, however, is not effective
until the year 2000. If this provision remains until its effective date, without being watered down
(which I, for one, doubt), you may expect many professionals to rush to implement defined
benefit plans, just as we thought that market was dead.
Elective Deferrals Are No Longer Treated as §415 Annual Additions
A plan is entitled to define compensation for discrimination purposes as including amounts
deferred under salary reduction arrangements, such as a cafeteria plan under §125, or a §401(k)
plan. However, the theory behind these plans is that the contributions are ―employer
contributions,‖ made in exchange for a reduced salary, despite the fact that employees and
employers both insist on referring to the contributions as ―employee money.‖ IRC §415(c) limits
the amount that an employee can contribute to a defined contribution plan to the lesser of
$30,000 or 25% of compensation. Compensation is a technical term under §415, which does not
necessarily track the definition used for allocation purposes under the plan. Section 415
compensation is roughly equivalent to W-2 compensation, and W-2 compensation does not
include elective deferrals. Thus, before the change in the law, an employee whose salary would
have been $36,000, may have been misled into thinking that she could defer $9,000 under the
employer‘s 401(k) plan. However, under the old law, a $9,000 deferral would have reduced her
salary from $36,000 to $27,000, $9,000 of which is 33% ($9000/%27,000), not 25%, of 415
compensation, causing the contribution to far exceed the annual addition limits — i.e., the lesser
of $30,000 or 25% of compensation—, and potentially disqualifying the plan. The effect of this
change on the above example is that a $9000 deferral will now equal 25% of compensation (not
33%).
SBJPA §1434 cures this problem by including in the 415 compensation base (a) elective
deferrals (as defined in §402(g)(3)), (b) cafeteria plan contributions under §125, and (c)
nonqualified deferred compensation under §457, effective beginning in 1998. On the down side,
including elective compensation under the rules may cause some employees to be treated as
highly compensated.
Repeal of §401(a)(26) For Defined Contribution Plans
The 1986 Tax Reform Act (TRA) introduced a new anti-discrimination provision, found in IRC
§401(a)(26). This provision basically requires that all qualified plans, whether or not
discriminatory, cover the lesser of 50 people or 40% of eligible employees, computed on a
controlled group basis. This rule was termed the minimum participation rule, and was not to be
confused with the minimum coverage rules of §410. Because the TRA enacted new provisions
under §401(a)(4) designed to comprehensively deal with the discrimination problem,
§401(a)(26) from the outset only served as an irritant, furthering little or no public policy.
Effective next year, SBJPA §1432 repeals this minimum participation rule, in the case of defined
contribution plans.
The ―Historically Performed‖ Test Deleted From the Leased Employee Rules
In testing for discrimination, the employer is required to treat as an employee, an independent
contractor, or the employee of another organization, if the services are performed for the


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recipient on a substantially full-time basis for at least a year, and the type of services performed
are those which historically were performed in the business field of the recipient by employees.
The historically performed test could be construed broadly under employment practices that are
no longer common, to include non-employees, in situations that otherwise would not be
considered abusive. For example, it was not unusual, years ago, for employers to hire their own
security personnel, and for doctors to employ nurse anesthetists. Now security guards are usually
and routinely employed by unrelated security agencies, and anesthetists by hospitals. SBJPA
§1454 amends IRC §414(n)(2)(C), effective in 1997, to do away with the phrase ―historically
performed‖ and to substitute in its stead the requirement that the services be performed under the
primary direction or control of the recipient. Although the statute itself offers little guidance as to
what is meant by the term‘s primary direction and control, the committee reports are replete with
examples.
Repeal of 50% Income Exclusion to Lenders to ESOPs
Effective for loans made after August 20, 1996, §1602 of the SBJPA repeals IRC §133, the
special rule that allowed certain commercial lenders to deduct half of the interest earned on an
ESOP loan from the lender‘s income taxes.
Excise Tax on Prohibited Transactions Increased From 5% to 10%
Effective for transactions occurring after August 20, 1996, SBJPA §1453 increases the IRC
§4975(a) excise tax on the amount involved in a prohibited transaction (e.g., self-dealing
between a plan and a disqualified person) from 5% to 10% for each year that the prohibited
transaction is not corrected.
Self- Employed Individuals No Longer Required To Provide A Comparable Plan For Every
Controlled Business
TEFRA 222 eliminated most of the differences between plans sponsored by corporations, and
those sponsored by noncorporate businesses. For some reason, TEFRA failed to eliminate a
provision found in IRC §401(d) that if an owner-employee participates in another qualified plan,
the owner is required to provide a comparable plan for every other business that the owner
controls. SBJPA §1441(a) eliminates this special rule, effective beginning in 1997. Of course,
the normal controlled group rules, in conjunction with the anti-discrimination rules of IRC
§401(a)(4) may continue to require that provision be made for the employees of the controlled
corporations.
Alternative ADP and ACP Testing For Emplo yers Covering Employees Who Do Not Meet the
Minimum Age and Service Requirements
Under present law, if a 401(k) plan covers employees who have not met the minimum age and
service requirements (age 21 and year of service), both the minimum coverage tests and the
annual deferral and contribution percentage tests can be conducted separately. Under SBJPA
§1459, IRC §§401(k)(3)(F) and 401(m)(5)(C) are amended so that if the employer can satisfy
coverage, taking into account only those employees who meet the statutory minimum age and
service requirements, then the ADP and ACP tests, at the employer‘s option, can be applied by



       222
             The Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248.


                                                 -Page 114 of 195-
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excluding all eligible nonhighly compensated employees who do not meet the minimum age and
service requirements, effective for plan years beginning after 1998.
Due Dates for Adopting Amendments
According to SBJPA §1465, amendments reflecting the new provisions of the 1996 legislation
need not be adopted prior to the first day of the plan year beginning in 1999 (2000 in the case of
a governmental plan), if the plan is operated in accordance with the new law in the meantime,
and the amendments are retroactive to the prior various effective dates.
Simple Retirement Accounts
IRC §401(k)(H), which describes and authorizes a type of IRA called Salary Reduction
Simplified Employee Plans (or SARSEPs), has been repealed by SBJPA §1421, in the case of
new SARSEPs, effective in 1997. In place of the SARSEP, we now have a new IRC §408(p),
effective in 1997, consisting of three new single spaced pages creating another type of retirement
plan called a ―simple retirement account.‖ A simple retirement account (SRA) is only available
for employers who (on a controlled group basis), and in addition to several other restrictions,
employ no more than 100 employees or self-employed individuals earning more than $5000 per
year, and who do not maintain a qualified plan.
A participant in a simple retirement account can enter into a ―qualified salary reduction
arrangement,‖ similar to a 401(k) plan, under which the emp loyee will take a reduction in salary
or wages, and the employer will contribute a commensurate amount to the SRA. The limit on a
salary reduction contribution for any one employee is $6000 per year, indexed for inflation. In
order to qualify, the employer must match the employee‘s contribution in an amount equal to so
much of the contribution elected by the employee as does not exceed the ―applicable percentage‖
of ―compensation.‖ The ―applicable percentage is stated as generally being three percent, but t he
employer may elect a lower match under certain conditions. As an alternative to the matching
contribution, the employer can simply make a contribution of two percent of compensation on
behalf of each employee earning over $5000.
An SRA is an IRA, and not a qualified plan. Most employees have to be covered, integration
with social security (permitted disparity) is not permitted, and all employees must be 100%
vested at all times. Thus, the fact that the nondiscrimination rules applicable to qualified pla ns do
not apply to SRAs is not much of a boon. However, employers who adopt an SRA will
appreciate the fact that there is no annual deferral percentage test to apply each year, unlike a
401(k) plan (other than a ―Simple 401(k) Plan, discussed below). Further, neither the top heavy
rules nor the joint and survivor annuity rules (applicable to many qualified plans) apply to SRAs.
The reporting rules are likewise simplified, and such reporting as is required is the primary
responsibility of the trustee rather than the employer. The employer is required to provide certain
notices to the employees who are eligible to participate.
The penalty for early withdrawal from and SRA under IRC §72(t) is increased from 10% to 25%
for withdrawals made during the first two years of participation.




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As is the case under §401(k), salary deferrals under an SRA are subject to FICA and FUTA
withholding. Distributions out of an SRA are, of course, subject to income tax, but are not
subject to income tax withholding. 223
ERISA 224 §404(c) protects fiduciaries from liability for losses in plan assets, under some
circumstances, where the participants are directing investments. Effective in 1997, this protection
is extended to Simple Retirement Accounts on the earlier of a rollover out of the SRA, an
affirmative election as to the investment of the original contribution, or one year after the SRA is
established.
Simple 401(k) Plans
Effective in 1997, ―eligible employers‖ have the option of adopting a ―Simple 401(k) Plan.‖ See
new 401(k)(11) and (12) as amended by SBJPA §1422. These plans have many of the same
requirements applicable to Simple Retirement Accounts discussed immediately above. A Simple
401(k) Plan will automatically satisfy the annual deferral percentage (ADP) and the annual
contribution percentage (ACP) tests of 401(k) and 401(m), respectively. The Simple 401(k) Plan
must be the only qualified plan of the employer for which the eligible employees accrue a benefit
during the year. The employees must always be 100% vested, and the salary reduction (elective)
contributions must not exceed $6000 in the case of any one employee.
As was the case with a Simple Retirement Account, the employer must either match the salary
reduction contributions up to three percent (or a lower match under certain conditions), or
alternatively, the employer may make a two percent nonelective contribution on behalf of all
eligible employees. Many of the terms used in 401(k)(11) and (12) look to the definitions used
for Simple Retirement Accounts found in IRC §408(p). Thus, a ―qualified employer‖ is an
employer that employs no more than 100 employees or self-employed individuals earning more
than $5000 per year.
Spousal IRAs Increased to $2000
Under present law, not everyone is eligible to contribute $2000 to an IRA. In addition to other
requirements and limitations applicable to persons who are participants in employer sponsored
retirement plans, a person must have earned income at least equal to the amount contributed.
However, in the case of a married individual, a combined contribution of $2250 was allowable,
even if the spouse had little or no earnings of his own. Under the new law (IRC §1427 amending
IRC §219(c)), effective for years beginning after 1996, if a married couple files a joint return, a
contribution to a spousal IRA of up to $2000 for the nonworking spouse can be made, if a
contribution could otherwise have been made had the spouse had $2000 in income.
ADP and ADP Testing Under 401(k) Plans Based Upon Prior Year Deferrals
Under present law the annual deferral percentage (ADP) test and the annual contributions
deferral (ACP) tests are performed in the year in which the contributions are made. This means
that an employer may not know until the year is over how much the highly compensated
employees could defer under the law. Beginning in 1997, IRC §§401(k)(3)(A) and 401(m)(2)(A)
have been amended by SBJPA §1433, to provide that the ADP and ACP tests for the nonhighly

       223
             IRC §3401(a)(12)(D).

       224
             The Emp loyee Ret irement Income Security Act of 1974, 29 U.S.C. §1001, et seq., as amended.


                                                 -Page 116 of 195-
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compensated participants shall be tested based on the prior years‘ deferrals. An employer may
elect to use the current year‘s deferrals, but the election may not thereafter be changed without
IRS approval. During the first year, the employer may treat the prior year‘s nonhighly
compensated deferrals as having been three percent.
Return of Excess Contributions To the Highly Compensated
Under present law, if the average deferral percentage (ADP) or the average contribution
percentage (ACP) of the highly compensated employees (HCEs) causes the plan to fail the ADP
or ACP test, the deferrals or contributions may be returned, in proportion to the percentage of
compensation deferred, beginning with the HCE having the highest deferral or contribution
percentage. Section 1433 of the SBJPA changes this rule by amending IRC §§401(k)(8)(C) and
401(m)(6)(C). For plan years beginning after 1996, the excess deferrals or contributions are
returned based upon the size (in dollars) of the excess deferrals or contributions, beginning with
the HCE having the highest deferral or contribution amount.
Under the old law, if one HCE had compensation of $100,000, and the other had compensation
of $150,000, and if both deferred $9000, the one HCE would have deferred 9% and the other 6%
of compensation. Thus, the HCE with the $100,000 salary would have his deferr als or
contributions cut first if the ADP or ACP test would otherwise be violated. Under the new law,
they would each have their contributions cut, dollar for dollar. In this sense, the old law favored
the most highly compensated HCE, and the new law favors the less highly compensated HCE.
Note that under the ne w law, more total dollars will have to be returned, in order to pass
the test.
Safe Harbor ADP Test for 401(k) Plans
SBJPA §1433, amends IRC §401(k)(12), effective for years beginning after 1998, to provide that
the ADP test can now be satisfied if the employer makes a 100% matching contribution on
behalf of each nonhighly compensated employee (NHCE), up to three percent of compensation,
and a 50% match for contributions between three and five percent, provided that the matching
contribution rate for any highly compensated employee (HCE) is not greater than that provided
for any NHCE. Alternatively, the test can be met by using differing matching formulas that
achieve the same average result, provided that the rate of match does not increase with the rate of
contributions. As another safe harbor alternative, the employer can make a 3% nonelective
contribution to any defined contribution plan covering the eligible NHCE under the 401(k) plan.
The safe harbor contributions must be subject to the usual 401(k) rules, e.g., full vesting with
restrictions on early withdrawal. The new law requires that the employees be given notice of
these options.
Safe Harbor ACP Test for 401(m) Plans
SBJPA §1433, amends IRC §401(m)(11), effective for years beginning after 1998, to provide a
special safe harbor under the ACP test for matching contributions. Among other things, to
qualify under this safe harbor, matching contributions cannot be based upon elective
contributions or deferrals exceeding 6 percent of compensation, the rate of matching cannot
increase with the size of the contributions or deferrals, the matching contribution rate for any
HCE must not be greater than that for any NHCE, and notice to the participants must be given
under rules similar or identical to the ADP safe harbor described above.
Tax Exempt Organizations May Establish 401(k) Plans


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SBJPA §1426 amended IRC §401(k)(4)(B), effective for plan years beginning in 1997, to allow
tax exempt organizations, rural cooperatives and Indian tribal governments to establish 401(k)
plans, effective in 1997. However, state and local governments are still prohibited from
establishing 401(k) plans, except for plans adopted before May 6, 1986.
403(b) Salary Reduction Frequency Rules Liberalized
403(b) plans (also known as tax sheltered annuity plans or TSAs) are similar, but by no means
identical to 401(k) plans. TSAs can only be adopted by 501(c)(3) charities and educational
organizations. One advantage that a TSA has over a 401(k) plan is that there is no ADP test to
apply. However, the rules governing the timing and frequency with which TSA salary reduction
arrangements could be made and undone have always been much more restrictive than under a
401(k) plan, even if these rules were often more honored in the breach. Among other things, in
order for a TSA salary reduction agreement to qualify for tax deferral, it is required that: ―(1) the
agreement be legally binding and irrevocable with respect to amounts earned while the
agreement is in effect, (2) the agreement apply only to amounts earned after the agreement
becomes effective, and (3) only one agreement be made in a single taxable year.‖ 225 Effective for
tax years beginning in 1996, the old restrictions are no longer in effect. Under the new law
(SBJPA §1450), the rules governing the modification or revocation of 403(b) salary reduction
agreements are the same as under a 401(k) plan.
Under the old law, if a person contributed too much to a 403(b) plan (over $9500 in 1996), the
excess was simply includible in income. Section 403(b)(1)(E) has been amended by SBJPA
§1450(c) to require that the any 403(b) contract must expressly prohibit excess elective deferrals.
Under some circumstances, failure to abide by this prohib ition will result in the disqualification
of the entire contract from deferral under 403(b). In the inimitable words of the statute, ―[t]he
amendment made by this subsection [1450(c)] shall apply to years beginning after December 31,
1995, except that a contract shall not be required to meet any change in any requirement by
reason of such amendment before the 90th day after the date of the enactment of this Act.‖
Governmental 457 Plans Now Must Hold Assets In Trust
Nonqualified plans are usually unfunded and restricted to a select group of highly compensated
employees. This is necessary, in the case of employers not exempt from ERISA, because funded
plans or plans covering nonhighly compensated employees are subject to a number of special
requirements under ERISA Title I. State and local governments are exempt from Title I of
ERISA.
Even governmental plans are subject to the IRC, however; and IRC §457 generally provides that
nonqualified deferred compensation plans of tax exempt organizations will be currently taxed to
the employee (contrary to the rules applicable in the case of non exempt organizations), unless
the deferred compensation is subject to a substantial risk of forfeiture, or is otherwise limited to
the lesser of $7500 (now indexed with increases in the cost of living) or 33.3% of
compensation. 226



        225
              Ann. 95-33, 1995-19 IRB.
        226
           If 33.3% of co mpensation is less than $7500, then, if the p lan were subject to ERISA, it would not
qualify under the top-hat exempt ion.


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IRC §457(b)(6)(C) expressly provides ―all income attributable to such amounts, property, or
rights, shall remain (until made available to the participant or other beneficiary) solely the
property and rights of the employer (without being restricted to the provision of benefits under
the plan), subject only to the claims of the employer's general creditors.‖ SBJPA §1448 amends
IRC §457(g)(1) to provide that 457 plans of state and local governments will not be tax exempt,
―unless all assets and income of the plan described in subsection (b)(6) are held in trust [or in a
custodial account] for the exclusive benefit of participants and their beneficiaries,‖ and amends
IRC §457(b)(6)(C) by making it subject to the new trust provisions of IRC §457(g)(1).
Other Changes Affecting Governmental Plans
SBJPA §1444 amends IRC §415(m), effective beginning in 1995, to allow state and local
governments to establish a ―qualified governmental excess benefit arrangement‖ in a manner
similar to any other plan providing benefits in excess of those allowable under §415(b) and (c),
without regard to the limits under §§415 and 457. Furthermore, the income under the plan will
not be taxable to the governmental sponsor.
The 415(b) limits on benefits provided under a governmental defined benefit plan have been
modified by SBJPA §1444, which amends IRC §§415(b)(11), 415(b)(2)(I) and 415(b)(10)(C)(ii),
effective for years beginning after 1994.
457 Dollar Limit Indexed
Effective in 1997, SBJPA §1447 amends IRC §457(e)(15), to index the $7500 deferral limit
under IRC §457(b)(2)(a) —applicable to nonqualified deferred compensation plans sponsored by
governmental or other tax exempt employers— to reflect increases in cost of living.
In-Service Distributions Under §457 Plans are Now Allowed Under Certain Circumstances
Under present law, IRC §457(d)(1) prohibits in-service distributions unless ―the participant is
faced with an unforeseeable emergency. SBJPA §1447(a), effective in 1997, amends IRC
§457(e)(9) to allow for distributions of $3500 or less, if, among several other requirements, ―no
amount has been deferred under the plan with respect to such participant during the 2- year period
ending on the date of the distribution.‖
Repeal of $5000 Death Benefit Exclusion
Summary
The changes wrought by the 1996 federal legislation may not be as monumental as what we
became used to in the first six years of the 1980s, but one would be making a mistake to
underestimate the breadth of the new law. Some of the changes are quite significant, and will
affect tax planning immediately.
The repeal of the family aggregation rules offers much welcomed relief, as does the simplified
definition of who is a ―highly compensated employee.‖ The repeal of the comb ined plan
limitations under former §415(e) in the year 2000 may be in the too good to be true category.
Eliminating elective deferrals from the §415 compensation base will eliminate a substantial trap
for the unwary, and will benefit the frugal nonhighly compensated employee. The repeal of the
IRC §401(a)(26) minimum participation rules will make life a lot less dangerous, without
increasing the potential for discrimination in the least. The several simplified approaches to
salary reduction arrangements, and the ADP and ACP safe harbors, will certainly be utilized by
many employers. The changes in the period used to calculate the ADP and ACP of the nonhighly


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compensated employees will ease the burdens of many a plan administrator. Finally, the changes
to §457 and the changes affecting governmental plans will be helpful and very important to tax
exempt employers. All in all, it can be said that most of the changes will be helpful to employees
and employers alike.
XIX. Roth IRAS.
ROTH                                                                         I RAs
Including Technical Corrections in the IRS Restructuring and Reform Act of 1998 227
and the Proposed Regulations 228
or
All Yo u Ever Wa nted to K now Abo ut Rot h I RAs But We re A fr a id to Ask

By                       Noel                                                C.                                Ice
www.TrustsAndEstates.net
WHAT IS A ROTH IRA?
What is the Basic            The approach I will take in this memorandum is to parse IRC 229 §408A,
Approach Used in             word by word, not necessarily in the order in which the statute was
this Outline For             drafted, explicating the statute by means of questions which the statute
Explaining the Roth          answers (we hope).
IRA Rules?
                             By the end of this memo, the statute will have been quoted in its
                             entirety and about one-third of the proposed regulations. This approach
                             has the advantage of at least being thorough, and the conclusions
                             subject to some sort of empirical check, which in this case is
                             particularly apropos, because the statute is new, the proposed
                             regulations brand new, and even the commentators differ on its precise
                             meaning in some cases. I will, of course, add comments as appropriate,
                             and at the end of the memo will devote a series of questions and
                             answers to issues that are outside of the statutory language, and hence,
                             not amenable to the parsing method.
                             This is not a user friendly memo. I know that. One day I will write a
                             ―nutshell‖ version. For now, I am sticking to original source material
                             more than I would like, adding comments only when I think called for.




        227
              Tit le VI of H.R. 2676. IRS Restructuring and Reform Act of 1998, PL 105-206, 7/ 22/ 98.
        228
              Prop. Treas. Reg. § 1.408A-4 (Proposed 9/3/98).
        229
            All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless
otherwise indicated.


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What    is      a   Roth             (a)     General rule. Except as provided in this section
IRA?                                 [§408A], a Roth IRA shall be treated for purposes of this title
                                     [Title 26 of the US Code, i.e., the Internal Revenue Code] in the
                                     same manner as an individual retirement plan. 230
                             So, except as otherwise provided in §408A, a Roth IRA is just like an
                             ordinary IRA (Individual Retirement Account/Annuity). The ―except‖
                             part is where the sizzle is, because there are some very important
                             differences.
Where is the Roth An ordinary IRA is created and described by IRC §408. The Roth IRA
IRA        Statute is described in §408A.
Found?
What      is   the                   Section 408A of the Internal Revenue Code (Code), which was
Statutory Basis of                   added by section 302 of the Taxpayer Relief Act of 1997, Public
the Roth IRA?                        Law 105-34 (111 Stat. 788), establishes the Roth IRA as a new
                                     type of individual retirement plan, effective for taxable years
                                     beginning on or after January 1, 1998. The provisions of section
                                     408A were amended by the Internal Revenue Service
                                     Restructuring and Reform Act of 1998, Public Law 105-206
                                     (112 Stat. 685). 231
What Are the Most Each of the differences will be discussed in detail below. However, here
Important         is a preview:
Differences               (1)    Contributions to a Roth IRA are not deductible. 232
Between a Roth
IRA and a Regular         (2)    Distributions from a Roth IRA (if qualified) are income
IRA?                             tax free. 233
                          (3)    And, finally, there are no minimum required lifetime
                                 distributions. 234




       230
             IRC §408A(a).

       231
             Preamble, ―Background,‖ first paragraph, Prop. Treas. Reg. §1.408A(Proposed 9/3/98).
       232
             IRC 408A(c)(1).
       233
             IRC §408A(d)(1)(A ).

       234
             IRC §408A(c)(5).


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                            The proposed regulations state the matter this way:
                                    A Roth IRA generally is treated under the Code like a traditional
                                    IRA with several significant exceptions. Similar to traditional
                                    IRAs, income on undistributed amounts accumulated under a
                                    Roth IRA is exempt from Federal income tax, and contributions
                                    to Roth IRAs are subject to specific limitations. Unlike
                                    traditional IRAs, contributions to Roth IRAs cannot be deducted
                                    from gross income, but qualified distributions from Roth IRAs
                                    are excludable from gross income. These proposed regulations
                                    set forth specific rules for Roth IRAs in accordance with the
                                    provisions of section 408A. 235
What     Are    the If certain conditions are met, distributions from a Roth IRA are tax free.
Primary        Tax Further, neither the mandatory minimum distributions rules of IRC
Benefits of a Roth §§401(a)(9) and 408(a)(6) & (b)(3) nor the old incidental death benefit
IRA?                rule apply during the life of the Roth IRA owner.
                                    (A)     Exclusions from gross income. Any qualified
                                    distribution from a Roth IRA shall not be includible in gross
                                    income. 236
                                                        *       *        *       *
                                    (5)     Mandatory distribution rules not to apply before
                                    death. Notwithstanding subsections (a)(6) and (b)(3) of section
                                    408 (relating to required distributions), the following provisions
                                    shall not apply to any Roth IRA:
                                             (A)      Section 401(a)(9)(A) [i.e., the minimum
                                                      require d distribution rules applicable during
                                                      the lifetime of the participant, after age 70& 1/2 ].
                                             (B)      The incidental death benefit requirements of
                                                      section 401(a) [a rule that benefits are primarily
                                                      for the benefit of the participant and not for the
                                                      benefit of the participant‘s beneficiaries]. 237
                                                      [Emphasis added.]




       235
             Preamble, ―Background,‖ second paragraph, Prop. Treas. Reg. § 1.408A(Proposed 9/3/98).
       236
             IRC §408A(d)(1)(A ).

       237
             IRC §408A(c)(5).


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Is a Roth IRA an The statute is explicit that a Roth IRA is a type of IRA and is to be
IRA?             treated the same as an ordinary IRA, except as otherwise provided.
                                      (a)     General rule. Except as provided in this section, a Roth
                                      IRA shall be treated for purposes of this title in the same manner
                                      as an individual retirement plan.
                                      (b)    Roth IRA. For purposes of this title, the term “Roth
                                      IRA” means an individual retire ment plan (as defined in
                                      section 7701(a)(37)) which is designated (in such manner as the
                                      Secretary may prescribe) at the time of the establishment of the
                                      plan as a Roth IRA. Such designation shall be made in such
                                      manner as the Secretary may prescribe. 238 [Emphasis added.]
                             And the proposed regulations reiterate this concept:
                                      As described in proposed §1.408A-1, a Roth IRA is treated for
                                      Federal tax purposes in the same manner as an individual
                                      retirement plan except as otherwise provided in section 408A
                                      and the proposed regulations. Thus, all the rules of section 408
                                      and the regulations under section 408 apply to Roth IRAs to the
                                      extent they are not inconsistent with section 408A or these
                                      proposed regulations. 239
When §408A Refers As indicated in IRC 408A(b) quoted above, an individual retirement
to an Individual plan has the definition used in §7701(a)(37). §7701(a)(37) reads as
Retirement   Plan, follows:
What    Does     it       (37) Individual retire ment plan. The term "individual
Mean?
                          retirement plan" means --
                                               (A)     an individual retirement account described in
                                                       section 408(a), and
                                               (B)     an individual retirement annuity described in
                                                       section 408(b).
                             §408(a) describes a conventional IRA. Is a SEP IRA an individual
                             account described in §408(a)? Well, yes; but SEPs appear to be
                             excluded under §408A(f). 240




        238
              IRC 408A(a) & (b).
        239
              Preamble, ―Exp lanation of Provisions,‖ second paragraph, Prop. Treas. Reg. §1.408A(Proposed 9/3/98).
        240
            ―[C]ontributions to any such pension or account [i.e., ―a simplified emp loyee pension or a simple
retirement account‖] shall not be taken into account for purposes of subsection (c)(2)(B).‖ IRC § 408A(f)(2).


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How       Do   the         As mentioned above, a big advantage of a Roth IRA is the minimum
Minimum Required           required distribution (MRD) rules do not apply during the lifetime of
Distribution Rules         the Roth IRA owner, even after the owner has reached age 70&1/2.
Apply to a Roth            However, the rules do apply at death.
IRA?
                                   (b)     The minimum distribution rules apply to the Roth IRA
                                   as though the Roth IRA owner died before his or her
                                   require d beginning date. Thus, generally, the entire interest in
                                   the Roth IRA must be distributed by the end of the fifth calendar
                                   year after the year of the owner's death unless the interest is
                                   payable to a designated beneficiary over a period not greater
                                   than that beneficiary's life expectancy and distribution
                                   commences before the end of the calendar year following the
                                   year of death. If the sole beneficiary is the decedent's spouse,
                                   such spouse may delay distributions until the decedent would
                                   have attained age 701/2 or may treat the Roth IRA as his or her
                                   own.
                                   (c)     Distributions to a beneficiary that are not qualified
                                   distributions will be includible in the beneficiary's gross income
                                   according to the rules in A-4 of this section. 241
Are Distributions                  Q- 15. Does section 401(a)(9) apply separately to Roth IRAs
From Roth IRAs                     and individual retirement plans that are not Roth IRAs?
and Regular IRAs
                                   A- 15. Yes. An individual required to receive minimum
Treated Separately                 distributions from his or her own traditional or SIMPLE IRA
Unde r           the
                                   cannot choose to take the amount of the minimum distributions
Minimum Required                   from any Roth IRA. Similarly, an individual required to receive
Distribution Rules.
                                   minimum distributions from a Roth IRA cannot choose to take
                                   the amount of the minimum distributions from a traditional or
                                   SIMPLE IRA. In addition, an individual required to receive
                                   minimum distributions as a beneficiary under a Roth IRA
                                   can only satisfy the minimum distributions for one Roth IRA
                                   by distributing from anothe r Roth IRA if the Roth IRAs
                                   we re inherited from the same decedent. 242




      241
            Prop. Treas. Reg. § 1.408A-6, Q&A 14(b)&(c) (Proposed 9/3/98).

      242
            Prop. Treas. Reg. § 1.408A-6, Q&A 15 (Proposed 9/3/98).


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                ANNUAL CONTRIBUTIONS TO REGULAR (Non-Roth) IRAs
Is It Necessary to        To a certain extent it is necessary to understand the rules applicable to
Know the Rules            regular IRAs in order to understand the rules applicable to Roth IRAs, if
Applicable      to        for no other reason than that the Roth IRA rules make reference to and
Regular IRAs In           in many cases incorporate the normal IRA rules. Therefore, without
Orde r          to        turning this memo into a full explication of the normal IRA rules, those
Unde rstand Roth          rules will be discussed briefly so far as necessary.
IRAs?                     The limit on Roth IRA contributions is defined by reference to the
                          limit on regular IRA contributions:
                                   The aggregate amount of contributions for any taxable year to
                                   all Roth IRAs maintained for the benefit of an individual shall
                                   not exceed the excess (if any) of —
                                            (A)     the maximum amount allowable as a deduction
                                                    under section 219, over
                                            (B)     the aggregate amount of contributions for such
                                                    taxable year to all other individual retirement
                                                    plans (other than Roth IRAs) maintained for the
                                                    benefit of the individual. 243
What           Statute Normal or regular IRAs are governed by IRC §408, for the most part.
Governs        Regular This statute is too long to quote in its entirety here, though I am sorely
IRAs?                  tempted to, to make a point.
                          The regular IRA limits are not particularly easy to describe, and to
                          describe them in detail here would be a significant digression.
                          Nevertheless, a summary will be attempted.
What        Statute       IRC §219 governs contributions to regular IRAs. A complete copy of
Governs                   this statute §219, including the special rules that apply only to volunteer
Contributions    to       firefighters, dog catchers and certified paleo-ornithologists, is contained
Regular IRA?              in the following footnote which represents tax simplification at its
                          worst. 244 I quote this statute in its entirety, in part for your ready
                          reference, and in part to make the point I wanted to make when I did not
                          quote §408 in full.



      243
            IRC §408A(c)(2).

      244
            § 219 Retirement savings.
      (a)     Allowance of deduction. In the case of an individual, there shall be allowed as a deduction an
      amount equal to the qualified retirement contributions of the individual fo r the taxable year.
      (b)        Maxi mum amount of deduction.
                 (1)      In general. The amount allowab le as a deduction under subsection (a) to any individual
                 for any taxable year shall not exceed the lesser of —
                         (A)      $2,000, or


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               (B)      an amount equal to the compensation includible in the individual's gross income
                        for such taxable year.
      (2)      Special rule for employer contri butions under simplified empl oyee pensions. This
      section shall not apply with respect to an employer contribution to a simp lified employee pension.
      (3)      Plans under section 501(c)(18). Notwithstanding paragraph (1), the amount allowab le as
      a deduction under subsection (a) with respect to any contributions on behalf of an employee to a
      plan described in section 501(c)(18) shall not exceed the lesser of —
               (A)      $7,000, or
               (B)      an amount equal to 25 percent of the compensation (as defined in section
                        415(c)(3)) includib le in the individual's gross income for such taxab le year.
      (4)    Special rule for simple retirement accounts. This section shall not apply with respect to
      any amount contributed to a simp le ret irement account established under section 408(p).
(c)   Special rules for certain married indi vi duals.
      (1)       In general. In the case of an individual to whom this paragraph applies for the taxable
      year, the limitation of paragraph (1) o f subsection (b) shall be equal to the lesser of —
               (A)      the dollar amount in effect under subsection (b)(1)(A) for the taxable year, or
               (B)      the sum of —
                        (i)      the compensation includible in such individual's gross income for the
                                 taxab le year, p lus
                        (ii)     the compensation includible in the gross income of such individual's
                                 spouse for the taxab le year reduced by —
                                 (I)        the amount allowed as a deduction under subsection (a) to
                                            such spouse for such taxable year, and
                                 (II)       the amount of any contribution on behalf of such spouse to a
                                            Roth IRA under section 408A for such taxab le year.
      (2)      Indi vi duals to whom paragraph (1) applies. Paragraph (1) shall apply to any individual
      if —
               (A)      such individual files a jo int return for the taxable year, and
               (B)      the amount of co mpensation (if any) includible in such individual's gross income
                        for the taxable year is less than the compensation includible in the gross income
                        of such individual's spouse for the taxable year.
(d)   Other li mitati ons and restrictions.
      (1)      Beneficiary must be under age 701/2. No deduction shall be allo wed under this section
      with respect to any qualified ret irement contribution for the benefit of an indiv idual if such
      individual has attained age 701/2 befo re the close of such individual's taxab le year for which the
      contribution was made.
      (2)       Recontri buted amounts. No deduction shall be allowed under this section with respect
      to a rollover contribution described in section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3).
      (3)      Amounts contri buted under endowment contract. In the case of an endowment
      contract described in section 408(b), no deduction shall be allowed under this section for that
      portion of the amounts paid under the contract for the taxable year which is properly allocable,
      under regulations prescribed by the Secretary, to the cost of life insurance.


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        (4)      Denial of deduction for amount contri buted to inherited annuities or accounts. No
        deduction shall be allowed under this section with respect to any amount paid to an inherited
        individual retirement account or individual retirement annuity (within the mean ing of section
        408(d )(3)(C)(ii)).
(e)      Qualified retirement contri buti on. For purposes of this section, the term ―qualified retirement
contribution‖ means —
        (1)      any amount paid in cash for the taxable year by or on behalf of an individual to an
                 individual retirement plan for such individual's benefit, and
        (2)      any amount contributed on behalf of any individual to a plan described in section
                 501(c)(18).
(f)     Other definiti ons and special rules.
        (1)      Compensati on. For purposes of this section, the term ―co mpensation‖ includes earned
        income (as defined in section 401(c)(2)). The term ―co mpensation‖ does not include any amoun t
        received as a pension or annuity and does not include any amount received as deferred
        compensation. The term ―compensation‖ shall include any amount includible in the individual's
        gross income under section 71 with respect to a divorce or separation inst rument described in
        subparagraph (A) of section 71(b)(2). Fo r purposes of this paragraph, section 401(c)(2) shall be
        applied as if the term trade or business for purposes of section 1402 included service described in
        subsection (c)(6).
        (2)      Married indi vi duals. The maximu m deduction under subsection (b) shall be computed
        separately for each individual, and this section shall be applied without regard to any community
        property laws.
        (3)      Ti me when contri butions deemed made. For purposes of this section, a taxpayer shall
        be deemed to have made a contribution to an individual ret irement plan on the last day of the
        preceding taxable year if the contribution is made on account of such taxable year and is made not
        later than the time prescribed by law for filing the return for such taxable year (not including
        extensions thereof).
        (4)      Reports. The Secretary shall prescribe regulations which prescribe the time and the
        manner in wh ich reports to the Secretary and plan participants shall be made by the plan
        administrator of a qualified employer or govern ment plan receiving qualified voluntary employee
        contributions.
        (5)       Empl oyer payments. For purposes of this title, any amount paid by an employer to an
        individual retirement plan shall be treated as payment of co mpensation to the employee (other than
        a self-employed individual who is an employee within the meaning of section 401(c)(1))
        includible in his gross income in the taxab le year for which the amount was contributed, whether
        or not a deduction for such payment is allowable under this section to the employee.
        (6)     Excess contri butions treated as contri bution made during subsequent year for
        which there is an unused li mitation.
                 (A)      In general. If for the taxable year the maximu m amount allo wable as a
                 deduction under this section for contributions to an individual retirement plan exceeds the
                 amount contributed, then the taxpayer shall be treated as having made an additional
                 contribution for the taxab le year in an amount equal to the lesser of —
                          (i)      the amount of such excess, or
                          (ii)     the amount of the excess contributions for such taxable year
                                   (determined under section 4973(b )(2) without regard to subparagraph
                                   (C) thereof).
                 (B)      Amount contri buted. For purposes of this paragraph, the amount contributed—


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                       (i)      shall be determined without regard to this paragraph, and
                       (ii)     shall not include any rollover contribution.
              (C)      Special rule where excess deducti on was allowed for closed year. Proper
              reduction shall be made in the amount allo wable as a deduction by reason of this
              paragraph for any amount allowed as a deduction under this section for a prior taxable
              year for which the period for assessing deficiency has exp ired if the amount so allowed
              exceeds the amount which should have been allowed fo r such prior taxab le year.
      (7)      Election not to deduct contri butions. For election not to deduct contributions to
      individual retirement plans, see section 408(o)(2)(B)(ii).
(g)   Li mitation on deduction for acti ve participants in certain pension pl ans.
      (1)      In general. If (for any part of any plan year ending with or within a taxable year) an
      individual o r the indiv idual's spouse is an active participant, each of the dollar limitations
      contained in subsections (b)(1)(A) and (c)(1)(A) for such taxable year shall be reduced (but not
      below zero) by the amount determined under paragraph (2).
      (2)     Amount of reduction.
              (A)       In general. The amount determined under this paragraph with respect to any
              dollar limitation shall be the amount which bears the same rat io to such limitation as —
                       (i)      the excess of —
                                (I)        the taxpayer's adjusted gross income for such taxab le year,
                                           over
                                (II)       the applicable dollar amount, bears to
                       (ii)     $10,000 ($20,000 in the case of a jo int return for a taxable year
                                beginning after December 31, 2006).
              (B)      No reduction bel ow $200 until c omplete phaseout. No dollar limitation shall
              be reduced below $200 under paragraph (1) unless (without regard to this subparagraph)
              such limitation is reduced to zero.
              (C)      Roundi ng. Any amount determined under this paragraph which is not a mu ltiple
              of $10 shall be rounded to the next lowest $10.
      (3)     Adjusted gross income; applicable dollar amount. For purposes of this subsection —
              (A)     Adjusted gross income. Adjusted gross income of any taxpayer shall be
              determined —
                       (i)      after applicat ion of sections 86 and 469, and
                       (ii)     without regard to sections 135 [sic], 137, and 911 or the deduction
                                allo wable under this section.
              (B)     Applicable dollar amount. The term ―applicable dollar amount‖ means the
              following:
                       (i)      In the case of a taxpayer filing a joint return:
                                For     taxable       years The applicable amount
                                beginning in:               is:
                                1998                          $50,000
                                1999                          $51,000
                                2000                          $52,000


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                            2001                         $53,000
                            2002                         $54,000
                            2003                         $60,000
                            2004                         $65,000
                            2005                         $70,000
                            2006                         $75,000
                            2007 and thereafter          $80,000.
                  (ii)      In the case of any other taxpayer (other than a married indiv idual filing
                            a separate return):
                            For     taxable       years The applicable amount
                            beginning in:               is:
                            1998                         $30,000
                            1999                         $31,000
                            2000                         $32,000
                            2001                         $33,000
                            2002                         $34,000
                            2003                         $40,000
                            2004                         $45,000
                            2005 and thereafter          $50,000.
                  (iii)     In the case of a married individual filing a separate return, zero.
(4)     Special rule for married indi vi duals filing separately and li ving apart. A husband and
wife who —
         (A)      file separate returns for any taxab le year, and
         (B)      live apart at all times during s uch taxable year,
shall not be treated as married indiv iduals for purposes of this subsection.
(5)      Acti ve participant. Fo r purposes of this subsection, the term ―active participant‖ means,
with respect to any plan year, an individual —
         (A)      who is an active participant in —
                  (i)       a plan described in section 401(a) which includes a trust exempt fro m
                            tax under section 501(a),
                  (ii)      an annuity plan described in section 403(a),
                  (iii)     a plan established for its employees by the United States, by a State or
                            political subdivision thereof, or by an agency or instrumentality of any
                            of the foregoing,
                  (i v)     an annuity contract described in section 403(b),
                  (v)       a simp lified employee pension (within the meaning of section 408(k)),
                            or
                  (vi)      any simple ret irement account (within the meaning of section 408(p)),
                            or


                                -Page 129 of 195-
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Where Can One         A very good (free) source of information is the IRS‘ own publication on
Find    A    Good     the subject, Pub. 590. Dave Foltz, an attorney with Comerica Bank,
Summary of the        recently called my attention to the fact that this publication was 8 pages
Regular IRA Rules?    in 1978, 48 pages in 1992 and 66 pages in 1997! The regulations
                      explaining the minimum required distribution rules are only slightly
                      longer, but then they are single spaced using small type.
                      When you consider that tens of millions of Americans have IRAs, it is
                      somewhat of an insult to the electorate that their own representatives
                      would pass a law this important and universal in its application that at
                      its simplest level takes 78 pages to explain in layperson language.
                      Publication 590 can be found on the world wide web in a number of
                      places,                                                 including:
                      http://www.benefitslink.com/index.cgi/forms/pub590.html
                      This cite is a link found on David Baker‘s employee benefits web site:
                      http://www.benefitslink.com/index.shtml.




                     (B)      who makes deductible contributions to a trust described in section 501(c)(18).
            The determination of whether an individual is an active part icipant shall be made without regard to
            whether or not such individual's rights under a plan, trust, or contract are nonforfeitable. An
            elig ible deferred compensation plan (within the meaning of section 457(b)) shall not be treated as
            a plan described in subparagraph (A)(iii).
            (6)      Certain indi vi duals not treated as acti ve partici pants. For purposes of this subsection,
            any individual described in any of the following subparagraphs shall not be treated as an active
            participant for any taxable year solely because of any participation so described:
                     (A)       Members of reserve components. Participation in a plan described in
                     subparagraph (A)(iii) of paragraph (5) by reason of service as a member of a reserve
                     component of the Armed Forces (as defined in section 10101 of tit le 10), unless such
                     individual has served in excess of 90 days on active duty (other than active duty for
                     training) during the year.
                     (B)      Volunteer firefighters. A volunteer firefighter —
                              (i) who is a participant in a plan described in subparagraph (A)(iii) of paragraph
                              (5) based on his activity as a volunteer firefighter, and
                              (ii) whose accrued benefit as of the beginning of the taxable year is not more
                              than an annual benefit of $1,800 (when expressed as a single life annuity
                              commencing at age 65).
            (7)      Special rule for s pouses who are not acti ve participants. If this subsection applies to
            an individual for any taxable year solely because their spouse is an active participant, then, in
            applying this subsection to the individual (but not their spouse) —
                     (A)      the applicable dollar amount under paragraph (3)(B)(i) shall be $150,000, and
                     (B)      the amount applicable under paragraph (2)(A )(ii) shall be $10,000.

      (h)   Cross reference. For failure to provide required reports, see section 6652(g).


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The       Proposed The Roth proposed regulations summarize the regular IRA contribution
Regulations        limits as follows:
Explanation of the
                           Proposed §1.408A-3 sets forth rules regarding regular (i.e., non-
Regular Roth IRA           conversion) contributions to a Roth IRA. Unlike contributions to
Contribution
                           traditional IRAs, contributions to Roth IRAs are not deductible
Limits.                    under any circumstances. A taxpayer's regular contributions to
                           all his or her Roth IRAs for a year are limited to the lesser of
                           $2,000 or the taxpayer's compensation for that year. As with
                           traditional IRAs, a special rule for married taxpayers
                           permits one spouse to treat the other spouse's compensation
                           as his or her own for purposes of the limit on regular
                           contributions. The limit is reduced by any amounts that the
                           taxpayer contributes for that year to an individual retirement
                           plan other than a Roth IRA (although employer contributions,
                           including elective contributions, to a SEP or SIMPLE IRA Plan
                           do not reduce the contribution limit). Additionally, the
                           contribution limit (determined without regard to any reduction
                           for traditional IRA contributions) is phased out for modified
                           adjusted gross income between $95,000 and $110,000 for single
                           taxpayers, between $150,000 and $160,000 for married
                           taxpayers filing joint returns, and between $0 and $10,000 for
                           married taxpayers filing separate returns. Any contribution in
                           excess of the contribution limit is subject to the 6-percent excise
                           tax under section 4973 unless it is distributed to the taxpayer
                           (with allocable net income) under section 408(d)(4) by the
                           Federal income tax return due date (with extensions) for the year
                           of the contribution. 245 [Emphasis added.]
How Much Can an The basic deduction limit under the regular IRA rules is $2000 per year,
Individual      if neither the taxpayer nor the taxpayer‘s spouse is an active participant
Contribute to a in a qualified plan and if the taxpayer has $2000 in compensation. (If
Regular IRA?    the taxpayer has less than $2000 in compensation, the limit is the lesser
                amount.) If either the taxpayer or the taxpayer‘s spouse is an active
                participant in a qualified plan —including being eligible to contribute to
                a 401(k) plan even if the taxpayer or spouse elects not to contribute—,
                the amount deductible depends on the taxpayer‘s adjusted gross income
                (AGI). Here is an executive summary of the regular IRA deduction
                limits.
Executive Summary           If the taxpayer is unmarried and is an active participant in a qualified
of Deduction Limits         plan, then the taxpayer cannot make a deductible IRA contribution if the
Applicable       to         taxpayer has $40,000 or more in AGI (adjusted for inflation after 1998).
Regular IRAs.               Between $30,000 and $40,000 the $2000 deduction limit is phased out
                            pro rata.


       245
             Preamble, ―Regular Contributions,‖ first paragraph, Prop. Treas. Reg. §1.408A(Proposed 9/3/ 98).


                                                  -Page 131 of 195-
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                           If the taxpayer is married filing separately, then unless the spouses are
                           not living together, no contribution can be made to a regular IRA if
                           either spouse is an active participant in a qualified plan.
                           If the taxpayer is married filing jointly and is an active participant in a
                           qualified plan, the taxpayer cannot make a deductible regular IRA
                           contribution if the taxpayer has AGI over $60,000 (adjusted for
                           inflation after 1998). Between $50,000 and $60,000 the $2000
                           deduction limit is phased out pro rata. (The $10,000 difference rises to
                           $20,000 in the case of a joint return for a taxab le year beginning after
                           December 31, 2006). Note that this limit is inapplicable to a Roth
                           IRA, which has AGI limits that are quite diffe rent.
                           If the taxpayer is married filing jointly and is not an active
                           participant in a qualified plan, but the taxpayer’s spouse is an
                           active participant in a qualified plan, then the applicable dollar
                           amount is $150,000 and the phase-out amount is $10,000. 246 Such a
                           taxpayer can deduct $2000 if AGI is $150,000 or less, can deduct $1000
                           if AGI is $155,000, and can deduct nothing if AGI is $160,000 or more.
What is the Limit                  As with traditional IRAs, a special rule for married
on Spousal IRAs?                   taxpayers permits one spouse to treat the othe r spouse's
                                   compensation as his or he r own for purposes of the limit on
                                   regular contributions.247
What Changes to            Until 1998, the AGI limits applied without modification to both a
§219         We re         husband and wife if either was an active participant in a qualified plan.
Wrought By the             Under the old rules, a married individual filing jointly would be treated
IRS Restructuring          as an active participant if the individual‘s spouse was an active
and Reform Act?            participant.
                           The IRS Restructuring and Reform Act of 1998 eased this rule in those
                           cases where the taxpayer is not an active participant in a qualified plan,
                           but the taxpayer‘s spouse is. (See executive summary above.) In that
                           case, the new rules provide that the applicable dollar amount is
                           $150,000 and the phase-out amount is $10,000. 248
                           The rules change daily for the tax practitioner, often for the worse, but
                           occasionally for the better.




      246
            IRC §219(g)(7) as amended by the IRS Restructuring and Reform Act of 1998.
      247
            Preamble to the Proposed Roth IRA Regulations, 1.40A (Proposed 9/3/98).

      248
            IRC §219(g)(7) as amended by the IRS Restructuring and Reform Act of 1998.


                                               -Page 132 of 195-
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How     Does     the The phase out of the deduction, which I simply described as pro-rata, is
Statute Describe the described in the statute more precisely as follows:
Phase-Out Rule?
                            (A)     In gene ral. The amount determined under this paragraph
                            with respect to any dollar limitation shall be the amount which
                            bears the same ratio to such limitation as —
                                             (i)        the excess of —
                                                        (I)     the taxpayer's adjusted gross income for
                                                                such taxable year, over
                                                        (II)    the applicable dollar amount, bears to
                                             (ii)       $10,000 ($20,000 in the case of a joint return for
                                                        a taxable year beginning after December 31,
                                                        2006).249
Can a Taxpayer              A taxpayer can make a nondeductible contribution to a regular IRA no
Make            a           matter what the taxpayer‘s AGI and whether or not the taxpayer or
Nondeductible               spouse is an active participant in a qualified plan; but with the advent of
Contribution to a           the Roth IRA, no one should ever make a nondeductible contribution if
Regular IRA?                the Roth IRA is available as an alternative. Unfortunately, the AGI
                            limits may make the Roth IRA unavailable as an alternative.
                            The rules on nondeductible regular IRA contributions are found in
                            §408(o). 250
                            The advantage of making a nondeductible contribution to a regular IRA
                            is that the growth while in the IRA is tax free. Unlike a Roth IRA,
                            however, the earnings are taxable when withdrawn.


       249
             IRC §219(g)(2)(A).
       250
         §408 (o) DEFINITIONS AND RUL ES RELATING TO NONDED UCTIB LE CONTRIB UTIONS
TO INDIVIDUAL RETIREMENT PLANS.
         (1)     IN GENERA L. -- Subject to the provisions of this subsection, designated nondeductible
contributions may be made on behalf of an individual to an in dividual retirement plan.
       (2)        LIMITS ON AM OUNTS WHICH MA Y BE CONTRIBUTED. --
                (A)       IN GENERA L. -- The amount of the designated nondeductible contributions made on
       behalf of any indiv idual for any taxable year shall not exceed the nondeductible limit for su ch taxable year.
                  (B)      NONDEDUCTIBLE LIMIT. -- For purposes of this paragraph --
                           (i)     IN GENERA L. -- The term 'nondeductible limit' means the excess of --
                                    (I)      the amount allowable as a deduction under section 219 (determined
                           without regard to section 219(g)), over
                                    (II)     the amount allowable as a deduction under section 219 (determined
                           with regard to section 219(g)).
                        (ii) TAXPA YER MA Y ELECT TO TREAT DEDUCTIBLE CONTRIBUTIONS
                  AS NONDEDUCTIBLE. -- If a taxpayer elects not to deduct an amount which (without reg ard to


                                                   -Page 133 of 195-
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                  this clause) is allowable as a deduction under section 219 for any taxable year, the nondeductible
                  limit for such taxable year shall be increased by such amount.
                  (C)      DESIGNATED NONDEDUCTIBLE CONTRIBUTIONS. --
                            (i)     IN GENERA L. -- For purposes of this paragraph, the term 'designated
                  nondeductible contributions' means any contribution to an individual retirement plan for the
                  taxab le year which is designated (in such manner as the Secretary may prescribe) as a contribution
                  for which a deduction is not allowab le under section 219.
                           (ii)    DESIGNATION. -- Any designation under clause (i) shall be made on the return
                  of tax imposed by chapter 1 for the taxable year.
       (3)       TIM E WHEN CONTRIBUTIONS MADE. -- In determining for which taxable year a designated
nondeductible contribution is made, the ru le of section 219(f)(3) shall apply.
      (4)   INDIVIDUA L REQUIRED TO REPORT AMOUNT OF DESIGNATED NONDEDUCTIBLE
CONTRIBUTIONS. --
                  (A)      IN GENERA L. -- Any individual who --
                           (i)      makes a designated nondeductible contribution to any individual retirement plan
                  for any taxable year, or
                            (ii)     receives any amount from any individual ret irement plan for any taxable year,
                  shall include on his return of the tax imposed by chapter 1 for such taxable year and any
                  succeeding taxable year (or on such other form as the Secretary may prescribe for any such taxable
                  year) in formation described in subparagraph (B).
               (B)        INFORMATION REQUIRED TO BE SUPPLIED. -- The fo llo wing informat ion is
       described in this subparagraph:
                           (i)      The amount of designated nondeductible contributions for the taxable year.
                           (ii)     The amount of distributions from indiv idual ret irement plans for the taxable
                  year.
                           (iii)    The excess (if any) of --
                                   (I)        the aggregate amount of designated nondeductible contributions for all
                           preceding taxab le years, over
                                   (II)    the aggregate amount of distributions from individual ret irement plans
                           which was excludable fro m g ross income for such taxab le years.
                           (i v)     The aggregate balance of all individual retirement plans of the individual as of
                  the close of the calendar year with or within which the taxable year ends.
                           (v)      Such other information as the Secretary may prescribe.
                  (C)      PENA LTY FOR REPORTING CONTRIBUTIONS NOT MADE. --

                  For penalty where individual reports designated nondeductible contribu tions not made, see section
       6693(b).


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Do the AGI Limits           The amount that can be contributed to a nondeductible regular IRA is
Apply      to   a           the same as that which can be contributed to a regular deductible IRA
Nondeductible               ($2000), except that there are no AGI limitations. Of course, the AGI
Regular       IRA           limits apply to a regular IRA only if the taxpayer or spouse is an active
Contribution?               participant in a qualified plan; but then, if the taxpayer or spouse is not
                            an active participant in a qualified plan, the taxpayer would certainly
                            prefer a deductible regular IRA contribution to a nondeductible regular
                            IRA contribution.
                            The concept of an AGI limit is common to both Roth IRAs and
                            regular IRAs; unfortunately, the limits do not correspond exactly.
                            See below.


             ANNUAL (NON ROLLOVER) CONTRIBUTIONS TO A ROTH IRA
Can        Anyone A major problem with the Roth IRA is that not everyone is eligible to
Contribute to a contribute to one. A Taxpayer whose adjusted gross income (AGI)
Roth IRA?         exceeds the ―applicable dollar amount‖ is either limited or prevented
                  from making a contribution to a Roth IRA.
                                      (ii)     the applicable dollar amount is —
                                               (I)        in the case of a taxpayer 251 filing a joint return,
                                                          $150,000,
                                               (II)       in the case of any other taxpayer (other than a
                                                          married individual filing a separate return),
                                                          $95,000, and
                                               (III)      in the case of a married individual filing a
                                                          separate return, zero. 252
                            Note that there are different limits applicable to Roth IRA rollovers. 253
                            These will be discussed later.
                            Taxpayers whose adjusted gross income exceeds the ―applicable dollar
                            amount‖ may still contribute to a Roth IRA if the excess is within 10 to
                            15 thousand dollars. In the inimitable style of the IRC, the pro rata
                            phase out is described as follows:




      251
            Is it significant that the word ―taxpayer‖ (singular), rather than ―taxpayers‖ (plural) is used here?
      252
            IRC §408A(c)(3)(C)(ii).

      253
            IRC §408A(c)(3)(B).


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                                     (A)    Dollar limit. The amount determined under paragraph
                                            (2) for any taxable year shall not exceed an amount equal
                                            to the amount determined under paragraph (2)(A) for
                                            such taxable year, reduced (but not below zero) by the
                                            amount which bears the same ratio to such amount as —
                                            (i)        the excess of —
                                                       (I)     the taxpayer's adjusted gross income for
                                                               such taxable year, over
                                                       (II)    the applicable dollar amount, bears to
                                            (ii)       $15,000 ($10,000 in the case of a joint return or a
                                                       married individual filing a separate return).
                                                       The rules of subparagraphs (B) and (C) of section
                                                       219(g)(2) shall apply to any reduction under this
                                                       subparagraph. 254
                          219(g)(2)(B)&(C), in turn, provide:
                                     (B)     No reduction below $200 until complete phaseout. No
                                     dollar limitation shall be reduced below $200 under paragraph
                                     (1) unless (without regard to this subparagraph) such limitation
                                     is reduced to zero.
                                     (C)    Rounding. Any amount determined under this paragraph
                                     which is not a multiple of $10 shall be rounded to the next
                                     lowest $10. 255
What            Does      Until 2005, ―adjusted gross income shall be determined in the same
“Adjusted      Gross      manner as under section 219(g)(3), except that any amount included in
Income”        Mean       gross income under subsection (d)(3) shall not be taken into
Unde r the Statute?       account.‖256
                          Income included under (d)(3) means income recognized as a result of
                          the rollover from a regular IRA to the Roth IRA, the point being that
                          such income is ignored in determining eligibility to make a regular Roth
                          IRA contribution. Not taking the conversion from the regular to the
                          Roth IRA into account can indirectly effect such things as the amount of
                          passive losses that the taxpayer can theoretically recognize in
                          determining AGI. For example, under the statute, as amended, the
                          taxpayer can compute AGI as if passive losses would be available,
                          when in fact they will be lost as a result of the recognition of the
                          conversion income.

      254
            IRC §408A(c)(3)(A).
      255
            IRC §219(g)(2)(B)&(C).

      256
            RC §408A(c)(3)(C)(i).


                                                  -Page 136 of 195-
                                                                    (Printed on Sunday, November 14, 2010 at 6:24 PM)



Does         Income Until 2005, income incurred as a result of the application of the
Include Minimum     minimum required distribution (MRD) rules must be taken into account
Required            in determining who is eligible to make a Roth IRA rollover. After
Distributions?      2004, however, MRDs will be ignored. However, this new rule does
                    not apply to the compensation limits applicable to persons making a
After    2004,   Is
Income Includible regular Roth IRA contribution.
As a Result of the         Q- 6. Is a required minimum distribution from an IRA for a year
Application of the         included in income for purposes of determining modified AGI?
Minimum Required           A- 6. (a) Yes. For taxable years beginning before January 1,
Distribution Limits        2005, any required minimum distribution from an IRA under
Taken Into Account         section 408(a)(6) and (b)(3) (which generally incorporate the
For Purposes of            provisions of section 401(a)(9)) is included in income for
Determining     the        purposes of determining modified AGI.
AGI          Limits
Applicable       to
Regular Roth IRA
Contributions?
                                    (b) For taxable years beginning after December 31, 2004, and
                                    solely for purposes of the $100,000 limitation applicable to
                                    conversions, modified AGI does not include any required
                                    minimum distributions from an IRA under section 408(a)(6) and
                                    (b)(3). 257 [Emphasis added.]
Is    a   Qualified         Since a taxpayer cannot make a Roth IRA contribution in excess of the
Rollover                    regular IRA contribution limits allowable, it is important that the statute
Contribution Taken          allows the taxpayer to exclude rollover Roth IRA contributions for this
Into Account In             purpose.
Determining     the
                                    (B)    Coordination with limit. A qualified rollover
Roth           IRA                  contribution shall not be taken into account for purposes of
Contribution                        paragraph (2) [which provides that ―the maximum amount
Limits?                             allowable as a deduction under section 219 with respect to such
                                    individual for such taxable year . . . over the aggregate amount
                                    of contributions for such taxable year to all other individual
                                    retirement plans (other than Roth IRAs)―258 ].259




       257
             Prop. Treas. Reg. § 1.408A-3 Q&A6 (Proposed 9/3/98).
       258
             IRC §408A(c)(3)(C).

       259
             IRC §408A(c)(6)(B).


                                                -Page 137 of 195-
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How      Do   the          Distinguish between the AGI limits and the compensation limits. The
Proposed                   AGI limits must be consulted to determine who is eligible to make a
Regulations                Roth IRA contribution or rollover, but there is a separate compensation
Describe                   limitation on the $2000 regular IRA or Roth IRA contribution. The size
Compensation For           of a regular IRA or regular Roth IRA contribution is limited to the
Roth Contribution          lesser of (i) compensation or (ii) $2000.
Purposes?
                                   [A]n individual's compensation is the same as that used to
                                   determine the maximum contribution an individual can make to
                                   a traditional IRA. This amount is defined in section 219(f)(1) to
                                   include wages, commissions, professional fees, tips, and other
                                   amounts received for personal services, as well as taxable
                                   alimony and separate maintenance payments received under a
                                   decree of divorce or separate maintenance. Compensation also
                                   includes earned income as defined in section 401(c)(2), but does
                                   not include any amount received as a pension or annuity or
                                   as deferred compensation. In addition, under section 219(c), a
                                   married individual filing a joint return is permitted to make an
                                   IRA contribution by treating his or her spouse's higher
                                   compensation as his or her own, but only to the extent that the
                                   spouse's compensation is not being used for purposes of the
                                   spouse making a contribution to a Roth IRA or a deductible
                                   contribution to a traditional IRA. 260
Is an Income Tax                   ―No deduction shall be allowed under section 219 [or under any
Deduction Allowe d                 other section, for that matter] for a contribution to a Roth
For a Contribution                 IRA.‖261
to a Roth IRA?
How Much Can an                    (2)     Contribution limit. The aggregate amount of
Individual                         contributions for any taxable year to all Roth IRAs maintained
Contribute Each                    for the benefit of an individual shall not exceed the excess (if
Year to a Roth                     any) of —
IRA?                                        (A)    the maximum amount allowable as a deduction
                                            under section 219 with respect to such individual for
                                            such taxable year (computed without regard to
                                            subsection (d)(1) or (g) of such section), over
                                            (B)     the aggregate amount of contributions for such
                                            taxable year to all other individual retirement plans
                                            (other than Roth IRAs) maintained for the benefit of the
                                            individual. 262


      260
            Prop. Treas. Reg. § 1.408A-3 Q&A4 (Proposed 9/3/98).
      261
            IRC 408A(c)(1).

      262
            IRC §408A(c)(2).


                                               -Page 138 of 195-
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                            The reference to the §219(d)(1)&(g) limitations above are important
                            because these limits are inapplicable in the case of a Roth IRA
                            regular contribution. IRC §219(d)(1) provides, in the case of a regular
                            IRA:
                                    (1)     Beneficiary must be under age 70 1/2 . No deduction
                                    shall be allowed under this section with respect to any qualified
                                    retirement contribution for the benefit of an individual if such
                                    individual has attained age 701/2 before the close of such
                                    individual's taxable year for which the contribution was made. 263
                            And IRC §219(g)(1) provides, in the case of a regular IRA:
                                    (g)     Limitation on deduction for active participants in
                                    certain pension plans. (1) In general. If (for any part of any
                                    plan year ending with or within a taxable year) an individual or
                                    the individual's spouse is an active participant, each of the dollar
                                    limitations contained in subsections (b)(1)(A) and (c)(1)(A) for
                                    such taxable year shall be reduced (but not below zero) by the
                                    amount determined under paragraph (2). 264
                            What all this means is that an individual cannot contribute any more to
                            a Roth IRA than he or she can to an ordinary IRA, and that any
                            contribution to an ordinary IRA will reduce the amount available for
                            contribution to a Roth IRA; except that the limitation on contributions
                            after age 70& 1/2, and the AGI and active participation limitations265
                            applicable to regular IRAs, do not apply to Roth IRAs. Of course
                            Roth IRAs have their own AGI limits. The fact that the limits are not
                            the same contributes some confusion to the area.
                            Unlike a regular IRA, a Roth IRA can receive contributions from a 71
                            year old who is an active participant in a qualified plan, if the special
                            Roth AGI limits can be met.




        263
              IRC §219(d)(1).
        264
              IRC §219(g)(1).
        265
             A person who is not an active participant in a qualified plan has no AGI limits under a regular IRA. An
active participant, however, is subject to limits similar to, but not identical with, the Roth IRA A GI limits.


                                                 -Page 139 of 195-
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Does            a Technical Corrections in the IRS Restructuring and Reform Act of 1998
Contribution to a make it clear that contributions to a SEP-IRA or Simple IRA do not
SEP-IRA or Simple reduce the amount otherwise available for contribution to a Roth IRA.
IRA Reduce the           (2)    contributions to any such pension or account [i.e., ―a
Amount that a
                                simplified employee pension or a simple retirement
Taxpayer      Can               account‖] shall not be taken into account for purposes of
Contribute to a
                                subsection (c)(2)(B). 266
Roth IRA?
                               Subsection (c)(2)(B) provides that ―the aggregate amount of
                               contributions for any taxable year to all Roth IRAs maintained for the
                               benefit of an individual shall not exceed the excess (if any) of . . . the
                               aggregate amount of contributions for such taxable year to all other
                               individual retirement plans (other than Roth IRAs) maintained for the
                               benefit of the individual.‖267
Do The Regular It is important to note that the regular IRA contribution limitations
IRA Contribution under discussion do not apply to Roth IRA rollovers, a subject that
Limits Apply to will be discussed in detail later.
Roth IRA Rollover
Contributions?
May Contributions ―Contributions to a Roth IRA may be made even after the individual for
to a Roth IRA Be whom the account is maintained has attained age 70 1/2.‖ 268
Made After Age
70&1/2 ?
Can Contributions         (7) Time when contributions made. For purposes of this
to a Roth IRA             section, the rule of section 219(f)(3) shall apply. 269
Made After the End §219(f)(3), in turn, provides:
of the Year be
Treated as Having         (3)      Time when contributions deemed made. For purposes
Been Made on the          of this section, a taxpayer shall be deemed to have made a
Last Day of the           contribution to an individual retirement plan on the last day of
Preceding Year?           the preceding taxable year if the contribution is made on account
                          of such taxable year and is made not later than the time
                          prescribed by law for filing the return for such taxable year (not
                          including extensions thereof). 270 [Emphasis added.]



       266
             IRC §408A(f)(2).

       267
             IRC §408A(c)(2)(B).
       268
             IRC §408A(c)(4).
       269
             IRC §408A(c)(7).

       270
             IRC §219(f)(3).


                                                 -Page 140 of 195-
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                             Since no deduction is allowed for a contribution to a Roth IRA, the
                             main significance of fixing the contribution year is for purposes of
                             computing the 5-year time period required for tax free distributions,
                             discussed below, and for computing the annual 271 deduction limitations
                             for regular Roth IRA contributions.
                             Interestingly, for purposes of the distribution rules of subsection (d), the
                             due dates would include extensions.
                                     (7)     Due date. For purposes of this subsection, the due date
                                     for any taxable year is the date prescribed by law (including
                                     extensions of time) for filing the taxpayer's return for such
                                     taxable year. 272
                             §408A(d) covers the definition of a ―qualified distribution‖ (including
                             the 5-year rule), rollovers from non Roth IRAs to Roth IRAs, etc.
Is There a Special                   “(D) Marital status. Section 219(g)(4) shall apply for
Rule For Married                     purposes of this paragraph.‖273 [Emphasis added.]
Taxpayers     Filing         The paragraph referred to is §408A(c)(3), which contains the limitation
Separately     And           on contributions in §408A(c)(3)(A)&(C) by reference to the ―applicable
Living       Apart           dollar amount‖ ($150,000/$90,000), and which also contains the
Applicable        In         $100,000 adjusted gross income limit on rollover eligibility described in
Applying         the         §408A(c)(3)(B).
Contribution Limits
and the Rollover             §219(g)(4), in turn, provides:
Limits?
                                     (4)    Special rule for married individuals filing separately
                                     and living apart. A husband and wife who —
                                              (A)      file separate returns for any taxable year, and
                                              (B)      live apart at all times during such taxable year,
                                                       shall not be treated as married individuals for
                                                       purposes of this subsection.




         271
            In this connection if a contribution is made in March of, say, 1999, it is important to know if the 1998 or
the 1999 annual limit is the one applicable, and that depends upon whether the March contribution was on account
of the 1998 or the 1999 year. To answer this question, it is merely necessary to consult the taxpayer‘s 1040.
         272
               IRC §408A(d)(7).

         273
               IRC §408A(c)(3)(D).


                                                  -Page 141 of 195-
                                                                     (Printed on Sunday, November 14, 2010 at 6:24 PM)



Is There a Penalty if               Q- 7. Does an excise tax apply if an individual exceeds the
an        Individual                aggregate regular contribution limits for Roth IRAs?
Exceeds          the
                                    A- 7. Yes. Section 4973 imposes an annual 6-percent excise tax
Regular Roth IRA                    on aggregate amounts contributed to Roth IRAs that exceed the
Contribution
                                    maximum contribution limits described in A-3 of this section.
Limits?                             Any contribution that is distributed, together with net income,
                                    from a Roth IRA on or before the tax return due date (plus
                                    extensions) for the taxable year of the contribution is treated as
                                    not contributed. Net income described in the previous sentence
                                    is includible in gross income for the taxable year in which the
                                    contribution is made. Section 4973 applies separately to an
                                    individual's Roth IRAs and other IRAs. 274


TAXATION OF DISTRIBUTIONS FROM A ROTH IRA
Are Distributions If the distribution from a Roth IRA is a ―qualified distribution,‖ it is
From a Roth IRA excluded from income for income tax purposes:
Tax Free?                 ―Any qualified distribution from a Roth IRA shall not be
                                    includible in gross income.‖275
What is a Qualified                 (2)      Qualified distribution. For purposes of this subsection
Distribution?                       —
                                             (A)     In gene ral. The term ―qualified distribution‖
                                                     means any payment or distribution —
                                                     (i)      made on or after the date on which the
                                                              individual attains age 591/2 ,
                                                     (ii)     made to a beneficiary (or to the estate of
                                                              the individual) on or after the death of
                                                              the individual,
                                                     (iii)    attributable to the individual's being
                                                              disabled (within the meaning of section
                                                              72(m)(7)), or
                                                     (iv)     which is a qualified s pecial purchase
                                                              distribution. 276 [Emphasis added.]




       274
             Prop. Treas. Reg. § 1.408A-3 Q&A6 (Proposed 9/3/98).
       275
             IRC §408A(d)(1).

       276
             IRC §408A(d)(2)(A ).


                                                -Page 142 of 195-
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What is a Qualified                 (5)     Qualified special purpose distribution. For purposes of
Special    Purchase                 this section, the term ―qualified special purpose distribution‖
Distribution?                       means any distribution to which subparagraph (F) of section
                                    72(t)(2) applies. 277
                            In case you were wondering, IRC §72(t)(2)(F), in turn, provides:
                                    (F)     Distributions from certain plans for first home purchases.
                                    Distributions to an individual from an individual retirement plan
                                    which are qualified first-time homebuyer distributions (as
                                    defined in paragraph (8)). Distributions shall not be taken into
                                    account under the preceding sentence if such distributions are
                                    described in subparagraph (A), (C), (D), or (E) or to the extent
                                    paragraph (1) does not apply to such distributions by reason of
                                    subparagraph (B). 278
***Are There Any A very important exception to the qualified distribution definition is for
Important           distributions within 5-years of the initial contribution.
Exceptions to the
Qualified                   (B)     Distributions within nonexclusion period. A payment
Distribution                or distribution from a Roth IRA shall not be treated as a
Definition       —          qualified distribution under subparagraph (A) if such payment
Distributions               or distribution is made within the 5-taxable year period
Within 5-years, For         beginning with the 1st taxable year for which the individual
Example?                    made a contribution to a Roth IRA (or such individual's
                            spouse made a contribution to a Roth IRA) established for such
                            individual. 279
Can a Taxpayer              The statute, as amended, appears to say that if a Roth IRA was
Start the 5-year            established more than five years prior to the distribution, it makes no
Period     Running          difference that contributions to the already established Roth IRA were
With    a    Token          made within five years of the distribution! This reading is supported by
Contribution Now?           the Senate Committee Reports to the IRS Restructuring and Reform Act
                            of 1998. 280 Query, what happens if you set up a Roth IRA today, with a
                            $1 contribution, withdraw it tomorrow, and make a ―real‖ Roth IRA
                            contribution or rollover 5- years from now? Is the 5-year distribution
                            rule a concern any longer? I don‘t think it is.
                            One cautionary note: you still have to meet the AGI limits in the year
                            the Roth IRA is established.



       277
             IRC §408A(d)(5).
       278
             IRC §72(t)(2)(F).
       279
             IRC §408A(d)(2)(B).

       280
             S Rept No. 105-174 (PL-105-206) p. 144


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                              Prior to its amendment, IRC §408A(d)(2(B)(ii) applied a separate five
                              year waiting period for Roth rollover IRAs. Prior to its amendment, IRC
                              §408A(d)(2(B) read:
                                      (B)     Certain distributions within 5-years. A payment or
                                      distribution shall not be treated as a qualified distribution under
                                      subparagraph (A) if —
                                      (i)       it is made within the 5-taxable year period beginning
                                                with the 1st taxable year for which the individual made a
                                                contribution to a Roth IRA (or such individual's spouse
                                                made a contribution to a Roth IRA) established for such
                                                individual, or
                                      (ii)      in the case of a payment or distribution properly
                                                allocable (as determined in the manner prescribed by the
                                                Secretary) to a qualified rollover contribution from an
                                                individual retirement plan other than a Roth IRA (or
                                                income allocable thereto), it is made within the 5-taxable
                                                year period beginning with the taxable year in which the
                                                rollover contribution was made. 281
                              While the provision just quoted was still in effect, the IRS indicated that
                              it was important to keep rollover Roth IRAs and annual contribution
                              Roth IRAs separate, 282 but the IRS Restructuring and Reform Act of
                              1998 would appear to make this no longer necessary. My reading of
                              the recent amendments is that the five year pe riod begins, not when
                              a particular contribution is made, but whe n the first contribution is
                              made, and that the rule is the same for rollovers as for other
                              contributions. The proposed regulations are in accord with this
                              interpretation.
                                      Q- 2. When does the 5-taxable- year period described in A-1 of
                                      this section (relating to qualified distributions) begin and end?




         281
               IRC §408A(d)(2(B) prio r to amend ment by the IRS Restructuring and Reform Act of 1998.

         282
           Ann. 97-122, 1997-50 IRB 1, issued prior to the enactment of the IRS Restructu ring and Reform Act of
1998, contains the following statement: ―The House of Representatives has passed technical corrections legislation
(H.R. 2645) affect ing, among other things, the taxability of distributions fro m Roth IRAs. The leg islation, if enacted ,
would be effective January 1, 1998. In light of this pending legislation, prototype sponsors may wish to consider
maintaining, o r encouraging individuals to maintain, qualified rollover contribution (described in section 408A(e))
in separate Roth IRAs fro m Roth IRAs containing regular Roth IRA contributions (described in section
408A(c)(2)).‖


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                                    A- 2. The 5-taxable-year period described in A-1 of this section
                                    begins on the first day of the individual's taxable year for which
                                    the first regular contribution is made to any Roth IRA of the
                                    individual or, if earlier, the first day of the individual's taxable
                                    year in which the first conversion contribution is made to any
                                    Roth IRA of the individual. The 5-taxable-year period ends on
                                    the last day of the individual's fifth consecutive taxable year
                                    beginning with the taxable year described in the preceding
                                    sentence. For example, if an individual whose taxable year is the
                                    calendar year makes a first-time regular Roth IRA contribution
                                    any time between January 1, 1998, and April 15, 1999, for 1998,
                                    the 5-taxable- year period begins on January 1, 1998. Thus, each
                                    Roth IRA owne r has only one 5-taxable- year period
                                    described in A-1 of this section for all the Roth IRAs of
                                    which he or she is the owner. Further, because of the
                                    requirement of the 5-taxable-year period, no qualified
                                    distributions can occur before taxable years beginning in
                                    2003.283
In Orde r to Avoid          Note that the statute does not require that the distribution be on the 5th
Recapture     Under         anniversary of the establishment of the Roth IRA. Rather, the
the 5-Year Rule,            distribution must be made afte r the end of the 5 taxable year period
Does the Taxpayer           in order to entirely avoid income taxation. So, if a contribution were
Look      to     the        made on April 14 of 2002 which was attributed to taxable year 2001,
Anniversary Date of         the first tax free distribution of earnings could be made January 1, 2006,
the           Initial       taxable year 6, a total of 3 years, 8 months and 16 days.
Establishme nt     of
the Roth IRA?


How       is     the The beneficiary is subject to the same 5-year waiting period as the
Taxpayer’s           taxpayer, except that the beneficiary gets credit for the time that passed
Beneficiary Taxed, while the taxpayer was still alive.
if the Taxpayer Dies        Q- 7. Is the 5-taxable- year period described in A-1 of this
Before the End of           section redetermined when a Roth IRA owner dies?
the 5-Year Waiting
Period?




       283
             Prop. Treas. Reg. § 1.408A-6, Q&A 2 (Proposed 9/3/98).


                                                -Page 145 of 195-
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                                    A- 7. (a)      No. The beginning of the 5-taxable- year period
                                    described in A-1 of this section is not redetermined when the
                                    Roth IRA owner dies. Thus, in determining the 5-taxable- year
                                    period, the period the Roth IRA is held in the name of a
                                    beneficiary, or in the name of a surviving spouse who treats the
                                    decedent's Roth IRA as his or her own, includes the period it
                                    was held by the decedent. 284
If the Beneficiary is The proposed regulations give the taxpayer‘s spouse a very surprising
the    Roth     IRA break here:
Owner’s      Spouse,         (b)     The 5-taxable-year period for a Roth IRA held by an
and the Spouse               individual as a beneficiary of a deceased Roth IRA owner is
Elects to Treat the          determined independently of the 5-taxable- year period for the
Roth IRA As His or           beneficiary's own Roth IRA. However, if a surviving spouse
Her Own, How is
                             treats the Roth IRA as his or her own, the 5-taxable-year
the 5-Year Period            period with respect to any of the surviving spouse's Roth
Computed        With
                             IRAs (including the one that the surviving spouse treats as his or
Respect    to     the        her own) ends at the earlier of the end of either the 5-taxable-
Inherited IRA and
                             year period for the decedent or the 5-taxable-year period
With Respect to              applicable to the spouse's own Roth IRAs.285
Other Roth IRAs
the Spouse May
Own?
Can             the         (C)     Distributions of excess contributions and earnings.
Distribution of An          The term ―qualified distribution‖ shall not include any
Excess         IRA          distribution of any contribution described in section 408(d)(4)
Contribution    Be          and any net income allocable to the contribution. 286
Treated     as    a 408(d)(4) overrides the general rule of 408(d)(1) that causes inclusion
Qualified           of IRA distributions in gross income under §72. §408(d)(4) provides
Distribution?
                    that 408(d)(1) ―does not apply to the distribution of any contribution
                    paid during a taxable year to an individual retirement account or for an
                    individual retirement annuity to the extent that such contribution
                    exceeds the amount allowable as a deduction under section 219 if‖ (1)
                    the contribution is returned before the due date of the individual‘s tax
                    return (including extensions if applicable), (2) no deduction is allowed
                    under §219, and the income attributable to the excess contribution is
                    returned as well. 287



       284
             Prop. Treas. Reg. § 1.408A-6 Q&A7(a) (Proposed 9/3/98).
       285
             Prop. Treas. Reg. § 1.408A-6 Q&A7(b) (Proposed 9/3/98).
       286
             IRC §408A(d)(2)(C).

       287
             IRC §408(d)(4).


                                                -Page 146 of 195-
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                           I think that this provision is in the statute simply to insure that the
                           income on the returned contribution will be taxed.
How        is    a         If a distribution is not a qualified distribution, it is not necessarily
Distribution Taxed         exempt from income, but it (or most of it) probably will be. If the
If It Is Not a             taxpayer has already paid tax on the amount distributed, then it would
Qualified                  be tax exempt, even if not part of a qualified distribution. If (or rather,
Distribution?              since) the account has earnings and appreciation, it is necessary to
                           determine whether it is the earnings and appreciation that is being
                           distributed as a part of the nonqualified distribution, or whether it is
                           after-tax contributions that are being returned. The IRS Restructuring
                           and Reform Act of 1998 gives us ordering rules with which to make this
                           determination.
Are    Nonqualified Recall §408A(a):
Distributions               (a) General rule. Except as provided in this section, a Roth IRA
Subject to the 10%          shall be treated for purposes of this title in the same manner as
Premature                   an individual retirement plan. 288
Distribution Tax?
                           As in the case of a regular IRA, a nonqualified distribution from a
                           Roth IRA, if includable in income, will now be subject to the 10%
                           premature distribution tax of §72(t), if the taxpayer is unde r age
                           59&1/2 , for example. In addition, even previously taxed distributions
                           (which are therefore not includable in income when distributed) will be
                           subject to §72(t) if a rollover contribution is withdrawn before the end
                           of the 5-year period. 289 This is a matter that will be discussed later in
                           this outline.
How      Are    the IRC §408(d) is a fairly comprehensive section which specifies the
Regular       IRA income tax treatment of distributions from IRAs. The first two
Distribution        paragraphs of 408(d) read as follows:
Taxation     Rules         (1)      IN GENERAL. -- Except as otherwise provided in this
Found in §408(d)(2)
                           subsection, any amount paid or distributed out of an individual
Coordinated With           retirement plan shall be included in gross income by the payee
Roth IRAs?
                           or distributee, as the case may be, in the manner provided under
                           section 72.
                                   (2)    SPECIAL RULES FOR APPLYING SECTION 72. --
                                   For purposes of applying section 72 to any amount described in
                                   paragraph (1) --




       288
             §408A(a).

       289
             IRC §408A(d)(3)(F).


                                             -Page 147 of 195-
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                                                  (A)     all individual retirement plans shall be
                                          treated as 1 contract,
                                                  (B)     all distributions during any taxable year
                                          shall be treated as 1 distribution, and
                                          (C)     the value of the contract, income on the contract,
                                          and investment in the contract shall be computed as of
                                          the close of the calendar year with or within which the
                                          taxable year ends.
                                   For purposes of subparagraph (C), the value of the contract shall
                                   be increased by the amount of any distributions during the
                                   calendar year. 290
                           §408A(d)(4)(A), provides:
                                   (A)     Aggregation rules. Section 408(d)(2) shall be applied
                                   separately with respect to Roth IRAs and other individual
                                   retirement plans.



The Distribution Ordering Rules
Does the Owner             It is a fundamental (though not in all cases universal) concept of income
Have a Basis in            taxation that income is only taxed once and that the cost or other basis
Contributions to           of an asset is recaptured tax free if the asset is sold or exchanged. Now
the Roth IRA?              tax has already been paid on amounts contributed to a Roth IRA.
                           Therefore, even if a distribution is not a qualified distribution, all or a
                           portion of the amount distributed will have already been taxed; and,
                           consequently, the taxpayer will have a basis in it.
If Amounts Are             Both before and after the IRS Restructuring and Reform Act,
Withdrawn From a           withdrawals from Roth IRAs received very favorable treatment.
Roth IRA, How Are          Originally, the statute simply provided that if a distribution was made,
Those      Amounts         the taxpayer‘s contributions (basis) would be treated as distributed first.
Allocated        or        While retaining this original approach, the IRS Restructuring and
Attributed?      In        Reform Act of 1998 replaced this broadly favorable rule with a more
Other Words, Are           precise set of ordering rules.
There          Any
Orde ring Rules?
                           The Senate Committee Reports to the IRS Restructuring and Reform
                           Act of 1998 describes the new rules this way:




       290
             IRC §408(d)(1)&(2).


                                             -Page 148 of 195-
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                                    Orde ring rules. Ordering rules will apply to determine what
                                    amounts are withdrawn in the event a Roth IRA contains both
                                    conversion amounts (possibly from different years) and other
                                    contributions. Under these rules, regular Roth IRA contributions
                                    will be deemed to be withdrawn first, then converted amounts
                                    (starting with the amounts first converted). Withdrawals of
                                    converted amounts will be treated as coming first from
                                    converted amounts that were includible in income. As under
                                    present law, earnings will be treated as withdrawn after
                                    contributions. For purposes of these rules, all Roth IRAs,
                                    whether or not maintained in separate accounts, will be
                                    considered a single Roth IRA. 291
How      is    Basis        I would describe the ordering rules as treating distributions as coming
Recaptured in the           from contributions (i.e., not income) first, and in the following order:
Case        of     a        (1) from non-rollover contributions first, (2) from taxable rollover
Distribution that is        contributions second, and (3) from nontaxable rollover contributions
Not a Qualifying            next. Only after all contributions have been recovered is income
Distribution?               recognized.
The         Ordering The new statute, §408A(d)(4)(B), is somewhat imposing, but the
Statute Itself.      essential import is that after-tax contributions to a Roth IRA (including
                     rollovers) will come out first, and it is only afte r all previously taxed
                     contributions are recovered that distributions will be taxable, and
                     then only if the distribution is a not a qualified distribution. The statute
                     —IRC §408A(d)(4)(B)—, as amended, provides:
Are Contributions                   Orde ring rules. For purposes of applying this section and
Made to all Roth                    section 72 [the section that imposes a tax on IRA distributions]
IRAs   Considered                   to any distribution from a Roth IRA, such distribution shall be
First?                              treated as made —
                                             (i)        from contributions to the extent that the amount
                                                        of such distribution, when added to all previous
                                                        distributions from the Roth IRA, does not exceed
                                                        the aggregate contributions to the Roth IRA, and
Within the Class of                          (ii)       from such contributions in the following order:
Contributions, Are                                      (I)     Contributions othe r than qualified
Rollover
                                                                rollover contributions   to  which
Contributions                                                   paragraph (3) applies.
Considered Last on
a FIFO Basis?                                           (II)    Qualified rollover contributions to
                                                                which paragraph (3) applies on a first- in,
                                                                first-out basis.



       291
             S. Rept .No. 105-174 (PL-105-206).


                                                   -Page 149 of 195-
                                                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)



Are         Rollover               Any distribution allocated to a qualified rollover
Contributions                      contribution under clause (ii)(II) shall be allocated first to
(Conside red on a                  the portion of such contribution required to be included in
FIFO          Basis)               gross income.292 [Emphasis added.]
Allocated First to
                           I assume that the phrase ―required to be includable in gross income‖ is a
Amounts Previously         reference to previously taxed regular and rollover contributions, which
Included          in
                           means it would be tax- free at this point. A hasty reading (to which I do
Income?                    not subscribe) might give the opposite impression: that the allocation is
                           made to distributions now required to be taxed.
                           The proposed regulations confirm the more careful reading:
                                   To the extent a distribution is treated as made from a particular
                                   conversion contribution, it is treated as made first from the
                                   portion, if any, that was includible in gross income as a result of
                                   the conversion. 293
How      Are   the                 The proposed regulations provide aggregation and ordering rules
Orde ring    Rules                 for Roth IRAs in accordance with section 408A(d)(4). Under
Described    Under                 these rules, a Roth IRA is not aggregated with a non-Roth IRA,
the       Proposed                 but all a taxpayer's Roth IRAs are aggregated with each other.
Regulations.                       Roth IRA distributions are treated as made first from Roth
                                   IRA contributions and second from earnings. Distributions
                                   that are treated as made from contributions are treated as made
                                   first from regular contributions and then from conversion
                                   contributions on a first- in, first-out basis. A distribution
                                   allocable to a particular conversion contribution is treated as
                                   consisting first of the portion (if any) of the conversion
                                   contribution that was includible in gross income by reason of the
                                   conversion.




      292
            IRC §408A(d)(4)(B), as amended.

      293
            Prop. Treas. Reg. § 1.408A-6 Q&A8(b) (Proposed 9/3/98).


                                               -Page 150 of 195-
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                              The proposed regulations provide that, in applying these
                              aggregation and ordering rules: all distributions from all of a
                              taxpayer's Roth IRAs during a taxable year are aggregated; all
                              regular contributions made for the same taxable year to all the
                              individual's Roth IRAs are aggregated and added to the
                              undistributed total regular contributions for prior taxable years;
                              all conversion contributions received during the same taxable
                              year by all the individual's Roth IRAs are aggregated (with a
                              special rule for a conversion contribution made by distribution
                              during 1998 and rollover during 1999 to which the 4- year spread
                              applies); and rollovers between Roth IRAs are disregarded. The
                              proposed regulations also provide special rules for applying the
                              aggregation and ordering rules in the case of recharacterizations
                              under section 408A(d)(6). Distributions of excess
                              contributions and allocable net income purs uant to section
                              408(d)(4) are treated diffe rently unde r the ordering rules.
                              Specifically, an excess contribution that is distributed under
                              section 408(d)(4) is treated as though it was never
                              contributed, and any allocable net income thereon is
                              includible in gross income for the taxable year of the
                              contribution without regard to whether the taxpayer still has
                              undistributed basis in his or her Roth IRAs. The proposed
                              regulations provide that, for purposes of these ordering rules,
                              different types of contributions are allocated pro rata among
                              multiple Roth IRA beneficiaries after the Roth IRA owner's
                              death. 294
                     In sum, if a nonqualifying distribution is made, the distribution will be
                     treated as having been made out of non rollover contributions first,
                     which means the distribution proceeds will be tax free to that extent.
                     After all non rollover contributions have been deemed distributed,
                     nonqualifying distributions will be treated as coming out of rollover
                     contributions on a FIFO basis, and within the distributions attributable
                     to rollover contributions, the previously taxed contributions will be
                     deemed to be distributed first, which means these distribution proceeds
                     will be tax free. Any remaining amounts will be allocated to income and
                     appreciation, and therefore taxed.




294
      Preamble, ―Distributions,‖ Prop. Treas. Reg. §1.408A(Proposed 9/3/98).


                                          -Page 151 of 195-
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                           Except for 1998 Rollovers from a regular IRA to a Roth IRA on which
                           4-year income averaging is elected (which are a special case), the
                           ordering rules go a long way towards mitigating the downside risk of
                           establishing a Roth IRA. The worst that can happen is that income on
                           the account will be recaptured, but then only if the distribution is
                           nonqualifying (e.g., made within five years of establishment) and then
                           only after the amounts on which tax has already been paid have been
                           distributed tax- free.
                           Example: Suppose a taxpayer contributes $2000 per year to a Roth IRA
                           for three years, and in year three also makes a $1 million Roth Rollover
                           contribution. In year four the taxpayer withdraws $5000 and in year five
                           withdraws $50,000. The $5000 withdrawal in year three is tax free,
                           representing a recapture of $5000 of the $6000 non rollover
                           contributions. Another $1000 would be recaptured in year four tax free.
                           Of the remaining $49,000 nonqualifying distribution made in year four,
                           it too would be nontaxable because it would be attributed to the portion
                           that has already been taxed when rolled over. (I think.)
                           The rule would be different if the rollover were made in 1998 and the
                           taxpayer elected to spread income recognition attributable to the
                           rollover over four years, as permitted for 1998 rollovers only. The
                           technical corrections require that income deferred under this special
                           provision be recaptured if distributions are made within the four year
                           period. This is discussed in detail later in this outline.
Are all Roth IRAs          The statute is somewhat ambiguous with respect to whether all Roth
to Be Aggregated           IRAs are to be aggregated for purposes of applying the ordering rules,
For Purposes of the        but it is implied that this is the case. Immediately prior to
Orde ring Rules?           §408A(d)(4)(B), the ordering rules quoted above, there is an
                           aggregation rule:
                                    (A)     Aggregation rules. Section 408(d)(2) shall be applied
                                    separately with respect to Roth IRAs and other individual
                                    retirement plans. 295
                           In this regard I note that 408(d)(2)(A) requires that ―all individual
                           retirement plans shall be treated as 1 contract.‖ 296
                           On the other hand Subparagraph (B) begins: For purposes of applying
                           this section and section 72 to any distribution from a Roth IRA, such
                           distribution shall be treated as made . . . ‖297 [Emphasis added.]



      295
            IRC §408A(d)(4)(A ).
      296
            IRC §408(d)(2)(A).

      297
            IRC §408A(d)(4)(B), first sentence.


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How Are Corrective                 (e)     Any amount distributed as a corrective distribution
Distributions                      (including net income), as described in A-1(d) of this section, is
Treated Unde r the                 disregarded in determining the amount of contributions,
Orde ring Rules?                   earnings, and distributions. 298
Do the Proposed            I confess that the complexity of the statute makes me less than certain
Regulations    Give        about the operation of the ordering rules in a given situation. The
Examples of the            concept is simple, but the law and regulations are so detailed and
Ope ration of the          convoluted that I am reluctant to rely on my own summations above.
Orde ring Rules?           The proposed regulations contain nine examples, and I am simply going
                           to list them here. If you are interested, read them; if not, skip it.
                                   Q- 10. Are there examples to illustrate the ordering rules
                                   described in A-8 and A-9 of this section?
                                   A- 10 . Yes. The following examples illustrate the ordering rules
                                   in A-8 and A-9 of this section:
                                   Example (1). In 1998, individual B converts $80,000 in his
                                   traditional IRA to a Roth IRA. B has a basis of $20,000 in the
                                   conversion amount and so must include the remaining $60,000
                                   in gross income. He decides to spread the $60,000 income by
                                   including $15,000 in each of the 4 years 1998-2001, under the
                                   rules of section 1.408A-4 A-8. B also makes a regular
                                   contribution of $2,000 in 1998. If a distribution of $2,000 is
                                   made to B anytime in 1998, it will be treated as made entirely
                                   from the regular contributions, so there will be no Federal
                                   income tax consequences as a result of the distribution.
                                   Example (2). The facts are the same as in Example 1, except that
                                   the distribution made in 1998 is $5,000. The distribution is
                                   treated as made from $2,000 of regular contributions and $3,000
                                   of conversion contributions that were includible in gross
                                   income. As a result, B must include $18,000 in gross income for
                                   1998: $3,000 as a result of the acceleration of amounts that
                                   otherwise would have been included in later years under the 4-
                                   year-spread rule and $15,000 includible under the regular 4-
                                   year-spread rule. In addition, because the $3,000 is allocable to a
                                   conversion made within the previous 5 taxable years, the 10-
                                   percent additional tax under section 72(t) would apply to this
                                   $3,000 distribution as if it were includible in gross income for
                                   1998, unless an exception applies. Under the 4- year-spread rule,
                                   B would now include in gross income $15,000 for 1999 and
                                   2000, but only $12,000 for 2001, because of the accelerated
                                   inclusion of the $3,000 distribution.



      298
            Prop. Treas. Reg. § 1.408A-6 Q&A9(e) (Proposed 9/3/98).


                                               -Page 153 of 195-
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Example (3). The facts are the same as in Example 1, except that
B makes an additional $2,000 regular contribution in 1999 and
he does not take a distribution in 1998. In 1999, the entire
balance in the account, $90,000 ($84,000 of contributions and
$6,000 of earnings), is distributed to B. The distribution is
treated as made from $4,000 of regular contributions, $60,000 of
conversion contributions that were includible in gross income,
$20,000 of conversion contributions that were not includible in
gross income, and $6,000 of earnings. Because a distribution has
been made within the 4-year-spread period, B must accelerate
the income inclusion under the 4-year-spread rule and must
include in gross income the $45,000 remaining under the 4-year-
spread rule in addition to the $6,000 of earnings. Because
$60,000 of the distribution is allocable to a conversion made
within the previous 5 taxable years, it is subject to the 10-
percent additional tax under section 72(t) as if it were includible
in gross income for 1999, unless an exception applies. The
$6,000 allocable to earnings would be subject to the tax under
section 72(t), unless an exception applies. Under the 4-year-
spread rule, no amount would be includible in gross income for
2000 or 2001 because the entire amount of the conversion that
was includible in gross income has already been included.
Example (4). The facts are the same as in Example 1, except that
B also makes a $2,000 regular contribution in each year 1999
through 2002 and he does not take a distribution in 1998. A
distribution of $85,000 is made to B in 2002. The distribution is
treated as made from the $10,000 of regular contributions (the
total regular contributions made in the years 1998-2002),
$60,000 of conversion contributions that were includible in
gross income, and $15,000 of conversion contributions that were
not includible in gross income. As a result, no amount of the
distribution is includible in gross income; however, because the
distribution is allocable to a conversion made within the
previous 5 years, the $60,000 is subject to the 10-percent
additional tax under section 72(t) as if it were includible in gross
income for 2002, unless an exception applies.




          -Page 154 of 195-
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Example (5). The facts are the same as in Example 4, except no
distribution occurs in 2002. In 2003, the entire balance in the
account, $170,000 ($90,000 of contributions and $80,000 of
earnings), is distributed to B. The distribution is treated as made
from $10,000 of regular contributions, $60,000 of conversion
contributions that were includible in gross income, $20,000 of
conversion contributions that were not includible in gross
income, and $80,000 of earnings. As a result, for 2003, B must
include in gross income the $80,000 allocable to earnings,
unless the distribution is a qualified distribution; and if it is not a
qualified distribution, the $80,000 would be subject to the 10-
percent additional tax under section 72(t), unless an exception
applies.
Example (6). Individual C converts $20,000 to a Roth IRA in
1998 and $15,000 (in which amount C had a basis of $2,000) to
another Roth IRA in 1999. No other contributions are made. In
2003, a $30,000 distribution, that is not a qualified distribution,
is made to C. The distribution is treated as made from $20,000
of the 1998 conversion contribution and $10,000 of the 1999
conversion contribution that was includible in gross income. As
a result, for 2003, no amount is includible in gross income;
however, because $10,000 is allocable to a conversion
contribution made within the previous 5 taxable years, that
amount is subject to the 10-percent additional tax under section
72(t) as if the amount were includible in gross income for 2003,
unless an exception applies. The result would be the same
whichever of C's Roth IRAs made the distribution.
Example (7). The facts are the same as in Example 6, except that
the distribution is a qualified distribution. The result is the same
as in Example 6, except that no amount would be subject to the
10-percent additional tax under section 72(t), because, to be a
qualified distribution, the distribution must be made on or after
the date on which the owner attains age 591/2, made to a
beneficiary or the estate of the owner on or after the date of the
owner's death, attributable to the owner's being disabled within
the meaning of section 72(m)(7), or to which section 72(t)(2)(F)
applies (exception for a first-time home purchase). Under
section 72(t)(2), each of these conditions is also an exception to
the tax under section 72(t).




           -Page 155 of 195-
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                                        Example (8). Individual D makes a $2,000 regular contribution
                                        to a traditional IRA on January 1, 1999, for 1998. On April 15,
                                        1999, when the $2,000 has increased to $2,500, D
                                        recharacterizes the contribution by transferring the $2,500 to a
                                        Roth IRA (pursuant to §1.408A-5 A-1). In this case, D's regular
                                        contribution to the Roth IRA for 1998 is $2,000. The $500 of
                                        earnings is not treated as a contribution to the Roth IRA. The
                                        results would be the same if the $2,000 had decreased to $1,500
                                        prior to the recharacterization.
                                        Example (9). In December 1998, individual E receives a
                                        distribution from his traditional IRA of $300,000 and in January
                                        1999 he contributes the $300,000 to a Roth IRA as a conversion
                                        contribution. In April 1999, when the $300,000 has increased to
                                        $350,000, E recharacterizes the conversion contribution by
                                        transferring the $350,000 to a traditional IRA. In this case, E's
                                        conversion contribution for 1998 is $0, because the $300,000
                                        conversion contribution and the earnings of $50,000 are
                                        disregarded. The results would be the same if the $300,000 had
                                        decreased to $250,000 prior to the recharacterization. Further,
                                        since the conversion is disregarded, the $300,000 is not
                                        includible in gross income in 1998. 299


The Application of the IRC §72(t) Premature Distribution Tax to Roth IRA Withdrawals
Does the §72(t) As a general rule, the premature distribution tax (imposed by §72(t))
Premature           does not apply on the income required to be recognized as a result of a
Distribution 10% Roth IRA rollover.
Penalty Tax For            (A)     In general. Notwithstanding section 408(d)(3) [which
Distributions Prior        defines rollovers exempt from income tax] in the case of any
to    Age    59&1/2        distribution to which this paragraph [sic] [§408A(d)(3)?,
Apply on Roth IRA
                           rollovers to a Roth IRA from an IRA other than a Roth IRA]
Rollovers Required         applies —
to be Included in
Ordinary Income?                            *     *       *      *
                                               (ii)    section 72(t) shall not apply, . . . 300




       299
             Prop. Treas. Reg. § 1.408A-6 Q&A11 (Proposed 9/3/98).

       300
             IRC §408A(d)(3)(A )(ii).


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                           If the 10% premature distribution tax does not apply to a Roth IRA
                           rollover, after it is withdrawn, then you might think (and some did) that
                           a Roth IRA rollover followed immediately by a withdrawal would be
                           clever way for a person under 59&1/2 to effect a withdrawal without
                           paying a penalty. Congress quickly closed this loophole: The IRS
                           Restructuring and Reform Act of 1998 now makes an exception to
                           the general rule (that Roth IRA distributions are immune from
                           72(t)) in the case of nonqualifying distributions attributable to
                           rollovers that are withdrawn within 5-years, even if not subject to
                           income tax. See below.
Are There Any              Distributions from a Roth IRA, if not included in income, would, under
Exceptions to the          prior law, not be subject to the premature distribution tax, because that
Inapplicability   of       tax only applies to distributions included in income. Hence a technique
the       Premature        was suggested of making a Roth IRA rollover (on which income tax
Distribution Tax to        would have to be paid), relying on the exception from 72(t) provided in
Roth            IRA        IRC §408A(d)(3)(A)(ii), quoted immediately above, and then taking a
Rollovers?                 nontaxable distribution from the Roth IRA which would be exempt
                           from 72(t), not because of an exception, but because it was nontaxable.
                           408A(d)(3)(F) was added to redress this loophole:
                                    (F)    Special rule for applying section 72.
                                           (i)        In general. If —
                                                      (I)     any portion of a distribution from a Roth
                                                              IRA is properly allocable to a qualified
                                                              rollover contribution described in this
                                                              paragraph, and
                                                      (II)    such distribution is made within the 5-
                                                              taxable year period beginning with the
                                                              taxable year in which such contribution
                                                              was made,
                                           then section 72(t) shall be applied as if such portion were
                                           includible in gross income.
                                    (ii)   Limitation. Clause (i) shall apply only to the extent of
                                           the amount of the qualified rollover contribution
                                           includible in gross income under subparagraph (A)(i)
                                           [i.e., (d)(3)(A)(i) Rollover from regular IRA to Roth
                                           IRA]. 301 [Emphasis added.]




      301
            IRC §408A(d)(3)(F)(i)(I).


                                                 -Page 157 of 195-
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Are Non Rollover           The combination of the 408A(F)(i)(I) phraseology, the 408A(F)(ii)
Roth           IRA         limitation, and the ordering rules of 408A(d)(4)(B) all lead to the
Contributions              conclusion that the premature distribution tax can apply only to
Immune From the            previously taxed rollover contributions, not to income and not to
Premature                  nonqualifying distributions attributable to non-rollover Roth IRA
Distribution Tax No        contributions. Distributions of these amounts are still immune from
Matter What?               the 10% pre mature distribution tax, no matte r when withdrawn.
                           The ordering rules treat distributions as coming from non-rollover
                           contributions first, from taxable rollover contributions second, and from
                           nontaxable rollover contributions next.
Can the Premature          The 5-year period necessary to escape the premature distribution tax is
Distribution   Tax         not the same 5- year period used to determine whether a distribution is a
Apply       to   a         qualifying distribution. Even if a distribution is a qualifying distribution
Nontaxable                 —meaning that a Roth IRA has been established for at least 5-years—
Qualifying                 then a nontaxable premature distribution tax could still apply, if the
Distribution?              taxpayer is under age 59&1/ 2 at the time, because the 5- year period
                           referred to in §408A(d)(3)(F)(i)(II) begins ―with the taxable year in
                           which such contribution was made‖302 rather than ―within the 5-taxable-
                           year period beginning with the 1st taxable year for which the individual
                           made a contribution to a Roth IRA‖303 and because the statute makes
                           the tax applicable ―as if such portion were includible in gross
                           income.‖304




      302
            IRC §408A(d)(3)(F)(i)(II).
      303
            IRC §408A(d)(2)(B).

      304
            IRC §408A(d)(3)(F)(ii), flush language.


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If an IRA Owner is                    [A] taxpayer's conversion of an amount from a non-Roth IRA
Taking                                from which the taxpayer was receiving a series of substantially
Substantially Equal                   equal periodic payme nts under section 72(t)(2)(A)(iv) will
Distributions From                    not be treated as a modification of that series under section
a Regular IRA in                      72(t)(4) and thus will not trigger recapture of the section 72(t)
Orde r to Avoid the                   tax on previous distributions from the non-Roth IRA as long as
Premature                             the series of substantially equal periodic payme nts is
Distribution   Tax,                   continued under the Roth IRA (or if section 72(t)(4) would
Can the Regular                       otherwise not apply). 305
IRA be Converted                                          *        *        *        *
to a Roth IRA,
Without                               Q- 12. Can an individual convert a traditional IRA to a Roth
“Modifying”     the                   IRA if he or she is receiving substantially equal periodic
Payment and Thus                      payments within the meaning of section 72(t)(2)(A)(iv) from
Triggering                            that traditional IRA?
Recapture Tax?                        A- 12 .Yes. Not only is the conversion amount itself not subject
                                      to the early distribution tax under section 72(t), but the
                                      conversion amount is also not treated as a distribution for
                                      purposes of determining whether a modification within the
                                      meaning of section 72(t)(4)(A) has occurred. However, if the
                                      original series of substantially equal periodic payments does
                                      not continue to be distributed in substantially equal periodic
                                      payments from the Roth IRA after the conversion, the series
                                      of payme nts will have been modified and, if this modification
                                      occurs within 5 years of the first payment or prior to the
                                      individual becoming disabled or attaining age 591/2 , the
                                      taxpayer will be subject to the recapture tax of section
                                      72(t)(4)(A). 306




ROLLOVERS TO A ROTH IRA
Can an Individual One of the most attractive features of the Roth IRA is the ability of
Rollover a Regular some persons to rollover a regular IRA or a qualified plan distribution
IRA to a Roth IRA? to a Roth IRA, so that the minimum required distribution rules will not
                   apply during life and so that distributions from the Roth IRA in the
                   future will not be subject to income tax.




       305
             Prop. Treas. Reg. § 1.408A, Preamb le, fifth full paragraph, Conversions (Proposed 9/3/98).

       306
             Prop. Treas. Reg. § 1.408A-4 Q&A12 (Proposed 9/3/98).


                                                  -Page 159 of 195-
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Can Anyone Make Unfortunately, not everyone is eligible to make a Roth IRA rollover.
a     Roth  IRA        (B)     Rollover from IRA. A taxpayer shall not be allowed to
Rollover?
                       make a qualified rollover contribution to a Roth IRA from an
                       individual retirement plan other than a Roth IRA during any
                       taxable year if, for the taxable year of the distribution to which
                       such contribution relates —
                                            (i)        the taxpayer's adjusted gross income for such
                                                       taxable year exceeds $100,000, or
                                            (ii)       the taxpayer is a married individual filing a
                                                       separate return. 307


Is    a   Qualified        Since a taxpayer cannot make a Roth IRA rollover if the individual has
Rollover                   adjusted gross income (AGI) over $100,000, then, unless there were a
Contribution Taken         special rule excluding the rollover income, no rollover could exceed
Into Account In            $100,000. Fortunately, the amount taken into income as a result of
Determining     the        the rollove r is excluded from the $100,000 AGI limitation.
Roth IRA Rollover                  Q- 5. What is the significance of modified AGI and how is it
Limits on Adjusted
                                   determined?
Gross Income?
                                   A- 5. Modified AGI is used for purposes of the phase-out rules
                                   described in A-3 of this section and for purposes of the $100,000
                                   modified AGI limitation described in §1.408A-4 A-2(a) (relating
                                   to eligibility for conversion). As defined in section
                                   408A(c)(3)(C)(i), modified AGI is the same as adjusted gross
                                   income under section 219(g)(3)(A) (used to determine the
                                   amount of deductible contributions that can be made to a
                                   traditional IRA by an individual who is an active participant in
                                   an employer-sponsored retirement plan), except that any
                                   conversion is disregarded in determining modified AGI. For
                                   example, the deduction for contributions to an IRA is not taken
                                   into account for purposes of determining adjusted gross income
                                   under section 219 and thus does not apply in determining
                                   modified AGI for Roth IRA purposes. 308




      307
            IRC §408A(c)(3)(B).

      308
            Prop. Treas. Reg. § 1.408A-3 Q&A5 (Proposed 9/3/98).


                                                  -Page 160 of 195-
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Is    a   Qualified Again:
Rollover                   Q- 9. Is the taxable conversion amount included in income for
Contribution Taken
                           all purposes?
Into Account In
Determining    The         A- 9. Except as provided below, any taxable conversion amount
Taxable Portion of         includible in gross income for a year as a result of the
Social     Security        conversion (regardless of whether the individual is using a 4-
Payments?                  year spread) is included in income for all purposes. Thus, for
                           example, it is counted for purposes of determining the
                           taxable portion of social security payme nts under section 86
                           and for purposes of determining the phase-out of the $25,000
                           exemption under section 469(i) relating to the disallowance of
                           passive activity losses from rental real estate activities.
                           However, as provide d in §1.408A-3 A-5, the taxable
                           conversion amount (and any resulting change in other
                           elements of adjusted gross income) is disregarded for
                           purposes of determining modified AGI for section 408A.309
                           [Emphasis added.]
                           This result is accomplished under the statute rather obliquely as follows.
                                   (C)      Definitions. For purposes of this paragraph [i.e.,
                                            §408A(c)(3) ―Limits based on modified adjusted gross
                                            income”]—
                                            (i)        adjusted gross income shall be determined in the
                                                       same manner as under section 219(g)(3), except
                                                       that any amount included in gross income
                                                       under subsection (d)(3) shall not be taken into
                                                       account . . . [this version of §408A(c)(3)(C)(i) is
                                                       applicable until 2005]




      309
            Prop. Treas. Reg. § 1.408A-4 Q&A9 (Proposed 9/3/98).


                                                  -Page 161 of 195-
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                                       (i)        adjusted gross income shall be determined in the
                                                  same manner as under section 219(g)(3), except
                                                  that —
                                                  (I)     any amount included in gross income
                                                          under subsection (d)(3) shall not be
                                                          taken into account, and
                                                  (II)    any amount included in gross income by
                                                          reason of a required distribution under a
                                                          provision described in paragraph (5) shall
                                                          not be taken into account for purposes of
                                                          subparagraph (B)(i). [this version of
                                                          §408A(c)(3)(C)(i) is applicable after
                                                          2004]310 [Emphasis added.]
                     The ―amount included in gross income under subsection (d)(3) ‖
                     which is not required to be taken into account is any amount that is a
                     rollover from an IRA other than a Roth IRA (assuming (d)(3) to be
                     §408A(d)(3), entitled “(3) Rollovers from an IRA other than a Roth
                     IRA.”
                     In the words of the preamble to the proposed regulations:
                              The proposed regulations define the terms compensation and
                              modified adjusted gross income. The definition of compensation
                              is the same as that applicable under section 219(f)(1) for
                              determining the amount, if any, that a taxpayer may contribute
                              to a traditional IRA. This definition does not include amounts
                              transferred from one individual to another by gift (for example,
                              a gift from a parent to a child). The definition of modified
                              adjusted gross income is based on the definition of adjusted
                              gross income applicable under section 219(g)(3)(A) for
                              determining the amount, if any, that a taxpayer may deduct for a
                              contribution to a traditional IRA where the taxpayer is an active
                              participant in an employee plan. However, the definition of
                              modified adjusted gross income applicable to Roth IRAs
                              provides that any amount includible in gross income because
                              of a Roth IRA conversion is disregarded in determining
                              modified adjusted gross income. Additionally, for taxable
                              years beginning after December 31, 2004, modified adjusted
                              gross income does not include the amount of any required
                              minimum distribution from an IRA for purposes of determining
                              conversion eligibility. 311 [Emphasis added.]


310
      IRC §408A(c)(2).

311
      Prop. Treas. Reg. § 1.408A, Preamb le, second full paragraph, Regular Contributions (Proposed 9/3/98).


                                             -Page 162 of 195-
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Can a Minimum In no event can a minimum required distribution (MRD) be rolled over
Required            to a Roth IRA or to any other IRA. 312
Distribution From a
Regular IRA Be
Rolled Over to a
Roth IRA?
                           Treas. Reg. §1.402(c)-2 Q&A 7(a) provides in part:
                                    A-7. (a) General rule. Except as provided in paragraphs (b) and
                                    (c) of this Q&A, if a minimum distribution is required for a
                                    calendar year, the amounts distribute d during that calendar
                                    year are treated as required minimum distributions under
                                    section 401(a)(9), to the extent that the total required minimum
                                    distribution under section 401(a)(9) for the calendar year has not
                                    been satisfied. Accordingly, these amounts are not eligible
                                    rollover distributions. . . . 313 [Emphasis added.]
                           This means, for example, that if one wanted to rollover $10,000 in a
                           year when the MRD was $90,000, one would have to withdraw a
                           minimum of $100,000 in order to make a $10,000 rollover.




      312
            IRC §402(c)(4)(B).

      313
            Treas. Reg. § 1.402(c)-2 Q&A 7(a).


                                                 -Page 163 of 195-
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Can an Individual          This is a very important issue, not easily grasped, and one that I expect
Make a Roth IRA            many to miss: On or before April 1 of the year following the year that
Rollover in the            an individual reaches age 70&1/2 (the required beginning date or RBD),
Year He or She             the individual is required to begin taking distributions from his or her
Reaches          Age       IRA under the minimum required distribution (MRD) rules. The first
70&1/2,     Without        distribution is on account of the preceding year, a nd the second and all
First Taking the           subsequent MRDs must be taken by December 31, beginning with the
Minimum Required           RBD. Thus in the year that includes the RBD, an individual may have
Distribution That is       to take two distributions, one no later than April 1, and one no later than
Not Due Until April        December 31. The individual will only have to take one distribution in
1 of the Next Year?        the year of the RBD if the first MRD was taken in the year the
                           individual reached 70&1/2.
                           Now, as explained above, one cannot rollover an MRD. 314 Further, the
                           first amounts distributed are treated as satisfying the MRD rules. Thus,
                           one cannot make a rollover, even on January 1, without first
                           withdrawing (and subjecting to tax) any MRDs that are due that year
                           (even though not due until December 31). 315 This is a very tricky rule
                           and is probably often reasonably overlooked. It applies in the case of a
                           regular IRA (and probably to a spousal rollover!!), and we now know
                           —because the proposed regs tell us— that the rule applies to Roth IRA
                           rollovers as well. As applied to Roth IRA rollovers, it means that in
                           determining whether an individual is eligible to make a regular
                           Roth IRA contribution or a rollover contribution, the individual
                           must first take into account (and into tax, and cannot rollover) any
                           MRD, including any MRD not due until the required beginning
                           date, even though the RBD is in the next year! After 1994, this rule
                           will not apply to Roth IRA rollovers, but will continue to apply to
                           regular Roth IRA contributions.
                                   Q- 6. Can an individual who has attained at least age 701/2 by
                                   the end of a calendar year convert an amount distributed from a
                                   traditional IRA during that year to a Roth IRA before receiving
                                   his or her required minimum distribution with respect to the
                                   traditional IRA for the year of the conversion?




      314
            IRC §402(c)(4)(B).

      315
            Prop. Treas. Reg. § 1.408A-4 Q&A6(a) (Proposed 9/3/98).


                                               -Page 164 of 195-
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                                     A- 6. (a) No. In order to be eligible for a conversion, an
                                     amount first must be eligible to be rolled over. Section
                                     408(d)(3) prohibits the rollover of a required minimum
                                     distribution. If a minimum distribution is required for a year
                                     with respect to an IRA, the first 316 dollars distributed during that
                                     year are treated as consisting of the required minimum
                                     distribution until an amount equal to the required minimum
                                     distribution for that year has been distributed.
                                     (b) As provided in A-1(c) of this section, any amount converted
                                     is treated as a distribution from a traditional IRA and a rollover
                                     contribution to a Roth IRA and not as a trustee-to-trustee
                                     transfer for purposes of section 408 and section 408A. Thus, in
                                     a year for which a minimum distribution is required
                                     (including the calendar year in which the individual attains
                                     age 701/2 ), an individual may not convert the assets of an
                                     IRA (or any portion of those assets) to a Roth IRA to the
                                     extent that the required minimum distribution for the
                                     traditional IRA for the year has not been distributed.
                                     (c) If a required minimum distribution is contributed to a Roth
                                     IRA, it is treated as having been distributed, subject to the
                                     normal rules under section 408(d)(1) and (2), and then
                                     contributed as a regular contribution to a Roth IRA. The amount
                                     of the required minimum distribution is not a conversion
                                     contribution. 317




        316
           I assume that there is authority for this in the regulations under §402, or under the proposed regulations
under §401(a)(9), but I am still looking for it.

        317
              Prop. Treas. Reg. § 1.408A-4 Q&A6 (Proposed 9/3/98).


                                                 -Page 165 of 195-
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                           Again, in the Preamble to the proposed regulations:
                                    A required minimum distribution may not be converted to a
                                    Roth IRA because section 408(d)(3)(E) prohibits the rollover of
                                    any such distribution. Under the proposed regulations, if a non-
                                    Roth IRA owner has reached age 701/2, any amount distributed
                                    (or treated as distributed because of a conversion) from the IRA
                                    for that year consists of the required minimum distribution to the
                                    extent that an amount equal to the required minimum
                                    distribution for that year has not yet been distributed (or treated
                                    as distributed). Thus, if a taxpayer who is required to receive a
                                    minimum distribution of $10,000 from his or her non-Roth IRA
                                    for a taxable year attempts to convert $11,000 to a Roth IRA
                                    prior to receiving the required minimum distribution, $10,000 of
                                    the conversion amount would be treated as the required
                                    minimum distribution and would be ineligible for conversion.
                                    This result is not affected by the means through which the
                                    taxpayer effects the conversion or by whether an amount greater
                                    than or equal to $10,000 remains in the taxpayer's non-Roth IRA
                                    after the conversion. 318
Must       Minimum                  Q- 6. Is a required minimum distribution from an IRA for a year
Required                            included in income for purposes of determining modified AGI?
Distributions    Be                 A- 6. (a) Yes. For taxable years beginning before January 1,
Included In Income                  2005, any required minimum distribution from an IRA under
For Purposes of                     section 408(a)(6) and (b)(3) (which generally incorporate the
Determining                         provisions of section 401(a)(9)) is included in income for
Eligibility to Make                 purposes of determining modified AGI. 319
a     Roth      IRA
Rollover (or a Roth
IRA          Regular
Contribution)?




      318
            Preamble, ―Conversions,‖ last paragraph, Prop. Treas. Reg. § 1.408A(Proposed 9/3/98).

      319
            Prop. Treas. Reg. § 1.408A-3 Q&A6(a) (Proposed 9/3/98).


                                                -Page 166 of 195-
                                                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)



After    2004,   Is        For tax years beginning after 12/31/2004, amounts required to be
Income Includible          distributed under the minimum required distribution (MRD) rules will
As a Result of the         be ignored in computing the compensation limits used to determine who
Application of the         is eligible to make a Roth IRA rollover. (However, this new rule does
Minimum Required           not apply to the compensation limits applicable to persons making a
Distribution Limits        regular Roth IRA contribution.)
Taken Into Account
                                     (b) For taxable years beginning after December 31, 2004, and
For Purposes of                      solely for purposes of the $100,000 limitation applicable to
Determining     the
                                     conversions, modified AGI does not include any required
Compensation                         minimum distributions from an IRA under section 408(a)(6) and
Limits Applicable                    (b)(3). 320 [Emphasis added.]
to Rollover Roth
IRA Contributions?
                                     (b) For taxable years beginning after December 31, 2004, and
                                     solely for purposes of the $100,000 limitation applicable to
                                     conversions, modified AGI does not include any required
                                     minimum distributions from an IRA under section 408(a)(6) and
                                     (b)(3). 321 [Emphasis added.]
                           The statute provides, effective for tax years beginning after 12/31/2004:
                                     (i)    adjusted gross income shall be determined in the same
                                            manner as under section 219(g)(3), except that —
                                            (I)        any amount included in gross income under
                                                       subsection (d)(3) [i.e., recognized because of the
                                                       rollover] shall not be taken into account, and
                                            (II)       any amount included in gross income by reason
                                                       of a required distribution under a provision
                                                       described in paragraph (5) [i.e., the minimum
                                                       required distributions applicable to regular IRAs
                                                       after age 70& 1/2, which by the way, cannot be
                                                       rolled over to a Roth or any other IRA] shall not
                                                       be taken into account for purposes of
                                                       subparagraph (B)(i) [i.e., for purposes of the
                                                       $100,000 AGI rollover limit!]. 322




      320
            Prop. Treas. Reg. § 1.408A-3 Q&A6(b) (Proposed 9/3/98).
      321
            Prop. Treas. Reg. § 1.408A-3 Q&A6 (Proposed 9/3/98).

      322
            IRC §408A(c)(3)(C)(i).


                                                  -Page 167 of 195-
                                                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)



                             Under IRC §219(g)(3)(A),
                                    (A)    Adjusted gross income. Adjusted gross income of any
                                    taxpayer shall be determined —
                                            (i)        after application of sections 86 and 469, and
                                            (ii)       without regard to sections 135 [sic], 137, and 911
                                                       or the deduction allowable under this section.
                             The difference between the current rule and the rule in 2005 is that in
                             and after the later date, amounts required to be distributed under the
                             minimum distribution rules during the lifetime of the IRA owner will
                             not be included in determining whether the taxpayer‘s adjusted gross
                             income exceeds the rollover Roth IRA AGI limits. Note that this
                             change does not apply to the Roth IRA contribution (non rollover)
                             limits.
                             This change is important, and it is too bad this rule is not in effect now.
                             It means that a client interested in qualifying to make a Roth IRA
                             rollover might need to make the rollover before the year he or she
                             reaches 70&1/2, if the minimum required distributions due the
                             following April 1 would cause the taxpayer‘s AGI to exceed the
                             $100,000 limit if made in the preceding year.
Must a Roth IRA                     (6)     Rollover contributions.
Rollover    Be    a                         (A)    In general. No rollover contribution may be
“Qualified Rollover                         made to a Roth IRA unless it is a qualified rollover
Distribution”?                              contribution. 323


What       is     a In order to make a Roth IRA rollover, the rollover must be a ―qualified
“Qualified Rollover rollover contribution.”
Contribution”?             (e)     Qualified rollover contribution. For purposes of this
                                    section, the term ―qualified rollover contribution‖ means a
                                    rollover contribution to a Roth IRA from another such account,
                                    or from an individual retirement plan, but only if such rollover
                                    contribution meets the requirements of section 408(d)(3). For
                                    purposes of section 408(d)(3)(B), there shall be disregarded any
                                    qualified rollover contribution from an individual retirement
                                    plan (other than a Roth IRA) to a Roth IRA. 324
                             Disregarding 408(d)(3)(B) means disregarding the rule that only one
                             rollover per year is permitted.



       323
             IRC §408A(c)(6)(A).

       324
             IRC §408A(e).


                                                  -Page 168 of 195-
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Are the Rollover Many people think that the rollover rules are very simple. In fact, they
Rules     Basically are very simple compared to the rules prior to the Small Business Job
Very Simple?        Protection Act. Now the rules can be described in one subsection that
                    can be squeezed into only two pages. §408(d)(3) is set forth in a
                    footnote below. 325 Whether or not you consider this to be simple
                    depends a lot on your personality.


        325
            IRC §408(d)(3)           Rollover contribution. An amount is described in this paragraph as a rollover
contribution if it meets the requirements of subparagraphs (A) and (B).
                 (A)      In general.
                Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement
        account or individual retirement annuity to the individual for whose benefit the account or annuity is
        maintained if -
                          (i)       the entire amount received (includ ing money and any other property) is paid into
                 an individual retirement account or individual retirement annuity (other than an endowment
                 contract) for the benefit of such individual not later than the 60th day after the day on wh ich he
                 receives the payment or distribution;
                           (ii)    no amount in the account and no part of the value of the annuity is attributable to
                 any source other than a rollover contribution (as defined in section 402) fro m an emp loyee's trust
                 described in section 401(a) which is exempt fro m tax under section 501(a), or an annuity plan
                 described in section 403(a) (and any earnings on such contribution) and the entire amount received
                 (including property and other money) is paid (for the benefit of such individual) into another such
                 trust or annuity plan not later than the 60th day on which the indiv idual receives the payment or
                 distribution; or
                          (iii)
                                   (I)       the entire amount received (including money and other property)
                          represents the entire interest in the account or the entire value of the annuity,
                                   (II)     no amount in the account and no part of the value of the annuity is
                          attributable to any source other than a rollover contribution from an annuity contract
                          described in section 403(b) and any earnings on such rollover, and
                                    (III)    the entire amount thereof is paid into another annuity contract
                          described in section 403(b) (for the benefit of such individual) not later than the 60th day
                          after he receives the payment or distribution.
                 (B)      Limitation.
                 This paragraph does not apply to any amount described in subparagraph (A) (i) received by an
        individual fro m an individual retirement account or individual ret irement annuity if at any time during the
        1-year period ending on the day of such receipt such individual received any other amount described in that
        subparagraph from an individual ret irement account or an individual retirement annuity which was not
        includible in h is gross income because of the application of this paragraph.
                 (C)      Denial of rollover treat ment for inherited accounts, etc.
                          (i)      In general. In the case of an inherited individual retirement account or
                 individual retirement annuity --
                                   (I)      this paragraph shall not apply to any amount received by an individual
                          fro m such an account or annuity (and no amount transferred fro m such account or annuity
                          to another individual ret irement account or annuity shall be excluded fro m gross income
                          by reason of such transfer), and


                                                 -Page 169 of 195-
                                                                          (Printed on Sunday, November 14, 2010 at 6:24 PM)



Can a Roth IRA IRC §408A, by its terms, applies only to rollovers from other Roth
Rollover be Made IRAs and from regular IRAs. For some reason, qualified plans are not
From a Qualified mentioned.
Plan or a 403(b)        Q- 5. Can amounts in other kinds of retirement plans be
Tax       Sheltered
                        converted to a Roth IRA?
Annuity Plan?
                        A- 5 .No. Only amounts in another IRA can be converted to a
                        Roth IRA. For example, amounts in a qualified plan or annuity
                        plan described in section 401(a) or 403(a) cannot be converted
                        directly to a Roth IRA. Also, amounts held in an annuity
                        contract or account described in section 403(b) cannot be
                        converted directly to a Roth IRA. 326
                           A rollover from a qualified plan to a Roth IRA could easily be
                           accomplished, however, by first rolling over (or making a direct
                           transfer) to a regular IRA, and from there to a Roth IRA.




                                    (II)     such inherited account or annuity shall not be treated as an individual
                          retirement account or annuity for purposes of determining whether any other amount is a
                          rollover contribution.
                         (ii)      Inherited individual ret irement account or annuity. An individual retirement
                 account or individual retirement annuity shall be treated as inherited if --
                                   (I)     the individual for whose benefit the account or annuity is maintained
                          acquired such account by reason of the death of another individual, and
                                   (II)      such individual was not the surviving spouse of such other individual.
      (D)        PARTIAL ROLLOVERS PERMITTED.-
                 (i)       In General.-If any amount paid or distributed out of an indiv idual ret irement account or
                 individual ret irement annuity would meet the requirements of subparagraph (A) but for the fact
                 that the entire amount was not paid into an elig ible p lan as required by clause (i), (ii), or (iii) of
                 subparagraph (A), such amount shall be treated as meeting the requirements of subparagraph (A)
                 to the extent it is paid into an eligib le p lan referred to in su ch clause not later than the 60th day
                 referred to in such clause.
                 (ii)     Eligible Plan.-For purposes of clause (i), the term ―elig ible plan‖ means any account,
                 annuity, contract, or plan referred to in subparagraph (A).
      (E)       DENIA L OF ROLLOVER TREATM ENT FOR REQUIRED DISTRIBUTIONS.-This paragraph
      shall not apply to any amount to the extent such amount is required to be distributed under subsection (a)(6)
      or (b)(3).
               (F)      FROZEN DEPOSITS. -- For purposes of this paragraph, rules similar to the rules of
      section 402(a)(6)(H) (relating to fro zen deposits) shall apply.

      326
            Prop. Treas. Reg. § 1.408A-4 Q&A5 (Proposed 9/3/98).


                                                  -Page 170 of 195-
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Can a Rollover Be                   (C)     Conve rsions. The conversion of an individual retirement
Effected By Simply                  plan (other than a Roth IRA) to a Roth IRA shall be treated for
“Conve rting”    a                  purposes of this paragraph as a distribution to which this
Regular IRA to a                    paragraph applies. 327
Roth IRA?
The        Proposed                 Proposed §1.408A-4 provides rules regarding Roth IRA
Regulations’                        conversions. In general, a taxpayer whose modified adjusted
Explanation of How                  gross income does not exceed $100,000 may ―convert‖ an
to Convert.                         amount held in a non-Roth IRA (i.e., a traditional IRA or
                                    SIMPLE IRA) to a Roth IRA. The conversion may be made in
                                    one of three ways: (1) a distribution from a non-Roth IRA may
                                    be rolled over to a Roth IRA within 60 days; (2) an amount in a
                                    non-Roth IRA of one financial institution may be transferred in
                                    a trustee-to-trustee transfer to a Roth IRA of a different financial
                                    institution; or (3) an amount in a non-Roth IRA may be
                                    transferred to a Roth IRA of the same financial institution. (In
                                    the third case, no physical transfer of assets is necessary, but the
                                    instrument governing the non-Roth IRA must, of course, be
                                    replaced by a Roth IRA instrument.) The conversion amount
                                    must be a qualified rollover contribution under section 408A(e)
                                    and, therefore, must satisfy section 408(d)(3) (other than the
                                    one-rollover-per-year rule of that section). Any amount
                                    distributed from a non-Roth IRA prior to the 1998 taxable year
                                    may not be contributed to a Roth IRA as a conversion
                                    contribution. 328 [Emphasis added.]
Are Roth Rollove rs Under the ―once-a-year rule,‖ no more than one regular IRA rollover
Restricted to One can be made during any twelve month period. 329 However, this rule
Rollover a Year?    does not apply to Roth IRA rollovers.
                                    An amount in a traditional IRA may be converted to an amount
                                    in a Roth IRA if two requirements are satisfied. First, the IRA
                                    owner must satisfy the modified AGI limitation described in A-
                                    2(a) of this section and, if married, the joint filing requirement
                                    described in A-2(b) of this section. Second, the amount
                                    contributed to the Roth IRA must satisfy the definition of a
                                    qualified rollover contribution in section 408A(e) (i.e., it must
                                    satisfy the requirements for a rollover contribution as defined in
                                    section 408(d)(3), except that the one-rollover-pe r-year
                                    limitation in section 408(d)(3)(B) does not apply). 330


        327
              IRC §408A(d)(3)(C).
        328
            Preamble, ―Conversions,‖ first paragraph, Prop. Treas. Reg. §1.408A (Proposed 9/3/98). See also, Prop.
Treas. Reg. § 1.408A-4 Q&A 1 (Proposed 9/3/98).

        329
              IRC §408(d)(3)(B).


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Can a SEP-IRA be For reasons that escape me, §408A was amended to provide that neither
Designated as a an SRA (a Simple Retirement Account described in §408(p)) or an SEP
Roth IRA?        (a Simplified Retirement Account described in §408(k)) can be
                 converted into a Roth IRA:
                                   (f)      Individual retire ment plan. For purposes of this section
                                   —
                                            (1)        a simplified employee pension or a simple
                                                       retirement account may not be designated as a
                                                       Roth IRA . . . 331
                           However, in most cases it would appear that a rollover from the SRA or
                           SEP to a regular IRA, followed by a rollover or conversion to a Roth
                           IRA, would be possible.
                           I must be reading the statute incorrectly, because the proposed
                           regulations address this issue as follows:




      330
            Prop. Treas. Reg. § 1.408A-4 Q&A1 (Proposed 9/3/98).

      331
            IRC §408A(f)(1).


                                                  -Page 172 of 195-
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                                   Q- 4. Do any special rules apply to a conversion of an amount
                                   in an individual's SEP IRA or SIMPLE IRA to a Roth IRA?
                                   A- 4 (a)        An amount in an individual's SEP IRA can be
                                   converted to a Roth IRA on the same terms as an amount in any
                                   other traditional IRA.
                                   (b)     An amount in an individual's SIMPLE IRA can be
                                   converted to a Roth IRA on the same terms as a conversion from
                                   a traditional IRA, except that an amount distributed from a
                                   SIMPLE IRA during the 2-year period described in section
                                   72(t)(6), which begins on the date that the individual first
                                   participated in any SIMPLE IRA Plan maintained by the
                                   individual's employer, cannot be converted to a Roth IRA.
                                   Pursuant to section 408(d)(3)(G), a distribution of an amount
                                   from an individual's SIMPLE IRA during this 2-year period is
                                   not eligible to be rolled over into an IRA that is not a SIMPLE
                                   IRA and thus cannot be a qualified rollover contribution. This 2-
                                   year period of section 408(d)(3)(G) applies separately to the
                                   contributions of each of an individual's employers maintaining a
                                   SIMPLE IRA Plan.
                                   (c)     Once an amount in a SEP IRA or SIMPLE IRA has been
                                   converted to a Roth IRA, it is treated as a contribution to a Roth
                                   IRA for all purposes. Future contributions under the SEP or
                                   under the SIMPLE IRA Plan may not be made to the Roth
                                   IRA. 332
In Order to Make a         The primary disadvantage in making a Roth IRA rollover is that income
Rollover to a Roth         tax must first be paid on the amount rolled over. 333 Unlike a regular
IRA, Must Income           rollover, no deduction is allowed for a rollover to a Roth IRA. 334 The
Tax Be Paid on the         statute is explicit on the question of income inclusion:
Amount       Rolled
Over?




      332
            Prop. Treas. Reg. § 1.408A-4 Q&A4 (Proposed 9/3/98).
      333
            IRC §72.

      334
            IRC §408A(c)(1).


                                               -Page 173 of 195-
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                                               (3)        Rollovers from an IRA other than a Roth IRA.
                                                          (A)     In general. Notwithstanding section
                                                          408(d)(3), in the case of any distribution to which
                                                          this paragraph applies —
                                                          (i)     there shall be included in gross income
                                                                  any amount which would be includible
                                                                  were it not part of a qualified rollover
                                                                  contribution, 335 . . . .
Are There Any                                             (iii)   unless the taxpayer elects not to have this
Special Income Tax                                                clause apply for any taxable year, any
Breaks For Roth                                                   amount required to be included in gross
IRA        Rollove rs                                             income for such taxable year by reason of
Made         Before                                               this paragraph [(d)(3)] for any distribution
January 1, 1999?                                                  before January 1, 1999 [i.e., not April
                                                                  15], shall be so included ratably over the
                                                                  4-taxable year period beginning with such
                                                                  taxable year. 336
                                                          Any election under clause (iii) for any
                                                          distributions during a taxable year may not be
                                                          changed after the due date for such taxable
                                                          year. 337
                             Roth IRAs established before 1999 means Roth IRAs established in
                             1998, because prior to 1998 there was no such thing as a Roth IRA.
                             This is a one-shot tax break only applicable in 1999.
                             Note that the election is all or nothing: a partial election procedure is
                             not described in the statute.
Why Not Make 4               It is tempting to consider simply making 4 rollovers, one in each of 4
Rollovers,        In         separate years, in an effort to achieve the same result as under IRC
Separate        Tax          §408A(d)(3)(A)(iii). However, the income in the regular IRA during the
Years, In Orde r to          intervening years will not be insignificant, and in order to roll it over
Avoid            the         too, income tax would have to be paid. If the rollover was made in
Restrictions                 1998, the income might never be taxed.
Applicable Under
the Special Rule?




       335
             IRC §408A(d)(3)(A )(i).
       336
             IRC §408A(d)(3)(A )(iii).

       337
             IRC §408A(d)(3)(A ), flush language follo wing clause (iii).


                                                     -Page 174 of 195-
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What Happens if a         As indicated above, if a taxpayer does not elect out of
Roth IRA Rollover         §408A(d)(3)(A)(iii), the taxpayer will recognize any income attributable
Made In 1998 is           to a rollover made in 1998 from a regular IRA to a Roth IRA ratably
Withdrawn Early?          over four years, 1998-2001. In order to prevent taxpayers from using
                          this provision simply as a loophole to spread the income, followed by
                          an immediate withdrawal from the Roth IRA, the IRS Restructuring and
                          Reform Act of 1998 amended §408A by adding elaborate provisions
                          designed to accelerate income if withdrawals are made the first three
                          years of the 4-year averaging period (i.e., before 2001).
                                     (E)    Special rules for contributions to which 4-year
                                     averaging applies. In the case of a qualified rollover
                                     contribution to a Roth IRA of a distribution to which
                                     subparagraph (A)(iii) applied, the following rules shall apply:
                                            (i)        Acceleration of inclusion.
                                                       (I)     In general. The amount required to be
                                                               included in gross income for each of the
                                                               first 3 taxable years in the 4-year period
                                                               under subparagraph (A)(iii) shall be
                                                               increased by the aggregate distributions
                                                               from Roth IRAs for such taxable year
                                                               which are allocable unde r paragraph
                                                               (4) [i.e., 408A(d)(4), Aggregation and
                                                               Ordering Rules] to the portion of such
                                                               qualified rollover contribution required
                                                               to be included in gross income under
                                                               subparagraph (A)(i)[i.e., any distribution
                                                               ―which would be includible were it not
                                                               part      of    a    qualified    rollover
                                                                             338
                                                               contribution‖ ].




     338
           IRC §408A(d)(3)(A )(i).


                                                  -Page 175 of 195-
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                                                  (II)    Limitation on aggregate amount
                                                          included. The amount required to be
                                                          included in gross income for any taxable
                                                          year under subparagraph (A)(iii) shall not
                                                          exceed the aggregate amount required to
                                                          be included in gross income under
                                                          subparagraph (A)(iii) [i.e., because of a
                                                          rollover to a Roth IRA] for all taxable
                                                          years in the 4-year period (without regard
                                                          to subclause (I)) reduced by amounts
                                                          included [(under (A)(3)?) because of a
                                                          rollover to a Roth IRA] for all preceding
                                                          taxable years. 339
                           Under the statute, income tax would be owed on any distributions made
                           in 1998, 1999 or 2000 attributable (under the ordering rules) to amounts
                           rolled over to a Roth IRA in 1998, until the total that was originally
                           deferred has been recognized. For example, if $100,000 were rolled
                           over in 1998, and no withdrawals and no election to accelerate were
                           made, $25,000 would be recognized in each of 1998, 1999, 2000 and
                           2001. If, however, $15,000 were withdrawn in 1999, we presume that
                           $40,000 would be recognized in that year ($25,000 + $15,000).
Does the Original 4-       At this point in the example (1999), $65,000 in tax has been paid
Year       Payment         ($25,000+$40,000), with $35,000 and two years left to go. If $50,000
Schedule Change to         were withdrawn in 2000, $35,000 is all that could be taxed under this
Reflect a Prior            portion of the statute (unless contributions were exhausted under the
Acceleration in the        ordering rules) because only $35,000 remains. However, what if
Tax Paid?                  nothing were withdrawn in 2000?
                           (a) Does the taxpayer still recognize $25,000 as if still under the
                           original schedule? Or (b), is the $35,000 that is left paid ratably over
                           two years ($17,500 per remaining year)? Or, (c) since the taxpayer was
                           to have paid a total of $75,000 over the first three yea rs, and since the
                           taxpayer has already paid $65,000 due to the withdrawal, maybe all that
                           is owed in year three is $10,000. In this case a $25,000 payment in year
                           four would round out the deficit.
                           My money is on (a): that the taxpayer must pay $25,000 each year, plus
                           whatever has been withdrawn that year, not to exceed a total of
                           $100,000 (except to the extent that the withdrawal is not a qualifying
                           distribution and all contributions have been recaptured).
                           Contrary to the usual Roth distribution rule, basis is recovered last if the
                           4-year averaging recapture provisions apply.



      339
            IRC §408A(d)(3)(E)(i).


                                             -Page 176 of 195-
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What Happens if Acceleration on account of death will not apply if the taxpayer‘s spouse
the Taxpayer Dies inherits the Roth IRA and makes an appropriate election.
Before the 4-Years
                          (ii) Death of distributee.
is Up?
                                  (I)     In general. If the individual required to include
                                          amounts in gross income under such
                                          subparagraph dies before all of such amounts are
                                          included, all remaining amounts shall be
                                          included in gross income for the taxable year
                                          which includes the date of death.
Is     The re     An                       (II)    Special rule for surviving spouse. If the spouse
Exception to the                                   of the individual described in subclause (I)
Income      Inclusion                              acquires the individual's entire interest in any
Rule in the Case of                                Roth IRA to which such qualified rollover
Death      of     the                              contribution is properly allocable, the spouse
Taxpayer Within 5-                                 may elect to treat the remaining amounts
Years      if     the                              described in subclause (I) as includible in the
Taxpayer’s Spouse                                  spouse's gross income in the taxable years of the
is the Beneficiary of                              spouse ending with or within the taxable years of
the Roth IRA?                                      such individual in which such amounts would
                                                   otherwise have been includible. Any such
                                                   election may not be made or changed after the
                                                   due date for the spouse's taxable year which
                                                   includes the date of death. 340 [Emphasis added.]
Does the Spouse             The statute accelerates the tax due if a taxpayer dies within 4- years of
Have to Be the              making a 1998 rollover that was being averaged. However, the
Beneficiary of All          exception in cases where the taxpayer‘s spouse is the beneficiary
Roth IRAs or Just           applies if the spouse acquires the interest in ―any Roth IRA to which
the 1998 Rollover           such qualified rollover contribution is properly allocable.‖ This
IRA,     for   the          certainly suggests that if there is more than one 1998 Roth rollover IRA,
Exception       to          only one of which names the spouse as the beneficiary, then the one of
Apply?                      which the spouse was the beneficiary should qualify for the exception.
                            Note that unless the spouse is also a beneficiary of the taxpayer‘s estate,
                            the spouse may not be inclined to make the election to defer the tax,
                            since the obligation to pay the tax would be on the estate if the
                            exception does not apply. If the spouse makes the election anyway, is
                            the payment of the tax a gift to the beneficiaries of the estate? Hopefully
                            not.




       340
             IRC §408A(d)(3)(E)(ii).


                                              -Page 177 of 195-
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What Distributions                   (B)     Distributions to which paragraph applies. This
Are Covered By the                   paragraph [i.e., §408A(d)(3) dealing with rollovers from a
Special   Taxation                   regular IRA to a Roth IRA] shall apply to a distribution from an
Rules   Governing                    individual retirement plan (other than a Roth IRA) maintained
Roth      Rollover                   for the benefit of an individual which is contributed to a Roth
IRAs?                                IRA maintained for the benefit of such individual in a qualified
                                     rollover contribution.. 341


Corrective Distributions and Transfers, Reconversions, Recharacterization and Recontribution
What Happens If a           If a person makes a Roth IRA rollover, but later finds out that he or she
Roth IRA Rollover           had more than $100,000 of adjusted gross income during the year, what
is Made, But It             can the taxpayer do about it? An amendment to the statute appears to
Later Turns Out             offer a way out, by allowing the taxpayer to transfer the Roth IRA
that the Taxpayer’s         contribution made during the year, plus earnings, to a regular IRA on or
Adjusted     Gross          before his or her income tax return is due.
Income    Exceeded                   (6)     Taxpayer may make adjustme nts before due date.
the        Rollover
Limits?
Can       Amounts
Contributed to an
IRA or Roth IRA
be Recharacterized
or Recontributed?
                                             (A)     In general. Except as provided by the Secretary,
                                             if, on or before the due date for any taxable year, a
                                             taxpayer transfers in a trustee-to-trustee transfer any
                                             contribution to an individual retirement plan made
                                             during such taxable year from such plan to any other
                                             individual retirement plan, then, for purposes of this
                                             chapter, such contribution shall be treated as having been
                                             made to the transferee plan (and not the transferor plan).




       341
             IRC §408A(d)(3)(B). Again, qualified plans are not mentioned.


                                                 -Page 178 of 195-
                                                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)



                                             (B)     Special rules.
                                                     (i)     Transfer of earnings. Subparagraph (A)
                                                             shall not apply to the transfer of any
                                                             contribution unless such transfer is
                                                             accompanied by any net income allocable
                                                             to such contribution.
                                                     (ii)    No deduction. Subparagraph (A) shall
                                                             apply to the transfer of any contribution
                                                             only to the extent no deduction was
                                                             allowed with respect to the contribution to
                                                             the transferor plan. 342
Are          The re                  Notice 98-49 sets forth additional reporting requirements, not
Additional                           found in the proposed regulations in the case of a
Reporting                            recharacterization of a contribution from one IRA to another as
Requirements     In                  described in Prop. Treas. Reg. §1.408A-5.343
the Case of a
Recharacterization?
When is the Latest                   (7)     Due date. For purposes of this subsection, the due date
that the Corrective                  for any taxable year is the date prescribed by law (including
Transfer Can Be                      extensions of time) for filing the taxpayer's return for such
Made?                                taxable year. 344
                              Interestingly, the corrective transfer can be made by the e xtended tax
                              return due date, though the original contribution would have had to have
                              been made by April 15 to be considered as having been made on
                              account of the preceding year. 345
                              This provision allows a Roth Rollover to be undone under certain
                              circumstances. Note that the undoing could work both ways.
                              Apparently, the transfer could be to or from a regular IRA and to or
                              from a Roth IRA. So, a contribution to a regular IRA could be
                              transferred to a Roth IRA by the tax return due date, as well as the other
                              way around.




      342
            IRC §408A(d)(6).
      343
            Notice 98-49, Q&A B-1, 1998-38 IRB.
      344
            IRC §408A(d)(7).

      345
            IRC §219(f)(3).


                                                -Page 179 of 195-
                                                                 (Printed on Sunday, November 14, 2010 at 6:24 PM)



May a Corrective        It might even be the case that a market crash following a Roth IRA
Transfer Be Made,       conversion causes the taxpayer to wish he had waited until the next year
Even       if    the    to effect the rollover. This new provision of the law would appear to
Taxpayer Is Not         allow the taxpayer to do just that.
Disqualified From
                        Further, the proposed regulations do not limit corrective transfers:
Making the Roth
Contribution       or
Rollover in the First
Place?
                                Proposed §1.408A-5 provides special rules for the
                                recharacterization of IRA contributions (including Roth IRA
                                regular and conversion contributions). Section 408A(d)(6)
                                provides that, except as otherwise provided by the Secretary of
                                the Treasury, an IRA contribution that is transferred to another
                                IRA in a trustee-to-trustee transfer on or before the Federal
                                income tax return due date (with extensions) for the taxable year
                                of the contribution is treated as made to the transferee IRA and
                                not the transferor IRA. Section 408A(d)(6) requires that the
                                transfer include allocable net income on the contribution and
                                that no deduction be allowed for the contribution to the
                                transferor IRA. This statutory provision was intended to permit a
                                taxpayer who had converted an amount held in a non-Roth IRA
                                to a Roth IRA and later discovered that his or her modified
                                adjusted gross income for the year of the conversion exceeded
                                $100,000 to correct the conversion by retransferring the
                                converted amount to a non-Roth IRA. The proposed
                                regulations interpret section 408A(d)(6) liberally to provide
                                broad relief to taxpayers who wish to change the nature of
                                an IRA contribution (and not only to allow taxpaye rs to
                                correct Roth IRA conversions for which they were
                                ineligible). Moreover, the proposed regulations make
                                application of section 408A(d)(6) elective by the taxpayer and
                                permit the taxpayer to recharacterize all or any portion of an
                                IRA contribution. 346




        346
          Preamble, ―Recharacterizations   of IRA   Contributions,‖   first   paragraph, Prop. Treas. Reg.
§1.408A(Proposed 9/3/98).


                                            -Page 180 of 195-
                                                                   (Printed on Sunday, November 14, 2010 at 6:24 PM)



                           A partial transfer might also be desirable, particularly if the taxpayer‘s
                           AGI is within the phase-out range.
                           Note that a rollover will not work. It has to be a ―trustee-to-trustee
                           transfer.‖ According to the Senate report, a trustee-to-trustee transfer
                           can include transfers between IRA trustees, transfers between IRA
                           custodians, transfers from and to IRA accounts and annuities, and
                           transfers between IRA accounts and annuities with the same trustee or
                           custodian. 347
How      Does      a               Q. C-1. What effect does the recharacterization of a contribution
Recharacterization                 (as described in section 1.408A-5 of the proposed Income Tax
Affect the Tax Free                Regulations) have on the rules governing the nontaxable return
Return of Basis                    of basis in the case of traditional IRA distributions?
Unde r the Ordering                A. C-1. Part III, ―Distributions,‖ of Notice 87-16, sets forth the
Rules?                             rules for calculating the nontaxable return of basis in the case of
                                   distributions from traditional IRAs. These rules continue to
                                   apply except as modified below.
                                   The total IRA account balances, the total nondeductible
                                   contributions, and the distribution amount (as these terms are
                                   used in Notice 87-16) for an individual for a taxable year are
                                   each adjusted to reflect recharacterized amounts contributed to,
                                   or distributed from, the traditional IRAs. For purposes of
                                   making this adjustment, the contribution that is being
                                   recharacterized as a contribution to the SECOND IRA is treated
                                   as having been originally contributed to the SECOND IRA on
                                   the same date and (in the case of a regular contribution) for the
                                   same taxable year that the contribution was made to the FIRST
                                   IRA. If the recharacte rization transaction occurs after the
                                   close of the taxable year and if the recharacterization
                                   transaction involves a regular contribution for the prior
                                   taxable year, the recharacterization is disregarded for the
                                   prior taxable year in determining the total IRA account
                                   balances.348




      347
            S Rept No. 105-174 (PL 105-206) p. 144.

      348
            Notice 98-49, Q&A C-1, 1998-38 IRB.


                                               -Page 181 of 195-
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What      is    the        The IRS appears to be using the term ―recharacterization‖ when
Difference Between         describing a rollback from a Roth IRA to a traditional IRA, and the term
a                          ―reconversion‖ to describe a rollover of recharacterized amounts in a
Recharacterization         traditional IRA back to a Roth IRA.
and               a
                                    Due to lack of guidance in recently published proposed regs,
Reconversion?                       IRS is providing interim rules on whether taxpayer who has
                                    converted amount from traditional IRA to Roth IRA may
                                    not only transfer amount back [to the traditional IRA] in
                                    recharacterization, but may also ―reconvert‖ amount from
                                    traditional to Roth IRA. 349
Can a Taxpayer The rules on Reconversions are set forth in detail in Notice 98-50.350
Conve rt a Regular The Headnote sets forth the general rule:
IRA to a Roth IRA,       Generally, taxpayer who conve rts from traditional to Roth
And then Reconvert       in '98, then transfers back to traditional by means of
Back to a Regular        recharacterization is eligible to convert back to Roth not
IRA?                     more than once on or after 11/1/98 and on or before
                         12/31/98, and then not more than once during '99. 351
How             Are                 Conversions or reconversions before 11/1/98, effective date of
Conve rsions    and                 rules, aren't treated as conversion for purposes of these
Reconversions                       limitations. 352
Prior to November
1, 1988 Treated?
                           The ―not more than once‖ requirement is not found in the statute or the
                           proposed regulations. However the “the Service and Treasury are
                           considering whether final regulations should permit reconversions
                           under any circumstances.”353




      349
            Notice 98-50, Headnote, first sentence, IRB1998-44.

      350
            Notice 98-50, IRB 1998-44.
      351
            Notice 98-50, Headnote, second sentence, IRB1998-44.
      352
            Notice 98-50, Headnote, third sentence, IRB1998-44.

      353
            Notice 98-50, IRB 1998-44.


                                                -Page 182 of 195-
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If a Taxpayer Has                   A taxpayer who converts an amount from a traditional IRA to a
Already Made One                    Roth IRA during 1998 and then transfers that amount back to a
Recharacterization                  traditional IRA by means of a recharacterization is eligible to
in 1998, Can the                    reconvert that amount to a Roth IRA once [more?] (but no more
Taxpayer                            than once) on or afte r November 1, 1998, and on or before
Reconvert      One                  December 31, 1998; the taxpayer also is eligible to reconvert
More    Time     In                 that amount once (but no more than once) during 1999. (Any
1998?                               conversion of that amount during 1999 would constitute a
                                    reconversion because the taxpayer previously converted that
                                    amount during 1998.) This rule applies without regard to
                                    whether the taxpayer's initial conversion or recharacterization of
                                    the amount occurs before, on, or after November 1, 1998, and
                                    (as indicated above) even if the taxpayer has made one or more
                                    reconversions before November 1, 1998. 354
                           The rules are somewhat mind boggling when applied to a specific set of
                           facts. For instance, if a Roth IRA rollover was made in the first half of
                           1988, and if the taxpayer could reconverted the Roth IRA back to a
                           regular IRA before November, the taxpayer could re-reconvert back to
                           a Roth IRA in November or December. 355 Because pre-November
                           conversions and reconversions are ignored, the post-November
                           conversion is treated as a first time Roth IRA rollover (I think). Ex. 2 in
                           Notice 98-50 approves a situation like that just described, where a re-
                           conversion that takes place in November is then followed by a
                           recharacterization transfer back to a traditional IRA before the end of
                           the year, noting that any subsequent reconversion would be an excess
                           conversion. 356 However, a taxpayer, in the example given, could
                           reconvert again (but only once) in 1999. 357
                           Here is an example




      354
            Notice 98-50, IRB 1998-44.
      355
            Notice 98-50, Ex. 1, IRB 1998-44.
      356
            Notice 98-50, Ex. 2, IRB 1998-44.

      357
            Notice 98-50, Ex. 2, last sentence, IRB 1998-44.


                                                 -Page 183 of 195-
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                           Here is an example taken from Notice 98-44. in case you are otherwise
                           confused:
                                    On November 5, 1998, R converts an amount in a traditional
                                    IRA (Traditional IRA 1) to a Roth IRA (Roth IRA 1). On
                                    November 25, 1998, R transfers the amount in Roth IRA 1 back
                                    to a traditional IRA (Traditional IRA 2) by means of a
                                    recharacterization. R is then eligible to reconvert the amount
                                    in Traditional IRA 2 to a Roth IRA at any time on or before
                                    December 31, 1998. After that reconversion, R may transfer
                                    the amount back to a traditional IRA by means of a
                                    recharacterization, but any subsequent reconversion of that
                                    amount to a Roth IRA before January 1, 1999, would be an
                                    excess reconversion. If R does transfer the amount back to a
                                    traditional IRA by means of a recharacterization (whether before
                                    or after the end of 1998), R will be eligible to reconvert that
                                    amount once (but no more than once) during 1999. Any
                                    additional reconversion of that amount during 1999 would be an
                                    excess reconversion. 358
If a Taxpayer Has                   A taxpayer who converts an amount from a traditional IRA to a
Already Made One                    Roth IRA during 1999 that has not been converted previously
Conve rsion from a                  and then transfers that amount back to a traditional IRA by
Traditional IRA to                  means of a recharacterization is eligible to reconvert that amount
a Roth IRA and                      to a Roth IRA once [more?] (but no more than once) on or
Back       to     a                 before December 31, 1999. In determining whether a taxpayer
Traditional IRA in                  has made a previous conversion for purposes of these interim
1999,    Can    the                 rules, a failed conversion, as described in proposed regulations
Taxpayer                            section 1.408A-4, Q & A-3 (that is, an attempted conversion for
Reconvert to a Roth                 which the taxpayer is not eligible for reasons set forth in
IRA One More                        proposed regulations section 1.408A-4), will not be treated as a
Time In 1999?                       conversion. 359
                                    On January 5, 1999, S converts an amount in a traditional IRA
                                    (Traditional IRA 1) to a Roth IRA (Roth IRA 1). S had not
                                    previously converted that amount. On February 17, 1999, S
                                    transfers the amount in Roth IRA 1 back to a traditional IRA
                                    (Traditional IRA 2) by means of a recharacterization. After the
                                    recharacterization, S is eligible to reconvert the amount in
                                    Traditional IRA 2 once (but no more than once) at any time
                                    on or before December 31, 1999. Any additional reconversion
                                    of that amount during 1999 would be an excess reconversion. 360

      358
            Notice 98-50, Ex. 6, IRB 1998-44.
      359
            Notice 98-50, IRB 1998-44.

      360
            Notice 98-50, Ex. 7, IRB 1998-44.


                                                -Page 184 of 195-
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How Do Excess                       Any excess reconversion of an amount during 1998 or 1999 will
Reconversions                       not change the taxpayer's taxable conversion amount (as defined
Affect        the                   in proposed regulations section 1.408A-8, Q & A-1(b)(7)).
Reconversion                        Instead, the excess reconversion and the last preceding
Amount?                             recharacterization will not be taken into account for purposes of
                                    determining the taxpayer's taxable conversion amount, and the
                                    taxpayer's taxable conversion amount will be based on the last
                                    reconversion that was not an excess reconversion (unless, after
                                    the excess reconversion, the amount is transferred back to a
                                    traditional IRA by means of a recharacterization). An excess
                                    reconversion will otherwise be treated as a valid reconversion.
                                    361


Are     Adjustments                 Any conversion, recharacterization, or reconversion of an
for    Gains     and                amount under this notice must satisfy the provisions of section
Losses Taken Into                   408A and the proposed regulations. For example, a taxpayer
Account            In               making a conversion or reconversion must satisfy the $100,000
Determining       the               modified AGI limitation of section 408A(c)(3)(B)(i) and
Ineligible Portion?                 proposed regulations section 1.408A-4, Q & A-2, and a
                                    taxpayer transferring a contribution from one IRA to
                                    another IRA by means of a recharacterization must make
                                    the transfer on or before the due date for the taxable year of
                                    the contribution, as required by section 408A(d)(6) and
                                    proposed regulations section 1.408A-5, Q & A-1. In determining
                                    the portion of any amount held in a Roth IRA or a traditional
                                    IRA that a taxpayer is not eligible to reconvert under the interim
                                    rules set forth in this notice, any amount previously converted
                                    (or reconverted) is adjusted for subsequent net gains or losses
                                    thereon. 362
                           Notice 98-50 gives five examples of the reconversion rules.
To What Extent                      [E]ffective as of November 1, 1998, the interim rules set forth . .
May a Taxpayer                      . [in Notice 98-50] will apply for 1998 and 1999. Any future
Rely on Notice 98-                  guidance that either prohibits reconversions or imposes
50?                                 conditions on reconversions more restrictive than those imposed
                                    under this notice will not apply to reconversions completed
                                    before issuance of that guidance. 363




       361
             Notice 98-50, IRB 1998-44.
       362
             Notice 98-50, IRB 1998-44.

       363
             Notice 98-50, IRB 1998-44.


                                              -Page 185 of 195-
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How Is an Ineligible               If a taxpayer converts (or reconverts) an amount, transfers that
Reconversion                       amount back to a traditional IRA by means of a
Treated For Income                 recharacterization, and reconverts that amount in a transaction
Tax Purposes?                      for which the taxpayer is not eligible under the interim rules set
                                   forth in this notice, the reconversion will be deemed an
                                   “excess reconversion.” However, any reconversions that a
                                   taxpayer has made before November 1, 1998, will not be treated
                                   as excess reconversions and will not be taken into account in
                                   determining whether any later reconversion is an excess
                                   reconversion. 364


MISCELLANEOUS
Are    Roth    and                 (D)     Additional reporting requirements. Trustees of Roth
Regular       IRA                  IRAs, trustees of individual retirement plans, or both, whichever
Trustees       and                 is appropriate, shall include such additional information in
Custodians                         reports required under section 408(i) as the Secretary may
Required to Report                 require to ensure that amounts required to be included in gross
Amounts Included                   income under subparagraph (A) are so included. 365
in Gross Income as
a Result of a Roth
IRA Rollover?
                                   The proposed regulations do contain reporting requirements:
                                   Q- 1. What reporting requirements apply to Roth IRAs?
                                   A- 1 .Generally, the reporting requirements applicable to IRAs
                                   other than Roth IRAs also apply to Roth IRAs, except that,
                                   pursuant to section 408A(d)(3)(D), the trustee of a Roth IRA
                                   must include on Forms 1099-R and 5498 additional information
                                   as described in the instructions thereto. Any conversion of
                                   amounts from an IRA other than a Roth IRA to a Roth IRA is
                                   treated as a distribution for which a Form 1099-R must be filed
                                   by the trustee maintaining the non-Roth IRA. In addition, the
                                   owner of such IRAs must report the conversion by completing
                                   Form 8606. In the case of a recharacterization described in
                                   §1.408A-5 A-1, IRA owners must report such transactions in the
                                   manner prescribed in the instructions to the applicable Federal
                                   tax forms.
                                   Q- 2. Can a trustee rely on reasonable representations of a Roth
                                   IRA contributor or distributee for purposes of fulfilling reporting
                                   obligations?

      364
            Notice 98-50, IRB 1998-44.

      365
            IRC §408A(d)(3)(D).


                                             -Page 186 of 195-
                                                                       (Printed on Sunday, November 14, 2010 at 6:24 PM)



                                   A- 2. A trustee maintaining a Roth IRA is permitted to rely on
                                   reasonable representations of a Roth IRA contributor or
                                   distributee for purposes of fulfilling reporting obligations. 366
Are          The re                Notice 98-49 sets forth additional reporting requirements, not
Reporting                          found in the proposed regulations in the case of a
Requirements Not                   recharacterization of a contribution from one IRA to another as
Set Forth in the                   described in Prop. Treas. Reg. §1.408A-5.367
Regulations?
Are There Any                      Q- 12. How do the withholding rules under section 3405 apply
Withholding Rules                  to Roth IRAs?
Applicable to Roth                 A- 12. Distributions from a Roth IRA are distributions from an
IRAs?
                                   individual retirement plan for purposes of section 3405 and thus
                                   are designated distributions unless one of the exceptions in
                                   section 3405(e)(1) applies. Pursuant to section 3405(a) and (b),
                                   nonperiodic distributions from a Roth IRA are subject to 10-
                                   percent withholding by the payor and periodic payments are
                                   subject to withholding as if the payments were wages. However,
                                   an individual can elect to have no amount withheld in
                                   accordance with section 3405(a)(2) and (b)(2).
                                   Q- 13. Do the withholding rules under section 3405 apply to
                                   conversions?
                                   A- 13 . Yes. A conversion by any method described in §1.408A-
                                   4 A-1 is considered a designated distribution subject to section
                                   3405. However, a conversion occurring in 1998 by means of a
                                   trustee-to-trustee transfer of an amount from a traditional IRA to
                                   a Roth IRA established with the same or a different trustee is not
                                   required to be treated as a designated distribution for purposes of
                                   section 3405. Consequently, no withholding is required with
                                   respect to such a conversion (without regard to whether or not
                                   the individual elected to have no withholding). 368




      366
            Prop. Treas. Reg. § 1.408A-7 Q&A1 & 2 (Proposed 9/3/98).
      367
            Notice 98-49, Q&A B-1, 1998-38 IRB.

      368
            Prop. Treas. Reg. § 1.408A-6 Q&A12 & 13 (Proposed 9/3/98).


                                               -Page 187 of 195-
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                     ISSUES NOT EXPRESSLY COVERED BY THE STATUTE
Are Roth IRAs IRAs are generally not covered by ERISA, 369 and therefore cannot rely
Exempt        From on the ERISA legislation giving creditor protection to certain pension
Creditor Claims?   plans. However, many states have ―shield laws‖ which classify IRAs as
                   exempt assets. Now, a Roth IRA is an IRA; so in most cases a state‘s
                   IRA shield law will protect a Roth IRA as well as a regular IRA. But
                   each state‘s statute will have to be carefully read, because the wording
                   could make a difference. For example, in Texas, the statute does not
                   extend to IRAs that are not tax deductible. Whether the statute covers a
                   Roth rollover IRA on which tax was paid is not clear. Arguably it
                   doesn‘t. Many states, including Texas, are expected to pass legislation
                   shortly to make sure that Roth IRAs are treated the same as regular
                   IRAs for purposes of creditor protection.
Can an Irrevocable           This is an idea that has been popularized by Merv Wilf, and, in my
Roth     IRA     Be          opinion, it has some merit, as well as some risk.
Established Under
                             The idea is that the Roth IRA is established in the form of a trust in
Which           the          which the owner has given up all benefits and rights. Because the
Taxpayer Retains
                             minimum distribution rules do not apply to a Roth IRA during life, the
No    Rights   that          owner is not required to take distributions. At death, the IRA continues
Would Put the Roth
                             for the benefit of the owner‘s beneficiaries, who are irrevocably
IRA       in    the          designated when the IRA is established. The owner has made a taxable
Taxpayer’s Estate?
                             gift at the time the IRA is established. But since the IRA will compound
                             tax free during the owner‘s life and thereafter for the life expectancy of
                             the beneficiary, the size of the gift and the size of the benefit ultimately
                             enjoyed will be very disproportionate. For example, a $1 million gift
                             could easily generate $30 million in benefits over thirty to forty years.
                             Further, that $30 million would be income and estate tax free. Not bad,
                             if it works. 370
                             Unfortunately, the proposed regulations nix this idea.
                                      Q- 19. What are the Federal income tax consequences of a Roth
                                      IRA owner transferring his or her Roth IRA to another
                                      individual by gift?




        369
              The Emp loyee Ret irement Income Security Act of 1974, 29 U.S.C. §1001, et seq., as amended.
        370
           See, among many other similar art icles by Mr. Wilf, ―The Roth IRA: A New Estate Planning
Opportunity,‖ by Mervin M. Wilf, Pension & Benefits Week, Research Institute of America, 10/ 27/ 97 beginning at
page 7.


                                                  -Page 188 of 195-
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                                    A- 19 .A Roth IRA owne r's transfer of his or her Roth IRA
                                    to another individual by gift constitutes an assignme nt of the
                                    owne r's rights under the Roth IRA. At the time of the gift, the
                                    assets of the Roth IRA are deemed to be distributed to the owner
                                    and, accordingly, are treated as no longer held in a Roth IRA. In
                                    the case of any such gift of a Roth IRA made prior to October 1,
                                    1998, if the entire interest in the Roth IRA is reconveyed to the
                                    Roth IRA owner prior to January 1, 1999, the Internal Revenue
                                    Service will treat the gift and reconveyance as never having
                                    occurred for estate tax, gift tax, and generation-skipping tax
                                    purposes and for purposes of this A-19.371
What is the Effect It is clear that a taxpayer may rely upon a proposed regulation under
of   a    Proposed certain circumstances, but the IRS cannot use a proposed regulation as a
Regulation?        sword. A proposed regulation has no more weight in court than that of a
                   brief filed by the Commissioner:
                                    First, we note that although final regulations command our
                                    respect (Commissioner v. Portland Cement Co. of Utah), 450
                                    U.S. 156, 169 (1981), proposed regulations carry no more
                                    weight than a position advanced on brief by respondent.
                                    Freesen v. Commissioner, 84 T.C. 920, 939 (1985), revd. on
                                    other grounds 798 F.2d 195 (7th Cir. 1986), quoting F. W.
                                    Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-1266
                                    (1970). Cf. Mearkle v. Commissioner, 87 T.C. 527, 531 (1986).
                                    See also Tamarisk Country Club v. Commissioner, 84 T.C. 756,
                                    761 (1985); Scott v. Commissioner, 84 T.C. 683 (1985); and
                                    Miller v. Commissioner, 70 T.C. 448, [pg. 898]460 (1978). fn
                                    We therefore decide this case by considering the evidence under
                                    the standards of the statute, not those of the proposed
                                    regulation. 372
Do the AGI Limits The proposed regulations apply the AGI limits to a husband and wife
Apply Separately to jointly, but it is not at all clear that the statute requires this. There is
a Husband and nothing in the technical corrections that address this issue.
Wife Filing Jointly?




       371
             Prop. Treas. Reg. § 1.408A-6 Q&A 19 (Proposed 9/3/98).

       372
             Laglia V. Co mmissioner, 88 TC 894 (1987).


                                                -Page 189 of 195-
                                                                        (Printed on Sunday, November 14, 2010 at 6:24 PM)



                                      (b) If the individual is married, he or she is permitted to
                                      convert an amount to a Roth IRA during a taxable year only
                                      if the individual and the individual's spouse file a joint
                                      return for the taxable year that the funds are paid from the
                                      traditional IRA. In this case, the modified AGI subject to the
                                      $100,000 limit is the modified AGI derived from the joint return
                                      using the couple's combined income. The only exception to
                                      this joint filing requirement is for an individual who has lived
                                      apart from his or her spouse for the entire taxable year. If the
                                      married individual has lived apart from his or her spouse for the
                                      entire taxable year, then such individual can treat himself or
                                      herself as not married for purposes of this paragraph, file a
                                      separate return and be subject to the $100,000 limit on his or her
                                      separate modified AGI. In all other cases, a married individual
                                      filing a separate return is not permitted to convert an amount to a
                                      Roth IRA, regardless of the individual's modified AGI. 373
                             The rollover AGI limit for a married taxpayer filing jointly as well as
                             for a single person is $100,000. It would stand to reason that each
                             spouse (each taxpayer) can effect a Roth IRA rollover if that spouse has
                             AGI that does not exceed $100,000, particularly since this is the limit
                             for a single person. Moreover, it would have been easy enough for the
                             statute to have referred to combined AGIs if that had been intended. 374
                             In the case of the AGI contribution limit applicable only to a taxpayer
                             [sic] filing a joint return, the literal wording of the statute is extremely
                             important, in my opinion. The statute reads:
                                      (I)     in the case of a taxpayer filing a joint return, $150,000375
                                              [Emphasis added.]
                             Now, this provision (§408A(c)(3)(C)(ii)(I)) applies only to joint returns.
                             Therefore, if the word ―taxpayers‖ (plural) had been substituted for
                             ―taxpayer‖ (singular) there would have been no ambiguity whatsoever,
                             because a joint return is never filed by a single taxpayer. In other words
                             there is not even a reason for claiming that the word taxpayer (singular)
                             was used for convenience, in a generic sense. Because a joint return is
                             always filed by more than one taxpayer, the use of the word taxpayer
                             (singular) can only refer to the taxpayer who is making the Roth IRA
                             contribution; since, otherwise, there would have been no imaginable
                             reason not to have used the plural.


        373
              Prop. Treas. Reg. § 1.408A-4 Q&A2(b) (Proposed 9/3/98).
        374
           For a detailed discussion of this issue, see Wilf, ―Roth IRA $100,000 A GI Threshold: Per Spouse or Per
Couple?,‖ Pension & Benefits Week, Research Institute of America, 12/22/97.

        375
              IRC §408A(c)(3)(C)(ii)(I).


                                                 -Page 190 of 195-
                                                                     (Printed on Sunday, November 14, 2010 at 6:24 PM)



Can an Inherited           I see no reason why an inherited IRA could not be converted to a Roth
IRA Be Converted           IRA by a surviving spouse, especially if the IRA were either rolled over
to a Roth IRA by a         by the spouse to a regular IRA first, or if the spouse elected to treat the
Surviving Spouse?          IRA as his or her own under §408(d)(3)(C). However, this is not
                           explicitly addressed in §408A.
                           I do not think that a beneficiary of an IRA who is not a spouse can make
                           a Roth IRA conversion, because only a spouse can rollover an inherited
                           IRA. 376 Further, I think it would be imprudent for a spouse-beneficiary
                           to make a Roth IRA rollover without first becoming the owner (rather
                           than the beneficiary) of the IRA.
Can A Surviving The proposed regulations specifically address the inherited Roth IRA:
Spouse Who is a
                       Q- 4. What is the effect of a surviving spouse of a Roth IRA
Beneficiary of a       owner treating an IRA as his or her own?
Roth IRA, Treat the
Roth IRA as His or     A- 4 . If the surviving spouse of a Roth IRA owner treats a Roth
Her Own, Under         IRA as his or her own as of a date, from that date forward, the
the Inhe rited IRA     Roth IRA is treated as though it were established for the benefit
Rules Applicable to    of the surviving spouse and not the original Roth IRA owner.
Spouses?               Thus, for example, the surviving spouse is treated as the Roth
                       IRA owner for purposes of applying the minimum distribution
                       requirements under section 408(a)(6) and (b)(3). Similarly, the
                       surviving spouse is treated as the Roth IRA owner rather than a
                       beneficiary for purposes of determining the amount of any
                       distribution from the Roth IRA that is includible in gross income
                       and whether the distribution is subject to the 10-percent
                       additional tax under section 72(t). 377


                                    MISCELLANEOUS MATTERS
Are There Any There are dozens of Roth IRA web sites on the internet. Check these
Roth Web Sites on out:
the World Wide         http://www.rothira.com/
Web?
                       http://www.fool.com/School/Taxes/1998/taxes980115.htm
                                   http://www.benefitslink.com/index.shtml
                           This article, along with a number of other articles dealing with
                           pensions, IRAs and estate planning can be found at my own site
                           www.trustsandestates.net.




      376
            IRC §402(c)(9); Temp. Treas. Reg. §1.402(c)-2T Q&A-10.

      377
            Prop. Treas. Reg. § 1.408A-2 Q&A4 (Proposed 9/3/98).


                                               -Page 191 of 195-
                                                                     (Printed on Sunday, November 14, 2010 at 6:24 PM)



                           The first site (www.rothira.com) is the mother of all Roth web sites. It
                           contains links to hundreds of other Roth web sites and articles and Roth
                           calculators.
                           The second site is maintained as a part of the ―Motley Fool‖ web page
                           (http://www.fool.com/index.htm). The site is devoted to more than just
                           Roth IRAs. You will find a free Roth IRA calculator there.
                           The third site is maintained by David Rhett Baker, an attorney in
                           Orlando. This is the mother of all pension web sites and the mother of
                           all pension links. I am telling you, this is a “must” for the
                           professional pension advisor.
Has the IRS Issued The IRS issued an Announcement 378 —issued before enactment of the
Any        Special IRS Restructuring and Reform Act of 1998—, which offered the
Guidance or Forms following guidance.
For Use With Roth        Model forms. – New Form 5305-R, Roth Individual Retirement
IRAs?
                         Trust Account, and Form 5305-RA, Roth Individual Retirement
                         Custodial Account, will serve as Service-approved model forms
                         for use by financial institutions to offer Roth IRAs to their
                         customers. These forms can be downloaded from the IRS
                         homepage at www.irs.ustreas.gov.


                                   •        Separate trusts. – Contributions to a Roth IRA must be
                                            maintained as a separate trust, custodial account or
                                            annuity from contributions to a Traditional IRA.
                                            Separate accounting within a single trust, custodial
                                            account or annuity is not permitted.
                                   •        Opinion letters. – The Service is not presently accepting
                                            submissions for opinion letters on prototype Roth IRAs,
                                            but will issue procedures in the future for requesting
                                            such opinion letters.
                                   •        Combined documents. – The Service will permit a
                                            prototype sponsor to combine a Roth IRA and a
                                            Traditional IRA in the same document provided that (1)
                                            the separate trust requirement, above, is satisfied and (2)
                                            the document, as completed by the owner, clearly
                                            indicates whether it is to be used as a Traditional IRA or
                                            as a Roth IRA. This must be done in a way that makes
                                            clear that designation as one type of IRA precludes its
                                            designation as the other type of IRA. 379


      378
            Ann. 97-122, 1997-50 IRB 1. See also Ann. 98-14, 1998-8 IRB 44.

      379
            Ann. 97-122, 1997-50 IRB 1.


                                               -Page 192 of 195-
                                                                     (Printed on Sunday, November 14, 2010 at 6:24 PM)



Has the IRS Issued         As indicated in Announcements 97-122 and 98-14380 , and more recently
a Form Roth IRA            in Notice 98-49, 381 the IRS has promulgated Forms 5305-R (trust
Trust or Custodial         account IRA) and 5305-RA (custodial account IRA), similar to the 5305
Agreement?                 IRA prototype forms. These forms leave much to the imagination. For
                           example, it is implied (perhaps), but not stated, that the IRA beneficiary
                           (or, for that matter, the owner) can withdraw funds from the IRA
                           without the permission of the IRA trustee. However, the Forms can be
                           amended by the knowledgeable:




      380
            Ann. 97-122, 1997-50 IRB 1. See also Ann. 98-14, 1998-8 IRB 44.

      381
            Notice 98-49, 1998-38 IRB.


                                               -Page 193 of 195-
                                                                 (Printed on Sunday, November 14, 2010 at 6:24 PM)



                                  Section A. Service-Approved Roth IRA Documents
                                  Q. A-1. Are there model forms available for establishing a Roth
                                  IRA?
                                  A. A-1. Yes. The Service has issued three model forms, Form
                                  5305-R, Form 5305-RA and Form 5305-RB, that can be used to
                                  establish a Roth IRA as a trust account, a custodial account or an
                                  annuity, respectively. In the case of Form 5305-RB, the model
                                  form is used as an endorsement to an insurance company's
                                  annuity contract. Model forms issued by the Service contain pre-
                                  approved language that, if followed, will satisfy the applicable
                                  statutory requirements.
                                  Q. A-2. Can the model forms be amended?
                                  A. A-2. Article IX of each of these model forms permits certain
                                  amendments to be made to provisions of the Roth IRA in
                                  accordance with the instructions to the model forms. For
                                  example, under the model forms, a spouse who is the sole
                                  designated beneficiary is deemed to have elected to treat the
                                  Roth IRA, upon the death of the owner, as his or her own. The
                                  model forms can be amended to give a surviving spouse who is
                                  the sole designated beneficiary the option of not treating the
                                  Roth IRA, upon the death of the owner, as his or her own.
                                  Q. A-3. Is the Service currently accepting applications for
                                  opinion letters on prototype Roth IRAs?
                                  A. A-3. The Service is not currently accepting applications for
                                  opinion letters on prototype Roth IRAs. Announcement 97-122,
                                  1997-50 I.R.B. 63, states that transitional relief similar to that
                                  provided under Rev. Proc. 97-29, 1997-1 C.B. 698, will be
                                  provided to sponsors and their customers who establish Roth
                                  IRAs with documents that have not been pre-approved by the
                                  Service. Thus, for example, if in January 1998 an individual
                                  made a contribution to a trust or custodial account or purchased
                                  an annuity using documents or associated written material that
                                  clearly designates the account or annuity as a Roth IRA, then,
                                  provided certain requirements are met, the individual will be
                                  deemed to have established a Roth IRA on that date using a
                                  document approved by the Service for use as a Roth IRA. 382
Blue Book                 On Dec. 17, the staff of the Joint Committee on Taxation released the
                          1997 Blue Book (General Explanation of Tax Legislation Enacted in
                          1997, JCS-23-97). The ―Blue Book‖ contains useful information on
                          Roth IRAs.


      382
            Notice 98-49, Q&A A-1, 1998-38 IRB.


                                             -Page 194 of 195-
                                                                           (Printed on Sunday, November 14, 2010 at 6:24 PM)



Senate Report                 The Senate Committee Reports to the IRS Restructuring and Reform
                              Act of 1998 contains very helpful information explaining the reasoning
                              behind the Roth IRA amendments found in that act. 383


                         THE ECONOMICS OF A ROTH IRA CONVERSION
Does     it   Make            Whether it makes sense to convert a regular IRA to a Roth IRA of
Economic Sense to             course depends on the circumstances of the taxpayer. Much has already
Conve rt a Regular            been written on this subject. There are by now dozens of Roth IRA
IRA to a Roth IRA?            calculators available on the internet to help taxpayers make this
                              decision.
                              I would pose a simple thought experiment to illustrate the point 384 :
                              Suppose, that a taxpayer has $1 million in a regular IRA. In one case the
                              IRA is converted to a Roth IRA; in the other it is not. If it is not
                              converted, it doubles in value after x number of years, 385 at which point
                              the IRA is liquidated and income taxes are paid. Assume the income tax
                              rate is 50%. 386 At this point, the taxpayer or his or her beneficiaries
                              have $1 million income tax free to utilize.
                              In the other example, the IRA is converted. This means that income tax
                              must be paid. So now we only have $.5 million to put in our Roth IRA.
                              At the end of the period of x years, the Roth IRA doubles in value and
                              is liquidated. Assuming 5- years have passed, no income taxes are paid.
                              At this point, the taxpayer or his or her beneficiaries have $1 million
                              income tax free to utilize.
                              I hope you see the point. At the very worst, we have a push, if the
                              taxpayer‘s income tax bracket remains the same.
                              Now there are several facts that we can add to our example that give the
                              Roth IRA a decided advantage.




         383
               S. Rept .No. 105-174 (PL-105-206) beginning at page 144.
         384
            I am indebted to Marvin Rotenberg of Bank of Boston for first suggesting this examp le to me. I have
used a similar examp le for years to demonstrate that a marital deduction is of no benefit if the property subject to the
deduction, and its proceeds, will simply be accumulated and taxed later in the surviving spouses estate (perhaps at a
higher bracket).
         385
            It makes absolutely no difference to this analysis or to the point being made what the rate of return is or
how long it takes for the IRA to double in value (so long as we have at least 5 years).
         386
            It makes absolutely no difference to this analysis or to the point being made what the income tax rate is,
so long as it is constant. If the rate is higher or lower at the end of the te rm than at the beginning, it would make a
difference —assuming this can be predicted.


                                                   -Page 195 of 195-
                                      (Printed on Sunday, November 14, 2010 at 6:24 PM)



For one thing, if the taxpayer were over age 70& 1/2 the regular IRA
would not be growing tax free because the premature distribution rules
would require that at least a portion of the IRA be distributed (and taxes
paid on it) each year. This alone tilts the scale in favor of conversion.
More significant, however, is that if the taxpayer had rolled over $1
million, and paid the $.5 million out of other funds, then, in effect, the
$.5 million will grow tax free during our theoretical time period.
Income taxes will have to be paid in any event, so the taxpayer is not
really out the .5 million by paying the tax early. As the example
showed, the time- value use of the pre-paid tax is not the issue that it
would first appear without doing the math. All that really happens is
that the $.5 million now grows in the Roth IRA tax free instead of
outside of the IRA in investments subject to annual income tax and
capital gains.
Thus, at the end of the term, the period, the taxpayer or heirs would
have $2 million tax free. The assumption is that the $.5 million can
double faster in the Roth IRA than outside of it. This is the primary
advantage of the Roth IRA rollover —this and the fact that lifetime
minimum distributions do not have to be made.
A further aid to the decision of whether or not to convert or contribute
to a Roth IRA can be found in any of the dozen or more calculators and
programs, most of them free, which can be found on the world wide
web. See, for example, http://www.rothira.com/, mentioned earlier.




                  -Page 196 of 196-

				
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