PRESENTER: CHRISTOPHER HOYT

FRIDAY NOVEMBER 13, 2020

CO-SPONSOR S

BENEFAC TOR

PRESENTER: CHRISTOPHER HOYT

FRIDAY, NOVEMBER 13, 2020

PROGRAM AGENDAVirtual doors open

7:45 to 8:00

Retirement Assets for First and Second Marriages: Let the Fun Begin (Part 2)

9:50 to 11:10

Break

11:10 to 11:20

So, You Wanna Be a Philanthropist, including Proposed New Rules for Donor Advised Funds

11:20 to 12:30

Seminar Concludes

12:30

Break

9:42 to 9:50Opening remarks and speaker introduction

8:00 to 8:12

Washington Update

8:12 to 8:17

Estate Planning for Retirement Assets after the

SECURE Act

8:17 to 9:17

Retirement Assets for First and Second Marriages: Let the Fun

Begin (Part 1)

9:17 to 9:42

PRESENTING SPONSORS

BENEFACTOR

BOK FINANCIALFENNEMORE.

FINEMARK NATIONAL BANK & TRUSTFRAZER RYAN GOLDBERG & ARNOLD LLP

DIAMOND

CONTENTSJewish Community Foundation

Arizona Community FoundationPAGES 4-7

01Estate Planning for Retirement Assets after the SECURE ActPAGES 126-138

04

2020 Tax & Legal Planning Committee and Underwriters

PAGES 8-40

02Retirement Assets for First and Second Marriages:Let the Fun BeginPAGES 139-179

05

Chris Hoyt’s Presentation SlidesPAGES 41-125

03So, You Wanna Be a Philanthropist, including Proposed New Rules for Donor Advised FundsPAGES 180-209

06

SEE YOU NEXT YEAR2021 Tax & Legal Seminar

Friday, November 5

Building a permanent source of financial support for a vibrant, enduring Jewish community.

pihsredaeL lanoisseforP

Richard Kasper

Sheryl Quen Director of Grants and Communications

Donna Corcoran Director of Finance and Operations

Rachel Rabinovich Director of Special Projects

LIFE & LEGACYTM Program Director

Andrea Cohen Director of Youth Philanthropy

Ernie Muntner Administrative Assistant

Board of Directors

Lee Eisinberg, Chair

Francine Coles

Bradley Dimond

Nora Feinberg

Alan Gold

Neil Goldstein

Richard Gottlieb

Victoria Corwin Harris

Neal Kurn, Honorary Director

Rebecca Light

Deborah Miller

Andrew Plattner

Virginie Polster

Sandy Rife

Robert Roos, Immediate Past Chair

Sadie Rosenthal

Donald Schon

12701 North Scottsdale Road, Suite 202 | Scottsdale, Arizona 85254

FOR PROFESSIONAL ADVISORS


History of the Jewish Community Foundation of Greater PhoenixThe Jewish Community Foundation of Greater Phoenix was established in 1972 with the vision of ensuring that future generations will inherit a thriving Jewish community.

We work with individuals, families and organizations to create personal charitable legacies rooted in Jewish tradition and values, to grow and sustain a vibrant, enduring Jewish community.

We are proud of the strong relationships we have built with financial and estate planning professionals, who share a common belief in the value of charitable giving. These professionals often are among our best referral sources, because of the trust and confidence they have earned from their clients. Likewise, donors often consult us when they need a referral for qualified professional services.

Because of the value we place on these important relationships, the Foundation offers a number of services to the professional advisory community.

GiftLawGiftLaw is a free electronic resource, which complements the services of the Foundation’s experienced staff, and is accessible through our website. It offers planned giving calculations, the latest information on IRS private letter rulings, and well-researched, expert articles on current trends. Weekly updates are delivered via email, ensuring that you never miss news and analysis that may be critical to your practice.

Tax & Legal SeminarThe region's most respected program for financial planning, tax and estate planning professionals, the annual Tax & Legal Seminar presents nationally recognized speakers on the latest trends and developments in tax, estate planning, and charitable giving. Attendees receive up to four hours of well-priced continuing education credits and the opportunity to network with hundreds of professionals who register annually.

This program has been presented by the Jewish Community Foundation since 1993, and in partnership with the Arizona Community Foundation since 2001.

Professional Advisory CommitteeProfessionals in the fields of law, accounting, financial and insurance services meet over breakfast four to five times annually. Committee members learn about stimulating topics of mutual interest, and are exposed to the Foundation’s work and the work of our community partners. Committee members have an opportunity to discuss recent developments in their own professional practices with a trusted group of professional peers.

Professional ConsultationThe Jewish Community Foundation offers personal advice and information to suit the individual needs of your clients, including custom illustrations of the charitable and financial implications of your clients’ various tax and charitable planning options. We are glad to be a confidential resource to you and your clients, at your convenience.

Phone: 480.699.1717 | Fax: 480.699.1807 | Email: [email protected] | www.jcfphoenix.org

FOR PROFESSIONAL ADVISORS


History of the Jewish Community Foundation of Greater PhoenixThe Jewish Community Foundation of Greater Phoenix was established in 1972 with the vision of ensuring that future generations will inherit a thriving Jewish community.

We work with individuals, families and organizations to create personal charitable legacies rooted in Jewish tradition and values, to grow and sustain a vibrant, enduring Jewish community.

We are proud of the strong relationships we have built with financial and estate planning professionals, who share a common belief in the value of charitable giving. These professionals often are among our best referral sources, because of the trust and confidence they have earned from their clients. Likewise, donors often consult us when they need a referral for qualified professional services.

Because of the value we place on these important relationships, the Foundation offers a number of services to the professional advisory community.

GiftLawGiftLaw is a free electronic resource, which complements the services of the Foundation’s experienced staff, and is accessible through our website. It offers planned giving calculations, the latest information on IRS private letter rulings, and well-researched, expert articles on current trends. Weekly updates are delivered via email, ensuring that you never miss news and analysis that may be critical to your practice.

Tax & Legal SeminarThe region's most respected program for financial planning, tax and estate planning professionals, the annual Tax & Legal Seminar presents nationally recognized speakers on the latest trends and developments in tax, estate planning, and charitable giving. Attendees receive up to four hours of well-priced continuing education credits and the opportunity to network with hundreds of professionals who register annually.

This program has been presented by the Jewish Community Foundation since 1993, and in partnership with the Arizona Community Foundation since 2001.

Professional Advisory CommitteeProfessionals in the fields of law, accounting, financial and insurance services meet over breakfast four to five times annually. Committee members learn about stimulating topics of mutual interest, and are exposed to the Foundation’s work and the work of our community partners. Committee members have an opportunity to discuss recent developments in their own professional practices with a trusted group of professional peers.

Professional ConsultationThe Jewish Community Foundation offers personal advice and information to suit the individual needs of your clients, including custom illustrations of the charitable and financial implications of your clients’ various tax and charitable planning options. We are glad to be a confidential resource to you and your clients, at your convenience.

Phone: 480.699.1717 | Fax: 480.699.1807 | Email: [email protected] | www.jcfphoenix.org

The Arizona Community Foundation has over 40 years of experience partnering with individuals, families, and organizations who wish to give back to their community. We make sure our donors have the expert guidance and flexible options that best suit their style of giving.

We partner with professional advisor firms across the state to provide personal service and helpful resources to meet their clients’ charitable goals. Some of the services we offer to our partners and their clients include:

Our network of professional advisor partners is always growing. If you’re interested in connecting with us, give us a call at 602.381.1400.

Tax planning. ACF will work directly with you and your clients to understand charitable interests, overall strategy, and goals for giving, while also ensuring their choices maximize available tax benefits.

Donor advised funds. With this cost-effective alternative to a private foundation, your clients can take advantage of available tax deductions when they contribute cash, stock, or appreciated assets to their named fund while making grant recommendations that align with their goals.

Local connections. With six affiliate offices across the state, ACF has a strong and comprehensive network of local resources to help your clients identify nonprofit organizations and projects that align with their charitable goals and interests.

Dedicated support. Your clients will receive a dedicated relationship manager who serve as their main point of contact to ensure that their charitable goals are accomplished. ACF will work directly with them to support local, national, or international causes.

Education events. ACF hosts a wide range of convenings and events on important social, cultural, and community topics for donors and community members. We also host seminars for professional advisors with opportunities to earn continuing education credit.

Investment management. When charitable assets meet a certain threshold, donors may continue to work with their existing wealth advisor to manage the investment of assets held in ACF funds.

We rely on our Professional Advisory Board to provide the Arizona Community Foundation with strategic planning, guidance, and oversight.

BOARD OF DIRECTORSStephen O. Evans, chair Robbin M. Coulon, Esq., vice chairLeezie Kim, Esq., secretaryRufus Glasper, Ph.D., CPA, treasurer Benito AlmanzaJim AmeduriLon BabbyNoreen BishopMark C. Bohn, Esq.Tony BolazinaDanny BryantGwen CalhounJavier Cárdenas, MD.Shelley Cohn, immediate past chair

Marianne Cracchiolo MagoAnn Drummond MelsheimerMark Feldman Charley FreericksPatricia Garcia DuarteXavier GutierrezNeil H. Hiller, Esq.Heidi Jannenga, PT, DPT, ATC/LLeonardo LooTammy McLeodJacob MooreRichard MorrisonDon OpatrnyEssen OtuMi-Ai ParrishBarbara A. Poley Eve Ross, JD

Lisa UriasRon Butler, past chairJack Davis, past chairWilliam J. Hodges, CPA/PFS, past chairMarilyn Harris, past chairRichard H. Silverman, past chairGerald Bisgrove, past chairRobert M. Delgado, past chairBennett Dorrance, past chairRichard B. Snell, past chairNeal Kurn, Esq., past chairRichard H. Whitney, Esq., past chairBert Getz, chairman emeritusSteve G. Seleznow, president & CEO

2020 PROFESSIONAL ADVISORY BOARD

Russell S. Goldstein, CFP®, CAP®, chairTrish Stark, vice chairYaser Ali, Esq.Ellen Steele Allare, CLU®, ChFC®, past chair emeritusStephen BarberMacAuley BeloneyBrenda A. Blunt, CPAMark C. Bohn, CPA, Esq., past chair emeritusLinda H. Bowers, JD, AEP®, CFP®, CEPA®, past chairRussell J. Bucklew, CFP®, JDSergio CàrdenasDavid L. Case, Esq.Stephen S. Case, Esq., past chair emeritusTheresa E. Chacopulos, CFP®Beth S. Cohn, Esq.Kathie J. Gummere, Esq., JD

Brent M. Gunderson, Esq.Carrie L. Hall, CLU®, CFP®William J. Hodges, CPA, past chair emeritusScott M. Horn, CPACharles J. Inderieden, CPA, PFSLindsey A. Jackson, Esq.Lynton M. Kotzin, CPA, CFA®Gregory M. Kruzel, Esq., past chair emeritusNeal H. Kurn, Esq., emeritusT. James Lee, Esq.W. John Lischer, emeritusMiranda Lumer, Esq.Thomas Maguire, CPAJeffrey M. Manley, Esq.Denise E. McClain, Esq., immediate past chairT. Troy McNemar, Esq.Jonathon M. Morrison, Esq.Mahes Prasad, AIF

Angelica F. Prescod, AAMSNeil E. Robbins, CLU®, ChFC®James W. Ryan, Esq., past chair emeritusAbbie S. Shindler, Esq.Christopher P. Siegle, Esq.Verne Smith, CLU®, ChFC®Mary Taylor Huntley, CFP®Michael J. Tucker, Esq.Benjamin Voelker, CFP®, CPWA®Angela Walker-Weber, Esq.David K. Walser, CPA, PFSCharles W. Whetstine, Esq.Kris Yamano, JD, MBAPaul E. Yates, FSA, CLU®

We offer special thanks to our Seminar Chair: Teresa Coin, Esq., Chair BOK Financial

Brenda A. Blunt, CPA, CGMA Eide Bailly, LLPDieter G. Bollmann First Financial Equity CorporationLinda H. Bowers, JD, AEP®, CFP®, CEPA®, Past Chair Northern TrustAdam M. Brooks, CFP®, Past Chair ABLE Financial Group, LLCKelley L. Cathie, Esq. Braun Siler Kruzel PCSusan M. Ciupak, Esq. First International Bank and TrustBeth S. Cohn, Esq. Jaburg & Wilk, P.C.John B. Even, Esq. Schmitt Schneck Casey Even & Williams PCRylan Folts One Charles Private Wealth Services, LLCJ. Noland Franz, Esq. Buchalter, a Professional CorporationTerri A. Hardy BonhamsVictoria C. Harris, CPA, Past Chair Hunter Hagan & Company, Ltd.Stephen Hart, CPA Stephen Hart PLLCDaniel L. Hulsizer, JD, CPA Warner Angle Hallam Jackson & Formanek PLCErin B. Itkoe, CPA/PFS, CFP® Tarbox Family OfficeLindsey A. Jackson, JD FineMark National Bank and TrustBrad Jepson, CFP®, CTFA, ChFC Northern Trust Elena Kohn ArtFortune LLCKimberly C. Kur, JD, CAP® Arizona Community FoundationJustin Lines Copper Canyon Law LLCMiranda K. Lumer, JD MidFirst BankDenise E. McClain, Esq., Past Chair Abbot Downing

James Sean McGettigan, CPA/PFS, CFP®, CGMA Stoker OstlerDeborah W. Miller, Esq. Immediate Past Chair Deborah W. Miller PLLCPaul R. Nothman, CPA McGrath Nothman, PCShawn Parker, CPC, QPA MGKSKristel K. Patton, Esq. Empowered Legacy PlanningDebra J. Polly, Esq. Sherman & Howard L.L.C.Christy Ray, JD, LLM First International Bank and TrustEliza Daley Read Mangum, Wall, Stoops & Warden, PLLCT.J. Ryan, Esq. Frazer Ryan Goldberg & Arnold LLPJeff A. Schlichting, CPA Eide Bailly, LLPDarin Shebesta, CFP®, AIF® Jackson/Roskelley Wealth Advisors, Inc.Abbie S. Shindler, Esq. Buchalter, a Professional CorporationChristopher P. Siegle, Esq. J.P. MorganLisa L. Sullivan, AEP®, CSOP®, CTFA, CWS® TrustBankAllyson J. Teply, Esq. Sacks Tierney P.A.Michelle Margolies Tran, Esq. Clark Hill PLCStephanie F. Tribe, Esq. Fennemore.Jeanne Vatterott-Gale, Esq. Hunt & GaleThomas C. Waite, CFP®, CWS® Schwab Private Client Investment Advisory, Inc.Pamela Wheeler, EA Past Chair Henry+HorneTrevor S. Whiting, JD, LLM, MBA Dana Whiting Law, PLLCFarrah H. Whitworth, CPA Globe CorporationKeith Wibel, CFA® Capital Insight Partners, LLCKris Yamano, JD, MBA BMO Private BankPaul E. Yates, FSA, CLU® Cohn Financial Group

2020 PLANNING COMMITTEEThank you to the committee of dedicated legal, accounting, financial planning

professionals, and life underwriters who volunteer their time and expertise to both the Arizona Community Foundation and the Jewish Community

Foundation. You are vital to the success of this annual seminar.

We gratefully acknowledge these contributors for their generous support of the 2020 Tax & Legal Seminar

Brenda A. Blunt, CPA, CGMALinda H. Bowers, JD, CFP®, AEP®, CEPA®

Susan M. Ciupak, JDTeresa Coin, Esq.

Jay Franz

Terri A. HardyVictoria C. Harris, CPA

Erin B. Itkoe, CFP®, CPA/PFSDenise E. McClain, JDKristel K. Patton, Esq.

Chris Siegle, Esq. Michelle Margolies Tran

Thomas C. Waite CFP® CWS®Farrah H. Whitworth, CPA

Keith Wibel, CFA

FRIENDS

Benefit Financial Services GroupBerk Law Group

BMO Wealth ManagmentCohn Financial Group

Deborah W. Miller, PLLCFirst Financial Equity Corporation

First Western TrustHolland & Knight

Hunt & GaleJackson/Roskelley Wealth Advisors, Inc.

Jewish Tuition OrganizationJohn Event of Schmitt Schneck Casey Even &

Williams, PC Dan P. Kammrath

Mack Business Appraisals, LLCJames Sean McGettigan, CPA/PFS, CFP®,

CGMA

McGrath Nothman, PCMcNemar Law Offices, P.C.Sherman & Howard L.L.P.

South Park AdvisorsStephen Hart PLLC

Strategic Wealth Advisors, LLCT&T Estate Services, LLC

SUPPORTERS

PATRONSAASK-Aid to Adoption for Special Kids

ABLE Financial GroupArizona Bank & Trust

Boyer Bohn, p.c.Braun Siler Kruzel PC

Dana Whiting Law, PLLC

Hunter Hagan & Company, Ltd. Jaburg|WilkJ.P. Morgan

Jennings, Strouss, & Salmon, PLCLohman Company, PLLC

Midfirst Bank

MRA AssociatesRSM US LLP

Sacks TierneyStoker Ostler Wealth AdvisorsVersant Capital Management

Warner Angle Hallam Jackson & Formanek PLC

BENEFACTOR

BOK FINANCIAL FENNEMORE.

FINEMARK NATIONAL BANK & TRUST

FRAZER RYAN GOLDBERG & ARNOLD LLP

DIAMONDBESSEMER TRUST

DYER BREGMAN & FERRIS, PLLCHENRY+HORNE

KOTZIN VALUATION PARTNERS, LLC

NORTHERN TRUSTTARBOX FAMILY OFFICE

TRUSTBANK

PLATINUMEIDE BAILLY LLP

ESTATE MANAGEMENT SERVICESMGKS

TFO PHOENIX, INC. ZIA TRUST, INC.

GOLD

480.699.1717jcfphoenix.org

Making a gift through your will, trust, retirement accounts, life insurance, or other assets, transforms your communityforever. A planned gift through the Jewish Community Foundation is an easy way to impact the community and the

their charitable goals, connect to the causes they care about, and create a vibrant Jewish community.Learn more about planting the seeds for those who will come after you. Plan your charitable legacy today.

How Will You Assure Jewish Tomorrows?Make Plans Today to Pass on Your Values

Partner with charitable experts to do more for your clients. Call or click: 602.381.1400 or azfoundation.org

“Working with ACF has been one of the true highlights of my 38 years in the investment industry.”James P. Marten, CIMAGlobal Institutional Consultant, Wealth Management Advisor, Merrill Lynch

Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is the banking affiliate of Wells Fargo & Company.

© 2020 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. WCR-0920-00348

WWW.ABBOTDOWNING.COMA Wells Fargo Business

To learn more, contact Denise McClain, Director at [email protected] or 480–887–4210.

ABBOT DOWNING IS PLEASED TO SUPPORT THE 2020 VIRTUAL TAX AND LEGAL SEMINAR

Abbot Downing helps build lasting legacies for

ultra-high-net-worth clients, family offices, foundations,

and endowments. We collaborate with clients and

their advisors to manage the full impact of wealth.

The result is a finely crafted strategy designed to

deliver desired results and a meaningful legacy for

future generations.

Drawing on the global resources of Wells Fargo,

Abbot Downing offers clients access to

opportunities not widely available, including:

• ASSET MANAGEMENT

• LEGACY AND WEALTH PLANNING

• INSTITUTE FOR FAMILY CULTURE

• TRUST, FIDUCIARY, AND ADMINISTRATIVE

SERVICES

• PRIVATE BANKING

• FOUNDATIONS AND ENDOWMENTS

PROUD TO BE PART OF ARIZONA’S PAST,

PRESENT AND FUTURE

www.bok� nancial.com | Jason Ray | 480.596.4353

BOK Financial® is a trademark of BOKF, NA. Member FDIC. Equal Housing Lender . ©2020 BOKF, NA.

PERSONALLY DEDICATEDTO CREATING POSSIBILITIES

SO YOU CAN THRIVE.Fennemore’s team of Trusts, Estates & Wealth

Preservation attorneys go beyond the expected to help clients achieve their goals.

Partner with counselors who create possibilities for future generations.

Proud supporters of the Arizona Community Foundation and Jewish Community Foundation’s Tax and Legal Seminar.

Visit us at FennemoreCraig.com.

David McCarvilleAttorney

[email protected]

Stephanie TribeAttorney

[email protected]

Jim LeeAttorney

[email protected]

Steve GoodAttorney

[email protected]

Thomas AldousAttorney

[email protected]

FINEMARK IS HONORED TO SUPPORT THE 2020 TAX AND LEGAL SEMINAR

To learn more, please contact Lindsey Jackson at [email protected] or 480-607-4882.

www.finemarkbank.comMember FDIC • Equal Housing Lender Trust and investment services are not FDIC insured, are not guaranteed by the bank and may lose value.

GAINEY RANCH7600 E. Doubletree Ranch Road, Suite 100

Scottsdale, AZ 85258

480-607-4860

DC RANCH20909 N. 90th Place, Suite 102

Scottsdale, AZ 85255

480-333-3950

▪ Asset Management ▪ Trust Administration

▪ Estate Settlement ▪ Financial Planning

▪ Banking ▪ Lending

FineMark National Bank & Trust delivers exceptional client service and offers customized solutions to help individuals and families reach their goals and build lasting legacies for generations to come. FineMark’s comprehensive wealth management services include:

ARIZONA TRUST & INVESTMENT TEAMTIM NGUYEN ASHLEY WITTNEBEN CHRIS HIGHMARK LINDSEY JACKSON MICHAEL BARNES JENNIFER GARCIA

BEFORE YOU SEL EC T AW E ALTH MANAGEMENT F IRM,

GIV E THEM THIS TEST.

Q. Is the firm privately or publicly held?

Q. What percentage of the firm’s revenue is generated by its wealth management business?

Q. Do the owners and employees invest their own wealth alongside that of clients?

Q. Are client relationship managers paid for sales or service?

Q. Are portfolio managers paid based on assets under management or on long-term performance?

Our answers are clear and concise: we are privately owned and independent; we only focus on private wealth management; our interests are aligned because our clients, owners, and employees invest side-by-side; our relationship managers are rewarded for their client service, not sales; and our portfolio managers are measured on long-term performance, not assets under management. These key principles have guided our firm since its founding. Bessemer Trust is a multifamily o∞ce that has served individuals and families of substantial wealth for more than 110 years. Through comprehensive investment management, wealth planning, and family o∞ce services, we help clients achieve peace of mind for generations.

To learn more about Bessemer Trust, please contact Jeff Glowacki, Western Region Head, at 213-330-8570, or visit Bessemer.com.

ATLANTA BOSTON CHICAGO DALLAS DENVER GRAND CAYMAN GREENWICH HOUSTON LOS ANGELES MIAMI

NAPLES NEW YORK PALM BEACH SAN FRANCISCO SEATTLE STUART WASHINGTON, D.C. WILMINGTON WOODBRIDGE

Estate Planning | Probate | Trust Administration

Disputed Inheritances | Undue Influence and Exploitation Litigation

Nursing Home Abuse and Wrongful Death | Guardianships

Conservatorships | Special Needs Planning | Veterans Disability

We provide legal services in the following areas and are available for

collaborations or referrals

3411 N. 5th Ave., Suite 300, Phoenix, AZ 85013Phone: (602) 254-6008 | www.dbfazlaw.com

Providing legal services to the community for over 50 years.

Northern Trust banks are members FDIC. © 2016 Northern Trust Corporation.

WEALTH PLANNING \ BANKING \ TRUST & ESTATE SERVICES \ INVESTING \ FAMILY OFFICE

Managing the complexities of wealth can be a challenge, even for the savviest of individuals and their advisors. When you partner with Northern Trust, you can draw on the expertise of highly experienced financial professionals who can help your clients consider, clarify and prioritize their financial needs across their entire lifetime – and beyond. We call it Life Driven Wealth Management.

For more than a century, Northern Trust has helped professional advisors address the complex financial needs of their high-net-worth clients. We are committed to creating a partnership that complements your expertise, builds trust, deepens relationships and brings value to both you and your clients.

FOR MORE INFORMATION CONTACT:

Stephen Barber, Senior Wealth Strategist2398 East Camelback Road, Suite 1100, Phoenix, AZ 85016

602-468-2553 or [email protected]

Doug Diehl, Senior Wealth Strategist14624 North Scottsdale Road, Suite 250, Scottsdale, AZ 85254

480-365-6708 or [email protected]

EXPERIENCE THE RIGHT PARTNERSHIP™

northerntrust.com/wealthadvisor

www.tbaz.com

Phoenix 2375 E Camelback Rd, Ste 155 Phoenix, Arizona

Scottsdale 14631 N Scottsdale Rd, Scottsdale, ArizonaOcotillo 4913 S Alma School Rd, Ste 5 Chandler, Arizona

602-957-2006

FOCUS INTEGRITY RESILIENCE

John Chichester Sr Wealth Stratetist

Phil HotchkissCWS

Sandra HudsonCEO

Lisa SullivanCOO

Greg FursethCFO

Jena Lugo Trust Officer

Gregg Balderrama Sr Portfolio Manager

Jay Nova Sr Portfolio Manager

What inspires you, inspires us.602.264.5844 | eidebailly.com

DOINGDREAMING

Wealth planning shouldn’t distract clients from the moments that matter most. Eide Bailly’s Wealth Planning Team works closely with industry advisors to offer well-rounded solutions and a holistic perspective. Together, we can offer the support clients need to feel confident in their future and live in the moment.

6530 North 16th Street, Phoenix, AZ 85016

P | 602.944.1515www.mgks.com

RETIREMENT SOLUTIONS FOR YOUR BUSINESSWe offer a free initial consultation and retirement plan design analysis

aimed at achieving optimal results for the stakeholders in your business.

ALAN GOLD, CPARUSSELL J. SNOW, ENROLLED ACTUARY

HENRY DESPAIN, APA, QPA, ERPASHAWN T. PARKER, CPC, QPA, ERPA

MGKSACTUARIES - CONSULTANTS - ADMINISTRATORS

Helping Families by Connecting Wealth and Purpose®.It’s what we do.

WEALTH PLANNING | INVESTMENT ADVICE | TAX | FINANCIAL EDUCATION | ESTATE PLANNING

602.466.2611 | www.tfophoenix.com

TFO Phoenix, Inc. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.

The Advisors’ Trust Company®Zia Trust, Inc.

Dave Long, J.D.Vice President and Senior Trust Officer

Josh Moore, M.S. Trust Officer

Rachel Zaslow, J.D.Trust Officer

Our Arizona fiduciary team offers skilled trust administration, estate settlement services, and more to families and individuals across the state.

We work with clients and their professional advisors to establish, implement, and accomplish the family estate plan.

We work alongside your clients’ investment advisors

11811 N. Tatum Blvd, Ste. 1062Phoenix, AZ 85028602.633.7999 www.ziatrust.com

SEE YOU NEXT YEAR!2021 Tax & Legal SeminarSteve Akers is Managing Director and Senior Fiduciary Counsel at Bessemer Trust. In this role, he serves as Chair of the firm’s Estate Planning Committee and works closely with clients in the Southwest region regarding their estate and trust planning issues.

Steve serves as President of The American College of Trust and Estate Counsel (ACTEC) and is a member of the Advisory Committee to the University of Miami Philip E. Heckerling Institute on Estate Planning, where he is a frequent speaker. He has previously served as Chair of the American Bar Association Section of Real Property, Trust & Estate Law and as Chair of the State Bar of Texas Real Estate, Probate & Trust Law Section.

Steve earned a JD from the University of Texas School of Law and a BS in chemical engineering from Oklahoma State University.

FRIDAY, NOVEMBER 5, 2021

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. ABLE Financial Group, LLC is a separate entity from WFAFN. ABLE Financial Group and WFAFN are not tax or legal advisors. 06/17

8737 E. Via de Commercio, Suite 100Scottsdale AZ 85258

TEL 480-258-6104 Toll Free 888-258-6108www.ablefinancialgroup.com

Creating Strategies Designed to Deliver Results

WE BELIEVE IN TRUE,COMPREHENSIVE,

AND HOLISTICPLANNING

Making sure your clients are prepared.

We work closely with CPA’s & Attorneys by providing your clients with unbiased and independent advice and solutions regarding:

First Vice President Financial Advisor Associate Financial AdvisorLarry Van Quathem Lane Reynolds Pearson Davis

Adam M. Brooks, CFP® Lee C. EisinbergManaging Partner Managing Partner

Call us today for a free consultation!

• Investment Management• Tax Minimization Strategies• Estate Planning Investment Strategies• Legacy Planning• Business Succession Planning• Converting Proceeds from the Sale of a Business Into Retirement Income• Wealth Transfer Planning and Family Dynamics• Retirement Income Planning and Strategies

WealthAdvisoryServices

Products offered through Wealth Advisory Services and Heartland Re�rement Plan Servicesare not FDIC insured, are not bank guaranteed and may lose value.

Andrew RoodveldtSenior Wealth Advisor, VP(602) [email protected]

Nadia Cunningham, JDWealth Advisor, [email protected]

Brooks Crandell, JDWealth Advisor, [email protected]

Experienced representation today to protect your assets for tomorrow.

Your personal and professional assets are only as valuable as the degree to which they are protected. Our adept estate planning, administration and business planning attorneys have been practicing in the Valley for over 33 years and have 100+ years of combined experience in protecting clients’ wealth, trus ts, estates and business endeavors.

Find out what we can do for you today to ensure a better tomorrow.

Estate Planning • Estate Administration • Business Planning • Estate, Trust, and Business Dispute Resolution

14811 North Kierland Boulevard, Suite 500 | Scottsdale, AZ 85254 | 480.951.8044 bskazlaw.com

www.DanaWhitingLaw.com

“An investment in knowledgepays the best interest.” - Benjamin Franklin

Maahew S. Dana Trevor S. WhitingESQ LLM CPA ESQ LLM MBA

Serving Arizona and the nation’s families for 200 years, with planning and executing the most creative plans. Proud sponsor of the 2020 Tax and Legal Seminar.

Chris Siegle J.P. Morgan Private Bank 480.367.3279 [email protected]

Julie GoldenJ.P. Morgan Private [email protected]

In the United States, bank deposit accounts, such as checking, savings and bank lending, may be subject to approval. Deposit products and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC.

JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

INVESTMENT PRODUCTS: • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

Business & Succession PlanningEstate Planning

• Corporate and Business Transactions

• Real Estate Transactions• Probate and Trust

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1

RREETTIIRREEMMEENNTT AACCCCOOUUNNTTSS:PPLLAANNNNIINNGG FFOORR IINNHHEERRIITTEEDD AACCCCOOUUNNTTSS AANNDD FFOORR MMAARRIITTAALL RRIIGGHHTTSS

TAX and LEGAL SEMINARJewish Community Foundation / Arizona Community Foundation

November 13, 2020

CHRISTOPHER R. HOYTUniversity of Missouri - Kansas City

School of Law

Legislative Changes

• CARES Act (March 2020) – The Coronavirus Aid, Relief, and Economic Security Act – the $2.2 trillion legislation to provide relief from the economic damage triggered by the coronavirus Covid-19

• SECURE Act – (December 2019) – The Setting Every Community Up for Retirement Enhancement Act –made major changes to the laws governing retirement accounts

Slides section 03

9/10/2020

2

CCoorroonnaavviirruuss AAiidd,, RReelliieeff,, aanndd EEccoonnoommiicc SSeeccuurriittyy ((CCAARREESS)) AAcctt

CChhaannggeess tthhaatt AAffffeecctt RReettiirreemmeenntt AAccccoouunnttss

• No RMDs required in the year 2020This includes accounts of people over age 70 ½ and people of all ages who have inherited retirement accounts

• 401(k) plans: Employees who have been diagnosed with Covid-19 (including a spouse or a dependent) or who have lost income from a layoff, business closure, quarantine, reduced hours, or inability to work because of child care:

* Hardship distribution possible. (Under age 59 ½, no 10% penalty)

It is still taxable income, but can avoid tax if repay in 3 years* Loan from plan possible: maximum increased to $100,000

.

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS**LLIIFFEETTIIMMEE DDIISSTTRRIIBBUUTTIIOONNSS**

THREE CHANGES FOR LIFETIME RMDs:1. New RMD Age : 72

(for people who attain age 70 ½ after 2019)(Despite new age 72, charitable QCD still 70 ½)

2. RMDs are not required in year 2020 - CARES-- from either your own IRA or an inherited IRA

3. New life expectancy tables (beginning in 2021)Annual RMD amounts will decline by

between 0.3% and 0.5% each year (varies by age)

9/10/2020

3

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS**LLIIFFEETTIIMMEE DDIISSTTRRIIBBUUTTIIOONNSS –– YYEEAARR 22001199**

Age of Account Owner Required Payout72 3.91%75 4.37%80 5.35%85 6.76%90 8.75%95 11.63%

100 15.88%

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS**LLIIFFEETTIIMMEE DDIISSTTRRIIBBUUTTIIOONNSS –– YYEEAARR 22002211++ **

Age of Account Owner Required Payout72 3.67%75 4.07%80 4.95%85 6.25%90 8.27%95 11.24%

100 15.71%

9/10/2020

4

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS**LLIIFFEETTIIMMEE DDIISSTTRRIIBBUUTTIIOONNSS**

A. THREE CHANGES FOR LIFETIME RMDs:

1. New RMD Age : 72 (for people who attain age 70 ½ after 2019)(Despite new age 72, charitable QCD still 70 ½)

2. No RMDs required in year 20203. New life expectancy tables (beginning in 2021)

Annual RMD amounts will decline bybetween 0.3% and 0.5% each year (varies by age)

B. WORKING INDIVIDUALS OVER AGE 70 ½ CAN MAKE TAX-DEDUCTIBLE CONTRIBUTIONS TO A TRADITIONAL IRA (Year 2020 maximum: $7,000)

WWaanntt ttoo mmaakkee cchhaarriittaabbllee ggiiffttss ffrroomm yyoouurr IIRRAA ((““QQCCDD””))??TThheenn NNEEVVEERR mmaakkee aa ttaaxx--ddeedduuccttiibbllee ccoonnttrriibbuuttiioonn

ttoo yyoouurr IIRRAA aafftteerr aattttaaiinniinngg aaggee 7700 ½½

New last sentence added to end of Sec 408(d)(8)(A):The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of—• (i) the aggregate amount of deductions allowed to the taxpayer under

section 219 for all taxable years ending on or after the date the taxpayer attains age 70 ½, over

• (ii) the aggregate amount of reductions under this sentence for alltaxable years preceding the current taxable year.

.

9/10/2020

5



LEGISLATIVE INTENT • To get a tax benefit from a charitable gift, a taxpayer must generally itemize

deductions (state taxes, mortgage interest, etc)• Only 11% of tax returns itemized deductions in 2018• A working senior could (a) contribute $7,000 to an IRA and then (b)

distribute $7,000 that same year to charities, and indirectly deduct charitable gifts via IRA contributions

ADMINISTRATIVE and BOOKEEPING HEADACHES• People in their 80s and 90s will need to keep all tax records after age 70 ½

and then make cumulative computations

.


ttoo yyoouurr IIRRAA aafftteerr aattttaaiinniinngg aaggee 7700 ½½ EXAMPLE• I. Work’s RMD both for this year and next year is $5,000• She donates each year’s RMD to charity; would be QCD• She is employed. This year she deducts $7,000 for IRA.

Next year she does not deduct any IRA contribution• How much can she EXCLUDE from income for QCD?

Year Donate Exclude Taxable This year $5,000 -0- $5,000*Next year $5,000 $3,000 $2,000** Taxpayer can claim an itemized charitable deduction

.

9/10/2020

6



STRATEGIES• If ever want to make a QCD, don’t contribute after age 70 ½ • Working seniors can contribute to plan at work (401(k), etc.)• Working seniors can contribute to a Roth IRA

• Footnote: Employed upper-income taxpayers can’t even make tax-deductible contributions to an IRA if there is a plan at work (e.g., 401(k) ). No tax deduction is permitted in year 2020 if AGI is over $75,000 ($124,0000 on married

.

SSeettttiinngg EEvveerryy CCoommmmuunniittyy UUpp ffoorr RReettiirreemmeenntt EEnnhhaanncceemmeenntt ((SSEECCUURREE)) AAcctt

CHANGES TO THE LAW:• Make it easier for 401(k) plans to offer annuities

-- Convert assets into reliable income in retirement • RMDs to begin at age 72 (up from age 70 ½) • Permit working individuals over age 70 ½ to make contributions to a

traditional IRA • Other changes to retirement plans and 529 plans• Kill the Stretch IRA. QRP and IRA accounts would generally have to be

liquidated by the end of the 10th year after death. There would be no RMDs in years 1 through 9.

.

9/10/2020

7

Setting Every Community Up for Retirement Enhancement (SECURE) Act

OTHER CHANGES TO RETIREMENT and 529 PLANS:• 529 plan account owners may withdraw up to $10,000 tax-

free (per beneficiary) to pay qualified education loans• 529 plans can be used for apprenticeships (old: schools only)• No 10% penalty on up to $5,000 distributed from a

retirement plan to a person under age 59 ½ within one year of a birth or adoption (though is still taxable income)

• “Kiddie tax” – parent’s rate (repeal T & E tax rates). Amend 2018?

.

DDiissttrriibbuuttiioonnss ffrroomm IInnhheerriitteedd RReettiirreemmeenntt AAccccoouunnttss AArree TTaaxxaabbllee IInnccoommee

IInnccoommee IInn RReessppeecctt ooff AA DDeecceeddeenntt ““IIRRDD”” ––§§669911

• No stepped up basis for retirement assets• Distributions from inherited retirement accounts are

usually taxable income to the beneficiaries.

9/10/2020

8

UUSSUUAALL OOBBJJEECCTTIIVVEE::DDeeffeerr ppaayyiinngg iinnccoommee ttaaxxeess

iinn oorrddeerr ttoo ggeett ggrreeaatteerr ccaasshh ffllooww

Principal 10% Yield

• Pre-Tax Amount $ 100,000 $ 10,000• Income Tax

on Distribution (40%) 40,000

• Amount Left to Invest $ 60,000 $ 6,000

Stretch IRA• “Stretch IRA” means an inherited retirement account

(e.g., IRA), where payments are gradually made over the beneficiary’s life expectancy

• Until the enactment of the SECURE Act, it was fairly easy for any beneficiary who inherited a retirement account to receive distributions until the age of 83 (or older for beneficiaries who inherited at an older age)

• New rules apply beginning in year 2020• Compare rules of the present, past & future

9/10/2020

9

Distributions After Death(for decedents who die in 2020 and later)

Maximum time period to empty account:

• Ten years (No RMD until year #10)[the account needs to be empty by December 31 of the tenth year after the year of the decedent’ death, or else there is a 50% penalty on the balance]

RREETTIIRREEMMEENNTT AACCCCOOUUNNTTSS IINN MMAARRRRIIAAGGEESS::TTYYPPEESS OOFF QQRRPPss

•Section 401(a) - Employer pension, profit sharing and stock bonus plans[incl. 401(k)]

•Section 408 – IRAs•Section 403(b) - School and charity employers•Section 457(b) plans - Government and tax-exempt

employers

9/10/2020

10

DDiissttrriibbuuttiioonnss AAfftteerr DDeeaatthh

Company policy may require faster liquidation• Employer might require account of

deceased employee to liquidated in just one year

• No such problem with IRAs• Beneficiary of employer plan account can

compel transfer to an inherited IRA

DDiissttrriibbuuttiioonnss AAfftteerr DDeeaatthh((ffoorr ddeecceeddeennttss wwhhoo ddiiee iinn 22002200 aanndd llaatteerr))


• Ten years (No RMD until year #10), or• Remaining life expectancy of an “eligible

designated beneficiary” (RMD every year)-- surviving spouse

9/10/2020

11

MARRIED COUPLES: RETIREMENT ASSETS

Surviving spouse has an option that no other beneficiary has:a rollover of deceased spouse’s retirement assets to her or his own new IRA (creditor protection, too!)

Other beneficiaries cannot do a rollover. Main option: liquidate over ten years

LLEEAAVVEE MMOONNEEYY IINN DDEECCEEDDEENNTT’’SS AACCCCOOUUNNTT??RReeqquuiirreedd DDiissttrriibbuuttiioonnss iiff tthhee

SSuurrvviivviinngg SSppoouussee iiss tthhee SSoollee BBeenneeffiicciiaarryy

•Spouse can recalculate life expectancy• IRAs only: Spouse can elect to treat IRA as

her own •Decedent died before age 72 ?

• No required distribution until year the deceased spouse would have been age 72

9/10/2020

12

Distributions After Death(for decedents who die in 2020 and later)



designated beneficiary” (RMD every year)-- surviving spouse -- minor child of the decedent-- disabled individual -- chronically ill person-- beneficiary within 10 years of age of decedent

LLIIQQUUIIDDAATTEE IINNHHEERRIITTEEDD IIRRAAssIINN TTEENN YYEEAARRSS

EXCEPTION: “Eligible Designated Beneficiary” -- surviving spouse -- minor child of the decedent-- disabled individual -- chronically ill person-- beneficiary within 10 years of age of decedent

An eligible designated beneficiary may take distributions over her/his life expectancy ** When minor child attains majority, the 10 year clock starts* When an EDB dies, the 10 year clock starts for successor

9/10/2020

13




designated beneficiary”, or• Five Years, or • “Ghost life expectancy”

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS** DDEEFFIINNIITTIIOONNSS **

• Required Beginning Date (“RBD”)April 1 in year after attain age 72

• Designated Beneficiary (“DB”)A human being. An estate or charitycan be a beneficiary of an account, but not a DB.

• Determination DateSeptember 30 in year after death.

9/10/2020

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RREEQQUUIIRREEDD DDIISSTTRRIIBBUUTTIIOONNSS IIFF TTHHEERREE IISS EEVVEENN JJUUSSTT OONNEE

NNOONN--DDEESSIIGGNNAATTEEDD BBEENNEEFFIICCIIAARRYY

Death Before RBD Death After RBDRemaining life

FIVE expectancy of YEARS someone who is

decedent’s age at death Roth IRA: Just 5 years

AACCTTIIOONNSS TTHHAATT CCAANN BBEE TTAAKKEENN BBEEFFOORREE TTHHEE DDEETTEERRMMIINNAATTIIOONN DDAATTEE

• Disclaimers• Full distribution of share• Divide into separate accounts

For example, separate accounts when: • one beneficiary is an EDB and another is not• one beneficiary is a charity & can’t pay by 9/30

9/10/2020

15

RREEQQUUIIRREEDD DDIISSTTRRIIBBUUTTIIOONNSS IIFF TTHHEERREE IISS EEVVEENN JJUUSSTT OONNEE

NNOONN--DDEESSIIGGNNAATTEEDD BBEENNEEFFIICCIIAARRYY

Death Before RBD Death After RBDRemaining life

FIVE expectancy of YEARS someone who is

[No RMD until year #5] decedent’s age at death [Each year has an RMD][“ghost life expectancy”]

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSS**GGhhoosstt LLiiffee EExxppeeccttaannccyy**

Age of Beneficiary Life Expectancy 72 Too soon! 5 year liquidation !73 April & later is after RBD74 6.4% 15.6 more years 75 6.8% 14.876 7.1% 14.0 77 7.5% 13.378 7.9% 12.678 8.4% 11.9 80 8.9% 11.2

9/10/2020

16




designated beneficiary”, or If on Sept 30:• Five Years, or << Charity is beneficiary• “Ghost life expectancy” << Charity is beneficiary

LLIIQQUUIIDDAATTEE IINNHHEERRIITTEEDD IIRRAAss IINN TTEENN YYEEAARRSS

EFFECTIVE DATES:* Rules apply for decedents dying after December 31, 2019* For decedents who died before 2020, beneficiaries can continue to receive payments over remaining life expectancy.• However, upon the death of that beneficiary, the 10 year clock starts ticking.• EXAMPLE: A 60 year old beneficiary inherited an IRA in 2019 when he had a

life expectancy to age 85 (for 25 years). That beneficiary dies 2 years later at age 62. The inherited IRA must be empty in the 10th year after death [rather than the year that the individual would have been age 85]

.

9/10/2020

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Distributions After Death“ life expectancy“

Oversimplified: Half of population will die before that age, and half will die after

RREEQQUUIIRREEDD MMIINN.. DDIISSTTRRIIBBUUTTIIOONNSS**LLIIFFEE EEXXPPEECCTTAANNCCYY TTAABBLLEE**

““SSTTRREETTCCHH IIRRAASS -- LLAAWW BBEEFFOORREE 22002200””

Age of Beneficiary Life Expectancy 30 1.9% 53.3 more years 40 2.3% 43.650 2.9% 34.260 4.0% 25.270 5.3% 18.7 80 8.9% 11.290 17.5% 5.7

9/10/2020

18

RREEQQUUIIRREEDD MMIINNIIMMUUMM DDIISSTTRRIIBBUUTTIIOONNSSEExxaammppllee:: DDeeaatthh aatt aaggee 8800??

NNEEWW LLAAWW:: TTEENN YYEEAARRSS ((iiff >>1100 yyeeaarr yyoouunnggeerr))

Age of Beneficiary Life Expectancy 30 10 years 40 1050 1060 1070 5.3% 18.7 80 8.9% 11.290 8.9% 5.7 * [11.2 yrs]


STRATEGIES:• Lotsa beneficiaries! Share the love! Spread the wealth!

Example: Children and grandchildren, rather than just children• Lifetime Roth IRA conversions, if current income tax rate is likely to be less than

future tax rates• Are any beneficiaries “eligible designated beneficiaries”?• Charitable bequests

* Have pre-tax dollars used for charitable purposes, especially if estate will be subject to federal or state estate taxes

* Charitable remainder trusts (more on this later)

.

9/10/2020

19

IIRRAAss PPAAYYAABBLLEE TTOO TTRRUUSSTTSSGeneral Rule: Trust is not DB

Exception: “Look-through” trust if four conditions are met. Reg. § 1.409(a)(9)-4, Q&A 5 & 6

• (1) The trust is a valid trust under state law• (2) The trust is irrevocable (or will become irrevocable on death)• (3) The beneficiaries are identifiable from the trust instrument,• (4) A document is given to the plan administrator. Either:

(a) a copy of the entire trust instrument or (b) a certified list of all of the beneficiaries of the trust

IIRRAAss PPAAYYAABBLLEE TTOO TTRRUUSSTTSS

General Rule: Trust is not DBException: “Look-through” trust if four

conditions are met. Reg. § 1.409(a)(9)-4, Q&A 5 & 6

Types:-- “accumulation trusts”-- “conduit trusts”

9/10/2020

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CCOONNDDUUIITT TTRRUUSSTTSS • Defined: Where the governing instrument provides

that all amounts distributed from the retirement account to the trustee while the primary beneficiary is alive will, upon receipt by the trustee, be paid directly from the trust to that beneficiary. Reg. § 1.409(a)(9)-5, Q&A 7(c)(3), Example 2.

• Advantage of a conduit trust: The conduit beneficiary is considered to be the sole beneficiary of that trust. The RMD computation ignores beneficiaries who will receive retirement plan $$ after the conduit beneficiary dies.

AACCCCUUMMLLAATTIIOONN TTRRUUSSTTSS • Defined: A trust where the trustee has the power to

either distribute or retain distributions that the trustee receives from a retirement plan account. Reg. §1.409(a)(9)-5, Q&A 7(c)(1)

• If retained, the income tax rate will likely be 37%• Effect of remainder beneficiaries: Except for a

“mere potential successor”, all possible beneficiaries must be considered for the RMD computation. PLR 200228025 (Apr. 18, 2002)

• Potential negative impact when some beneficiaries are EDBs and others aren’t?

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•Payable to a “minimum RMD” trust?• Is the IRA itself a “trusteed IRA”?•Payable to a conduit trust? •Payable to an accumulation trust?

““MMiinniimmuumm RRMMDD”” TTrruusstt

•Review the terms of the trust!Does the trust instrument state (oversimplified):“distribute only the minimum RMD required by law”? If so, there would be zero distributions in years 1 through 9 and 100% would be distributed in year #10. An income tax disaster!

• If appropriate, consider modification of the trust instrument, or decanting

• Most states permit modification to achieve the settlors’ tax objectives when laws change. UTC § 416

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CCOONNDDUUIITT TTRRUUSSTTSS

• Unless the beneficiary is an eligibledesignated beneficiary, the retirement account will be fully liquidated in ten years. The beneficiary will personally own all of the retirement assets.

• So what are the advantages of naming a conduit trust as the beneficiary, compared to simply naming the individual as the beneficiary on the IRA/retirement plan beneficiary form?

AACCCCUUMMLLAATTIIOONN TTRRUUSSTTSS • Trusts pay the highest income tax rate: 37%.

Will the beneficiaries be in a much lower income tax bracket?

• If so, will the benefits of the trust outweigh the much higher income tax cost?

• Benefits include: * Asset protection * Professional management* Restricted withdrawals by spendthrift beneficiaries

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AACCCCUUMMLLAATTIIOONN TTRRUUSSTTSS

• In general, there should a real need for a trust. If the beneficiaries are stable, mature adults who will pay substantially lower income tax rates than the trust’s 37% income tax rate, the rules are simpler if they are named as the beneficiaries of the account.

• If a trust will be a beneficiary of a retirement account, adopt specific strategies for the receipt of retirement assets. Those assets are pure taxable income that could be taxed at the highest 37% rate.

(Individuals don’t pay that 37% rate unless taxable income is over $500,000+ single ($600,000+ married joint))

TTwwiinn TTEEAA PPOOTT TTrruusstt SSyysstteemm℠℠AAllaann GGaassssmmaann,, CChhrriissttoopphheerr DDeenniiccoolloo aanndd BBrraannddoonn KKeettrroonn

Concept: • If an estate has both taxable IRD assets and

tax-free assets (e.g., assets that have a stepped-up income tax basis),

• Then the greatest amount of wealth will be transferred to the heirs and beneficiaries if the IRD will be taxed at the lowest possible income tax rate.

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TTwwiinn TTEEAA PPOOTT TTrruusstt SSyysstteemm℠℠AAllaann GGaassssmmaann,, CChhrriissttoopphheerr DDeenniiccoolloo aanndd BBrraannddoonn KKeettrroonn

• A trust arrangement for beneficiaries (e.g., children) who are in very different income tax brackets.

• A pot trust is named as the beneficiary of the retirement accounts. Trustee has discretion to give different amounts to different beneficiaries.

• The pot trust is a look-through accumulation trust. Yes, IRA is liquidated in ten years. Trustee distributes most taxable retirement income to low tax-rate beneficiaries.

• A separate pot trust distributes tax-free principal to high-tax rate beneficiaries. Equalizes after-tax dollars to all.

• Caution: Take steps to avoid “merger” of the two trusts

Beneficiary Deemed Owner Trust (BDOT)• A “grantor trust,” where the income of the trust is taxed to

the beneficiary under §678(a)• The beneficiary is usually in a lower income tax bracket than

the trust’s 37%. Trust distributes cash to pay tax.• Beneficiary is given a withdrawal power over the taxable

income of the trust. But no withdrawal power over the principal. This provides asset protection and other benefits for the assets retained in the trust.

Not perfect, of course. Wouldn’t want to have a withdrawal power for a substance abuser or when trying to qualify for public assistance with a special-needs beneficiary

• Comprehensive article by Ed Morrow: Google search: SSRN BDOT

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IIRRAAss PPAAYYAABBLLEE TTOO TTRRUUSSTTSS TTHHAATT BBEENNEEFFIITT BBOOTTHH EEDDBBss aanndd nnoonn--EEDDBBSS

ISSUE: Does naming an accumulation trust for a spouse (e.g., QTIP trust), minor child, etc. as an IRA beneficiary require liquidation of the IRA in 10 years, if there are also beneficiaries who are not eligible designated beneficiaries?GENERALLY YES: Under current tax regulations, all beneficiaries of an accumulation trust are considered when computing RMDs. Regs bias to faster payout.

IRAs PAYABLE TO TRUSTS THAT BENEFIT BOTH EDBs and non-EDBS

EXAMPLE: An accumulation trust states (oversimplified): “pay to my second wife (an EDB) for life, remainder to my children from my first marriage (adult children are not EDBs)”

An IRA payable to such a trust must be liquidated within ten years after the decedent’s death.Consider alternatives. Conduit trust? Percent outright to spouse (who can rollover) and percent to kids?

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IIRRAAss PPAAYYAABBLLEE TTOO TTRRUUSSTTSS TTHHAATT BBEENNEEFFIITT BBOOTTHH EEDDBBss aanndd nnoonn--EEDDBBSS

ISSUE: Naming an accumulation trust for a spouse(e.g., QTIP trust), minor child, etc. as an IRA beneficiary requires liquidation of the IRA in 10 years. EXCEPTION:• Accumulation trust for disabled & chronically illPLANNING:• Conduit trust for other type of EDB

AACCCCUUMMLLAATTIIOONN OORR CCOONNDDUUIITT TTRRUUSSTT FFOORR DDIISSAABBLLEEDD OORR CCHHRROONNIICCAALLLLYY IILLLL

EXCEPTION IN STATUTE: A retirement account payable to a trust (either accumulation or conduit) that benefits a disabled or chronically ill beneficiary could qualify for stretch life-expectancy payouts. Upon the death of that beneficiary, the ten year rule would apply.

Statute only provides an exemption for trust beneficiaries who are disabled or chronically ill.

There is no comparable provision for other EDBs:surviving spouse, minor child, person within ten years age

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CCoonndduuiitt TTrruussttss ffoorr EElliiggiibbllee DDeessiiggnnaatteedd BBeenneeffiicciiaarriieess

Conduit trusts for EDBs permit RMDs to be made over the EDB’s life expectancy, without considering the potential impact of contingent or remainder beneficiaries who are not EDBs.Conduit trusts can still make sense for:• A surviving spouse (though a rollover is better)• A person not more than ten years younger• A minor child (but have flexibility after majority age)

MMAANNDDAATTOORRYY DDIISSTTRRIIBBUUTTIIOONNSS[[AAssssuummee iinnhheerriitt IIRRAA aatt aaggee 8800 aanndd ddiiee aatt 9944]

EXAMPLE: D. John Mustard owned three IRAs when he died this year at age 93. His surviving spouse, Honey, turned age 80 the year after his death. Each IRA had a different beneficiary: • An accumulation trust for Honey, remainder to his children

from his first marriage• A conduit trust for Honey, remainder to his children from his

first marriage• Honey was the sole beneficiary ( rollover is possible )

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MMAANNDDAATTOORRYY DDIISSTTRRIIBBUUTTIIOONNSS[[AAssssuummee iinnhheerriitt IIRRAA aatt aaggee 8800 aanndd ddiiee aatt 9944]]

ROLL - Accumulation ConduitAGE OVER Trust Trust . 80 4.95% -0-% 8.93%

85 6.25 % -0- % 12.35%

90 8.26% 100.00% << 10 years, since it is 91 8.77% empty an accumulation trust92 9.26% empty 20.41%

MMAANNDDAATTOORRYY DDIISSTTRRIIBBUUTTIIOONNSS[[AAssssuummee iinnhheerriitt IIRRAA aatt aaggee 8800 aanndd ddiiee aatt 9944]

Conduit Trust for Surviving Spouse?

1. A conduit trust with several beneficiaries permits an EDB to receive distributions over remaining life expectancy, rather than just ten years

(There are RMDs every year, though)

2. A surviving spouse can annually recompute remaining life expectancy

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85 6.25% -0- % 12.35%

90 8.26% 100.00% 17.54%91 8.77% empty 18.87%92 9.26% empty 20.41%

CCoonndduuiitt TTrruussttss ffoorr EElliiggiibbllee DDeessiiggnnaatteedd BBeenneeffiicciiaarriieess

Conduit trusts for EDBs permit RMDs to be made over the EDB’s life expectancy, without considering the potential impact of contingent or remainder beneficiaries who are not EDBs.Conduit trusts can still make sense for:• A surviving spouse (though a rollover is better)• A person not more than ten years younger• A minor child (but have flexibility after majority age)

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•Payable to a “minimum RMD” trust?• Is the IRA a “trusteed IRA”?•Payable to a conduit trust? •Payable to an accumulation trust?• If appropriate, consider modification of the trust instrument, or decanting


IMPLICATIONS FOR CHARITIESDonors more likely to consider•Outright bequests•Retirement assets to tax-exempt CRT

• Child: income more than 5 years; then charity• Spouse & children (no estate tax marital deduction)

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CCHHAARRIITTAABBLLEE RREEMMAAIINNDDEERR TTRRUUSSTT

•Payment to non-charitable beneficiary (ies) for life *or* for a term of years

(maximum 20 years)

•Remainder interest distributed to charity•Exempt from income tax

2-GENERATION CHARITABLE REMAINDER UNITRUST

•Typically pays 5% to elderly surviving spouse for life, then 5% to children for life, then liquidates to charity

•Like an IRA, a CRT is exempt from income tax•Can be like a QTIP trust for IRD assets [but no

estate tax marital deduction]

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TThheeoorryy:: TTaaxx aaddvvaannttaaggee ooff iinnccoommee ttaaxx ddeeffeerrrraall !!

Move IRD tax-free after death from one tax exempt trust (e.g., the IRA) to another tax-exempt trust (the CRT). It can be done! PLR 199901023. No taxable income to beneficiaries until they receive distributions from CRT

[ compare: a charitable lead trust is NOT tax-exempt; don’t name a CLT as an IRA beneficiary !]

Can a CRT Produce More Family Wealth Than a Ten Year Liquidation?

Yes. It is possible. But usually not likely.• It can happen with long-term CRUTS (e.g., 40 or 50 years) and

beneficiaries who pay high income tax rates• Outcomes vary with investment returns and tax rates

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CCaann aa CCRRTT PPrroodduuccee MMoorree FFaammiillyy WWeeaalltthh TThhaann aa TTeenn YYeeaarr LLiiqquuiiddaattiioonn??

5% CRUT -- Investments earn 5% -- Tax rate: 40%5% Annual

Income Consume Save

CRT $1,000,000 $50,000 $30,000 $20,000

Income tax -400,000 Income tax >>> -$8,000

Net annual investment $12,000

After-tax $600,000 Purchase $600k life insurance? <50 years?

CCaann aa CCRRTT PPrroodduuccee MMoorree FFaammiillyy WWeeaalltthh TThhaann aa TTeenn YYeeaarr LLiiqquuiiddaattiioonn??

5% CRUT -- Investments earn 5% -- Tax rate: 20%5% Annual

Income Consume Save

CRT $1,000,000 $50,000 $40,000 $10,000

Income tax -200,000 Income tax >>> -$2,000

Net annual investment $8,000

After-tax $800,000 <50 years?

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Can a CRT Produce More Family Wealth Than a Ten Year Liquidation?

Yes. It is possible. But usually not likely.• It can happen with long-term CRUTS (e.g., 40 or 50 years) and

beneficiaries who pay high income tax rates• Outcomes vary with investment returns and tax rates• How often have you seen outcomes over 40 or 50 years

actually match the projections & assumptions that had been made 40 or 50 years earlier? (Me? Never)

• A CRT is best for someone with charitable intentions who also wants to benefit family. It should not be foisted on people who have no charitable intent.

PLANNING and LEGAL HURDLESA. Choosing the trustee and the charityB. Choosing the Best Type of CRT

- CRAT, CRUT, FLIPCRUT, or NIMCRUTC. How Long ? Term of Years? For Life?D. CRT Requirements That Can Pose ChallengesE. Extra Requirements for CRATsF. Asset protection issues G. Four-tier system for taxation of beneficiaries [WIFO]H. What do you say if a client or a charity suggest

“a charitable gift annuity” instead of a CRT ?

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Choosing the trustee and the charity

Charity• Stable; likely to exist when CRT endsTrustee• Competent to administer CRT• What is the minimum asset size to justify the costs of

administering the trust?• Some charities are willing to do $100,000 CRT if they

are named as the remainder beneficiary(but maybe not for a long term of 40 or 50 years)

CChhoooossiinngg tthhee BBeesstt TTyyppee ooff CCRRTT -- CCRRAATT,, CCRRUUTT,, FFLLIIPPCCRRUUTT,, oorr NNIIMMCCRRUUTT --

Charitable Remainder Annuity Trust (“CRAT”) - A trust that pays a fixed dollar amount (at least 5% and no more than 50% of the value of the property contributed to the trust) each year to one or more income beneficiaries for life (or for a fixed term of years -- maximum 20) and on liquidation distributes to a charity.

Charitable Remainder Unitrust (“Standard CRUT”) - A trust that pays a fixed percentage (at least 5% and no more than 50% ) of the value of the trust’s assets each year (redetermined annually) to one or more income beneficiaries for life (or for a fixed term of years -- maximum 20) and on liquidation distributes to a charity.

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CCRRTT RReeqquuiirreemmeennttss TThhaatt CCaann PPoossee CChhaalllleennggeess

1. Annual payouts between 5% and 50%2. Minimum 10% charitable deduction3. Avoid multiple donors to a single CRT4. Private foundation self-dealing rules apply to CRTs5. Problematic assets (partnership interests, debt-encumbered, etc)

6. Was trust actually administered in accordance with its terms

MMiinniimmuumm 1100%% cchhaarriittaabbllee ddeedduuccttiioonn• The value of the charity’s remainder interest

of a CRT must be at least 10 percent of the initial net fair market value of all property placed in the trust

• [computed using the Section 7520 discount rates in effect at the time of contribution. ]

• If a contribution is made to a trust that fails the 10 percent requirement, the trust will not qualify as a tax-exempt CRT.

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MMiinniimmuumm 1100%% cchhaarriittaabbllee ddeedduuccttiioonnOversimplified, there are two ways that the present value of a charity’s remainder interest in a CRT can be less than 10 percent of the value of the property contributed to the trust. • The first is if the stated payout rate is too

high (e.g., “for the next 20 years, distribute to my child 30% of the trust’s assets each year”).

• The solution is to lower the CRT’s payout rate, but it cannot be lowered below 5%.

MMiinniimmuumm 1100%% cchhaarriittaabbllee ddeedduuccttiioonnThe second way is if the projected term of the trust is too long. • The 10 percent requirement limits the

projected term of a CRUT to a maximum of roughly 55 years.

• For example, in 2019 if there was only one beneficiary of a CRUT, then the 10 percent test was met only if the beneficiary was at least age 27. If there were two beneficiaries who were the same age (e.g., husband and wife), then each had to be at least age 38.

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MMiinniimmuumm 1100%% cchhaarriittaabbllee ddeedduuccttiioonnWhat can an estate planner do if the beneficiaries are so young that a CRT fails the 10 percent test? • One strategy is to create multiple CRTs. For example, if a

client has three children who are triplets and each is age 27, there could be three CRTs (one per child) rather than a single CRT.

• Wait 5 years to liquidate IRA (death before RBD)? Can draft CRT for person age 22? Estate tax issue?

• Another option is to have a CRT for a term of years.

TTeerrmm--ooff--YYeeaarrss CCRRTT::AAnnnnuuaall PPaayymmeennttss DDeecclliinnee wwiitthh HHiigghh %% CCRRUUTT

• One advantage of a Stretch IRA is that each year’s RMD percentage increases, leading to rising payments over time

• Helps with inflation and psychology

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TTeerrmm--ooff--YYeeaarrss CCRRTT::AAnnnnuuaall PPaayymmeennttss DDeecclliinnee wwiitthh HHiigghh %% CCRRUUTT

• One advantage of a Stretch IRA is that each year’s RMD percentage increases, leading to rising payments over time

• Helps with inflation and psychology• If a CRT provides that the distribution percentage is “the

highest rate permitted by law”, payments from a term-of-years CRT will likely decline every year

• Example: A CRUT pays 11%, but only earns 7% -- every future year’s payment will fall by 4%

MMiinniimmuumm 1100%% cchhaarriittaabbllee ddeedduuccttiioonn

The “Sweet Spot”: A 5% CRUT•With a 5% payout (the lowest distribution rate permitted

by law), both the CRUT assets and the annual distributions can grow if the trustee can earn more than 5%

•The benefit to the family of a 5% CRUT is greatest with a long-term trust (maximum projected term of about 55 years) compared to a term-of-years CRT.

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CCRRTT RReeqquuiirreemmeennttss TThhaatt CCaann PPoossee CChhaalllleennggeess

1. Annual payouts between 5% and 50%2. Minimum 10% charitable deduction3. Avoid multiple donors to a single CRT4. Private foundation self-dealing rules

apply to CRTs5. Problematic assets (partnership interests,

debt-encumbered property, etc)6. Was trust actually administered in

accordance with its terms

EExxttrraa RReeqquuiirreemmeennttss ffoorr CCRRAATTss

1. Only one contribution possible to a CRAT(Compare: CRUTs can be funded in multiple years)

2. Minimum five percent probability thatCRAT's assets will not be exhausted

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What do you say if a client or a charity

suggests “a charitable gift annuity” instead of a CRT ?

Note: Most charities are not willing to issue a charitable gift annuity that immediately begins making payments to someone under age 60 or age 65

PPRRAACCTTIICCAALL SSTTEEPPSS

• Choose the trustee, the charities and the type of CRT• Draft the CRT, making certain that it complies with all

requirements, including an over 10% charitable deduction • Client should sign and date the CRT• On the beneficiary form of the retirement account, designate

as the beneficiary “___, trustee of the charitable remainder trust dated ____”

• Communicate with the retirement plan administrator of this intent. Avoid a future problem (e.g., if the client is married and the account is a 401(k) plan, a spousal waiver may be needed).

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designated beneficiary”, or

• Five Years, or << when pay to a CRT• “Ghost life expectancy” << when pay to a CRT




designated beneficiary”, or

• Five Years, or << when pay to a CRT• “Ghost life expectancy” << when pay to a CRT

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Retirement Accounts Challenges with Second Marriages

RETIREMENT PLANS SUBJECT TO THE LAW

• Section 401(a) - Employer pension, profit sharing and stock bonus plans [incl. 401(k)]

• Section 408 – IRAs

• Section 403(b) - School and charity employers• Section 457(b) plans - Government and tax-exempt employers

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WHAT THE QRPs HAVE IN COMMON

•1. Defer income taxation•2. 10% penalty - on most taxable distributions received

before age 59 1/2

•3. RMDs - 50% penalty for failure

•4. Taxation – ordinary income; no 3.8%

DIFFERENCES AMONG THE RETIREMENT PLANS

Section 401(a) - Employer pension, profit sharing and stock bonus plans [incl. 401(k)]• Your employer has your money • Congress: you need protections from business

failures; from creditors of your employer; from your own creditors

•ERISA

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Section 408 – IRAs • You select trustee / custodian of your IRA with a

regulated financial institution• There is no need to impose the many complicated

ERISA laws to IRAs


Bottom Line:• Your rights to your 401(k) account are governed

almost exclusively by federal law• Your rights to your IRA are governed primarily by your

state’s law

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Example: Your right to get money while employed• 401(k): Generally, no right to money until terminate

employment. Possible exceptions: 1. loan 2. hardship distribution 3. Age 59 1/2

• IRA : No law restricts access to money.(if under 59 ½, may have to pay IRS 10% penalty)


How accounts are split & taxed at divorce • 401(k): Need a QDRO“Qualified Domestic Relations Order” §414(p)

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§401(a)(13) - Assignment and alienation. (A) In general. A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that benefits provided under the plan may not be assigned or alienated. (B) Special rules for domestic relations orders. Subparagraph (A) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that subparagraph (A) shall not apply if the order is determined to be a qualified domestic relations order.



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• IRA : Simply divide IRA between spouses

No QDRO for IRA in Divorce§408(d)(6) Transfer of account incident to divorceThe transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument …is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.

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• IRA : Simply divide IRA between spouses

§72(t) – Additional 10% tax(t) 10-percent additional tax on early distributions from qualified retirement plans.(1) Imposition of additional tax. If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer's tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.(2) Subsection not to apply to certain distributions. Except as provided in paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:(A) In general. Distributions which are--(i) made on or after the date on which the employee attains age 59 1/2 ,(ii) made to a beneficiary (or to the estate of the employee) on or after the death of the employee.

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§72(t) – Additional 10% tax(t) 10-percent additional tax on early distributions from qualified retirement plans.(2) Subsection not to apply to certain distributions. Except as provided in

paragraphs (3) and (4), paragraph (1) shall not apply to any of the following distributions:(A) In general. Distributions which are--(i) made on or after the date on which the employee attains age 59 1/2 ,

(C) Payments to alternate payees pursuant to qualified domestic relations orders. Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of section 414(p)(1)).A QDRO is only for a §401(a) plan (profit sharing, 401(k) etc)A 10% penalty does apply to a distribution received from an IRA that was split after a divorce, if the recipient is under age 59 ½. Why? Because IRAs (§408) are not divided pursuant to a §414(p) QDRO


How accounts are split & taxed at divorce • 401(k): Need a QDRO * Distributions to ex-spouse are taxable income* No 10% penalty for QDRO distribution, if under 59 ½ • IRA : Simply divide IRA between spouses* Distributions to ex-spouse are taxable income* Yes 10% penalty if recipient is under age 59 ½

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MARRIED COUPLES: PLANNING WITH

RETIREMENT ASSETS


Tax Planning: -- Rollovers ? -- Funding Trusts ?-- Second Marriages ?

Legal Rights-- 401(k) plans: federal law-- IRAs: state laws

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MARRIED COUPLES: RETIREMENT ASSETSSurviving spouse has an option that no other beneficiary has:a rollover of deceased spouse’s retirement assets to her or his own new IRA (creditor protection, too!)

Other beneficiaries only option: an inherited IRA , usually liquidated within ten years.


Should the estate plan provide:-- a rollover of deceased spouse’s retirement assets to a new IRA?

-- or ---- the deceased spouse’s retirement assets are payable to a trust for the surviving spouse?

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D. John Mustard owned three IRAs when he died this year at age 93. His surviving spouse, Honey, turned age 80 the year after his death. Each IRA had a different beneficiary: • An accumulation trust for Honey, remainder to his

children from his first marriage• A conduit trust for Honey, remainder to his children

from his first marriage• Honey was the sole beneficiary ( rollover is possible )

MANDATORY DISTRIBUTIONS[Assume inherit IRA at age 80 and die at 94]

ROLL - Accumulation ConduitAGE OVER Trust Trust .80 4.95% -0-% 8.93%

85 6.25 % -0- % 12.35%

90 8.26% 100.00% << 10 years, since is %91 8.77% empty an accumulation trust%92 9.26% empty 20.41%

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Conduit Trust for Surviving Spouse?

1. A conduit trust with several beneficiaries permits an EDB to receive distributions over remaining life expectancy, rather than just ten years (There are RMDs every year, though)

2. A surviving spouse can annually recompute remaining life expectancy



85 6.25% -0- % 12.35%

90 8.26% 100.00% 17.54%91 8.77% empty 18.87%92 9.26% empty 20.41%

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IRS PLRs: Surviving Spouse Rollover

20+ IRS Private Letter Rulings – 2015-2020Surviving spouse can rollover deceased spouse’s IRA, even when the account is payable to:• Trust for the spouse• The estate, with estate pour-over into a trust for the

spouse• The estate, where the spouse is the sole or residuary

beneficiary of the estate

IRS PLRs: Surviving Spouse Rollover

IS A PLR NECESSARY?• IRS user fee for PLR now $28,300 (2015)

– PLR on IRA issues now $10,000 (2016)

• ACTEC: “public needs a Revenue Ruling”• Some trustees willing to do rollover

without a PLR, if facts fit the PLRs

Kirkland

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IRAs in SECOND MARRIAGES


85 6.25% -0- % 12.35%

90 8.26% 100.00% 17.54%91 8.77% empty 18.87%92 9.26% empty 20.41%


SURVIVING SPOUSE ROLLOVER?•The surviving spouse sets up a new IRA

in her/his own name•Then the surviving spouse selects the

beneficiaries upon death•What assurance that a child from the

deceased spouse’s prior marriage will be named as a beneficiary?

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•All IRAs to spouse? Buy some life insurance for children?

•Divide IRAs? Some to spouse; some to children from prior marriage-- caution: 401(k) & ERISA plans: 100% to spouse, unless executes waiver

MARRIED COUPLES: 401(a) RETIREMENT ASSETS

Legal Rights: Regardless of who a plan participant named as a beneficiary of a 401(a) account, the surviving spouse is entitled to 100% of the assets in the account unless that spouse executed a waiver. By comparison, IRAs are generally subject to state laws, including general divorce and community property laws.

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A Waiver: A spouse may waive the privilege to receive the

entire account balance by executing a qualified waiver. Such a waiver is also required for other transactions that might reduce a surviving spouse’s benefit at death, such as a rollover from a QRP to an IRA.


A Waiver:• Prenuptial agreements usually ineffective• The waiver must be signed while married; must

acknowledge the effect of the waiver; and must be witnessed by a plan representative or by a notary public

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IRAs in SECOND MARRIAGES-- 401(k) versus IRA --

Divorce? Then die? And the will or a life insurance policy never changed (still names former spouse as beneficiary)? • State law in most states: Then the former

spouse will not receive under the will, unless the decedent reaffirmed intent that the former spouse should inherit.

IRAs in SECOND MARRIAGES-- 401(k) versus IRA --

Facts: Man dies with ex-spouse still named as beneficiary of retirement account and company group-term life insurance. There are children from a prior marriage. • U.S. Supreme Court: ERISA pre-empts state

law. Ex-spouse gets 100% since she is named as beneficiary. Egglehoff v. Eggelhoff

• IRAs? Probably follow state laws

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•All IRAs to children?•COMMUNITY PROPERTY law?•PLR 201623001 (March 3, 2016): IRS held that

a surviving spouse may not rollover the portion of her husband's IRA assigned to her by a court in settlement of her claim to a community property interest.

• Logic: “IRS doesn’t follow a state’s community property law for IRA taxation”

PLR 201623001 –Community Property

“Section 408(g) provides that section 408 shall be applied without regard to any community property laws, and, therefore, section 408(d)’s distribution rules must be applied without regard to any community property laws.”

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“Accordingly, because [widow] was not the named beneficiary of the IRA of Decedent and because we disregard [widow]’s community property interest, [widow] may not be treated as a payee of the inherited IRA for [child] and [widow] may not rollover any amounts from the inherited IRA for [child] (and therefore any contribution of such amounts by [widow] to an IRA for [widow] will be subject to the contribution limits governing IRAs).”


“Additionally, because [child] is the named beneficiary of the IRA of Decedent and because we disregard [widow]’s community property interest, any “assignment” of an interest in the inherited IRA for [child] to [widow] would be treated as a taxable distribution to [child]. Therefore, the order of the state court cannot be accomplished under federal tax law.”

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IMPLICATIONS:• Plan to leave sufficient assets to spouse to avoid assertion of community property rights ?

• Avoid IRAs to satisfy community property share under state law

IIRRSS && CCOOMMMMUUNNIITTYY PPRROOPPEERRTTYY

• PLR 201623001 (March 3, 2016): IRS held that a surviving spouse may not rollover the portion of her husband's IRA assigned to her by a court in settlement of her claim to a community property interest.

• COMPARE: PLR 202034002 (Aug 21, 2020). IRS permitted a widow to rollover her half of a community property IRA when her husband had named a trust for her benefit as the beneficiary of the entire IRA.

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•All IRAs to spouse? Buy some life insurance for children?

•Divide IRAs? Some to spouse; some to children from prior marriage

• IRAs to a 2-generation charitable remainder trust ?

CCHHAARRIITTAABBLLEE RREEMMAAIINNDDEERR TTRRUUSSTT

•Payment to non-charitable beneficiary (ies) for life *or* for a term of years

(maximum 20 years)

•Remainder interest distributed to charity•Exempt from income tax

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2-GENERATION CHARITABLE REMAINDER TRUST

•Typically pays 5% to elderly surviving spouse for life, then 5% to children for life, then liquidates to charity

•Like an IRA, a CRT is exempt from income tax•Can be like a credit-shelter trust for IRD assets

[no estate tax marital deduction]


•Can be a solution for second marriages when estate is top-heavy with retirement assets. Example:-- Half of IRA to surviving spouse-- Other half of IRA to a CRT for 2nd

spouse and children from 1st marriage

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TECHNICAL REQUIREMENTS• Minimum 10% charitable deduction

-- all children should be over age 30 • CRUT – minimum 5% annual distrib• No estate tax marital deduction• Charitable intent !


Own Accumulation ConduitAGE IRA Trust Trust . C R T . 80 4.95% -0-% 8.93% 5.00%

85 6.25% -0- % 12.35% 5.00%

90 8.26% 100.00% 17.54% 5.00%91 8.77% empty 18.87% 5.00%92 9.26% empty 20.41% 5.00%

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IRAs in SECOND MARRIAGES• All IRAs to spouse? Buy some life insurance for children?• Divide IRAs? Some to spouse; some to children

• IRAs to a 2-generation charitable remainder trust ?

• What about the grandchildren? (Trust assets go to charity upon death of last child)

• Solution: Life insurance on lives of the children, to benefit grandchildren

SO YOU WANNA BE A PHILANTHROPIST?

WHY ?-- Donor Passion for Cause-- Tax & Administrative Situations

-- Windfall income– need large deduction-- “Bunch gifts” in years to itemize deductions-- Avoid 3.8% NIIT surtax: investment income

is moved from taxpayer’s tax return and is instead earned by a tax-exempt charity

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Administrative Convenience – split large gift to many charities-- one receipt from DAF/PF instead of

many CWAs from many charities-- make anonymous gifts from a DAF


WHY ?-- Donor Passion for Cause-- Tax & Administrative Situations

DONATE WHAT? Appreciated property

WHICH VEHICLE? PF? DAF? SO?

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WHICH PHILANTHROPIC VEHICLE?

COST-BENEFIT CHOICES: -- PRIVATE FOUNDATION -- DONOR ADVISED FUND -- SUPPORTING ORGANIZATION

PHILANTHROPIC CHOICE OF CHARITABLE ENTITY

•Private Foundation•Supporting Organization “Friends of ..”

-- Type I -- Type II-- Type III

- Functionally integrated-Non-functionally integrated (“NFI”)

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•DONOR ADVISED FUND-- a fund or account owned by a

sponsoring public charity where the donor (or person appointed by the donor) can recommend grants or investments


•DONOR ADVISED FUND-- lower administrative costs -- grants to any public charity-- very popular: grants from donor advised funds already exceed 40% of grants from private foundations

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Who Offers Donor Advised Funds?

• Traditionally – Local Community Foundations• The Arizona Community Foundation• The Jewish Community Foundation of Greater Phoenix

• Since 1993, “National DAFs” Associated With Financial Establishments• Fidelity, Schwab, Vanguard, Goldman Sachs, etc.

• And, national charities, colleges and universities,• The National Christian Community Foundation• Harvard University

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Donor Advised Funds

2019 Donor-Advised Fund Report National Philanthropic Trust• 729,000 – Number of DAFs in 2018• $121 billion – assets held by DAFs• $ 37 billion – contributions to DAFs• $ 23 billion – grants paid by DAFs• 2,500 – Organizations with DAFs

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DONOR ADVISED FUNDS2019 Donor-Advised Fund Report National Philanthropic Trust

Growth in Number ofDonor Advised Funds

The vast majority of DAFs are less than four years old

Year Number2015 273,0002016 290,0002017 463,0002018 729,000

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Average Dollars in Each DAFContinues to Decline

New DAFs tend to be established with smaller dollar amounts

2018: Gifts to DAFs Were 10% of All Individual Charitable Giving

4.4% 4.8%5.7%

7.1%7.9% 8.1%

9.2%10.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2010 2011 2012 2013 2014 2015 2016 2017Source: NPT Study

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- DONOR ADVISED FUNDS -HISTORY

• 1931 – First DAF (NY Comm Trust? Winston-Salem?)• 1969 – PF law enacted; community foundations with

DAFs are classified as public charities• 1993 – IRS OKs the Fidelity Charitable Gift Fund • 1990s – Wall Street Journal articles on DAF abuses• 2004 – Xelan Foundation wins court case• 2006 – Congress enacts legislation to define DAFs;

penalties for violations

DONOR ADVISED FUND• Sec 4966 – Definitions, Exemptions, 20% penalty• Sec. 4958 - Entire loan or compensation to donor is

“excess benefit”• Sec. 4943( e) - PF excess business holding laws apply• Sec. 4967 – 125% penalty on donor for advising

distribution that provides donor “a more than incidental benefit”

• Sec. 170(f)(18) – no income tax deduction for gift to DAF unless contemporaneous written acknowledgment (“CWA”) states “exclusive legal control”

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DONOR ADVISED FUND -- Definition --The definition is important for:• Charities with different types of funds under “fund accounting”-- which funds could have DAF penalties?-- can an endowed chair at a college be a DAF?

• Donor loses income tax deduction ?-- DAF’s CWA must mention “legal control”

DONOR ADVISED FUNDS

PERMISSABLE GRANTS:• Any public charity or private operating foundation, except a Type III

NFI S.O.• The sponsoring public charity• Another donor advised fund• A foreign charity or civic organization, but only if “expenditure

responsibility” (like a private foundation) to assure charitable purpose.

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DONOR ADVISED FUNDS

PROHIBITED GRANTS:•A human being•For a non-charitable purpose•Grants to an organization other than a public charity where the sponsoring charity failed to exercise “expenditure responsibility”

DONOR ADVISED FUNDS

PENALTIES IF PROHIBITED GRANTS

• ON CHARITY: 20%

• ON EMPLOYEE: 5% (max $10,000)

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DONOR ADVISED FUNDS

“EXCESS BENEFIT” TRANSACTION –• Different law than applies to other charities• Other charities: penalty only on “excess benefit” paid to disqualified

person-- 25% (later 200%) on DP; 10% on charity manager

• DAFs: penalty on the entire amount of “any grant, loan, compensation, or other similar payment from such fund” to a donor/advisor

DONOR ADVISED FUNDSPENALTIES IF PROHIBITED GRANTSExample: A DAF reimburses the DAF’s donor [a “disqualified person”] $10,000 for her expenses to visit Asia for art purchases. • Penalty on charity: $2,000 (20%)• Penalty on employee who knew: $500 (5%)• Penalty on DP: Initially $2,500 (25%) [EE 10%]• Penalty on DP if not return $: $20,000 (200%)

The $10,000 cannot be placed in any DAF

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DONOR ADVISED FUNDS“EXCESS BENEFIT” TRANSACTION –• Different law than applies to other charities• Other charities: penalty on “excess benefit” paid

to disqualified personApplies to either services or property sales

• DAFs: penalty only “grant, loan, compensation, or other similar payment” to a donor/advisor

DAF excess benefit NOT apply to property sale between DAF and donor/family member

DONOR ADVISED FUNDS“more than an insubstantial benefit”

DEFINED: A donor/advisor recommends a distribution from a DAF and the donor/advisor (or a family member) “receives a more than incidental benefit” Section 4967

EXAMPLE: tuition payment for own childPENATIES:• 125% tax on donor/advisor• 10% tax on fund manager who knew of benefit

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DONOR ADVISED FUNDS“more than an insubstantial benefit”

DEFINED: A donor/advisor recommends a distribution from a DAF and the donor/advisor (or a family member) “receives a more than incidental benefit” Section 4967

TAX POLICY & PERSPECTIVE• Charitable tax deduction under Section 170?• DAFs are mini private foundations?

DONOR ADVISED FUNDS“more than an insubstantial benefit”IRS NOTICE 2017-73• Pledges• Bifurcated GrantsOTHER MATTERS IN IRS NOTICE:• Charities receiving grants from DAFs: Computation of

public support test• Private foundation grants to DAFs: Gather

information on PF use of DAFs

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PLEDGES MADE BY PF’s DONOR or BY DAF’s DONOR• PRIVATE FOUNDATION

Cannot pay a pledge that is “legally binding”, but can pay pledge that is not legally binding

• DONOR ADVISED FUND – IRS Notice 2017-73No 125% penalty if three conditions are met:

1. No reference to pledge when make distribution2. Donor not receive benefit (except incidental OK)3. Donor not attempt to claim charitable income tax

deduction for the DAF distributionTHIS IS OFFICAL IRS POLICY TODAY

DONOR ADVISED FUNDS “bifurcated grants”DEFINED: A donor/advisor recommends a distribution

from a DAF for the charitable portion of a payment, and the donor/advisor personally pays non-deductible portion

EXAMPLE: Attend a $100 charitable event where a $20 meal is served; charitable deduction only $80

Notice 2017-73: This is a “more than insubstantial benefit”

• 125% tax on donor/advisor• 10% tax on fund manager who knew of benefitTHIS IS A PROPOSAL – THIS IS NOT YET LAW

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NNoottiiccee 22001177--7733 -- CCoonncceerrnnss• More-than-incidental benefit to donor (§4767)

• Pledges• Bifurcated Grants

• “Contribution Laundering”• Using DAFs to turn donor’s support into

public support; permits a private foundation to be classified as a public charity

• Avoidance of PF 5% payout requirement

DAF GRANTS – PUBLIC SUPPORT TEST -

In past PLRs, the Service concluded that a grant from a DAF to a charity was a grant from a publicly-supported charity. Logic: the sponsoring organization was a public charity.

Thus, in theory, a charity’s sole support might be grants from a single DAF and the charity would be able to avoid private foundation status because all of its support came from a public charity.

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DAF GRANTS – PUBLIC SUPPORT TEST -

IRS Notice 2017-73: Proposed new rules(1) a DAF grant will be treated as being received from the donor who funded the DAF, (2) all anonymous contributions will be treated as being made by one person, and(3) distributions from a sponsoring organization will be treated as 100% “public support” only if that charity states that the distribution was not from a DAF

WHAT IS THE INTERACTION OF PFs WITH DAFs?

IRS Notice 2017-73: “The Treasury Department and the IRS request comments regarding the issues addressed in this notice and suggestions for future guidance with respect to DAFs. In addition, the Treasury Department and the IRS request comments with respect to the following:

“(1) How private foundations use DAFs in support of their purposes.(2) Whether, consistent with § 4942 and its purposes, a transfer of funds by a private foundation to a DAF should be treated as a “qualifying distribution” only if the DAF sponsoring organization agrees to distribute the funds for § 170(c)(2)(B) purposes (or to transfer the funds to its general fund) within a certain timeframe.”

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PPOOLLIICCYY,, CCOONNTTRROOVVEERRSSYY,, AANNDD

PPRREEDDIICCTTIIOONNSS

Donor Advised Funds Legislation Introduced in CaliforniaA bill to regulate donor advised funds was introduced in the California Assembly on February 22, 2019. It would require the state Attorney General to issue regulations that would, among other things, require disclosure of dormant funds or an inactive policy at a DAF sponsor, and the types of investments made by the DAF sponsor. AB-1712

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LEGAL REGULATION & TAXES

SELF DEALING TAXESPF SO DAF

•Prohibit sale ? Yes No No•Prohibit loan ? Yes Yes Yes•Prohibit paying

donor for services? No Yes Yes

LEGAL REGULATION & TAXES

PF SO DAF• Minimum 5% payout? Yes Yes* No

(*3.5% - NFI)• Excess Bus. Holdings? Yes Yes Yes

(NFI)• Jeopardy Investments? Yes No No• Taxable expenditures? Yes No No*

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PRIVATE FOUNDATION•POSITIVES – control! control! control!-- governing body, grants & investments•NEGATIVES-- lower income tax deduction for gifts of

real estate or closely-held stock-- strict and harsh private foundation taxes-- high administrative costs – tax return, etc-- No anonymity about assets, grants, etc

DONOR ADVISED FUND•NEGATIVES-- loss of legal control over investments-- cope with policies of administering charity -- excise taxes on excess business holding, etc•POSITIVES -- lowest administrative costs (no tax return)-- public charity tax status for donations -- access to staff of community foundation-- anonymity possible for assets, grants, etc

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SUPPORTING ORGANIZATION

NEGATIVES & POSITIVES SIMILAR TO DAF, BUT ALSO:

• greater sense of independence and identity to have a separate corporation or trust compared to just an account

• way to avoid policies that are an issue (e.g., limit on future generation involvement with DAF?)

RETIREMENT ACCOUNTS

REQUIRED DISTRIBUTION RULES

AFTER ENACTMENT OF THE SECURE ACT

TABLES AND COMPUTATIONS

Required Distributions - Lifetime 1Required Distributions - Inherited accounts - life expectancy tables 3Required Distributions - Inherited accounts - terminology 4Required Distributions - Summary of rules - table 5

Case study - Mandatory Distributions To An 80 Year-Old Widow 7IRS PLRs: When A Surviving Spouse Can Rollover An IRA Payable To An Estate or Trust 8

Combination of Federal Estate and Income Taxes on IRD in 2020 9Section 401(a)(9), as amended by The SECURE Act 10

Christopher R. HoytUniversity of Missouri (Kansas City) School of Law

© 2020 Christopher Hoyt All Rights Reserved

Handout section 04

A. OBJECTIVES - Keep the largest amount in an IRA or QRP, so you can earninvestment income on the deferred income taxes in the account. EXAMPLE:

Principal 10% Yield 5% Yield

Amount in IRA $100,000 10% $ 10,000 5% $ 5,000Income Tax on Distribution (40%) 40,000Amount Left to Invest $ 60,000 10% $ 6,000 5% $ 3,000

In order to force QRP and IRA accounts to be used to provide retirement income,Congress enacted two significant penalties. First, there is a 10% penalty tax for mostdistributions before age 59 ½. Section 72(t). Second, there is a 50% penalty tax imposed on theaccount owner for not receiving the required minimum distribution (“RMD”). Sec. 4974; Reg.Sec. 54.4974-2. The penalty is imposed during one’s lifetime after attaining the age of 72 orretiring, whichever occurs later. The 50% penalty tax also applies after the account owner'sdeath to beneficiaries who fail to receive the post-death minimum amounts.

B. REQUIRED LIFETIME DISTRIBUTIONS AFTER AGE 72 [previously age 70 ½]

GENERAL RULES – Unless you are married to someone who is more than ten years youngerthan you, there is one -- and only one -- table of numbers that tells you the portion of your IRA,403(b) plan or qualified retirement plan that must be distributed to you each year after you attainthe age of 72. The only exception to this table is if (1) you are married to a person who is morethan ten years younger than you and (2) she or he is the only beneficiary on the account. In thatcase the required amounts are even less than the amounts shown in the table. To be exact, therequired amounts are based on the joint life expectancy of you and your younger spouse.Note: There are no RMDs in year 2020. The CARES Act eliminated RMDs for the year

–YEAR 2019 --UNIFORM LIFETIME DISTRIBUTION TABLE –Age Payout70 -0-71 3.78%* 72 3.91% 73 4.05% 74 4.21%

75 4.37% 76 4.55% 77 4.72% 78 4.93% 79 5.13%

80 5.35% 81 5.59% 82 5.85% 83 6.14% 84 6.46%

85 6.76% 86 7.10% 87 7.47% 88 7.88% 89 8.33%

90 8.78% 91 9.26% 92 9.81% 93 10.42% 94 10.99%

95 11.63% 96 12.35% 97 13.16% 98 14.09% 99 14.93%

100 15.88% 101 16.95% 102 18.19% 103 19.24% 104 20.41%

105 22.23%106 23.81%107 25.65%108 27.03%109 29.42%

[Table computed from Table A-2 of Reg. Sec. 1.401(a)(9)-9 (2002) -- (rounded up)][* Individuals who attained age 70 ½ in the year 2019 must receive a distribution in year 2020(e.g., at age 71), despite the provision in the SECURE Act that changed the age to 72]

1

TWO SIMPLE STEPS: Step 1: Find out the value of your investments in your retirement plan account on the last day ofthe preceding year. For example, on New Years Day -- look at the closing stock prices forDecember 31. Step 2: Multiply the value of your investments by the percentage in the table that is next to theage that you will be at the end of this year. This is the minimum amount that you must receivethis year to avoid a 50% penalty.

Example: Ann T. Emm had $100,000 in her only IRA at the beginning of the year. Shewill be age 80 at the end of this year. In the year 2020, she must receive at least $5,350

during the year to avoid a 50% penalty (5.35% times $100,000). If she had attained age80 in the year 2021, she would only need to receive at least $4,950 during the year toavoid a 50% penalty (4.95% times $100,000). Please see the table below.

– Year 2021 and later --UNIFORM LIFETIME DISTRIBUTION TABLE –Age Payout

70 ½ -0-%71 -0-% 72 3.67% 73 3.79% 74 3.93%

75 4.07% 76 4.22% 77 4.39% 78 4.57% 79 4.77%

80 4.95% 81 5.19% 82 5.44% 83 5.69% 84 5.96%

85 6.25% 86 6.58% 87 6.95% 88 7.36% 89 7.76%

90 8.27% 91 8.78% 92 9.26% 93 9.91% 94 10.53%

95 11.24% 96 12.05% 97 12.83% 98 13.70% 99 14.71%

100 15.63% 101 16.95% 102 17.86% 103 19.24% 104 20.41%

105 21.74%106 23.26%107 24.39%108 25.65%109 27.03%

C. MAXIMUM YEARS FOR PAYOUTS AFTER ACCOUNT OWNER’S DEATH: TEN YEARS, FIVE YEARS, OR A REMAINING LIFE EXPECTANCY

Failure to receive the required minimum distribution (“RMD”) for that year from an inherited retirementaccount triggers a 50% penalty on the shortfall. The maximum time period over which a decedent’s accountmay be liquidated without such a penalty after the year of death is either: (#1) ten years, if only “designated beneficiaries” (“DBs”) (or a “look-through trust” with 100% DBs) arethe beneficiaries of the account (there is no RMD until the 10th year), § 401(a)(9)(H)(i)

(#2) the remaining life expectancy of an eligible designated beneficiary (“EDB”), based on the EBD’sage at the end of the year that follows the account owner’s death. An EDB is a beneficiary who is: asurviving spouse, a minor child of the decedent, disabled, chronically ill, or someone who is not more thanten years younger than the decedent (there is an RMD every year), §§ 401(a)(9)(H)(ii), (E)(ii) & B(iii)

(#3) five years(there is no RMD until the 5th year), if the account owner died before the required beginningdate (“RBD”) and there is even just one non-DB on the “determination date” (generally, September 30following the year of death), §§ 401(a)(9)(B)(ii) and (H)(i)(“Except in the case of...);Reg. § 1.401(a)(9)-3 Q&A 4; or (#4) the life expectancy of someone who was the account owner’s age (a/k/a a “ghost life expectancy”)if the account owner died after the RBD and there is even just one non-DB on the “determination date.”

There will be RMDs in each of those years. §§ 401(a)(9)(B)(i) and (H)(i); Reg. § 1.401(a)(9)-5 Q&A 5(c)(3)

2

YEAR 2020 LIFE EXPECTANCY TABLEAge Life Expectancy Age Life Expectancy Age Life Expectancy Age Life Expectancy Age Life Expectancy

0 82.41 81.62 80.63 79.74 78.7

5 77.76 76.77 75.88 74.89 73.8

10 72.811 71.812 70.813 69.914 68.9

15 67.916 66.917 66.018 65.019 64.0

20 63.021 62.122 61.123 60.124 59.1

25 58.226 57.227 56.228 55.329 54.3

30 53.331 52.432 51.433 50.434 49.4

35 48.536 47.537 46.538 45.639 44.6

40 43.641 42.742 41.743 40.744 39.8

45 38.846 37.947 37.048 36.049 35.1

50 34.251 33.352 32.353 31.454 30.5

55 29.656 28.757 27.958 27.059 26.1

60 25.261 24.462 23.563 22.764 21.8

65 21.066 20.267 19.468 18.669 17.8

70 17.071 16.372 15.573 14.874 14.1

75 13.476 12.777 12.178 11.479 10.8

80 10.281 9.782 9.183 8.684 8.1

85 7.686 7.187 6.788 6.389 5.9

90 5.591 5.292 4.993 4.694 4.3

95 4.196 3.897 3.698 3.499 3.1

Table A-1 of Reg. Sec. 1.401(a)(9)-9 (“single life ”), required by Reg. Sec. 1.401(a)(9)-5, Q&A 5(a) & 5(c) and Q&A 6.

LIFE EXPECTANCY TABLE - Years 2021 and later

Age Life Expectancy Age Life Expectancy Age Life Expectancy Age Life Expectancy Age Life Expectancy

0 84.51 83.72 82.73 81.74 80.8

5 79.86 78.87 77.88 76.89 75.8

10 74.811 73.812 72.813 71.914 70.9

15 69.916 68.917 67.918 66.919 66.0

20 65.021 64.022 63.023 62.024 61.1

25 60.126 59.127 58.228 57.229 56.2

30 55.331 54.332 53.433 52.434 51.4

35 50.536 49.637 48.638 47.639 46.6

40 45.741 44.742 43.843 42.844 41.8

45 40.946 39.947 39.048 38.049 37.1

50 36.151 35.252 34.353 33.154 32.4

55 31.556 30.657 29.758 28.859 27.9

60 27.161 26.262 25.363 24.564 23.6

65 22.866 22.067 21.268 20.469 19.5

70 18.771 17.972 17.173 16.374 15.6

75 14.876 14.077 13.378 12.679 11.9

80 11.281 10.582 9.983 9.284 8.6

85 8.186 7.587 7.088 6.689 6.1

90 5.791 5.392 4.993 4.694 4.2

95 3.996 3.797 3.498 3.299 3.0

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D. REQUIRED DISTRIBUTIONS AFTER DEATH-- Terminology

Required Beginning Date ("RBD") - The first date that a distribution must be made from an IRA,QRP or 403(b) account to the account owner in order to avoid the 50% penalty tax.1

IRAs: The RBD for an IRA is April 1 following the calendar year that the IRA accountowner attains age 72.2 QRP or 403(b): The RBD for a qualified retirement plan or a tax-sheltered annuity is thelater of (a) April 1 following the calendar year that the account owner attains age 72 or (b)April 1 following the calendar year that the employee separates from service (e.g., somebodywho works past age 73).3 Individuals who own 5% or more of a business are not eligible forthis later RBD: their RBD is April 1 following the calendar year that they attain age 70 ½.

“Beneficiaries” versus “Designated Beneficiary” ("DB") - A beneficiary is any person or entitythat is entitled to receive benefits from a QRP or IRA account after the account owner’s death. Bycomparison, a designated beneficiary is an individual who is entitled to the benefits of the IRA orQRP account upon the death of the employee / participant / IRA owner (hereafter "account owner").4 Neither a charity nor the decedent's estate will qualify as a DB since neither has a life expectancy. Ifcertain criteria are met, a trust may be the beneficiary of an IRA or QRP and distributions will bebased on the beneficiaries of that trust (a “look-through trust").

“Eligible Designated Beneficiary” ("EDB") - An EDB qualifies for an exception to the general tenliquidation rule. An EDB may receive distributions over his or her the remaining life expectancy ofan eligible designated beneficiary (“EDB”), based on the EBD’s age at the end of the year thatfollows the account owner’s death. An EDB is a beneficiary who is: a surviving spouse, a minorchild of the decedent (though upon attaining majority age, the ten year rule applies), disabled,chronically ill, or someone who is not more than ten years younger than the decedent.5

Determination Date - The minimum distributions will be computed based only on the beneficiarieswho still have an interest on the determination date. That date is September 30 of the calendar yearthat follows the calendar year of the account owner's death.6 Example: Sarah died on September 14,2020, the determination date for her IRA and QRP accounts will be September 30, 2021.

There are basically three ways to eliminate some of the beneficiaries before the determinationdate: (1) disclaimers, (2) cash-out of a beneficiary and (3) separate accounts for differentbeneficiaries. If a beneficiary’s interest is eliminated between the time that the account owner died and thedetermination date – for example by a cash out or a disclaimer -- then that beneficiary will not impact therequired minimum distributions. PLR 200740018 (July 12, 2007).

1 Sec. 4974; Reg. Sec. 54.4974-2, Q&A 1 and 2; Sec. 401(a)(9)(C)(i).

2Sec. 408(a)(6); Reg. Sec. 1.408-8 Q&A 3.

3Sec. 401(a)(9)(C); Reg. Sec. 1.401(a)(9)-2, Q&A 2.4 Sec. 401(a)(9)(E)(i); Reg. Sec. 1.401(a)(9)-4, Q&A 1. 5 Sec. 401(a)(9)(E)(ii)6 Reg. Sec. 1.401(a)(9)-4, Q&A 4.

4

E. REQUIRED MINIMUM DISTRIBUTIONS FROM IRAs AND QRPsAFTER THE ACCOUNT OWNER’S DEATH, BASED ON THEBENEFICIARIES AS OF THE “DETERMINATION DATE”

BENEFICIARY DEATH BEFORE RBD DEATH AFTER RBD“No designated beneficiary

(“DB”)” - if there is evenjust one non-humanbeneficiary (e.g., probateestate or a charity)

Five Years[No RMD until the 5th year]

Remaining life expectancy of someonewho was the decedent’s age in the yearof death (“ghost life expectancy”)

[RMDs must be made each year]

NON-SPOUSEDESIG. BENIF.

General Rule if allbenef iciaries areindividuals (“DBs”)

Ten Years[No RMD until the 10th year]

- Same: Ten Years - ** An argument can be made that the

term can be the “ghost life expectancy,” if that is more than ten years

Rollover option? Not available to anyone but asurviving spouse.**

** - Possible to transfer decedent’saccount from a company plan (but notfrom an IRA) to an IRA payable overten years (or life expectancy of an EDB)

Eligible DesignatedBeneficiary (“EDB”)

Remaining life expectancy of theEDB,* fixed as of the year after death. Distributions must begin before the endof the year that follows the year of

death. [RMDs must be made each year]

– Same Rule –

* - (if the EDB is older than the deceased, uselife expectancy based on the deceased’s age)

Beneficiaries includeboth EDBs and non-EDBs

Unless separate shares are established,generally Ten Years (or Five Years). Special rules benefit accumulation trustfor disabled & chronically ill.

Ten Years ( or remaining life expectancyof someone who was the decedent’s age) [unless separate shares; special rulesbenefit disabled & chronically ill]

SPECIAL RULES“Look-through”trust/“See-through” trust

“Look through” to identity of DBs andEDBs of the trust to determine RMDs. – Same Rule --

Remainderbeneficiary

A remainder beneficiary is counted as abeneficiary of an accumulation trust, butnot of a conduit trust

– Same Rule –

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BENEFICIARY DEATH BEFORE RBD DEATH AFTER RBD

SPOUSE IS THEBENEFICIARY

Rollover Option? Yes, available Yes, available

Leave in deceased’saccount and spouse isthe sole beneficiary?

-- General RuleMinimum distributions over the surviving spouse’s remaining life expectancy, gradually extendedeach year as the spouse ages.

– Same Rule --

-- IRAs only: elect totreat as own IRA

Surviving spouse can elect to leaveassets in deceased’s IRA but treatthat IRA like a rollover IRA.

– Same Rule --

-- Decedent diedbefore age 72?

Can defer first distribution untilthe year that the deceased spousewould have been age 72.

Not applicable

MULTIPLE DBs;ONE IS THESPOUSE

Both spouse andanother DB are thebeneficiaries

Generally ten years, unless separateshares are established.

– Same Rule --

Both spouse and a charity are beneficiaries

Five Years, unless separate accounts areestablished for the beneficiaries.

Remaining life expectancy of someonewho was the decedent’s age, unless separate accounts for the beneficiaries.

“Look-through” trust/“See-through” trust

Generally ten years, since “look through”to identity of the beneficiaries. Ifpayable to a conduit trust, then theremaining life expectancy of the spouse.

– Same Rule --

Remainder beneficiary

A remainder beneficiary is counted as abeneficiary of an accumulation trust, butnot of a conduit trust

– Same Rule –

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SURVIVING SPOUSE DISTRIBUTION OPTIONS – AT AGE 80

Example: At age 80, Ms. Widow began receiving distributions from several IRAs, includingthe IRAs of her older husband and her older sister (both of whom had died in the precedingyear at age 93). Although the life expectancy of an 80 year old is 11.2 years (i.e., to age 91),Ms. Widow in fact lived to age 94. Whereas the law requires two IRAs (IRAs C and D) to beempty by age 89 (ten years after the deaths), amounts could still remain in other IRAs at thatage. The minimum amounts required to be distributed from each of six IRAs are listed in thetable.

A - Her own IRA, established with contributions she made during her working career. *B - A rollover IRA, funded after her husband's death with a distribution from his 401(k) plan.C - An inherited IRA (her sister's IRA) D - Bypass Trust #1 - Her deceased husband's IRA is payable to a standard bypass trust,

treated as a stretch IRA payable to a look-through accumulation trust (requireddistributions from an accumulation trust are determined by looking at all beneficiariesof the trust – EBDs and non-EDBs. The same distribution rules apply to a QTIP trust.)

*E - Bypass Trust #2 - Her deceased husband's IRA is payable to a similar trust, but thetrust requires all retirement plan distributions to be made to Ms. Widow. Thisprovision permits a look-though trust to be treated as a conduit trust

CRT - Charitable Remainder Trust - After his death, her husband’s fourth IRA wasdistributed in a lump sum to a tax-exempt CRT that will annually distribute 5% of itsassets to Ms. Widow for the rest of her life, then to her husband’s 50-year old childfrom his first marriage for the rest of the child’s life, and then upon the child’s deathwill be distributed to a charity.

IRAs IRAs IRA IRAAGE A & B C & D E CRT 80 4.95% -0- % 8.93% 5.00%81 5.19% -0- % 9.53% 5.00%

82 5.44% -0- % 10.10% 5.00% 83 5.69% -0- % 10.87% 5.00% 84 5.96% -0- % 11.63% 5.00%

85 6.25% -0- % 12.35% 5.00% 86 6.58% -0- % 13.33% 5.00% 87 6.95% -0- % 14.29% 5.00% 88 7.36% -0- % 15.15% 5.00% 89 7.76% 100.00% 16.40% 5.00%

90 8.27% empty 17.54% 5.00% 91 8.78% 18.87% 5.00% 92 9.26% 20.41% 5.00% 93 9.90% 21.38% 5.00%

94 10.53% 23.81% 5.00%

*Payout “B" (a rollover) is only available to a surviving spouse. *Payout “E" permits a surviving spouse to annually recompute her life expectancy. With a conduit trust,RMDs are computed without considering remainder beneficiaries (unlike an accumulation trust).

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Legal Authority for Various Payout Rules: IRA A: Reg. Sec. 1.401(a)(9)-5, Q&A 4 and Reg. Sec. 1.401(a)(9)-9, Table A-2. IRA B: Same, and Secs. 402(c)(9) and 408(d)(3)(C)(ii)(II) permit a surviving spouse to do arollover. IRA C: Secs. 401(a)(9)(H)(i) and (vi), and 408(d)(3)(C). IRA D: Reg. Sec. 1.401(a)(9)-5, Q&A7(c)(3), Example 1, as modified by Sec. 401(a)(9)(H)(i) and (vi). IRA E: Reg. Sec. 1.401(a)(9)-5, Q&A7(c)(3), Example 2, reinforced by Secs. 401(a)(9)(H)(E)(ii)(I) and (H)(ii).

Required Payments after Ms. Widow's Death:

IRAs A & B: IRAs A & B will generally be liquidated within ten years after Ms. Widow’s death to thebeneficiaries that she named. Sec. 409(a)(9)(H)(iii)(2020).

IRA E: Ms. Widow is an eligible designated beneficiary, and a conduit trust permits her to recompute her lifeexpectancy and to ignore remainder beneficiaries for RMDs. After Ms. Widow's death, payments from IRA Emust generally be completed over ten years. Sec. 409(a)(9)(H)(iii)(2020). (Compare Reg. Sec. 1.401(a)(9)-5,Q&A 5(c)(2) – old law provided that the remaining term was over the life of someone who was her age in theyear of her death).

IRA CRT (Exhibit G): The charitable remainder unitrust (CRUT) will commence payments to the nextbeneficiaries (children) upon the death of the surviving spouse. A CRUT must annually distribute at least 5% ofthe value of its assets, recalculated annually. With a two generation trust (parent and then child), the parties willlikely select the 5% amount to generate the minimum 10% charitable deduction necessary for the trust to qualifyas a CRT.

IRS Private Letter Rulings - 2014 - 2020A surviving spouse can rollover a deceased spouse’s retirement account,

even when the account is payable to:

A TRUST FOR THE SPOUSE* PLR 201944003 (Aug 8, 2019) - payable to revocable joint trust

* PLR 201923002 (March 4, 2019) - payable to trust where spouse is trustee and beneficiary* PLRs 201934006 & 201935005 - spouse mistakenly listed as contingent beneficiary

* PLR 201844004 (Aug 4, 2018) - payable to spouse’s revocable trust* PLR 201707001 (Nov 8, 2016) - payable to revocable joint trust

* PLR 201632015 (May 10, 2016) - payable to trust - community property state* PLR 201507040 (Dec 24, 2014)

* PLR 201430029 (Apr 30, 2014) - H’s IRA payable to W’s revocable trust* PLR 201430026 (Apr 29, 2014)

* PLR 201423043 (Feb 29, 2014) - Rollover Roth IRAs payable to a marital trust

THE ESTATE, WITH ESTATE POUR-OVER INTO A TRUST FOR THE SPOUSE* PLR 201736018 (June 9, 2017) - payable to estate; pourover into trust

* PLR 201511036 (Dec 18, 2014) and * PLR 201437029 (June 05, 2014)

THE ESTATE, WHERE THE SPOUSE IS THE SOLE OR RESIDUARY BENEFICIARY OF THE ESTATE

*PLR 201931006 (7 May 2019) - probate estate was default beneficiary when beneficiary form left blank* PLR 201451066 (Sep 25, 2014)

* PLR 201445031 (Aug 11, 2014) - spouse is residuary beneficiary of estate* PLR 201430027 (Apr 30, 2014) - spouse is residuary beneficiary of estate

* PLR 201430020 (May 1, 2014)

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COMBINATION OF FEDERAL ESTATE AND INCOME TAXES ON INCOME INRESPECT OF A DECEDENT – (Year 2020). State estate & income taxes are extra!

EXAMPLE: Assume Mother's total taxable estate is $12,000,000 and that all of it will betransferred to her sole heir: Daughter. Assume that the estate will pay the entire estate taxregardless of how Daughter acquired the assets (e.g., joint tenancy, etc.). If $100,000 in anIRA is immediately distributed to Daughter and if Daughter is in a 37% marginal income taxbracket, then the combined estate and income taxes on the $100,000 of IRA assets would be$62,200 (62%).

Beginning Balance in Retirement Plan $ 100,000 Minus: Total Estate Tax Paid by the Probate Estate (40,000)

Minus: Income Tax On DistributionGross Taxable Income $ 100,000Reduced By §691(c) Deduction for

Federal Estate TaxTotal Estate Tax $ 40,000State Tax Credit* Zero

Deduction for Federal Estate Tax ** (40,000)

Net Taxable Income $ 60,000 Times Income Tax Rate*** x 37%

Net Income Tax on Income In Respect Of Decedent (22,200)

NET AFTER-TAX AMOUNT TO DAUGHTER $ 37,800 444444444

* Treas. Reg. Section 1.691(c)-1(a) limits the deduction to federal estate tax. The 2001 Tax Actprovided that the Section 2011 state tax credit was fully repealed by the year 2007 so there is no statetax adjustment.

** The deduction is an itemized deduction on Schedule A that is claimed on the last line of the form("other miscellaneous deductions"). It is not subject to the 2%-of-adjusted-gross-income ("AGI")limitation that most miscellaneous deductions had been subject to. Sec. 67(b)(7). Thus, the Section691( c) deduction can still be claimed in 2020, even though the 2017 Tax Cut & Jobs Act eliminatedthe ability to deduct most other miscellaneous itemized deductions.

*** Whereas retirement income is exempt from the 3.8% health care surtax, if the source of IRD isincome that is subject to the surtax (interest, annuity, rents, etc) then the effective marginal income taxrate would be even higher than 37%. The 3.8% health care surtax applies when an individual’sadjusted gross income exceeds $250,000 ($300,000 on a joint return). For a trust or estate, the 37%marginal tax rate (plus the 3.8% health care surtax) applies with taxable income over just $12,500.

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Section 401(a)(9) Required distributions.

(A) In general.—A trust shall not constitute a qualified trust under this subsection unless the plan provides that theentire interest of each employee— (i) will be distributed to such employee not later than the required beginning date, or (ii) will be distributed, beginning not later than the required beginning date, in accordance with regulations,over the life of such employee or over the lives of such employee and a designated beneficiary (or over a periodnot extending beyond the life expectancy of such employee or the life expectancy of such employee and adesignated beneficiary).

(B) Required distribution where employee dies before entire interest is distributed.— (i) Where distributions have begun under subparagraph (A)(ii).—A trust shall not constitute a qualifiedtrust under this section unless the plan provides that if— (I) the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), and (II) the employee dies before his entire interest has been distributed to him, the remaining portion of such interest will be distributed at least as rapidly as under the method of distributionsbeing used under subparagraph (A)(ii) as of the date of his death.

(ii) 5-year rule for other cases.—A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee diesbefore the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entireinterest of the employee will be distributed within 5 years after the death of such employee.

(iii) Exception to 5-year rule for certain amounts payable over life of beneficiary.—If—(I) any portion of the employee’s interest is payable to (or for the benefit of) a designated beneficiary,(II) such portion will be distributed (in accordance with regulations) over the life of such designated beneficiary(or over a period not extending beyond the life expectancy of such beneficiary), and(III) such distributions begin not later than 1 year after the date of the employee’s death or such later date as theSecretary may by regulations prescribe, for purposes of clause (ii), the portion referred to in subclause (I) shall be treated as distributed on the date onwhich such distributions begin.

(iv) Special rule for surviving spouse of employee.—If the designated beneficiary referred to in clause (iii)(I) isthe surviving spouse of the employee—(I) the date on which the distributions are required to begin under clause (iii)(III) shall not be earlier than the dateon which the employee would have attained age 72, and(II) if the surviving spouse dies before the distributions to such spouse begin, this subparagraph shall be appliedas if the surviving spouse were the employee.

(C) Required beginning date.—For purposes of this paragraph—(i) In general.—The term “required beginning date” means April 1 of the calendar year following the later of—(I) the calendar year in which the employee attains age 72, or(II) the calendar year in which the employee retires.

(ii) Exception.—Subclause (II) of clause (i) shall not apply—(I) except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined insection 416) with respect to the plan year ending in the calendar year in which the employee attains age 72, or(II) for purposes of section 408(a)(6) or (b)(3).

(iii) Actuarial adjustment.—In the case of an employee to whom clause (i)(II) applies who retires in a calendar year after the calendar year inwhich the employee attains age 70½, the employee’s accrued benefit shall be actuarially increased to take intoaccount the period after age 70½ in which the employee was not receiving any benefits under the plan.

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(iv) Exception for governmental and church plans.—Clauses (ii) and (iii) shall not apply in the case of a governmental plan or church plan. For purposes of thisclause, the term “church plan” means a plan maintained by a church for church employees, and the term “church”means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as definedin section 3121(w)(3)(B)).

(D) Life expectancy.—For purposes of this paragraph, the life expectancy of an employee and the employee’s spouse (other than in thecase of a life annuity) may be redetermined but not more frequently than annually.

[OLD LAW:] (E) Designated beneficiary.—For purposes of this paragraph, the term “designated beneficiary” means any individual designated as a beneficiary by the employee.

[NEW LAW Jan 1, 2020:]

(E) DEFINITIONS AND RULES RELATING TO DESIGNATED BENEFICIARIES.—For purposes of this paragraph—

(i) Designated Beneficiary.—The term ‘designated beneficiary’ means any individual designated as a beneficiary by the employee.

(ii) Eligible Designated Beneficiary.—The term ‘eligible designated beneficiary’ means, with respect to any employee, any designated beneficiary who is—

(I) the surviving spouse of the employee, (II) subject to clause (iii), a child of the employee who has not reached majority (within the meaning of subparagraph (F)), (III) disabled (within the meaning of section 72(m)(7)), (IV) a chronically ill individual (within the meaning of section 7702B(c)(2), except that the requirements of subparagraph (A)(i) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature), or (V) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee. The determination of whether a designated beneficiary is an eligible designated beneficiary shall be made as of the date of death of the employee.

(iii) Special Rule for Children.—Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual’s interest to which sub-paragraph (H)(ii) applies shall be distributed within 10 years after such date.

(F) Treatment of payments to children.—Under regulations prescribed by the Secretary, for purposes of this paragraph, any amount paid to a child shall betreated as if it had been paid to the surviving spouse if such amount will become payable to the surviving spouseupon such child reaching majority (or other designated event permitted under regulations).

(G) Treatment of incidental death benefit distributions.—For purposes of this title, any distribution required under the incidental death benefit requirements of thissubsection shall be treated as a distribution required under this paragraph.

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Sub-Paragraph “H” was added by the SECURE Act, effective Jan 1, 2020:

(H) SPECIAL RULES FOR CERTAIN DEFINED CONTRIBUTION PLANS.—In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest—

(i) IN GENERAL.—Except in the case of a beneficiary who is not a designated beneficiary,subparagraph (B)(ii)— (I) shall be applied by substituting ‘10 years’ for ‘5 years’, and (II) shall apply whether or not distributions of the employee’s interests have begun in accordance with subparagraph (A).

(ii) EXCEPTION FOR ELIGIBLE DESIGNATED BENEFICIARIES.—Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary.

(iii) RULES UPON DEATH OF ELIGIBLE DESIGNATED BENEFICIARY.—If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.

(iv) SPECIAL RULE IN CASE OF CERTAIN TRUSTS FOR DISABLED OR CHRONICALLY ILL BENEFICIARIES.—In the case of an applicable multi-beneficiary trust, if under the terms of the trust—

(I) it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or (II) no individual (other than a eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee’s interest inthe plan until the death of all such eligible designated beneficiaries with respect to thetrust,

for purposes of a trust described in sub-clause (I), clause (ii) shall be applied separately with respect to the portion of the employee’s interest that is payable to any eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii); and, for purposes of a trust de-scribed in subclause (II), subparagraph (B)(iii) shall apply to the distribution of the employee’s interest and any beneficiary who is not such an eligible designated ben-eficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary.

(v) APPLICABLE MULTI-BENEFICIARY TRUST.—For purposes of this sub-paragraph, the term ‘applicable multi-beneficiary trust’ means a trust—

(I) which has more than one beneficiary,(II) all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and (III) at least one of the beneficiaries of which is an eligible designated beneficiary described in sub-clause (III) or (IV) of subparagraph (E)(ii).

(vi) APPLICATION TO CERTAIN ELIGIBLE RETIREMENT PLANS.—For purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B), other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan) shall be treated as a definedcontribution plan.

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i

RETIREMENT ACCOUNTS IN FIRST AND SECOND MARRIAGES: THE FUN BEGINS

Christopher R. Hoyt Professor of Law

University of Missouri (Kansas City) School of Law

Table of Contents I. Types of Qualified Retirement Plans ..................................................................................... 1 II. Lifetime Divisions - Divorce and Separation ........................................................................ 2 III. Lifetime Distributions - Eligibility, Taxation and Penalties .................................................. 3 IV. Transfers at Death ..................................................................................................................10 V. Tax Planning for Required Distributions ...............................................................................13 VI. Second Marriages...................................................................................................................31 Table of Contents I. Types of Qualified Retirement Plans .....................................................................................1 A. Section 401(a) - Employer pension, profit sharing and stock bonus plans ................1 B. Section 408 – IRAs ..................................................................................................1 C. Section 403(b) - School and charity employers ..................................................... 1 D. Section 457(b) plans - Government and tax-exempt employers ............................ 2 E. Government and church plans - Special rules ........................................................ 2 II. Lifetime Divisions - Divorce and Separation .................................................................... 2 A. QDRO for Sec. 401 plans - a federal statute .......................................................... 2 B. IRAs - No federal statute, but state laws (e.g., community property) ................... 3 III. Lifetime Distributions - Eligibility, Taxation, and Penalties ............................................. 3 A. Eligibility ............................................................................................................... 3 1. Employer plans - usually must separate from service ...................................3 2. IRAs - no prohibition on early withdrawals .............................................. 4 B. Taxation ................................................................................................................. 4 1. General rule - ordinary income .................................................................. 4 2. Exemption from 3.8% surtax .........................................................................4 3. Special rules - NUA, Roth, and return of non-deductible contributions ... 5 4. Exception: 60-day rollovers .........................................................................6 C. Penalties ................................................................................................................. 7 1. 10% penalty for distributions before age 59 ½; exceptions ...........................7 2. 50% penalty for failure to receive RMD; exceptions ....................................9

Notes section 05

ii

IV. Transfers at Death - Spousal rights ....................................................................................10 A. Overview - General rules for non-spouse and a spouse .........................................10 B. Section 401(a) plans ...............................................................................................10 1. Defined benefit plans - QJSA and QPSA ..................................................10 2. Defined contribution plans .........................................................................10 a. General rule - spouse entitled to 100% ..........................................10 b. Exception - waiver by spouse ........................................................11 c. Prenuptial agreements usually ineffective .....................................11 d. Community property laws – Boggs................................................12 C. Section 408 – IRAs ................................................................................................12 1. General rule - no federal law trumps beneficiary designation ...................12 2. State community property laws .................................................................12 3. PLR 201623001 - IRS will tax original beneficiary when surviving spouse

receives distributions under state community property law ......................12 V. Tax Planning for Required Distributions ...........................................................................13 A. Tax-planning objectives .........................................................................................13 B. Required minimum distributions after age 72 .......................................................14 1. General rule ................................................................................................14 2. Smaller RMDs when spouse is more than 10 years younger.....................15

C. Inherited accounts 1. Maximum time period for liquidation of an account:

ten years, five years, or a remaining life expectancy of EDB 15 a. Life expectancy table for EDB and “ghost” period ............................16 b. Surviving spouse can rollover to own IRA .........................................17 2. Non-spouse beneficiary ..................................................................................17 a. General rules 17 b. Employer plans can impose faster distributions; IRA options ................18 c. Trusts as beneficiaries - look-through” options .......................................19 d. Terminology - RBD, DB and determination date ....................................20 e. Disclaimers .........................................................................................21 f. Table - required distributions .........................................................23 g. Glossary .........................................................................................25 3. Additional benefits to a surviving spouse ..................................................27 a. Rollover to IRA for the surviving spouse ......................................27 b. Leave in deceased’s account? Three advantages if sole beneficiary.. i. Annually recompute remaining life expectancy ....................28 ii. IRA only: elect to treat as own IRA .......................................28 iii. No RMDs until deceased spouse would have been 72 ..........28 D. Retirement assets payable to a trust for a surviving spouse .......................................29 1. Case study: 80 year-old surviving spouse ......................................................29 2. IRS PLRs - surviving spouse can rollover retirement assets payable to an estate or

trust, provided the surviving spouse is the sole beneficiary ..........................30

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VI. Second Marriages...................................................................................................................31 A. Prenuptial agreements ................................................................................................31 B. Rollovers versus QTIP trusts - the income tax challenge ..........................................32 C. Some planning options ...............................................................................................34 1. Retirement accounts for spouse; life insurance for children? ........................34 2. Divide retirement accounts - spouse & children ............................................34 3. All retirement accounts for children? ............................................................34 a. Section 401 - need spouse’s waiver ...................................................34 b. Community property laws - IRS PLR – Boggs .................................34 4. Two-generation CRT for spouse and children from prior marriage ..............34 a. Concept ..............................................................................................34 b. Eligibility - some issues .....................................................................37 i. Minimum 10% charitable deduction ......................................37 ii. More likely CRUT than CRAT..............................................37 iii. Minimum annual 5% distribution ..........................................38 iv. No marital estate tax deduction - avoid for taxable estate .....38

1

RETIREMENT ACCOUNTS IN FIRST AND SECOND MARRIAGES: THE FUN BEGINS

I. Types of Qualified Retirement Plans A. Section 401(a) - Employer pension, profit sharing and stock bonus plans Employers that administer a qualified pension, profit sharing or stock bonus plan (a “qualified retirement plans” or “QRP”), must comply with the myriad of provisions contained in Section 401(a) , enacted as part of the Employee Retirement Income Security Act of 1974 (ERISA). For married couples, two of the most important provisions are requirements that:

(1) a plan participant’s interest in a QRP may not be divided in a divorce, unless the court order meets the requirements of a qualified domestic relations order (QDRO - a federal statute). Sec. 401(a)(13)(B). By comparison, IRAs are subject to state laws, including a state’s community property law. and (2) regardless of who an employee named as the beneficiary of a QRP account, the mandatory beneficiary of any married employee’s QRP account is the surviving spouse, unless the surviving spouse executed a valid waiver. Whereas 401(k) plans are subject to this ERISA provisions, IRAs are not.

B. Section 408 - IRAs Individual retirement accounts (“IRAs”) are retirement accounts that an individual establishes with a financial institution selected by that person, rather than with an employer. To be eligible to contribute to an IRA, a person must have earned income – either a paycheck or self-employment income. Since there is no supervision by an employer, IRAs are generally exempt from many of the ERISA provisions. For married couples, two of the most important distinctions between IRAs and employer plans are that (1) an individuals’s IRA can be divided during a divorce without all of the formalities of a QDRO, and (2) if someone other than the spouse was named as the beneficiary of an IRA (e.g., a child from a prior marriage), then generally that person will inherit the IRA assets rather than the surviving spouse. C. Section 403(b) - School and charity employers A 403(b) plan (sometimes referred to as a “tax-sheltered annuity plan”) is a retirement plan offered by schools and other types of tax-exempt Section 501( c)(3) charities. In addition to employer contributions, a 403(b) plan can operate like a 401(k) plan and permit employees to defer some of their salary into individual accounts. Also, like a 401(k) plan, a 403(b) plan may offer Roth accounts.

2

D. Section 457(b) plans - Government and tax-exempt employers A 457(b) plan operates like a 401(k) plan and can be established by state and local governments and by any type of tax-exempt organization (chambers of commerce, social clubs, etc). By comparison, a 403(b) plan can only be offered by an organization that is tax-exempt under Section 501(c)(3) (a charity). Like a 401(k) plan, a 457(b) plan can permit employees to defer some of their salary into individual accounts. E. Government and church plans - Special rules If a church or government establishes an employer plan, it is exempt from some of the ERISA provisions that apply to plans operated by private employers. Advisors with clients who participate in church and government plans should be alert to the different rules that may apply. This outline will focus on private employer plans and IRAs and will not highlight all of the nuances that apply to 403(b), 457(b), church, and government plans. Practitioners who are dealing with a 403(b), 457(b), church, and government plan should be aware that there could be different rules. II. Lifetime Divisions - Divorce and Separation A. QDRO for Sec. 401 plans - a federal statute ERISA provides that an employee’s account at a qualified retirement plan may not be assigned to others or be alienated by creditors. This creditor protection generally extends to a divorce proceeding, unless a former spouse, child or other eligible party obtains a qualified domestic relations order (QDRO). A generic domestic relations order (DRO) is a court order issued under a state's domestic relations law that recognizes that someone other than the plan participant has a right to some or all of the assets in a qualified retirement plan (such as 401(k) plan) because of child support, alimony, or marital property rights. In order for the DRO to qualify as a QDRO, the DRO must contain certain information (such as the amount to be paid) and must not contain other matters.1 For example, a DRO will not qualify as a QDRO if the DRO states that a 401(k) plan must pay an annuity to a former spouse, but that 401(k) plan does not offer an annuity to any plan participant or any beneficiary.

1 Secs. 401(a)(13)(B) and 414 (p). A QDRO must specify: (A) the name and the last known mailing address of the participant and each alternate payee,(B) the amount (or percentage) of the participant’s benefits to be paid to each alternate payee, (C) the number of payments or period to which such order applies, and (D) each plan to which such order applies. A DRO will fail to qualify as a QDRO if it (A) requires a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan, (B) requires the plan to provide increased benefits, or (C) requires payments a new alternate payee that were previously allocated to another alternate payee under a prior QDRO.

3

If a QDRO orders a distribution from the employer plan to a former spouse, then the distribution will be taxed to the former spouse. If, instead, the benefits are paid to a child or some other dependent, then the distributions will be taxed to the plan participant. All distributions from a QRP pursuant to a QDRO are exempt from the 10% penalty that usually applies to distributions made to an individual who is under the age of 59 ½.2 B. IRAs - No federal statute, but state laws (e.g., community property) Since IRAs are not governed by ERISA, a generic DRO under a state's domestic relations law will usually be sufficient to divide an IRA. The state’s laws, such as community property laws, will govern the ownership of the IRA assets. Splitting an IRA under a decree of divorce or under a written separation instrument is usually not a taxable distribution. Instead, the spouse who receives the interest may treat the IRA as his or her own IRA.3 Whereas a distribution from a QRP pursuant to a QDRO is exempt from the 10% penalty for early distributions,4 there is no exemption from the 10% penalty if a distribution is made from an IRA that was acquired during a divorce proceeding to an individual who is under the age of 59 ½. III. Lifetime Distributions - Eligibility, Taxation, and Penalties

A. Eligibility 1. Employer plans - usually must separate from service Since the purpose of an employer’s qualified retirement plan is to provide retirement income after an employee separates from service, the tax laws generally prohibit an employer from making a distribution from a qualified plan to an employee while the employee is still employed. For example, Section 401(k)(3) provides that a plan participant’s account balance in a 401(k) plan “may not be distributable to participants or other beneficiaries earlier than”— (i) severance from employment, death, or disability, (ii) termination of the 401(k) plan, (iii) the attainment of age 59½, (iv) a financial hardship of the employee, or (v) when a qualified reservist is called to active duty. Thus, usually the only permissible way for a 401(k) participant to be able to access his or her account balance while still employed (and, only if the plan document allows “in-service distributions” or loans) is by attaining age 59 ½, incurring a financial hardship, or obtaining a loan from the plan by using the account as collateral. Even if an employee can demonstrate a financial hardship, the distribution to the employee will usually be subject to the 10% early distribution penalty if the employee has not

2 Sec. 72(t)(2)( c).

3 Sec. 408(d)(6).

4 Sec. 72(t)(2)( c).

4

attained age 59 ½. Only a medical hardship is exempt from the 10% early distribution penalty. Sec. 72(t)(2)(B), described below in Part III.C.1. 2. IRAs - no prohibition on early withdrawals There is no comparable legal prohibition that prevents a person from withdrawing assets from an IRA. Since an IRA is an account that an individual established at a financial institution, a person can withdraw amounts from the account at anytime. The only law that specifically discourages an IRA owner from withdrawing amounts before retirement is the 10% early distribution penalty that applies to most taxable distributions from IRAs and QRPs that are made before an individual has attained the age of 59 ½. B. Taxation 1. General rule - ordinary income Distributions from qualified plans and from IRAs are generally taxed as annuity income (“ordinary income”), rather than at lower tax rates. Secs. 402(a)(QRP) and 408(d)(1)(IRAs). Even though most of the income earned inside a QRP or an IRA is investment income, all distributions, no matter how large, are exempt from the 3.8% surtax that is imposed on the net investment income of affluent individuals. In addition, some distributions of employer stock from an employer’s qualified retirement plan can qualify for long-term capital gain treatment. 2. Exemption from 3.8% surtax Although the income earned inside a retirement plan account is investment income (interest, dividends, and capital gains), distributions from a QRP or an IRA to an individual, a trust, or an estate are completely exempt from the 3.8% surtax that is imposed on net investment income. Section 1411(a)(1) imposes a surtax of 3.8 percent on the lesser of:

i. an individual’s net investment income or

ii. the amount by which the individual’s modified adjusted gross income5 exceeds the threshold amount of $250,000 (married joint returns; $125,000 if file separately) or $200,000 for all other returns (single or head of household).

5 Sec. 1411(d) defines modified adjusted gross income to be adjusted gross income increased by the excess of (1) the amount excluded from gross income under the foreign earned income exclusion of Sec. 911(a)(1), over (2) the amount of any deductions (taken into account in computing adjusted gross income) or exclusions disallowed under Sec. 911(d)(6) with respect to the amount excluded from gross income under Sec. 911(a)(1).

5

The statute and regulations specifically exclude from the definition of net investment income any distribution from a qualified retirement plan. Sec. 1411(c)(5) , Reg. § 1.1411- 8. The exemption applies to qualified plans described in Secs.: 401(a) – qualified retirement plans, including pension plans, profit-sharing plans, stock bonus plans, ESOPs and Section 401(k) plans 403(a) – qualified annuity plans 403(b) – tax-sheltered annuities for employees at charities 408 – Individual Retirement Accounts (IRAs) 408A – Roth IRAs 457(b) – state and local government deferred compensation plans Consequently, a Roth IRA conversion (a taxable distribution from a traditional qualified retirement plan into a Roth IRA) will not be subject to the 3.8% net investment income tax (“NIIT”). However, a large Roth IRA conversion might cause a person whose adjusted gross income (“AGI”) would otherwise be less than $200,000 ($250,000 on a joint return) to have AGI above those thresholds, thereby subjecting that taxpayer’s net investment income from interest, dividends, rents and capital gains to the 3.8% NIIT. 3. Special rules - NUA, Roth, and return of non-deductible contributions i. NUA - Net unrealized appreciation One situation when a retirement plan distribution is not taxed as ordinary income can occur when a QRP distributes appreciated stock of that employer as part of a lump sum distribution. The recipient can usually sell that stock and recognize a long-term capital gain on the NUA amount (“NUA”- net unrealized appreciation) rather than ordinary income. The NUA amount is the built-in gain that represents the difference between the value of the stock at the time that it was distributed by the QRP over the value of the stock at the time that it was added to the employee’s account.6 The recipient does not have to hold the NUA employer stock for more than a year to qualify for long-term capital gain treatment. Furthermore, the capital gain attributable to the NUA will be exempt from the 3.8% NIIT since the capital gain is attributable to a distribution from a qualified retirement plan.7 ii. Roth distributions An eligible distribution from a Roth IRA, a Roth 401(k), a Roth 403(b) or a Roth 457(b) is completely excluded form taxable income. It will also be exempt from the 3.8% net investment income surtax. However, distributions of investment income received before age 59 ½, or received less than five years after the Roth account was established, could be taxable. More specifically, in order for a

6 Sec. 402(e)(4)(B); Reg. § 1.402(a)-1(b)(2)(i). 7 Reg. § 1.1411- 8(b)(4).

6

distribution of the investment income earned by a Roth IRA, 401(k), 403(b) or 457(b) to be excluded from gross income, the distribution must meet two tests:

a. the distribution must be made after the individual attained age 59 ½, with exceptions if the individual became disabled, acquired a first home, or died.8

-- and -- b. the distribution must be made more than five years after the

taxpayer made his or her first contribution to the Roth account, or conversion to a Roth account.9

iii. Return of non-deductible contributions - A return of a non-deductible

contribution is excluded from income. Section 72(b). 4. Exception: 60 day rollovers With a 60-day rollover, a check is issued from a QRP to the plan participant or from an IRA to the account owner. Typically the recipient deposits the check into his or her personal checking account and commingles it with other cash. Then, within 60 days of the distribution, he or she writes a check and deposits the amount into a new IRA (or QRP) to complete the rollover. That way the person will not be taxed on the distribution.10 A 60 day rollover will also avoid the 10% penalty that would otherwise apply if a taxable distribution is received from a QRP or IRA before the recipient had attained the age of 59 ½.11 Instead of a 60-day rollover, the superior way to transfer assets from one retirement plan account to another is to use a trustee-to-trustee transfer. With a trustee-to-trustee transfer, sometimes referred to as a “direct rollover,” a person fills out forms with a new QRP or IRA administrator. Then that new QRP or IRA administrator contacts the administrator of the existing QRP or IRA and arranges for the assets to be deposited into a new account with the new administrator. There are three main reasons to prefer a trustee-to-trustee transfer over a 60-day rollover. First, there is no income tax withholding on a trustee-to-trustee transfer whereas there can be a mandatory 20% income tax withholding requirement with a 60-day rollover.12 Second, a taxpayer is limited to one

8 Secs. 408A(d)(2)(A)(iv), 408A(d)(5) and 72(t)(2)(F). 9 Sec. 408A(d)(2)(B); Reg. § 1.408A-6, Q&A-2 (Roth IRA); Sec. 402A(d)(2)(B); Reg. § 1.402A-1, Q&A-4 (Roth 401(k)). 10 Sec. 402( c) (QRPs) and Sec. 408(d)(3) (IRAs). 11 Sec. 72(t). 12 There is a mandatory 20% income tax withholding requirement for distributions from a QRP, including a distribution from a 401(k) plan. Sec. 3405( c)(1). A person who requests a cash distribution of his or her entire balance in a QRP will only receive 80% of the account balance. He or she will have to use cash from other sources to complete the rollover in order to avoid having taxable income and incurring a potential 10% penalty. IRAs have a general 10% withholding policy, but an IRA owner can elect to have a different amount withheld by the IRA administrator. By comparison, there is no tax withholding requirement for a trustee-to-trustee transfer. Sec. 3405( c)(2).

7

60-day IRA rollover per year; a second rollover attempt will trigger taxable income.13 Third, a trustee-to-trustee transfer completely eliminates the risk of triggering taxable income because of a time delay. This is a much better situation than a rollover, where missing the 60-day deadline will usually cause the distribution to be taxable income. If a person misses the 60-day deadline, he or she is presumed to have a taxable distribution. A person can apply to the IRS for a waiver, but that requires paying the IRS a $10,000 fee.14 An important development in 2016 is that the IRS will now permit a taxpayer self-certify to the retirement plan administrator that the delay was caused by any one of eleven reasons.15 The parties can operate as if the transfer had been a valid rollover.16

C. Penalties 1. 10% penalty for distributions before age 59 ½; exceptions

13 If a taxpayer attempts a second IRA rollover within 12 months of a prior 60-day IRA rollover, the second distribution is not eligible to be rolled over and will result in taxable income and a potential 10% early withdrawal penalty. Sec. 408(d)(3)(B), as interpreted by IRS Announcement 2014-15, 2014–16 I.R.B. 973 and IRS Announcement 2014-32, 2014-48 I.R.B. 90, following the Tax Court decision of Bobrow v. Commissioner, T.C. Memo. 2014-21. By comparison, there is no limit on the number of times each year that an IRA owner can change IRA administrators with trustee-to-trustee transfers. Revenue Ruling 78-406, 1978-2 C.B. 157. 14 Rev. Proc. 2016-8, 2016-1 I.R.B. 243, at 246. 15 Rev. Proc. 2016-47, 2016-37 I.R.B. 346. The eleven eligible reasons for missing the 60-day deadline are: (1) an error was committed by the financial institution receiving or making the contribution; (2) the check was misplaced and never cashed; (3) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; (4) the taxpayer’s principal residence was severely damaged; (5) a member of the taxpayer’s family died; (6) the taxpayer or a member of the taxpayer’s family was seriously ill; (7) the taxpayer was incarcerated; (8) restrictions were imposed by a foreign country; (9) a postal error occurred; (10) the distribution was made on account of an IRS levy and the levy proceeds were returned to the taxpayer; or (11) the retirement plan that made the distribution delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information. 16 The IRS reserves the right to investigate and reverse the outcome if it concludes that the actual facts do not fit one of the eleven situations.

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Generally, there is a 10% penalty imposed on all taxable distributions made from qualified plans and IRAs to individuals who are under the age of 59 ½.17 A 60-day rollover will prevent the imposition of the penalty since the distribution will not be included in taxable income. Other situations where a person under the age of 59 ½ may receive a taxable distribution but avoid the 10% penalty, are distributions:18 1. made to a beneficiary at any age (or to an estate or trust) after the death of the employee (distributions from inherited accounts are exempt from the 10% penalty), 2. made to a plan participant who is disabled (that is, unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment), (3) that are part of a series of substantially equal periodic payments made for the life (or life expectancy) of the plan participant (or the joint lives (or joint life expectancies) of the participant and his or her designated beneficiary),

– there is no age or employment requirement periodic payments from IRAs. – for a plan participant to qualify for this exemption for distributions from a QRP, the

employee must have separated from service from the employer. 19 (4) made from a QRP (but not from an IRA) to a plan participant who separated from service after attaining the age of 55,20 (5) made from an ESOP of qualified dividends described in Section 404(k), (6) made on account of a Section 6331 IRS levy on the retirement plan, (7) made under certain types of phased retirement annuities,21 (8) made on account of medical expenses, to the extent that the plan participant would have been able to deduct the medical expenses under section 213 (determined without regard to whether the employee itemizes deductions for such taxable year). [ Note: a medical hardship is the only hardship distribution that a person who is under age 59 ½ can receive from a qualified plan and avoid the 10% penalty.], (9) made from a QRP (but not from an IRA) to an alternate payee pursuant to a qualified domestic relations order (QDRO),22

17 Sec. 72(t)(1). The 10% early distribution penalty only applies to taxable distributions. 18 Sec. 72(t)(2). 19 Sec. 72(t)(3)(B). 20 Sec. 72(t)(3)(A). 21 Sec. 72(t)(2)(A)(viii). Eligible phased retirement annuities are described in Sec. 8366a(a)(5) or 8412a(a)(5) of title 5, United States Code, or as composite retirement annuities under Sec. 8366a(a)(1) or 8412a(a)(1) of title 5. 22 Sec. 72(t)(2)( c). QRPs are subject to a requirement of a QDRO to divide a retirement plan account, but IRAs are not subject to such a requirement. Sec. 401(a)(13)(B).

9

(10) made from an IRA (but not from a QRP) to an unemployed person to pay health insurance premiums, (11) made from an IRA (but not from a QRP) to pay certain higher education expenses,23 (12) made from an IRA (but not from a QRP) of up to $10,000 to a qualified first-time home-buyer,24 (13) made from an IRA or from a 401(k) plan to a qualified reservist called up to active duty,25 or (14) made from a retirement plan (up to $5,000) in the year of a birth or adoption. Sec. 72(t)(2)(H)(2019). 2. 50% penalty for failure to receive RMD a. General Rule There are two times that distributions are required from QRPs and IRAs. The first is when the QRP plan participant or the IRA owner attains age 72. Then the individual must receive a required minimum distribution (“RMD”) each year for the rest of his or her life. The second time is after death: the QRP account or IRA must be liquidated to the beneficiary over a specific time period, and RMDs must occur every year over that time period (unless the account is to be liquidated in five years, in which case all that is required is that the account be empty at the end of the fifth year following death).26 If a plan participant or beneficiary receives less than the RMD for that year, there is a 50% penalty imposed on the deficiency.27 There is no future credit for larger distributions. For example, if a 75 year old person withdraws 6% of the account balance when the minimum RMD for that year is 4.07%, the person cannot carryforward the extra 2% withdrawal to the next year. Instead, the RMD in the following year will be the same 4.22% that applies to all 76 year old individuals. b. Multiple IRAs may be aggregated If an individual has accounts at several QRPs, then generally each plan must distribute the minimum RMD for that year. By comparison, there is relief when a person has multiple IRAs. A person can calculate the total RMDs that would be required from each IRA, and can then satisfy the requirement with a distribution from just one or more of the IRAs.28 For example, if a 75 year old has an IRA that holds an illiquid asset worth $100,000 and another IRA has liquid assets worth $200,000, the requirement is satisfied if $12,210 (the RMD of 4.07% times $300,000) is withdrawn entirely from the IRA that holds the liquid assets. This aggregation rule also applies to multiple inherited IRAs as long as they are inherited from the same person.

23 Secs. 72(t)(2)(E) and (t)(7). 24 Secs. 72(t)(2)(F) and (t)(8). 25 Sec. 72(t)(2)(G). 26 Secs. 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), and 457(d)(2). 27 Sec. 4974. 28 Sec. 408(d)(2).

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IV. Transfers at Death - Spousal rights A. Overview - General rules for non-spouse and a spouse Federal law gives a surviving spouse rights to assets in a QRP that superseded the laws of any state. For example, regardless of who a plan participant named as a beneficiary of a 401(k) plan, the surviving spouse is entitled to 100% of the assets in the account unless that spouse executed a waiver.29 By comparison, IRAs are generally subject to state laws, including general divorce and community property laws. B. Section 401(a) plans 1. Defined benefit plans - QJSA and QPSA A defined benefit plan is required to pay benefits to every married plan participant in the form of a qualified joint and survivor annuity (QJSA) at retirement. If the plan participant dies while still employed and before retirement, the plan is required to pay the surviving spouse a qualified pre-retirement survivor annuity (QPSA).30 A QJSA pays the retirement benefit first as a life annuity to the plan participant and then as a survivor annuity over the life of the participant’s surviving spouse. It is possible to have a survivor annuity paid to a former spouse, child or dependent who is treated as a surviving spouse under a qualified domestic relations order. The amount paid to the surviving spouse must be no less than 50% and no greater than 100% of the amount of the annuity paid during the participant’s life. A spouse can waive the right to a QJSA. For example, a spouse might waive the right to a QJSA to permit the plan participant to receive larger payments that will terminate upon the death of that participant (a single life annuity).31 2. Defined contribution plans a. General rule - spouse entitled to 100% A QRP that does not offer annuities is required to pay 100% of the assets in a deceased plan participant’s account to the surviving spouse if the individual was married at the time of his or her death.32 This provision applies to most 401(k) plans. Such plans typically reduce their operating costs by not offering annuities, since that would subject them to the complicated and cumbersome QJSA rules.

29 Sec. 401(a)(11)(B)(iii); Egelhoff v. Egelhoff, 532 U.S. 141 (2001).

30 Secs. 401(a)(11) and 417. 31 Secs. 401(a)(11)(A) and 417(a)(2).

32 Sec. 401(a)(11)(B)(iii).

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Consequently, as a matter of federal law, it will not matter who a married plan participant named as the beneficiary of a QRP account. In that case the retirement assets will be distributed to the individuals, trusts or estate that were named as the beneficiaries of the QRP account. b. Exception - waiver by spouse A surviving spouse may waive the privilege to receive the entire account balance by executing a qualified waiver.34 Such a waiver is also required for other transactions that might reduce a surviving spouse’s benefit at death, such as a rollover from a QRP to an IRA.35 The consent must acknowledge the effect of the waiver and must be witnessed by a plan representative or by a notary public.36 A beneficiary designation generally cannot be later modified without a new consent from the spouse.37 However, it is possible for a spouse to sign a "general consent"38 or to name a "class of beneficiaries"39 in the consent so that changing amounts to beneficiaries within the defined class does not require a new consent. It may be possible for a spouse who failed to execute a written consent before the employee's death to execute one afterward. This may permit the taxable distribution to be paid to the specified beneficiary pursuant to a Section 2518 "qualified disclaimer" by the surviving spouse without triggering a taxable gift by the surviving spouse. c. Prenuptial agreements usually ineffective This federal law has generated a significant amount of litigation in second marriages, where children from a prior marriage were named as beneficiaries of the retirement account but the plan administrator informed them that their step-parent was entitled to the assets instead.40

34 Secs. 401(a)(11)(B)(iii) and 417(a)(2).

35 With an IRA, a surviving spouse will usually not receive the assets unless he or she was specifically named as the beneficiary. Thus, if a 401(k) account is rolled over into an IRA, a surviving spouse loses the protection that he or she would have had if the assets had remained in the 401(k) plan. Charles Schwab & Co. v Debickero, 593 F.3d 916 (9th Cir. 2010).

36 Sec. 417(a)(2)(A). 37 Reg. § 1.401(a)-20, Q&A-31(a). 38 Reg. § 1.401(a)-20, Q&A-31(b). 39 Reg. § 1.401(a)-20, Q&A-31(a). Usually the class is the children of the employee.

40 Egelhoff v. Egelhoff, 532 U.S. 141 (2001); Reg. § 1.401(a)-20, Q&A-28.

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d. Community property laws - Boggs Unlike IRAs, QRPs are governed by ERISA, which contains one of the most powerful federal preemption laws on the books. This preemption was demanded by employers that operated businesses in multiple states. They wanted uniform administration of employer plans in all states, without state-by-state variations that might exist under the laws of the various states. Congress granted them this preemption.41 consequently, the U.S. Supreme Court concluded in Boggs v. Boggs that a state’s community property law has no impact on a plan participant’s account in a QRP.42 C. Section 408 - IRAs

1. General rule - no federal law trumps beneficiary designation

Since IRAs are governed by Section 408, they are not subject to the ERISA provisions that govern QRPs described in Section 401. For example, an IRA can be divided in a divorce without the necessity of a QDRO.43 Furthermore, upon the death of an IRA owner, the IRA will generally be paid to whoever was named as the beneficiary of the IRA. The QRP provision that requires the account of an employee who was married on the date of death to be paid to the surviving spouse, regardless of who was named as the beneficiary, does not apply to an IRA. 2. State community property laws Whereas the Supreme Court concluded in Boggs v. Boggs that a state’s community property law cannot apply to a QRP account since it is instead subject to ERISA, there is no federal preemption for IRAs. A state’s community property law can apply to an IRA. However, the IRS concluded that byzantine income tax consequences can occur when a state’s community property law is applied to an IRA, described below. 3. PLR 201623001 - IRS will tax original beneficiary when surviving spouse

receives distributions under state community property law In PLR 201623001 (March 3, 2016), an IRA was payable to a married couple's child, but the surviving spouse exercised her community property rights after her husband died, and a state court concluded that she was entitled to it. The IRS, however, concluded that even though the surviving spouse would receive the distributions from the IRA pursuant to the state court order, the IRS would continue to view the child as the beneficiary. Thus, distributions to the surviving spouse will be taxed to child. In PLR 201623001, it appears that the child was the biological child of the two parents. But if it had been a child from a prior marriage who was paying the income tax on the distributions to the step-parent .... whoa!

42 “We can begin, and in this case end, the analysis by simply asking if state law conflicts with the provisions of ERISA or operates to frustrate its objects. We hold that there is a conflict, which suffices to resolve the case.” Boggs v. Boggs, 520 U.S. 833, 117 S. Ct. 1754, at 1760-61 (1997). 43 Sec. 408(d)(6).

13

Here is the crucial excerpt from the PLR [emphasis added by Hoyt]: "Section 408(g) provides that section 408 shall be applied without regard to any community property laws, and, therefore, section 408(d)’s distribution rules must be applied without regard to any community property laws.” “Accordingly, because [widow] was not the named beneficiary of the IRA of Decedent and because we disregard [widow]’s community property interest, [widow] may not be treated as a payee of the inherited IRA for [child] and [widow] may not rollover any amounts from the inherited IRA for [child] (and therefore any contribution of such amounts by [widow] to an IRA for [widow] will be subject to the contribution limits governing IRAs).” “Additionally, because [child] is the named beneficiary of the IRA of Decedent and because we disregard [widow]’s community property interest, any “assignment” of an interest in the inherited IRA for [child] to [widow] would be treated as a taxable distribution to [child]. Therefore, the order of the state court cannot be accomplished under federal tax law.”

V. Tax Planning for Required Distributions

A. Tax-planning objectives

The tax planning strategy that most advisors recommend is to keep the balance in the retirement account as large as possible. * For a traditional retirement account, retaining a large balance permits the individual to earn investment income on the deferred income taxes. * If the account is a Roth account, the distribution is usually not subject to income tax. However, the investment income earned on the withdrawn assets will be taxable.

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EXAMPLE: If $100,000 was withdrawn from a traditional retirement account, income taxes would be due. In this example, $40,000, assuming a 40% rate of federal and state income taxes. By leaving amounts in the plan, a person can earn investment income on the $40,000 of deferred taxes (e.g., receive $10,000 per year rather than $6,000 assuming a 10% yield, or $5,000 rather than $3,000 assuming a 5% yield, etc. etc.). If the account had been a Roth account, the $100,000 withdrawal would not be taxable. However, once the assets are out of the Roth account, the investment income (e.g., $10,000 or $5,000) is taxable. It would have been tax-exempt if earned inside the Roth account.

Principal 10% Yield 5% Yield

Amount in IRA $100,000 10% $ 10,000 5% $ 5,000 Income Tax on Distribution (40%) 40,000 Amount Left to Invest $ 60,000 10% $ 6,000 5% $ 3,000

B. Required minimum distributions after age 72

1. General rule There is a 50% penalty tax imposed on a retirement account owner if he or she does not receive a

required minimum distribution (ARMD@) after attaining the age of 72 or retiring, whichever occurs later.1 The amount of each year=s RMD is determined by a uniform lifetime distribution table, with no distinction based on gender or other factors. That table appears on the next page.

TWO SIMPLE STEPS: Step 1: Find out the value of the investments in the retirement plan

account on the last day of the preceding year. For example, on New Years Day -- look at the closing stock prices for December 31. Step 2: Multiply the value of the investments by the percentage in the table that is next to the age that the account owner will be at the end of that year. This is the minimum amount that must be distributed that year to avoid a 50% penalty.

Example: Ann T. Emm had $100,000 in her only IRA at the beginning of the year. She will be age 80 at the end of this year. She must receive at least $4,950 during the year to avoid a 50% penalty (4.95% times $100,000).

1 Sec. 4974; Reg. Sec. 54.4974-2. If there is reasonable cause for the failure, the penalty can be waived. Reg. Sec. 54.4974-2, Q&A 7. In addition, a qualified retirement plan could be disqualified for failing to make the required distributions. Sec. 401(a)(9). Individuals who own 5% or less of a business can defer the imposition of the penalty if they are still employed after age 70 2, but they still must take RMDs from their IRAs. IRAs are governed by Sec. 408 rather than Sec. 401.

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--UNIFORM LIFETIME DISTRIBUTION TABLE BB Age Payout

70 ½ -0-% 71 -0-% 72 3.67% 73 3.79% 74 3.93% 75 4.07% 76 4.22% 77 4.39% 78 4.57% 79 4.77%

80 4.95% 81 5.19% 82 5.44% 83 5.69% 84 5.96% 85 6.25% 86 6.58% 87 6.95% 88 7.36% 89 7.76%

90 8.27% 91 8.78% 92 9.26% 93 9.91% 94 10.53% 95 11.24% 96 12.05% 97 12.83% 98 13.70% 99 14.71%

100 15.63% 101 16.95% 102 17.86% 103 19.24% 104 20.41% 105 21.74% 106 23.26% 107 24.39% 108 25.65% 109 27.03%

[Table computed from Table A-2 of Reg. Sec. 1.401(a)(9)-9 (updated in 2021) -- (rounded up)]

2. Smaller RMDs when spouse is more than 10 years younger

The uniform lifetime distribution table was computed based on a hypothetical joint life expectancy of the account owner and someone who was ten years younger. An exception to this uniform table applies when an account owner is in fact married to a spouse who is more than ten years younger than the account owner, if that spouse is the sole beneficiary of the account. In that case, smaller RMDs apply, determined by the joint life expectancy of the account owner and the younger spouse. These tables can be found in IRS Publication 590.

C. Inherited accounts – Maximum time period for liquidation of an account: ten years, five years, or a remaining life expectancy

Failure to receive the required minimum distribution (“RMD”) for that year from an inherited retirement account triggers a 50% penalty on the shortfall. The maximum time period over which a decedent’s account may be liquidated without such a penalty after the year of death is either: 1. (#1) ten years, if only “designated beneficiaries” (“DBs”) (or a “look-through trust” with 100%

DBs) are the beneficiaries of the account (there is no RMD until the 10th year), 2. (#2) the remaining life expectancy of an eligible designated beneficiary (“EDB”), based on

the EBD’s age at the end of the year that follows the account owner’s death. An EDB is a beneficiary who is: a surviving spouse, a minor child of the decedent, disabled, chronically ill, or someone who is not more than ten years younger than the decedent (there is an RMD every year),

3. (#3) five years(there is no RMD until the 5th year), if the account owner died before the required beginning date (“RBD”) and there is even just one non-DB on the “determination date” (generally, September 30 following the year of death), or

4. (#4) the life expectancy of someone who was the account owner’s age (a/k/a a “ghost life expectancy”) if the account owner died after the RBD and there is even just one non-DB on the “determination date.” There will be RMDs in each of those years.

For a surviving spouse, the best income tax consequences usually occur with a rollover to a new IRA for the surviving spouse.

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a. Life expectancy table for eligible designated beneficiaries and “ghost life expectancy”

Whereas the general rule is that an inherited account must be liquidated over ten years, there are two exceptions that use a measuring period of a remaining life expectancy. This table contains that life expectancy time period. As described above, they are: (#2) the remaining life expectancy of an eligible designated beneficiary (“EDB”), based on the EBD’s age at the end of the year that follows the account owner’s death. An EDB is a beneficiary who is: a surviving spouse, a minor child of the decedent, disabled, chronically ill, or someone who is not more than ten years younger than the decedent (there is an RMD every year), and (#4) the life expectancy of someone who was the account owner’s age (a/k/a a “ghost life expectancy”) if the account owner died after the RBD and there is even just one non-DB on the “determination date.” There will be RMDs in each of those years.

Age Life Expectancy Age Life Expectancy Age Life Expectancy Age Life Expectancy Age Expectancy 0 84.5 1 83.7 2 82.7 3 81.7 4 80.8 5 79.8 6 78.8 7 77.8 8 76.8 9 75.8 10 74.8 11 73.8 12 72.8 13 71.9 14 70.9 15 69.9 16 68.9 17 67.9 18 66.9 19 66.0

20 65.0 21 64.0 22 63.0 23 62.0 24 61.1 25 60.1 26 59.1 27 58.2 28 57.2 29 56.2 30 55.3 31 54.3 32 53.4 33 52.4 34 51.4 35 50.5 36 49.6 37 48.6 38 47.6 39 46.6

40 45.7 41 44.7 42 43.8 43 42.8 44 41.8 45 40.9 46 39.9 47 39.0 48 38.0 49 37.1 50 36.1 51 35.2 52 34.3 53 33.1 54 32.4 55 31.5 56 30.6 57 29.7 58 28.8 59 27.9

60 27.1 61 26.2 62 25.3 63 24.5 64 23.6 65 22.8 66 22.0 67 21.2 68 20.4 69 19.5 70 18.7 71 17.9 72 17.1 73 16.3 74 15.6 75 14.8 76 14.0 77 13.3 78 12.6 79 11.9

80 11.2 81 10.5 82 9.9 83 9.2 84 8.6 85 8.1 86 7.5 87 7.0 88 6.6 89 6.1 90 5.7 91 5.3 92 4.9 93 4.6 94 4.2 95 3.9 96 3.7 97 3.4 98 3.2 99 3.0

Table A-1 of Reg. Sec. 1.401(a)(9)-9 (“single life ”), required by Reg. Sec. 1.401(a)(9)-5, Q&A 5(a) & 5(c) and Q&A 6. (updated for 2021)

17

c. Surviving spouse can rollover to own IRA

A surviving spouse is the only person who can rollover a distribution from an inherited IRA or QRP account into a new IRA that treats the surviving spouse as the new account owner.2 No other person can rollover an inherited retirement plan distribution; he or she must report each distribution as taxable income in the year that it is made from the deceased's account.3

2. Non-spouse beneficiary a. General rules

i. Ten year liquidation Although the statute provides that the general rule is that a deceased=s

retirement account must be empty ten years after death,4 there are three important exceptions. First, if the decedent died after the required beginning date (ARBD@, which is usually April 1 following the year the individual attained age 72), the liquidation period could instead be the remaining life expectancy of someone who was the decedent=s age in the year of death, which could be more than five years.5 Second, if the individual died before the RBD, the account might have to be liquidated in just five years if on the determination date there is even just one beneficiary that is not a Adesignated beneficiary@ (i.e., is not a human being). Third, if the beneficiary is an “eligible designated beneficiary (“EDB”), the maximum distribution period is the remaining life expectancy of the EDB (e.g., the Astretch IRA@ where payments are stretched over the EDB’s remaining life expectancy). ii. AStretch@ over life expectancy of an EDB

A designated beneficiary (AADB@@) is a human being, and an eligible designated beneficiary (AAEDB@@) is one of five individuals who qualify for distributions payable over her/his remaining life expectancy rather than just five or ten years.6 An EDB is a beneficiary who is: a surviving spouse, a minor child of the decedent (though upon attaining majority age, the ten year rule applies), disabled, chronically ill, or someone who is not more

2 Sec. 402(c)(9) for inherited QRP accounts and Sec. 408(d)(3)(C)(ii)(II) for inherited IRAs.

3 The general prohibition against rolling over an inherited IRA is described in Sec. 408(d)(3)(C).

4 Sec. 401(a)(9)(H). There is no minimum amount each year. Instead, the requirement is that the account be empty at the end of the tenth year.

5 Reg. Sec. 1.401(a)(9)-5, Q&A 5(a)(2)(death after RBD).

6 Sec. 401(a)(9)(E); Reg. Sec. 1.401(a)(9)-4, Q&A 1 (“DB”); Sec. 401(a)(9)(E)(ii) (“EDB”)

18

than ten years younger than the decedent The RMD for the year is usually determined by placing the DB=s remaining life

expectancy in the denominator of a fraction, and then reducing the denominator by one in each subsequent year. For example, a 66 year old has a remaining life expectancy of 22 years, to age 88. Thus at age 66, the RMD is 1/22. At age 67 it will be 1/21; at age 68 it will be 1/20; etc. In this example, the inherited account will have to be empty when the EDB attains age 88.

Although a charity or a probate estate can be a beneficiary of an IRA or QRP account, neither will qualify as a DB since neither has a life expectancy.7 Having a single non-DB as a beneficiary might cause the inherited account to fail to qualify for a ten-year liquidation, and instead trigger the five year rule. In many cases ten-year treatment can be preserved if the non-DBs are eliminated as beneficiaries before the Adetermination date@, which is September 30 in the year following the year of death.8 There are basically three ways that a beneficiary can be eliminated before the determination date: (1) disclaimer by a beneficiary, (2) cash-out of a beneficiary=s entire interest (advisable for a tax-exempt charity)9 and (3) establishing a separate account for each different beneficiary before the September 30 date.10

Although a trust is not a DB, if certain criteria are met, a trust may be the beneficiary of an IRA or QRP and RMDs will be determined based on the beneficiaries of that trust (a Asee-through@ or a Alook -through@ trust").11 This exception is examined below in Part Ac@. b. Employer plans can impose faster distributions; IRA options

The federal tax laws permit an inherited retirement account to be liquidated over the remaining life expectancy of a designated beneficiary. But no employer wants to be responsible for keeping track of the whereabouts until age 85 of every grandchild of every employee who ever worked at the business. Consequently, many employer plans provide that the accounts of deceased employees will be liquidated over a much shorter time span,

7 Reg. Sec. 1.401(a)(9)-4, Q&A 3. 8 Reg. Sec. 1.401(a)(9)-4, Q&A 4.

9 See, for example, Private Letter Ruling 200740018 (July 12, 2007) for an illustration of how a cash-out of one beneficiary before September 30 meant that the beneficiary was not considered for purposes of minimum distributions.

10 Reg. Sec. 1.401(a)(9)-8, Q&A 2 and 3

11 Reg. Sec. 1.401(a)(9)-4, Q&A 5 and 6.

19

perhaps within one year after the employee=s death.12 That could push a lot of taxable income onto the income tax returns of the beneficiaries.

There are two tax laws that give beneficiaries income tax deferral possibilities. First, if the beneficiary is the surviving spouse, he or she can rollover the retirement assets into a new IRA or other qualified plan account.13 The surviving spouse will be considered the owner of the account rather than just the beneficiary of an inherited IRA. No other beneficiary can get such rollover treatment of an inherited account.14

Second, a non-spouse beneficiary can compel the employer plan to make a trustee-to-trustee transfer of the deceased employee=s account balance to an IRA that will operate as an inherited IRA.15 Although not as good as a rollover to the beneficiary=s own IRA, this outcome permits deferral of income taxes under the stretch rules, described above.

c. Trusts as beneficiaries - Alook-through@ options If certain criteria are met, a trust can be named as a beneficiary of either an IRA or a QRP account and each of the individuals who are beneficiaries of the trust will be considered beneficiaries of the IRA or QRP. Reg. Sec. 1.409(a)(9)-4, Q&A 5 and 6 permit beneficiaries of the trust to be treated as beneficiaries of the retirement account for purposes of determining minimum mandatory distributions if the following 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 or will become irrevocable upon the death of the employee. (3) The beneficiaries of the trust are identifiable from the trust instrument, and (4) Either one of the following documents has been provided to the plan administrator: (a) a document that contains:

(i) a list of all of the beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement sufficient to establish whether or not the spouse is the sole beneficiary) entitled to receive retirement assets; (ii) a certification that the list is correct and complete and that the preceding 3 requirements have been met to the best of the retirement account owner's knowledge),

12 Reg. Sec. 1.401(a)(9)-3, Q&A 4.



15 Sec. 402(c)(11).

20

(iii) a statement that if the trust instrument is amended at any time in the future, the retirement account owner will provide corrected certifications to the plan administrator, and (iv) a statement that the retirement account owner agrees to provide a copy of the trust instrument to the plan administrator upon demand.

(b) A copy of the entire trust instrument, together with a statement that the account owner will provide copies of future amendments.

d. Terminology – RBD, DB, and determination date

Required Beginning Date ("RBD") - The first date that a distribution must be made from an IRA, QRP or 403(b) account to the account owner in order to avoid the 50% penalty tax.16

IRAs: The RBD for an IRA is April 1 following the calendar year that the IRA account owner attains age 72.17 QRP or 403(b): The RBD for a qualified retirement plan or a tax-sheltered annuity is the later of (a) April 1 following the calendar year that the account owner attains age 72 or (b) April 1 following the calendar year that the employee separates from service (e.g., somebody who works past age 72).18 Individuals who own 5% or more of a business are not eligible for this later RBD: their RBD is April 1 following the calendar year that they attain age 72.

ABeneficiaries@@ versus AADesignated Beneficiary@@ ("DB") - A beneficiary is any person or entity that is entitled to receive benefits from a QRP or IRA account after the account owner=s death. By comparison, a designated beneficiary is an individual who is entitled to the benefits of the IRA or QRP account upon the death of the employee / participant / IRA owner (hereafter "account owner").19 Neither a charity nor the decedent's estate will qualify as a DB since neither has a life expectancy. If certain criteria are met, a trust may be the beneficiary of an IRA or QRP and distributions will be based on the beneficiaries of that trust (a Alook-through trust"). “Eligible Designated Beneficiary” ("EDB") - An EDB qualifies for an exception to the general ten liquidation rule. An EDB may receive distributions over his or her the remaining life expectancy of an eligible designated beneficiary (“EDB”), based on the EBD’s age at the end of the year that follows the account owner’s death. An EDB is a beneficiary who is: a

16 Sec. 4974; Reg. Sec. 54.4974-2, Q&A 1 and 2.

17 Sec. 408(a)(6); Reg. Sec. 1.408-8 Q&A 3.

18 Sec. 401(a)(9)(E); Reg. Sec. 1.401(a)(9)-2, Q&A 2.

19 Sec. 401(a)(9)(E); Reg. Sec. 1.401(a)(9)-4, Q&A 1.

21

surviving spouse, a minor child of the decedent (though upon attaining majority age, the ten year rule applies), disabled, chronically ill, or someone who is not more than ten years younger than the decedent

Determination Date - The date when the beneficiaries must be determined is September 30 of the calendar year that follows the calendar year of the account owner's death.20 Example: Sarah died on June 15, 2021, the determination date for her IRA and QRP accounts will be September 30, 2022. The minimum distributions will be computed based only on the beneficiaries who still have an interest on the determination date. If a beneficiary=s interest is eliminated between the time that the account owner died and the determination date B for example by a cash out or a disclaimer -- then that beneficiary will not impact the required minimum distributions. PLR 200740018 (July 12, 2007). There are basically three ways to eliminate some of the beneficiaries before the determination date: (1) disclaimers, (2) cash-out of a beneficiary, and (3) separate accounts for different beneficiaries.

e. DISCLAIMERS -- What happens when a person disclaims an interest in an inherited retirement plan account? That is, upon the employee's death, the primary beneficiary makes a "qualified disclaimer" within the applicable 9 month period so that the property passes to a contingent beneficiary, such as a charity. The IRS will allow a primary beneficiary to disclaim all or part of an inherited retirement account even if he or she received a mandatory distribution from the account in the year of the account owner=s death. Rev. Rul.2005-36, 2005-26 IRB 1368 (by comparison, any acceptance of benefits will normally disqualify a disclaimer). The estate can then claim an estate tax charitable deduction for the amount that was transferred to a charity by way of the disclaimer.21

EXAMPLE WITH A CHARITY: Assume that Mother=s estate is comprised of a $1.1 million retirement account and $1 million of other assets. Mother named Daughter as the primary beneficiary and named Charity as a contingent beneficiary of her retirement account. Upon Mother's death, Daughter could make a qualified disclaimer of just $100,000, generating a $100,000 charitable estate tax deduction. Mother=s taxable estate would be just $2 million, thereby avoiding the estate tax. Daughter would not have to recognize any taxable income nor would she be treated as having

20 Reg. Sec. 1.401(a)(9)-4, Q&A 4.

21 Reg. Sec. 20.2055-2(c)(1).

22

made a gift.22 CAUTION #1: Disclaimers of property that pass to a private foundation pose tax problems. A solution that has been approved by the IRS is to make a disclaimer to a donor advised fund of a community foundation rather than a private foundation. 23 CAUTION #2: Generally avoid this strategy for transferring assets to a charitable remainder trust. A person (except for a surviving spouse) cannot make a valid disclaimer to a trust if he or she will also be a beneficiary of that trust.24

23 Rev. Rul. 2005-36, 2005-26 I.R.B 1368

23 A problem exists if a parent names a child as a beneficiary of an estate and through the child's disclaimer the property passes to a private foundation where the child is a director. The child's participation in the private foundation's selection of charitable grant recipients could prevent the disclaimer from being a qualified disclaimer. This is because the child would be normally involved in selecting the ultimate charitable beneficiaries of the private foundation, which could violate the requirement that the interest in property passes "without any direction on the part of the person making the disclaimer." Reg. Sec. 25.2518-2(d)(1) & (2); 25.2518-2(e)(1)(I). One solution to deal with this is for the private foundation to amend its bylaws so as to prohibit the child and the child's spouse from participating in the selection of grant recipients from amounts that are attributable to the disclaimed property. See PLRs 200649023 (Aug. 23, 2006), 9317039 (Feb. 2, 1993) and 9141017 (July 10, 1991). This is a fairly clumsy solution that interferes with a parent's desire to allow children to be involved with a private foundation. A better solution may be to have a child disclaim property to an advised fund of a community foundation. The IRS concluded that the advisory nature of a child's or grandchild=s grant recommendations did not pose a problem. PLRs 200518012 (Dec. 17, 2004) (disclaimers by grandchildren) and PLR 9532027 (May 12, 1995) (disclaimers by children).

24 Reg. Sec. 25.2518-2(e)(3).

23

f. REQUIRED MINIMUM DISTRIBUTIONS FROM IRAs AND QRPs AFTER THE ACCOUNT OWNER’S DEATH, BASED ON THE BENEFICIARIES AS OF THE “DETERMINATION DATE” BENEFICIARY DEATH BEFORE RBD DEATH AFTER RBD

“No designated beneficiary”

(“No DB”)” - if there is even just one non-human beneficiary (e.g., probate

estate or a charity)

Five Years [No RMD until the 5th year]

Remaining life expectancy of someone who was the decedent’s age in the year of death (“ghost life expectancy”)

[RMDs must be made each year]

NON-SPOUSE DESIG. BENIF.

General Rule if all beneficiaries are individuals (“DBs”)

Ten Years

[No RMD until the 10th year]

- Same: Ten Years - * * An argument can be made that the

term can be the “ghost life expectancy,”

if that is more than ten years Rollover option?

Not available to anyone but a surviving spouse.**

** - Possible to transfer decedent’s account from a company plan (but not from an IRA) to an IRA payable over ten years (or life expectancy of an EDB)

Eligible Designated Beneficiary (“EDB”)

Remaining life expectancy of the EDB,* fixed as of the year after death. Distributions must begin before the end of the year that follows the year of death. [RMDs must be made each year]

– Same Rule –

* - (if the EDB is older than the deceased, use life expectancy based on the deceased’s age)

Beneficiaries include both EDBs and non-EDBs

Unless separate shares are established, generally Ten Years (or Five Years). Special rules benefit accumulation trust for disabled & chronically ill.

Remaining life expectancy of someone who was the decedent’s age, unless separate accounts for the beneficiaries.

SPECIAL RULES “Look-through”trust/ “See-through” trust

“Look through” to identity of DBs and EDBs of the trust to determine RMDs.

– Same Rule --


A remainder beneficiary is counted as a beneficiary of an accumulation trust, but not of a conduit trust

– Same Rule –

24

BENEFICIARY DEATH BEFORE RBD DEATH AFTER RBD SPOUSE IS THE BENEFICIARY

Rollover Option?

Yes, available

Yes, available

Leave in deceased’s account and spouse is the sole beneficiary?

-- General Rule

Minimum distributions over the surviving spouse’s remaining life expectancy, gradually extended each year as the spouse ages.

– Same Rule --

-- IRAs only: elect to treat as own IRA

Surviving spouse can elect to leave assets in deceased’s IRA but treat that IRA like a rollover IRA.

– Same Rule --

-- Decedent died before age 72?

Can defer first distribution until the year that the deceased spouse would have been age 72.

Not applicable

MULTIPLE DBs; ONE IS THE SPOUSE

Both spouse and another DB are the

beneficiaries

Generally ten years, unless separate shares are established.

– Same Rule --

Both spouse and a charity are beneficiaries

Five Years, unless separate accounts are established for the beneficiaries.

Remaining life expectancy of someone who was the decedent’s age, unless separate accounts for the beneficiaries.

“Look-through” trust / “See-through” trust

Generally ten years, since “look through” to identity of the beneficiaries. If payable to a conduit trust, then the remaining life expectancy of the spouse.

– Same Rule --


A remainder beneficiary is counted as a beneficiary of an accumulation trust, but not of a conduit trust

– Same Rule –

25

g. GLOSSARY

Designated Beneficiary ("DB") - A designated beneficiary is an individual who is entitled to the benefits of the IRA or QRP account upon the death of the employee / participant / IRA owner (hereafter "account owner").25 Neither a charity nor the decedent's estate will qualify as a DB since neither has a life expectancy.26 If certain criteria are met, a trust may be the beneficiary of an IRA or QRP and distributions will be based on the beneficiaries of that trust (an "eligible trust").27 “Eligible Designated Beneficiary” ("EDB") - An EDB qualifies for an exception to the general ten liquidation rule. An EDB may receive distributions over his or her the remaining life expectancy of an eligible designated beneficiary (“EDB”), based on the EBD’s age at the end of the year that follows the account owner’s death. An EDB is a beneficiary who is: a surviving spouse, a minor child of the decedent (though upon attaining majority age, the ten year rule applies), disabled, chronically ill, or someone who is not more than ten years younger than the decedent Determination Date - The date when the beneficiaries must be determined is September 30 of the calendar year that follows the calendar year of the account owner's death.28 Example: Sarah died in 2022 the determination date for her IRA and QRP accounts will be September 30, 2023. The minimum distributions will be computed based only on the beneficiaries who still have an interest on the determination date. If a beneficiary=s interest is eliminated between the time that the account owner died and the determination date B for example by a cash out or a disclaimer -- then that beneficiary will not have any impact on the required minimum distributions. PLR 200740018 (July 12, 2007).

Five Year Rule - If an account is subject to the five year rule, then the entire account must be distributed by the end of the calendar year which contains the fifth anniversary of the date of the employee's death.29 For example, if an employee died on January 11, 2020, the entire interest must be distributed by December 31, 2025. Ineligible Trust - If a trust is not an eligible trust, then the IRA is deemed to have no DB.30 Life expectancy / remaining life expectancy - The maximum number of years that a deceased account

25 Sec. 401(a)(9)(E); Reg. Sec. 1.401(a)(9)-4, Q&A 1.

26 Reg. Sec. 1.401(a)(9)-4, Q&A 3.

27 Reg. Sec. 1.401(a)(9)-4, Q&A 5 and 6.

28 Reg. Sec. 1.401(a)(9)-4, Q&A 4.

29 Sec. 401(a)(9)(B)(ii); Reg. Sec. 1.401(a)(9)-3, Q&A 1(a) and 2.

30 Reg. Sec. 1.401(a)(9)-4, Q&A 5(a).

26

owner's IRA or QRP account can hold assets before it must finally be depleted is usually based on the life expectancy of either an eligible designated beneficiary (EDB) or of someone who is the same age as the deceased account owner.31 Whereas the number of years is usually frozen based on a person's life expectancy as of the determination date, a surviving spouse who is the sole beneficiary of the account is permitted to extend the date as she or he ages.32 Look-Through Trust (a/k/a ASee-through Trust@) -- If certain criteria are met, a trust can be named as a beneficiary of either an IRA or a QRP account and each of the individuals who are beneficiaries of the trust will be considered beneficiaries of the IRA or QRP.33 Qualified Retirement Plan ("QRP") - Profit sharing plan, 401(k) plan, pension plan, money purchase plan, defined benefit plan, or employee stock ownership plan ("ESOP").34 For purposes of this paper, the term will also include Sec. 403(b) plans. Remainder Beneficiary - A beneficiary that is entitled to payments upon the termination of someone else's rights (e.g., upon the termination of an income beneficiary's interest).35 Required Beginning Date ("RBD") - The first date that a distribution must be made from an IRA, QRP or 403(b) account to avoid the 50% penalty tax.36

IRAs: The RBD for an IRA is April 1 following the calendar year that the IRA account owner attains age 72.37 QRP or 403(b): The RBD for a qualified retirement plan or a tax-sheltered annuity is the later of (a) April 1 following the calendar year that the account owner attains age 72 or (b) April 1 following the calendar year that the employee separates from service (e.g., somebody who works past age 72).38 Individuals who own 5% or more of a business are not eligible for this later RBD: their RBD is April 1 following the calendar year that they attain age 72.39

31 After the account owner's death, life expectancies are based on the figures contained in Table A-1 of Reg. Sec. 1.401(a)(9)-9. See Reg. Sec. 1.401(a)(9)-5, Q&A 5(a)-(c) and Q&A 6.

32 Compare Reg. Sec. 1.401(a)(9)-5, Q&A (c)(1) (a non-spouse beneficiary) with Q&A (c)(2) (spouse is sole beneficiary).

33 Reg. Sec. 1.401(a)(9)-4, Q&A 5 and 6.

34 Sec. 401(a); Reg. Sec. 1.401-1(a).

35 Private Letter Ruling 9820021 concluded that a charity that was a remainder beneficiary of a trust would be considered as one of the beneficiaries of the trust for purposes of computing the minimum required distributions.

36 Sec. 4974; Reg. Sec. 54.4974-2, Q&A 1 and 2.

37 Sec. 408(a)(6); Reg. Sec. 1.408-8 Q&A 3.

38 Sec. 401(a)(9)(E); Reg. Sec. 1.401(a)(9)-2, Q&A 2.

39 Reg. Sec. 1.401(a)(9)-2, Q&A 2(b) and (c).

27

Rollover - A surviving spouse is the only person who can rollover a distribution from an inherited IRA or QRP account into a new IRA that treats the surviving spouse as the new account owner.40 No other person can rollover an inherited retirement plan distribution; he or she must report each distribution as taxable income in the year that it is made from the deceased's account.41 See-through Trust -- Same as ALook-Through Trust@ Separate Accounts B If an IRA or QRP account is divided into separate accounts, then the minimum distributions after the account owner=s death are generally computed separately based on the beneficiary of each of the separate accounts. In other words, the separate accounts are treated like separate IRAs. A separate account is a portion of the deceased's IRA or QRP account that is determined using an acceptable separate accounting and to which a pro rata allocation of investment gains and losses, etc. is made in a reasonable and consistent manner.42 For an example of separate payout streams when an IRA was payable to a trust that provided 10% for charities and 90% for family, see PLR 200218039 (Feb. 4, 2002)(using the 1987 proposed regulations).

3. Additional benefits to a surviving spouse

a. Rollover to IRA for the surviving spouse

A surviving spouse is the only person who can rollover a distribution from an inherited IRA or QRP account into a new IRA that treats the surviving spouse as the new account owner.43 No other person can rollover an inherited retirement plan distribution; he or she must report each distribution as taxable income in the year that it is made from the deceased's account.44

b. Tax trap for surviving spouse under age 59 ½ : 10 percent penalty One situation where a complete rollover should be avoided is for s surviving spouse under age 59 1/2. Whereas a distribution from a deceased person’s account is exempt from the 10 percent penalty on early distributions, once the assets are rolled over into one’s own IRA, every distribution will be subject to the penalty if the surviving spouse is under age 59 ½. A planning strategy is to leave sufficient assets in the deceased spouses’ account that the surviving spouse may need to draw upon until age 59 ½ (when he or she can then rollover that amount), but to rollover the excess amount that she or he is confident will not be needed before age 59 1/2. This will permit estate planning for the rolled over assets, and prevent accelerated distributions that could



42 Reg. Sec. 1.401(a)(9)-8, Q&A 2 and 3.



28

occur for the assets in the deceased spouse’s IRA if the surviving spouse dies before rolling over those amounts.45

c. Leave in deceased=s account? Three advantages if sole beneficiary

i. Annually recalculate remaining life expectancy.

If the surviving spouse is the sole beneficiary, she or he can annually recalculate the remaining life expectancy when calculating the annual RMD. For example, a 70 year old person has a life expectancy to age 88, but an 80 year old person has a life expectancy to age 91.46

ii. IRA only: elect to treat as own IRA

A surviving spouse may elect to treat the deceased spouse’s IRA (but not QRP account) as his or her own account. This has the effect of a rollover. It might justify a failure to have received RMDs from the IRA: “I elected to treat the account as my own”

iii. No RMDs until deceased spouse would have been 72

If the plan participant or IRA owner died before age 72, the surviving spouse is not required to receive an RMD from the deceased spouse’s account until the year the deceased spouse would have attained age 72 .47

45 Sears v. Commissioner, T.C. Memo. 2010-146 (2010). A widow who was under age 59 ½ rolled over roughly $800,000 from her deceased husband’s IRAs into her own IRAs, and then withdrew approximately $60,000 from those IRAs that same year. The Tax Court concluded that the 10% early distribution penalty applied. The penalty would not have applied if she had withdrawn the $60,000 directly from her deceased husband’s IRAs. A similar outcome occurred in Gee v. Commissioner, 127 T.C. 1, 4-5 (2006). 46 Reg. Secs. 1.401(a)(9)-5, Q&A 4(b) and 1.401(a)(9)-5, Q&A 5(c)(2) (outright to spouse who is sole beneficiary) and 1.401(a)(9)-5, Q&A 7(c)(3), Example 2 (to a conduit trust with spouse as beneficiary). The life expectancies are from Reg. Sec. 1.401(a)(9)-9, Table A. 47 Sec. 401(a)(9)(B)(iv)(I).

29

D. Retirement assets payable to a trust for a surviving spouse

1. Case study: an 80 year-old surviving spouse


Example: At age 80, Ms. Widow began receiving distributions from several IRAs, including the IRAs of her older husband and her older sister (both of whom had died in the preceding year). Although the life expectancy of a 80 year old is 10 years (i.e., to age 90), Ms. Widow in fact lived to age 92. Whereas the law requires two IRAs (IRAs C and D) to be empty by age 90, amounts could still be in the other IRAs at that age. The minimum amounts required to be distributed from each of six IRAs are listed in the table. A - Her own IRA, established with contributions she made during her working career. *B - A rollover IRA, funded after her husband's death with a distribution from his 401(k) plan. C - A stretch IRA -- Her sister's IRA D - Bypass Trust #1 - Her deceased husband's IRA is payable to a standard bypass trust,

treated as a stretch IRA payable to a look-through accumulation trust (where the required distributions are based on the age of the oldest beneficiary of the trust. The same distribution rules apply to a QTIP trust.)

*E - Bypass Trust #2 - Her deceased husband's IRA is payable to a similar trust, but the trust requires all retirement plan distributions to be made to Ms. Widow. This provision permits a look-though trust to be treated as a conduit trust

IRAs IRAs IRA Age A & B C & D . E . 80 4.95% ,-0-% 8.93% 81 5.19% ,-0-% 9.53% 82 5.44% ,-0-% 10.10% 83 5.69% ,-0-% 10.87% 84 5.96% ,-0-% 11.63%

85 6.25% ,-0-% 12.35% 86 6.58% ,-0-% 13.33% 87 6.95% ,-0-% 14.29% 88 7.36% ,-0-% 15.15% 89 7.76% ,-0-% 16.40%

90 8.27% 100.00% 17.54% 91 8.78% empty 18.87% 92 9.26% 20.41% 93 9.90% 21.38% 94 10.53% 23.81%

*Payouts “B" and "E" are only available to a surviving spouse. Other payouts are available to anyone.

30

Legal Authority for Various Payout Rules: IRA A: Reg. Sec. 1.401(a)(9)-5, Q&A 4 and Reg. Sec. 1.401(a)(9)-9, Table A-2. IRA B: Same, and Secs. 402(c)(9) and 408(d)(3)(C)(ii)(II) permit a surviving spouse to do a rollover. IRA C: Secs. 401(a)(9)(H)(i) and (vi), and 408(d)(3)(C). IRA D: Reg. Sec. 1.401(a)(9)-5, Q&A 7(c)(3), Example 1, as modified by Sec. 401(a)(9)(H)(i) and (vi). IRA E: Reg. Sec. 1.401(a)(9)-5, Q&A 7(c)(3), Example 2, reinforced by Secs. 401(a)(9)(H)(E)(ii)(I) and (H)(ii). Required Payments after Ms. Widow's Death: IRAs A & B: IRAs A & B will generally be liquidated within ten years after Ms. Widow’s death to the beneficiaries that she named. Sec. 409(a)(9)(H)(iii)(2020). IRA E: Ms. Widow is an eligible designated beneficiary, and a conduit trust permits her to recompute her life expectancy and to ignore remainder beneficiaries for RMDs. After Ms. Widow's death, payments from IRA E must generally be completed over ten years. Sec. 409(a)(9)(H)(iii)(2020). (Compare Reg. Sec. 1.401(a)(9)-5, Q&A 5(c)(2) – old law provided that the remaining term was over the life of someone who was her age in the year of her death).

2. IRS PLRs - surviving spouse can rollover retirement assets payable to an estate or trust, provided the surviving spouse is the sole beneficiary

IRS Private Letter Rulings - 2014 - 2020

A surviving spouse can rollover a deceased spouse’s retirement account, even when the account is payable to:

A TRUST FOR THE SPOUSE

* PLR 201944003 (Aug 8, 2019) - payable to revocable joint trust * PLR 201923002 (March 4, 2019) - payable to trust where spouse is trustee and beneficiary

* PLRs 201934006 & 201935005 - spouse mistakenly listed as contingent beneficiary * PLR 201844004 (Aug 4, 2018) - payable to spouse’s revocable trust

* PLR 201707001 (Nov 8, 2016) - payable to revocable joint trust * PLR 201632015 (May 10, 2016) - payable to trust - community property state

* PLR 201507040 (Dec 24, 2014) * PLR 201430029 (Apr 30, 2014) - H’s IRA payable to W’s revocable trust

* PLR 201430026 (Apr 29, 2014) * PLR 201423043 (Feb 29, 2014) - Rollover Roth IRAs payable to a marital trust

THE ESTATE, WITH ESTATE POUR-OVER INTO A TRUST FOR THE SPOUSE

* PLR 201736018 (June 9, 2017) - payable to estate; pourover into trust * PLR 201511036 (Dec 18, 2014) and * PLR 201437029 (June 05, 2014)

THE ESTATE, WHERE THE SPOUSE IS THE SOLE OR RESIDUARY BENEFICIARY OF THE ESTATE

*PLR 201931006 (7 May 2019) - probate estate was default beneficiary when beneficiary form left blank * PLR 201451066 (Sep 25, 2014)

* PLR 201445031 (Aug 11, 2014) - spouse is residuary beneficiary of estate * PLR 201430027 (Apr 30, 2014) - spouse is residuary beneficiary of estate

* PLR 201430020 (May 1, 2014)

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VI. Second Marriages One of the potentially contentious issues in a second marriage can involve financial and tax planning for retirement accounts when each spouse has children from a prior marriage. Whereas a QTIP trust (income to surviving spouse for life, remainder to children from a prior marriage) might work well for other assets such as stock and real estate, a QTIP trust poses income tax challenges for retirement accounts. This is because the annual RMD that must be distributed from a deceased spouse’s retirement account to a QTIP trust will always be greater than the RMD that would have been required if the surviving spouse had rolled over the assets to her or his own IRA. After age 80, the annual RMDs payable to such a trust are twice what the RMDs would be if the spouse had rolled over the deceased spouse’s retirement assets into her or his own IRA. Consequently, there will be trade-offs of income tax savings over other planning objectives. Some ways that people have dealt with this situation has been to leave all retirement assets to a surviving spouse and to use life insurance as an alternative benefit for the children. Another has been to divide the retirement assets between the spouse and children. Another alternative for people who have charitable intent is to use a two-generation charitable remainder trust. Of course, in all situations the procedural requirements must be met to get the optimal outcome.

A. Prenuptial agreements

If the retirement assets are in a QRP, such as a 401(k) plan, then a prenuptial agreement will not be sufficient to transfer the assets to the children from a first marriage, even if those children are named as beneficiaries of the QRP account. If the plan participant was married at the time of death, a QRP must pay 100% of the account balance to the surviving spouse. In order for the named beneficiaries to be entitled to the assets, the spouse must execute a valid waiver that was signed while they were married, rather than before they were married. See Part IV.B.2, above. If the retirement assets are in an IRA, then generally the named beneficiaries will be entitled to the IRA assets rather than the surviving spouse. Thus, if children from a prior marriage are named as beneficiaries, they will generally inherit.1 In a state with community property laws, however, a surviving spouse may have a legal claim to a portion of the assets. This situation is posing an income tax riddle that has yet to be resolved. See Part IV.C.3, above. Even if the planning was done well, we are hearing stories of bad outcomes because of administrative mistakes. One common situation is where an individual moves the retirement

1 When a 401(k) account is rolled over into an IRA, a surviving spouse loses the protection that he or she would have had if the assets had remained in the 401(k) plan. Charles Schwab & Co. v Debickero, 593 F.3d 916 (9th Cir. 2010).

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assets into a new IRA through either a trustee-to-trustee transfer or through a 60-day rollover. Whereas the beneficiary designation at the original IRA may have named the children from the first marriage as beneficiaries, the individual left the information blank at the new IRA. The IRA administrator will then apply its own default policies, such as paying the assets to a surviving spouse or to the probate estate. Good luck waiving a prenuptial agreement at the IRA administrator when that agreement conflicts with its own policies for a blank beneficiary designation. B. Rollovers versus QTIP trusts - the income tax challenge Whereas a QTIP trust (income to surviving spouse for life, remainder to children from a prior marriage) might work well for other assets such as stock and real estate, a QTIP trust poses income tax challenges for retirement accounts. This is because the annual RMD that must be distributed from a deceased spouse’s retirement account to a QTIP trust will always be greater than the RMD that would have been required if the surviving spouse had rolled over the assets to her or his own IRA. After age 80, the annual RMDs payable to such a trust are twice what the RMDs would be if the spouse had rolled over the deceased spouse’s retirement assets into her or his own IRA. Consequently, there will be trade-offs of income tax savings over other planning objectives. Another tax consideration are the marginal tax-rates. In most cases, both the spouse and the children will not be in the highest marginal income tax rate of 39.6%. That rate only applies to individuals with taxable income well in excess of $400,000. By comparison, a trust is subject to those tax rates with income in excess of just $12,500. Thus whatever is left to accumulate in the trust for the children will likely be subject to higher income tax rates than if the spouse and the children had been named as beneficiaries rather than the trust. The table on the next page compares the annual RMDs depending on whether the IRA was rolled over by the surviving spouse, was payable to an accumulation trust, or a conduit trust. In all situations, it is assumed that the trust is a “look-through” or “see-through” trust, so that the distributions may be made over the remaining life expectancy of the oldest trust beneficiary rather than in just five years.2

2 If a trust is named as a beneficiary of an IRA or some other type of qualified retirement plan account, Reg. Sec. 1.409(a)(9)-4, Q&A 5 and 6 permit beneficiaries of the trust to be treated as beneficiaries of the retirement account for purposes of determining minimum mandatory distributions if the following 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 or will become irrevocable upon the death of the employee. (3) The beneficiaries of the trust are identifiable from the trust instrument, and (4) Either one of the following documents has been provided to the plan administrator: (a) a document that contains:

(i) a list of all of the beneficiaries of the trust (including contingent and remaindermen

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A conduit trust is a trust where the governing trust instrument requires all retirement plan payments to be made directly to the primary intended beneficiary so that no retirement assets accumulate in the trust. One income tax advantage of a conduit trust is that for purposes of determining the annual RMDs, contingent trust beneficiaries (particularly older contingent beneficiaries and charities that have no life expectancy) of conduit trusts are not considered. Reg. Sec. 1.401(a)(9)-5, Q&A 7(c)(3), Example 2. Another income tax advantage is that a surviving spouse of a conduit trust may annually recalculate his or her remaining life expectancy, so that the deceased spouse’s retirement account never has to be fully depleted during the surviving spouse’s lifetime. An accumulation trust is a trust that does not contain such provisions, so that it is possible that some of the retirement assets could be retained in the trust. The two advantages of conduit trusts do not apply to an accumulation trust. Furthermore, an income tax consideration is that all of the retirement plan distributions retained by the trust will likely be subject to a 39/6% marginal income tax rate (though they will be exempt from the 3.8% net investment surtax, as described above in Part III.B.2). Great resources that explain the difference between conduit and accumulation trusts and that include drafting language include: Natalie Choate, Life and Death Planning for Retirement Benefits, www.ataxplan.com Keith Herman, How to Draft Trusts to Own Retirement Benefits, ACTEC Law Journal, Vol 39, No. 3 (Winter 2013), pages 207-267.

beneficiaries with a description of the conditions on their entitlement sufficient to establish whether or not the spouse is the sole beneficiary) entitled to receive retirement assets; (ii) a certification that the list is correct and complete and that the preceding 3 requirements have been met to the best of the retirement account owner's knowledge), (iii) a statement that if the trust instrument is amended at any time in the future, the retirement account owner will provide corrected certifications to the plan administrator, and (iv) a statement that the retirement account owner agrees to provide a copy of the trust instrument to the plan administrator upon demand.

(b) A copy of the entire trust instrument, together with a statement that the account owner will provide copies of future amendments.

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B. Some planning options

1. Retirement accounts for spouse; life insurance for children? One arrangement is to leave all retirement assets to the surviving spouse, but to purchase life insurance so that there is something from the children from a prior marriage to inherit. 2. Divide retirement accounts - spouse & children Another strategy is to split the retirement assets between the spouse and the children from a prior marriage. Although this can be done fairly easily with IRAs, ERISA will prevent such a splitting of 401(k) accounts unless the spouse executes a qualified consent. 3. All retirement accounts for children? a. Section 401 - need spouse’s waiver

It will not matter who a married plan participant named as the beneficiary of a QRP account. If the individual was married on the date of death, the surviving souse is entitled to the entire account balance. The one exception is if the surviving spouse executes a qualified waiver. In that case the retirement assets will be distributed to the individuals, trusts or estate that were named as the beneficiaries of the QRP account. See above in Part IV.B.2.

b. Community property laws - IRS PLR – Boggs

Although the U.S. Supreme Court concluded in Boggs v. Boggs that a state’s community property law has no impact on a plan participant’s account in a QRP, community property laws can govern retirement assets in IRAs. However, the IRS concluded that byzantine income tax consequences can occur when a state’s community property law is applied to an IRA. See above in Part IV.C.3. 4. Two-generation CRT for spouse and children from prior marriage a. Concept A significant challenge exists when there is a sequence of beneficiaries of a retirement plan account (e.g., "to A for life, then to B for life"). The stretch IRA regulations require distributions to be made from an IRA or a QRP account over a time period that does not extend beyond the life expectancy of the oldest beneficiary. The IRA will likely be depleted when the oldest beneficiary dies.

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Whereas an IRA cannot make distributions over the lifetimes of the younger beneficiaries, a charitable remainder trust (“CRT”) can. A charitable remainder trust pays distributions to individuals over their lifetimes (or for a term of years), and then terminates with a distribution to one or more charities.3 Like an IRA, a CRT pays no income tax.4 Thus there will be no income tax liability when an IRA is completely liquidated after a person’s death with a single distribution to a CRT.5 Unlike an IRA, the term of a CRT can last until the last of the multiple beneficiaries dies, which will usually be the youngest beneficiary. As is further explained below, a CRT that will last for 30 or 40 years should be a charitable remainder unitrust (“CRUT”)6 rather than a charitable remainder annuity trust (“CRAT”)7.

EXAMPLE: Mr. Husband has a terminal illness. He would like his IRA to provide income to his second wife (age 80) for the rest of her life and then provide income to his children from his first marriage (currently ages 52 and 55) for the rest of their lives.

If his IRA is payable to a QTIP trust that benefits both his spouse and children. If the trust is an accumulation trust (rather than a conduit trust), the IRA must be completely distributed by the year his wife attains age 90 (the life expectancy of an 80 year old is 10 years).8 The result? The IRA will likely be empty when the surviving spouse dies, leaving nothing in the IRA for the children. What's worse, the IRA must be empty when the surviving spouse attains age 90, even if the spouse in fact lives to be 100!

By comparison, if the IRA is distributed to a CRUT upon his death, the CRUT will provide income to his wife for the rest of her life (which could be beyond age 90) and then provide income to his children for the rest of their lives. In other words, the CRUT can extend payouts from the life expectancy of an 80 year old to the actual years lived by a 52 year old or a 55 year old. The CRUT also provides estate tax advantages: none of the assets in the CRUT will be included on the estate tax return of the surviving spouse. Furthermore, Mr. Husband has the personal satisfaction of benefitting his favorite charity.

3 Sec. 664.

4 Sec. 664(c)(1). No matter how much income a CRT may earn in a year, no tax is paid until a distribution is made to a taxpaying beneficiary.

5 PLR 199901023 (Oct. 8, 1998).

6 Sec. 664(d)(2); Treas. Reg. § 1.664-3.

7 Sec. 664(d)(1); Reg. § 1.664-2.

8 Reg. Sec. 1.401(a)(9)-5, Q&A 7(a) and 7(c)(3), Ex. (1).

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Example: At age 80, Ms. Widow began receiving distributions from several IRAs, including the IRAs of her older husband and her older sister (both of whom had died in the preceding year). Although the life expectancy of a 80 year old is 10 years (i.e., to age 90), Ms. Widow in fact lived to age 92. Whereas the law requires two IRAs (IRAs C and D) to be empty by age 90, amounts could still be in the other IRAs at that age. The minimum amounts required to be distributed from each of six IRAs are listed in the table. A - Her own IRA, established with contributions she made during her working career. *B - A rollover IRA, funded after her husband's death with a distribution from his 401(k) plan. C - A stretch IRA -- Her sister's IRA D - Bypass Trust #1 - Her deceased husband's IRA is payable to a standard bypass trust,

treated as a stretch IRA payable to a look-through accumulation trust (where the required distributions are based on the age of the oldest beneficiary of the trust. The same distribution rules apply to a QTIP trust.)

*E - Bypass Trust #2 - Her deceased husband's IRA is payable to a similar trust, but the trust requires all retirement plan distributions to be made to Ms. Widow. This provision permits a look-though trust to be treated as a conduit trust

CRT - Charitable Remainder Unitrust - After his death, one of her husband’s IRAs was distributed in a lump sum to a tax-exempt CRUT. The CRUT annually distributed 5% of its assets to Ms. Widow for her entire life, then made 5% payments to her husband’s 50-year old child from his first marriage for the rest of the child’s life, and then upon the child’s death the CRUT will terminated and the assets were distributed to a charity.

IRAs IRAs IRA IRA

AGE A & B C & D E CRT 80 4.95% -0- % 8.93% 5.00% 81 5.19% -0- % 9.53% 5.00% 82 5.44% -0- % 10.10% 5.00%

83 5.69% -0- % 10.87% 5.00% 84 5.96% -0- % 11.63% 5.00%

85 6.25% -0- % 12.35% 5.00% 86 6.58% -0- % 13.33% 5.00% 87 6.95% -0- % 14.29% 5.00% 88 7.36% -0- % 15.15% 5.00% 89 7.76% -0- % 16.40% 5.00%

90 8.27% 100.00% 17.54% 5.00%

91 8.78% empty 18.87% 5.00% 92 9.26% 20.41% 5.00% 93 9.90% 21.38% 5.00% 94 10.53% 23.81% 5.00%

*Payouts “B" and "E" are only available to a surviving spouse. Other payouts are available to anyone.

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b. Eligibility - some issues i. Minimum 10% charitable deduction The value of the charity’s remainder interest of a CRT must be at least 10 percent of the initial net fair market value of all property placed in the trust, computed using the Section 7520 discount rates in effect at the time of contribution.9 If a contribution is made to a trust that fails the 10 percent requirement, the trust will not qualify as a tax-exempt CRT. ii. More likely CRUT than CRAT There are two reasons that a CRUT is superior to a CRAT for a two-generation CRT. First, the value of the annual fixed amount distribution of a CRAT will decline with value in time because of inflation. A CRUT that earns over 5% per year can gradually increase in value, and consequently increase distributions. More importantly, a CRAT is much less likely to satisfy the 10% deduction test than a CRUT. By way of background, there are two ways that the present value of a charity’s remainder interest in a CRT can be less than 10 percent of the value of the property that was contributed to the trust. The first is if the stated payout rate is too high (e.g., “for the next 20 years, distribute to my child 30 percent of the trust’s assets each year”). The solution is to lower the CRT’s payout rate, but it cannot be lowered below 5 percent. The second way is if the projected term of the trust is too long.10 This makes it impossible in the low interest rate environment of 2019 to establish a CRUT that would last for the life of any individual under age 27. The problem is much more challenging for a CRAT. Until the IRS provided relief in 2016,11 the 10% deduction requirement (combined with a 5%

9 Secs. 664(d)(1)(D) (CRAT) and 664(d)(2)(D) (CRUT)

10 For example, if you invest $5 today and earn 3 percent interest every year for the next 100 years, then the $5 will grow to $100 in 100 years. Thus, the present value today of receiving $100 in 100 years is just 5 percent, which is less than 10 percent. The 10 percent requirement limits the projected term of a CRUT to a maximum of roughly 50 years.

11 With a CRAT, there can be a greater impact caused by the large spread between the fixed distribution amount (a minimum annual distribution of at least 5 percent of the value of the contributed property) and the assumed investment return of the assets in the trust (in the year 2015, the Sec. 7520 rate was never higher than 2.4 percent). The IRS offered relief for CRATs in Rev. Proc. 2016-42, 2016-34 I.R.B. 269. A CRAT will be able to qualify for a younger beneficiary, even if would otherwise fail the 5% probability of exhaustion test, as long as its governing instrument provides for an early termination (and transfer to charity) of the trust’s assets if the assets ever fall to less than 10% of the original value contributed to the trust.

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probability of exhaustion requirement) prevented a CRAT to be established for the life of anyone under age 70. iii. Minimum annual 5% distribution The minimum annual distributions from a CRT to its beneficiaries is 5 percent of the value of the assets.12 A CRT cannot have a stated percentage of 3 percent or 4 percent, even though several states have adopted a 4 percent default rule under their state statutes for unitrusts and net-income trusts. The minimum 5 percent distribution requirement has been an administrative challenge in the low interest rate environment of the past dozen years. Trustees often sell some assets in order to make the required distributions, which usually isn’t a tax problem since the trust is tax-exempt. The only way to distribute less than 5 percent is if the trust instrument contains a net-income limitation (that is, the CRT is a NICRUT, a NIMCRUT or a FLIPCRUT). iv. No marital estate tax deduction - avoid for a taxable estate If the only beneficiaries of a CRT are a surviving spouse and a charity, an estate can claim a charitable estate tax deduction for the charitable remainder interest and a marital estate tax deduction for the martial interest.13 However, once another beneficiary is added to the CRT, the marital estate tax deduction is lost. Consequently, the two-generation CRT is best suited for estates that will not be subject to the federal estate tax.

12 Sec. 664(d)(1)(A) (CRAT) and Sec. 664(d)(2)(A) (CRUT).

13 Sec. 2056(b)(8).

DONOR ADVISED FUNDS

Christopher R. HoytUniversity of Missouri (Kansas City) School of Law

Kansas City. Missouri

TABLE OF CONTENTS

I. History and Economic Impact 1II. What is (or isn’t) a DAF 2

A. Importance for charities that administer both DAFs and other funds 21. Distribution from a DAF to an individual triggers automatic penalties 22. Impact on donor’s charitable income tax deduction 2

B. Definition - Section 4966(d)(2) 3C. Case Study 4D. Exceptions 4

1. Designated fund: payments to a single charity 42. Scholarship fund not controlled by the donor 53. Future reg - fund where committee not controlled by the donor 74. Future reg - specific charitable purpose 8

III. Permissible grants 9IV. Taxable distributions 10

A. Defined 10B. Penalties on the sponsoring organization and its management 10

V. Excess benefit transactions 11A. General rule for all public charities 11B. Different rules for DAF: entire payment for services is excess benefit 12

VI. Private foundation excess business holding rules apply to DAFs 13VII. Penalty on donor who recommends a grant with “a more than incidental benefit” 14

A. Overview 14B. Definition of “a more than incidental benefit” 15

1. Legislative history 152. Tax policy - Section 170 vs. “mini-private foundations” 153. Pledges 17

a. Private foundation rules - “legally binding” pledges 17b. DAF proposed rules under IRS Notice 2017-73 19

4. Bifurcated grants 21a. Defined 21b. Private foundation rules - PLR 9021066 21c. DAF proposed rules under IRS Notice 2017-73 21

VIII. Public support test for DAF grants - IRS Notice 2017-73 22IX. Private foundations and DAFs 23X. Choice of Entity: DAF vs. PF [ and vs. SO] 24

Appendix - Timeline - History of Donor Advised Funds 27

i

Notes section 06

DONOR ADVISED FUNDS

Christopher R. HoytUniversity of Missouri (Kansas City)

School of LawKansas City, Missouri

I. History and Economic Impact

A. History - Please see the appendix.

B. Increased interest because of 2018 income tax changes. The 2017 Tax Cut &Jobs Act significantly increased the tax incentive to contribute to a donor advisedfund (“DAF”). The higher standard deduction ($24,000 married-joint, $18,000head of household, and $12,000 single), combined with a $10,000 limit for theitemized deduction for state & local taxes, will cause millions of taxpayers whoused to get tax benefits from their itemized tax deduction for charitable gifts toinstead take the standard deduction. A strategy to get tax benefits from charitablegifts is to concentrate charitable deductions into one year (“bunching gifts” or“bundling gifts”) so that the taxpayer will benefit from itemized deductions. ADAF is the perfect vehicle to implement such a strategy. A large gift a can bemade in one year to a DAF, and then distributions can be made from the DAF tomany different charities over many years.

C. Statistics from 2017

463,000 – The number of DAFs in 2017 (Compare: There were 83,276 private foundations)

2,400 – Organizations that administered DAFs

$110 billion – assets held by DAFs (Compare: private foundations held $752.5 billion)

$ 29 billion – contributions to DAFs in 2017 (10% of total individual giving in 2017 went to DAFs)

$ 19 billion – grants made from DAFs in 2017 (Compare: private foundations distributed $45.1 billion)

Source: 2018 Donor-Advised Fund Report, The National Philanthropic Trust, https://www.nptrust.org/daf-report/index.html

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II. What is (or isn’t) a DAF

A. Importance for charities that administer both DAFs and other funds

1. Distribution from a DAF to an individual triggers automatic penalties

The definition of a DAF is of particular importance to charities, such as communityfoundations, that administer both DAFs and other charitable funds. They, like virtually allnon-profit organizations, use “fund accounting.” They record each restricted gift in aseparate fund. They must closely examine each fund agreement to determine whether it isa DAF or not because of the different rules and penalties that apply to the different funds.

For example, public charities may make charitable grants to individuals from most typesof funds. But a charitable grant to an individual from a DAF triggers a 20% penalty onthe charity that administers the DAF. Secs. 4966(a)(1) and (c)(1)(A). If that individual isthe donor or a family member, then there is an additional 25% penalty imposed on thatindividual, plus a potential 200% penalty if the payment is not returned to the charity.Sec. 4958(c)(2).

Their problem has been exacerbated by the absence of guidance for ambiguous situations. The definition of a DAF is so broad that it could potentially include every restricted giftwhere there is any continuing donor involvement. For example, one would normally notthink that an endowed chair at a university foundation is a DAF. If, however, the assetsare invested by an investment firm where the donor’s son is employed, is the endowedchair a DAF? A DAF exists when a donor or related party advises either distributions orinvestments. Sec. 4966(d)(2)(A)(iii). An endowed chair will make payments to anindividual, which would trigger penalties if the endowment fund is a DAF.

2. Impact on donor’s charitable income tax deduction

A charity’s misclassification of a restricted fund could also prevent a donor from claiminga charitable income tax deduction. Why? A typical contemporaneous writtenacknowledgment (“CWA”) merely requires a statement from the charity that identifies thedonated property and states whether or not the donor received any goods and services.Sec. 170(f)(8). However, if property is donated to a DAF, the donor will lose the incometax deduction unless the CWA also states that the sponsoring organization “has exclusivelegal control over the assets contributed.” Sec. 170(f)(18). Thus, if a DAF was originallymisclassified as a non-DAF fund, the donor might have received the wrong type of CWAand might not be eligible to claim a charitable income tax deduction.

Planning tip: Cautious charities (especially community foundations) add these wordsabout exclusive legal control to every CWA, regardless of whether the donation was to aDAF or not. That way if a fund is reclassified as a DAF the donor’s charitable incometax deduction will be secure.

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B. Definition - Section 4966(d)(2) - The statute states:

“(A) IN GENERAL- Except as provided in subparagraph (B) or (C), the term `donoradvised fund' means a fund or account--

“(I) which is separately identified by reference to contributions of a donor or donors,1

“(ii) which is owned and controlled by a sponsoring organization,2 and

“(iii) with respect to which a donor (or any person appointed or designated by such donor)has, or reasonably expects to have, advisory privileges with respect to the distribution orinvestment of amounts held in such fund or account by reason of the donor's status as adonor.” 3

1 “The first prong of the definition requires that a donor advised fund be separately identified byreference to contributions of a donor or donors. A distinct fund or account of a sponsoring organizationdoes not meet this prong of the definition unless the fund or account refers to contributions of a donor ordonors, such as by naming the fund after a donor, or by treating a fund on the books of the sponsoringorganization as attributable to funds contributed by a specific donor or donors. Although a sponsoringorganization's general fund is a "fund or account," such fund will not, as a general matter, be treated as adonor advised fund because the general funds of an organization typically are not separately identified byreference to contributions of a specific donor or donors; rather contributions are pooled anonymouslywithin the general fund. Similarly, a fund or account of a sponsoring organization that is distinct from theorganization's general fund and that pools contributions of multiple donors generally will not meet thefirst prong of the definition unless the contributions of specific donors are in some manner tracked andaccounted for within the fund. Accordingly, if a sponsoring organization establishes a fund dedicated tothe relief of poverty within a specific community, or a scholarship fund, and the fund attractscontributions from several donors but does not separately identify or refer to contributions of a donor ordonors, the fund is not a donor advised fund even if a donor has advisory privileges with respect to the

fund.” Technical Explanation of H.R. 4, The "Pension Protection Act of 2006," Joint Committee onTaxation, JCX-38-06 (August 3, 2006) at page 342-343.

2 Code Sec. 4966(d)(1) defines a sponsoring organization as any organization which is describedin section 170(c) [i.e., eligible recipients of charitable income tax deductions, though governments areexempt] that maintains 1 or more donor advised funds, except that a private foundation will not beconsidered to be a sponsoring organization.

3 “Advisory privileges are distinct from a legal right or obligation. For example, if a donorexecutes a gift agreement with a sponsoring organization that specifies certain enforceable rights of thedonor with respect to a gift, the donor will not be treated as having "advisory privileges" due to suchenforceable rights for purposes of the donor advised fund definition....

“A further requirement of the third prong is that the reasonable expectation of advisory privileges isby reason of the donor's status as a donor. Under this requirement, if a donor's reasonable expectation ofadvisory privileges is due solely to the donor's service to the organization, for example, by reason of thedonor's position as an officer, employee, or director of the sponsoring organization, then the third prongof the definition is not satisfied. For instance, in general, a donor that is a member of the board ofdirectors of the sponsoring organization may provide advice in his or her capacity as a board member

3

C. Case Study

Mrs. Smith intends to donate $5 million to the Metro Art Museum (a public charity) toestablish the Smith Fund for Asian Art. The fund will acquire art from Asia. It isanticipated that some payments will be made from the fund to individuals (for example,to pay for travel to and from Asia). A DAF incurs penalties if it makes a distribution toan individual.

There will be a committee of five people to oversee the fund at the museum:

PLAN A: Mrs. Smith will appoint all five members of the committee.PLAN B: Mrs. Smith will appoint one person to the committee, and the museum willappoint the other four individuals, none of whom have any relation to Mrs. Smith.

ISSUE: Is the Smith Fund for Asian Art a donor advised fund?

D. Exceptions

1. Designated fund: payments to a single charity

A. Law: “The term `donor advised fund' shall not include any fund oraccount ...which makes distributions only to a single identifiedorganization or governmental entity” Section 4966(d)(2)(B)(I).

B. This exception would apply to a designated fund or an agencyendowment fund at a community foundation.

C. ISSUE: If a fund is established solely for the benefit of a publiccharity or governmental entity so that it would normally falloutside the definition of a donor advised fund, can the fund makedisbursements to individuals or other parties pursuant to writteninstructions received from that public charity or governmental

with respect to the distribution or investment of amounts in a fund to which the board membercontributed. However, if by reason of such donor's contribution to such fund, the donor secured anappointment on a committee of the sponsoring organization that advises how to distribute or investamounts in such fund, the donor may have a reasonable expectation of advisory privileges,notwithstanding that the donor is an officer, employee, or director of the sponsoring organization. “The third prong of the definition is applicable to a donor or any person appointed or designated bysuch donor (the donor advisor)..... For example, if a donor recommends that a committee of a sponsoringorganization that will provide advice regarding scholarship grants for the advancement of science at localsecondary schools should consist of persons who are the heads of the science departments of suchschools, then the donor generally would not be considered to have appointed or designated such persons,i.e., they would not be treated as donor advisors.” Technical Explanation of H.R. 4, The "PensionProtection Act of 2006," Joint Committee on Taxation, JCX-38-06 (August 3, 2006) at page 343-345.

4

entity without thereby converting its classification into a donoradvised fund? In 2007, an ABA RPTE Task Force recommendedthat such payments should be permitted without converting thefund into a DAF.4

2. Scholarship fund not controlled by the donor

A. Law: “The term `donor advised fund' shall not include any fund oraccount ...with respect to which a person described in subparagraph(A)(iii) advises as to which individuals receive grants for travel,study, or other similar purposes ...[if conditions are met].5 ”

4 “Many public charities place their endowments with community foundations because of theirinvestment expertise with endowments. Similarly, several city governments have established funds atcommunity foundations or other charities to receive charitable contributions for a public project, such asthe construction or maintenance of a park. In the past, these charities and governments would routinelyinstruct the sponsoring organization to make disbursements to third parties, such as payments to aconstruction company or some other service provider. This arrangement was usually more advantageousthan having the check first issued to the charity or government which would then deposit the amount andthen issue a new check to pay the expense. The procedure was particularly helpful for government fundssince many governments had accounting systems that did not satisfactorily track voluntary charitablecontributions to the government.”

“If it were not for the exemption for “distributions only to a single identified organization,” designatedcharitable and government funds would fall within the definition of a donor advised fund since thecharity or government that established the fund is identified with the fund, often is a contributor to thefund, and is also involved with making disbursements.”

“The problem is that the exemption requires that all disbursements be made “only to” the charity orgovernment. Since Section 4966 was enacted, community foundations and other sponsoringorganizations have had to deny the reasonable requests of the public charity or government to issuechecks to third parties for fear of losing the exemption from the definition of a donor advised fund andfor fear of triggering the penalty taxes for making ineligible distributions from a donor advised fund,such as a grant to an individual. Instead, the checks must be issued to the supported charity orgovernment which must then reissue the check to the service provider or individual. This prohibition hasresulted in the inefficient use of charitable resources, especially with government funds.

“Task Force Recommendation: The exemption from the definition of a donor advised fund contained inSection 4966(d)(2)(B)(I) should be interpreted to include a fund that benefits a single public charity(other than a disqualified supporting organization) or governmental entity so that disbursements can bemade to another party pursuant to instructions received from that public charity or governmental entity. This clarification will increase the efficient use of charitable resources.”

ABA Charitable Group Members Respond to Notice 2007-21, available at https://www.pgdc.com/pgdc/aba-charitable-group-members-respond-notice-2007-21

5 Section 4966(d)(2)(B)(ii). The exemption allows, for example, members of a scholarshipselection committee to contribute to the scholarship fund without having the fund be considered a donoradvised fund, provided that: “(I) such person's advisory privileges are performed exclusively by such

5

B. This exception permits a member of a scholarship committee tocontribute to a scholarship fund where she or he participates in theselection of scholarship recipients. Such contributions will notconvert the scholarship fund into a DAF when the donor does notcontrol the committee. It is particularly important for a scholarshipfund to not be classified as a DAF, since penalties apply when aDAF makes a grant to an individual.

C. If the fund was established by a for-profit corporation, and allcommittee members are employees of the corporation, will theexception apply?

D. ISSUE: Does a scholarship fund established at a communityfoundation by a Section 501(c)(4) organization (e.g., Rotary)qualify for the exemption from the definition of a DAF if all of thescholarship committee members are members of that organization(even if they are otherwise unrelated by blood or by employment)? In 2007, an ABA RPTE Task Force recommended that such ascholarship funds should qualify for the exemption from thedefinition of a DAF if certain criteria were met.6

person in the person's capacity as a member of a committee all of the members of which are appointed bythe sponsoring organization, (II) no combination of persons described in subparagraph (A)(iii) (orpersons related to such persons) control, directly or indirectly, such committee, and (III) all grants fromsuch fund or account are awarded on an objective and nondiscriminatory basis pursuant to a procedureapproved in advance by the board of directors of the sponsoring organization, and such procedure isdesigned to ensure that all such grants meet the requirements of paragraph (1), (2), or (3) of section4945(g) [the private foundation scholarship provisions].”

6 “Rather than form a separate Section 501© )(3) charitable organization with the ensuingadministrative costs and tax returns (also a burden for the Service), many Section 501© )(4) socialwelfare organizations and 501( c)(8)&(10) fraternities and sororities have instead established scholarshipfunds at area community foundations. Perhaps the most common are Rotary scholarship funds. Thearrangement had been mutually beneficial since the community foundation has charitable expertise andcan help educate the scholarship selection committee on objective and charitable standards for selectingscholarship recipients.

“In the past, the membership organization was able to appoint competent, unrelated members who wouldcomprise the entire scholarship selection committee. However, under the PPA, this is no longerpermitted since “the donor” cannot control the committee. This has led to awkward situations. Forexample, community foundations must inform the local Rotary that the Rotary scholarship recipient mustbe selected by a committee, the majority of which are non-Rotarians. Furthermore, the communityfoundation has a difficult time finding numerous motivated non-Rotarians to serve on a Rotaryscholarship selection committee. Multiply this by numerous scholarship funds and there is a seriouslogistical problem....

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3. Future reg - fund where committee not controlled by the donor

A. The statute permits the Treasury Department to issue regulationsthat exempt a fund from the definition of a DAF if the advisorycommittee is not controlled by a donor or by any person appointedby the donor. 7

B. No regulations have been proposed at this time.

C. A possible legal framework that might be adopted are rules similarto those that prohibit a Section 509(a)(3) supporting organizationfrom being controlled by disqualified persons. Under those rules,

I. Control exists if (a) 50% or more of the voting power of thegoverning body consists of disqualified persons, or (b) anydisqualified person has a veto power over the actions of theorganization.8

ii. A person does not lose the taint of disqualified personstatus by serving as the sponsoring organization’s

“Task Force Recommendation: The prohibition that a donor cannot directly or indirectly control ascholarship selection committee should be interpreted to permit members of many types of Section 501(c) tax-exempt organizations to comprise all or part of the scholarship committee. Specifically, theexemption should include Section 501( c)(3) public charities, 501( c)(4) social welfare organizations,501( c)(5) labor and agricultural organizations, 501( c)(6) business leagues, 501( c)(8) and (10) fraternalorganizations, and 501( c)(19) war veterans organizations. Section 501( c)(3) private foundations shouldcontinue to be subject to the requirements under existing law concerning grants made to public charitiesthat are to be used for scholarships.

“The committee should still be subject to all of the other requirements to avoid classification as a donoradvised fund. For example, a majority of committee members should not be related family members. Inaddition there is the requirement that “all grants from such fund or account are awarded on an objectiveand nondiscriminatory basis pursuant to a procedure approved in advance by the board of directors of thesponsoring organization, and such procedure is designed to ensure that all such grants meet the

requirements of paragraph (1), (2), or (3) of section 4945(g).” Section 4966(d)(2)(B)(ii)(III). ABA Charitable Group Members Respond to Notice 2007-21, available at https://www.pgdc.com/pgdc/aba-charitable-group-members-respond-notice-2007-21

7 Sec. 4966(d)(2)(c) states: SECRETARIAL AUTHORITY- “The Secretary may exempt a fundor account not described in subparagraph (B) from treatment as a donor advised fund– (I) if such fund oraccount is advised by a committee not directly or indirectly controlled by the donor or any personappointed or designated by the donor for the purpose of advising with respect to distributions from suchfund (and any related parties)”

8 Sec. 509(a)(3)©. A prohibited veto power exists if any contributor retains the right to designatewho will receive the income or principal from a contribution. Treas. Reg. Section 1.509(a)-4(j)(1).

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representative on the governing body.9

iii. A disqualified person is defined under the privatefoundation rules in Section 4946, but there is a differentdefinition of a disqualified person for supportingorganizations in Section 4958(c)(3)(B) (an excess benefittransaction).

iv. The Service has occasionally labeled individuals asdisqualified persons, even though they did not meet thedefinition in the statute. For example, it believes thatemployees of a substantial contributor are disqualifiedpersons because they could be controlled or influenced bythe contributor. Rev. Rul. 80-207, 1980-2 C.B. 193. TheService might extend this policy to an independentcontractor, such as an attorney or an accountant of thedonor.

4. Future reg - specific charitable purpose

A. The statute permits the Treasury Department to issue regulationsthat exempt a fund from the definition of a DAF if the “fundbenefits a single identified charitable purpose.” Sec. 4966(d)(2)(ii).

B. At this time, we cannot think of a single example when it would beappropriate to permit one individual to be the sole contributor to afund, and also be the sole advisor to the fund, yet would be toavoid DAF status because the governing instrument limited grantsto a single identified exempt purpose, such as education orreligion.

9 Treas. Reg. Section 1.509(a)-4(j)(1). For example, if the Art Museum appointed Mrs. Smith’sdaughter as the museum’s representative, the daughter would still be treated as a disqualified person todetermine whether or not the committee was controlled by Mrs. Smith.

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III. Permissible grants

Grants to the following grant recipients are permissible:10

-- Any public charity or private operating foundation (except “non-functionallyintegrated” Type III supporting organizations and other disqualified type I or Type IIsupporting organizations are ineligible).11 The eligible recipients are organizationsdescribed in Section 170(b)(1)(A), which includes public charities and private operatingfoundations. A “functionally integrated” type III supporting organization is eligible toreceive DAF distributions, but a “non-functionally integrated” type III supportingorganization is not.

-- The sponsoring organization of the donor advised fund. For example, a grant couldbe made from a donor advised fund at a community foundation to a fund at that samecommunity foundation that, for example, provides housing to the homeless.

– Any other donor advised fund. This permits donors to move donor advised fundsfrom one sponsoring organization to another, which can be especially helpful when anindividual moves to a new community.

– A foreign charity or a non-charity organization (e.g., a civic organization or achamber of commerce), but only if the proceeds are actually used for a charitablepurpose. To qualify for this exception, the sponsoring organization must investigate andverify (“expenditure responsibility”) the charitable use of the funds by meeting thestandards that private foundations must meet for comparable grants to avoid the privatefoundation “taxable expenditure” excise tax. Whereas a private foundation could make agrant to an individual under this standard (e.g., a commissioned work of art), a donoradvised fund cannot -- the recipient must be an organization.12

10 Sec. 4966(c)(1)(A).

11 Sec. 4966(d)(4) describes a disqualified supporting organization as (i) any type III supportingorganization (as defined in section 4943(f)(5)(A)) which is not a functionally integrated type IIIsupporting organization (as defined in section 4943(f)(5)(B)), and (ii) a Type I or Type II supportingorganization where the donor (or any person designated by the donor) directly or indirectly controls thesupported organization.

12 Sec. 4966(c)(1).

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IV. Taxable distributions

A. Defined

A distribution from a DAF to any of the following grant recipients will be considered ataxable distribution:13

– to any natural person (i.e., a human being),

– to any organization where the proceeds were not actually used for a charitablepurpose,14 For example, a distribution to a school where the payment will be used to paythe tuition of the advisor’s child would be a grant to a public charity, but the distributionwould not be used for a charitable purpose that would qualify for a charitable income taxdeduction under Section 170(c)(2)(B). See below for the penalty imposed on an advisorunder Section 4967 for recommending such a non-charitable distribution.

– to any organization where the sponsoring organization of the donor advised fundfailed to exercise expenditure responsibility to investigate the use of the grant. 15 Asdescribed above, grants to three eligible recipients are exempt from the expenditureresponsibility requirement: grants to a public charity or a private operating foundationorganization (except for Type III or other disqualified supporting organizations), to thesponsoring organization of the donor advised fund, or to any other donor advised fund.16

B. Penalties on the sponsoring organization and its management

Sec. 4966(a) imposes the following taxes on taxable distributions:

“(1) ON THE SPONSORING ORGANIZATION- There is hereby imposed on eachtaxable distribution a tax equal to 20 percent of the amount thereof. The tax imposed bythis paragraph shall be paid by the sponsoring organization with respect to the donoradvised fund.

“(2) ON THE FUND MANAGEMENT- There is hereby imposed on the agreement of

13 Sec. 4966(c)(1).

14 “Such distribution is for any purpose other than one specified in section 170(c)(2)(B)”. Sec.4966(c)(1)(B)(I).

15 “[T]he sponsoring organization does not exercise expenditure responsibility with respect to suchdistribution in accordance with section 4945(h).” Sec. 4966(c)(1)(B)(ii).

16 Sec. 4966(c)(1)(B)(ii).

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any fund manager17 to the making of a distribution, knowing that it is a taxabledistribution, a tax equal to 5 percent of the amount thereof. The tax imposed by thisparagraph shall be paid by any fund manager who agreed to the making of thedistribution.

(2) LIMIT FOR MANAGEMENT- With respect to any one taxable distribution, themaximum amount of the tax imposed by subsection (a)(2) shall not exceed $10,000.”

V. Excess benefit transactions

A. General rule for all public charities

An excess benefit transaction is a transaction whereby an economic benefit was providedby a public charity to a “disqualified person” and the value of that economic benefitexceeded the value of the consideration that was received by the charity.18 There is a 25%penalty imposed on the disqualified person.19 The disqualified person must return theexcess benefit to the public charity, or else a 200% penalty is imposed on the disqualifiedperson.20

Example with services: President AAA of Public Charity ABC is paid $300,000 forservices that were only worth $200,000. The excess benefit is $100,000. President AAAmust pay a penalty of $25,000 to the IRS (25%). If she doesn’t return the $100,000 to thecharity, she is subject to a penalty of $200,000 (200%).

Example with property: President PPP of Public Charity XYZ sells property worth $2million to Public Charity XYZ for $ 3 million cash. The excess benefit is $1 million. President PPP must pay a penalty of $250,000 to the IRS (25%). If he doesn’t return the$1,000,000 to the charity, he is subject to a penalty of $2,000,000 (200%).

In addition, if an officer, director, or other "foundation manager" of the sponsoring charityagreed to the excess benefit transaction, knowing that it was such a transaction, then thatmanager is subject to an excise tax of 10 percent of the amount of the benefit (maximum

17 Sec. 4966(d)(3) defines a fund manager as “(A) an officer, director, or trustee of such sponsoringorganization (or an individual having powers or responsibilities similar to those of officers, directors, ortrustees of the sponsoring organization), and (B) with respect to any act (or failure to act), the employeesof the sponsoring organization having authority or responsibility with respect to such act (or failure toact).”

18 Sec. 4958(c)(1). A disqualified person is a person who at any time during a 5-year period was ina position to exercise substantial influence over the affairs of the organization (e.g., an officer or adirector), and includes a member of that person’s family. Sec. 4958(f)(1).

19 Sec. 4958(a)(1).

20 Sec. 4958(b).

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$ 20,000), unless the participation was not willful and was due to reasonable cause.21

B. Different rules for DAF: entire payment for services is excess benefit

An “excess benefit transaction" with respect to a DAF includes any grant, loan,compensation, or other similar payment from such fund to a donor, a DAF advisor, or tocertain people or businesses related to those individuals.22 An example of a “similarpayment” would be an expense reimbursement.23 Furthermore, the amount of the“excess benefit" includes the entire amount of any such grant, loan, compensation, orother similar payment.24

Example with services: Daughter DD was paid $30,000 for services that she rendered tothe “D Family Fund”, a donor advised fund. The services were indeed worth $30,000. Daughter DD is the daughter of Daddy D, who was the sole donor to the DAF. Theexcess benefit is the entire $30,000. Daughter DD must pay a penalty of $7,500 to theIRS (25%). If she doesn’t return the $30,000 to the charity, she is subject to a penalty of$60,000 (200%). If she does return $30,000 to the charity, it cannot be deposited intoany sort of DAF.25

On the other hand, if a payment is made from the sponsoring charity to a donor forservices, and the sources of the payment was not from the DAF, then the penalty does notapply. For example, an employee at a community foundation who receives compensationfor services might establish a DAF at that community foundation.26

Example with property: Son ZZ paid $100,000 to purchase $100,000 of Z Company stockfrom the “Z Family Fund” (a DAF), administered by public charity QRS. Z Company is a

21 Secs. 4958(a)(2) and (d)(2).

22 Secs. 4958(c)(2), (f)(1)(E), and (f)(7).

23 “Other similar payments include payments in the nature of a grant, loan, or payment ofcompensation, such as an expense reimbursement.” Technical Explanation of H.R. 4, The "PensionProtection Act of 2006," Joint Committee on Taxation, JCX-38-06 (August 3, 2006) at page 347.

24 Secs. 4958(c)(2), (f)(1)(E), and (f)(7).

25 Sec. 4958(f)(6).

26 “[P]ayment by a sponsoring organization of, for example, compensation to a person who both isa donor with respect to a donor advised fund of the sponsoring organization and a service provider withrespect to the sponsoring organization generally, will not be subject to the automatic excess benefittransaction rule of the provision unless the payment (of a grant, loan, compensation, or other similarpayment) properly is viewed as a payment from the donor advised fund and not from the sponsoringorganization.” Technical Explanation of H.R. 4, The "Pension Protection Act of 2006," Joint Committeeon Taxation, JCX-38-06 (August 3, 2006) at page 347.

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closely-held family business and the stock was donated to the Z Family Fund by Son ZZ’smother, Mama Z. This is a property transaction, so it is not affected by the special rulesthat apply to a “grant, loan, compensation, or other similar payment” from a DAF.27 Instead, it is subject to normal rules that govern public charities. There could be aproblem, for example, if Son ZZ or Mama Z are on the board of directors of publiccharity QRS, in which case the general rules for excess benefit transactions at publiccharities could apply to the property transaction.

VI. Private foundation excess business holding rules apply to DAFs .

A. The private foundation excess business holding rules

Generally, the maximum percentage of a corporation’s voting stock that a privatefoundation may hold is limited to 20 percent. The 20 percent limit is computed bylooking at the combined holdings of the private foundation and all of its disqualifiedpersons. This limitation makes it difficult for a private foundation to hold the stock of aclosely-held family business, which is what Congress intended. There are exceptions andspecial rules. For example, property acquired by a gift or a bequest may be held for up tofive years before the excise tax is triggered. Furthermore, a private foundation may holdup to 2 percent of outstanding stock, even when disqualified persons hold the other 98percent. The rules are contained in Section 4943.

A private foundation that has excess business holdings is generally subject to an excisetax of 10 percent of the value of the excess holdings. After the initial tax has beenimposed, an excise tax of 200 percent of the excess holdings is imposed on the privatefoundation if it has not disposed of the remaining excess business holdings by the end ofthe correction period.

B. The excess business holding rules apply to DAFs

The private foundation rules on excess business holdings also apply to a fund that is aDAF. Sec. 4943(e). In the case of a DAF, the persons who are considered “disqualifiedpersons” are defined to include:

(A) a donor (or any person appointed or designated by such donor) who has, orreasonably expects to have, advisory privileges with respect to the distribution orinvestment of amounts held in such fund or account by reason of the donor's status as adonor,

27 “Other similar payments do not include, for example, a payment pursuant to bona fide sale orlease of property, which instead are subject to the general rules of section 4958 under the specialdisqualified person rule of the provision described below.” Technical Explanation of H.R. 4, The"Pension Protection Act of 2006," Joint Committee on Taxation, JCX-38-06 (August 3, 2006) at page347.

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(B) a member of the family of such an individual, determined by the private foundationrules for a member of the family, but also including brothers and sisters of the individual,and their spouses, [Sec. 4958(f)(4)], and(C) a 35-percent controlled entity, defined in Sec. 4958(f)(3) to mean:

(I) a corporation in which persons described (A) or (B) own more than 35 percentof the total combined voting power,(ii) a partnership in which such persons own more than 35 percent of the profitsinterest, and(iii) a trust or estate in which such persons own more than 35 percent of thebeneficial interest.

The constructive ownership rules of section 4946(a)(3) and (4) apply for purposesdetermining a 35% ownership interest.

VII. Penalty on donor who recommends a grant with “a more than incidental benefit”

A. Overview

If a donor, a donor advisor, or a person related to the donor or donor advisor, providesadvice as to a distribution that results in any such person receiving “a more thanincidental benefit,” then an excise tax equal to 125 percent of the amount of the benefit isimposed against that person, or against the recipient of the benefit.28 In addition, if anofficer, director, or other "foundation manager" of the sponsoring charity agreed to makethe distribution, knowing that the distribution would confer a more than incidentalbenefit, then that manager is subject to an excise tax of 10 percent of the amount of suchbenefit (maximum $ 10,000).29 If, however, an “excess benefit transaction” tax hasalready been imposed under Section 4958, then no tax will be imposed under Section4967 for a “more than incidental benefit.”30

28 Sec. 4967 [Taxes on Prohibited Benefits] states: (a) Imposition of taxes.(1) On the donor, donor advisor, or related person. There is hereby imposed on the advice of any persondescribed in subsection (d) to have a sponsoring organization make a distribution from a donor advisedfund which results in such person or any other person described in subsection (d) receiving, directly orindirectly, a more than incidental benefit as a result of such distribution, a tax equal to 125 percent ofsuch benefit. The tax imposed by this paragraph shall be paid by any person described in subsection (d)who advises as to the distribution or who receives such a benefit as a result of the distribution.

A “person described in subsection (d)” includes the donor, a person who has advisory privileges, amember of the family of the donor of the DAF advisor, and a 35-percent controlled entity. Secs. 4967(d)and 4958(f)(7).

29 Sec. 4967(a)(2) and (c)(2).

30 Sec. 4967(b)

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B. Definition of “a more than incidental benefit”

1. Legislative history

Clearly, if a donor receives an economic benefit that would have reduced or eliminated acharitable income tax deduction (a “quid pro quo”), then the donor has received a “morethan incidental benefit.” This is confirmed in the legislative history.31

Are there, however, situations when a donor has received a “more than incidental benefit”even though that donor could have claimed a full charitable income tax deduction if sheor he had paid the charitable amount directly to the charity? The controversies havecentered on the payment of a donor’s pledge and on making bifurcated grants (both ofwhich are described below). The example in the committee report (it is not a “more thanincidental benefit” when there is a DAF distribution to the Girls Scouts while the donor’sdaughter is a Girl Scout) does not shed light on the issue of pledges or bifurcated grants. The IRS, however, directly addressed the issues of pledges and bifurcated grants in IRSNotice 2017-73.

2. Tax policy - Section 170 vs. “mini-private foundations”

a. Policy decision at Treasury Department

After the DAF statutes were first enacted in 2006, the Treasury Department was taskedwith drafting regulations. In oversimplified terms, the staff could approach the “morethan incidental benefit” penalty from two perspectives: a Section 170 charitable deductionstandard, or treating a DAF as a mini private foundation.

“Section 170 charitable deduction standard”. From one perspective, the “more thanincidental benefit” legal standard could mean that the penalties would be triggered only ifthe benefit that the donor/advisor received was so substantial that it would have preventedan individual from claiming a charitable income tax deduction for the payment underSection 170.

The logic is: if a person can claim a charitable income tax deduction for a payment, thenany benefit that the donor receives is, by definition, only an incidental benefit. An

31 “In general, under the provision, there is a more than incidental benefit if, as a result of adistribution from a donor advised fund, a donor, donor advisor, or related person with respect to suchfund receives a benefit that would have reduced (or eliminated) a charitable contribution deduction if thebenefit was received as part of the contribution to the sponsoring organization. If, for example, a donoradvises a that a distribution from the donor's donor advised fund be made to the Girl Scouts of America,and the donor's daughter is a member of a local unit of the Girl Scouts of America, the indirect benefitthe donor receives as a result of such contribution is considered incidental under the provision, as itgenerally would not have reduced or eliminated the donor's deduction if it had been received as part of acontribution by donor to the sponsoring organization. Technical Explanation of H.R. 4, The "PensionProtection Act of 2006," Joint Committee on Taxation, JCX-38-06 (August 3, 2006) at page 349-350.

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example is attending a charitable fund-raising event. The donor’s payment can be splitinto two components (a “bifurcated grant”): a donation to the charity that permits thedonor to attend the event, and the value of the meal that was served at the event. When a donor receives an economic benefit, the charitable income tax deduction is reduced by thevalue of that benefit. Under this approach, if a meal is served, then the value of the foodis a “more than incidental benefit” that reduces the charitable income tax deduction. Ifmerely attending the event had economic value, then the donor would not be able to claima charitable income tax deduction for that value under Section 170. There are a variety ofpolicy arguments in favor of such a legal standard.32

Mini private foundations. Another perspective is that DAFs are grant-making vehicles,similar to grant-making private foundations. The significant influence that the donor andother donor advisors have with respect to a DAF have parallels to the influence thatdonors have over their private foundations. For example, Congress explicitly expandedthe private foundation excess business holding rules to DAFs, which demonstratesrecognition of comparable donor influence.33

From this perspective, it could be appropriate to enact regulations that apply some privatefoundation laws, particularly the self-dealing rules, to the legal standard of whatconstitutes a “more than insignificant benefit.” In that case, the penalty could betriggered even though a comparable payment would qualify for a charitable income taxdeduction if it had been made directly by an individual. From this perspective, the donoris receiving a benefit from a bifurcated grant (e.g., attending a prestigious event) that sheor he would not have received but for the grant from the donor advised fund. Theadvocates of the bright-line Section 170 perspective counter: if the benefit is that great,

32 First, such a legal standard is consistent with the legislative history of § 4967.

Second, such a legal standard would provide greater legal clarity, thereby improving theadministration of the tax laws. For example, under a Section 170 standard, “token benefits” (describedin Rev. Proc. 90-12, such as coffee mugs with charity logos) could clearly be accepted by a donor/advisorwithout being treated as a “more than incidental benefit. By comparison, there is legal uncertainty whentaxpayers don’t know when a payment that would qualify for a charitable income tax deduction (if paiddirectly by a taxpayer) might be considered a “more than incidental benefit” that would trigger a 125%penalty on the donor/advisor.

Third, taxpayers can easily understand such a legal standard. Thereby increasing tax compliance.

Fourth, permitting DAF grants to pay personal pledges and the charitable portion of bifurcatedgrants will reduce the “timing delay” of a DAF. A taxpayer claimed a charitable income tax deduction inthe year of the contribution to the DAF, and those funds typically enter the broader charitable sector in alater year when a grant is made from the DAF. Policies should encourage dollars to flow from DAFsrather than remain bottled-up in DAFs. Permitting grants to be applied toward pledges and toward thethe charitable portion of charitable fund-raising dinners and other bifurcated grants, funds will leaveDAFs faster and get into the larger charitable economy sooner.

33 Sec. 4943(e).

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then it shouldn’t qualify for a charitable income tax deduction under Section 170.

Most comments to IRS Notice 2017-73 urged the adoption of a Section 170 charitablededuction standard. At least one comment advocated a private foundation standard.

b. DAF laws should be much simpler than PF laws

The primary purpose of the laws that regulate donor advised funds is to assure that theassets held in these funds are used exclusively for exempt purposes. This is the primarypurpose of the penalties in Sections 4966, 4967 and 4958. Since these penalties wereenacted in 2006, they seem to have done their job. We are not aware of any reportedcases where these penalties have been imposed in connection with a donor advised fund.34

It is essential that the laws and regulations that govern DAFs be clear and easy to complywith. DAFs typically have much smaller balances than private foundations, they makenumerous small grants (e.g., as little as $50), and they are often established by individualswho have less tax sophistication than their private foundation counterparts. Clarity andsimplicity are, therefor, a practical necessity. Furthermore, the governing bodies of thesponsoring organizations that administer donor advised funds are independent of thedonors. They are less likely to be overly influenced by a donor than, say, the directors ofa private foundation who might be influenced by a rich and powerful founder of thatfoundation. From this author’s perspective, applying private foundation rules wholesaleto DAFs is overkill.

3. Pledges

a. Private foundation rules - “legally binding” pledges

The private foundation tax regulations provide that if a private foundation satisfies adisqualified person’s legally binding pledge, the private foundation has engaged in an actof self-dealing that is subject to the self-dealing excise tax.35 An exception applied to

34 “The PPA appears to have provided a legal structure to address abusive practices andaccommodate innovations in the sector without creating undue additional burden or new opportunities forabuse.” Report to Congress on Supporting Organizations and Donor Advised Funds, TreasuryDepartment, December 2011, at p. 7.

35 Treas. Reg. Section 53.4941(d)-2(f) states: "In general, the transfer to, or use by or for thebenefit of, a disqualified person of the income or assets of a private foundation shall constitute an act ofself-dealing..... [I]f a private foundation makes a grant or other payment which satisfies the legalobligation of a disqualified person, such grant or payment shall ordinarily constitute an act of self-dealingto which this subparagraph applies. However, if a private foundation makes a grant or payment whichsatisfies a pledge, enforceable under local law, to an organization described in section 501(c)(3), whichpledge is made on or before April 16, 1973, such grant or payment shall not constitute an act ofself-dealing to which this subparagraph applies so long as the disqualified person obtains no substantial

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pledges made before 1973 “so long as the disqualified person obtains no substantialbenefit, other than the satisfaction of its obligation, from such grant or payment."36 Bycomparison, a private foundation may pay a non-legally binding pledge that was made bya disqualified person.

Many donors to private foundations were not, and still are not, aware of this rule andconsult a legal advisor only after a pledge has been made. The rule has spawned muchlegal work surrounding the issue of whether a pledge was legally binding or not. Theresults can vary from state to state because of different laws. One commentator observedthat the law has become a trap “only for the uninformed philanthropist.”37 Educateddonors have learned to make joint pledges with a private foundation or have carefullyworded supportive commitments to a charity that don’t rise to the status of a legallybinding pledge.38

Educating donors, however, doesn’t solve the problem. We hear of reports where donorsartfully worded an intention to make a gift (e.g., “I will recommend a grant from a donoradvised fund”) but the benefitting charity mistakenly records the statement on its books asa pledge. When the charity contacted the sponsoring organization and mentioned theword “pledge”, all chaos broke out as the staff tried to sort out the actual nature of thedonor’s statement. Until 2017, there had never been any written guidance from theService whether a pledge could be paid from a donor advised fund, leading toconsiderable speculation and debate within the field.39

benefit, other than the satisfaction of its obligation, from such grant or payment" (emphasis added). TheService concluded, for example, that establishing a charitable remainder trust to satisfy a pledge was anact of self-dealing, since a CRT is subject to the private foundation self-dealing taxes. Private LetterRuling 9714010 (Dec. 20, 1996). The Service also concluded in a revenue ruling that a privatefoundation engaged in a prohibited act of self-dealing when it paid the dues of a member of a religiouscongregation, even though the payment of such dues by that have person would have qualified for a fullcharitable income tax deduction. The Service concluded that membership was a direct benefit and theprivate foundation was relieving the individual of a legal obligation. Revenue Ruling 77-160, 1977-1

C.B. 351.

36 Treas. Reg. Section 53.4941(d)-2(f).

37 Katzenstein, Lawrence, “Reformation of Charitable Contribution Deduction: Areas for Reform,”35 Exempt Organization Tax Review 33 (Jan. 2002).

38 Id. and James B. Lyon, James, “Charitable Giving -- Pledges v. Letters of Intent,” 2003 TaxNotes Today 249-28 (Dec. 30, 2003).

39 See the analysis in the pre-PPA legal memorandum of the law firm Arnold & Porter LLP whichconcluded that donor advised funds could pay pledges. “Firm Addresses Satisfaction of CharitablePledges by Donor Advised Funds,” 2005 Tax Notes Today 226-26 (Nov. 18, 2005). Among other things,the firm concluded that a donor did not have cancellation of indebtedness income when a third party paida donor’s pledge, citing Revenue Rulings 64-240, 1964-2 C.B. 172 and 55-410, 1955-1 C.B. 297 and theTax Court case of Wekesser v. Commissioner, T.C. Memo. 1976-214.

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b. DAF proposed rules under IRS Notice 2017-73

IRS Notice 2017-73 provides that it will not be a “more than incidental benefit” under theSection 4967 to pay a pledge made by a donor or donor-advisor, provided that threeconditions are met. This is the current policy of the Service and taxpayers may rely uponit until further notice.40

The Service stated:41

The Treasury Department and the IRS currently agree with those commenters whosuggested that it is difficult for sponsoring organizations to differentiate between alegally enforceable pledge by an individual to a third-party charity and a mereexpression of charitable intent. The Treasury Department and the IRS are of the viewthat, in the context of DAFs, the determination of whether an individual’s charitablepledge is legally binding is best left to the distributee charity, which has knowledge of thefacts surrounding the pledge.

Accordingly, to facilitate distributions from DAFs to charities, the Treasury Departmentand the IRS are considering proposed regulations under § 4967 that would, if finalized,provide that distributions from a DAF to a charity will not be considered to result in amore than incidental benefit to a Donor/Advisor under § 4967 merely because theDonor/Advisor has made a charitable pledge to the same charity (regardless of whetherthe charity treats the distribution as satisfying the pledge), provided that the sponsoringorganization makes no reference to the existence of any individual’s pledge when makingthe DAF distribution.

Specifically, it is anticipated that under this approach a distribution from a DAF to acharity to which a Donor/Advisor has made a charitable pledge (whether or notenforceable under local law) will not be considered to result in a more than incidentalbenefit to the Donor/Advisor if the following requirements are satisfied:

(1) the sponsoring organization makes no reference to the existence of a charitablepledge when making the DAF distribution;

(2) no Donor/Advisor receives, directly or indirectly, any other benefit that is more thanincidental (as discussed in this notice and as further defined in future proposedregulations) on account of the DAF distribution; and

(3) a Donor/Advisor does not attempt to claim a charitable contribution deductionunder § 170(a) with respect to the DAF distribution, even if the distributee charityerroneously sends the Donor/Advisor a written acknowledgment in accordance with §

40 SECTION SEVEN of IRS Notice 2017–73, 2017–51 I.R.B. 562, at 566.

41 SECTION FOUR of IRS Notice 2017–73, 2017–51 I.R.B. 562, at 565.

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170(f)(8) with respect to the DAF distribution.

The IRS Notice contains an example of how a penalty can be avoided.42 The Serviceobserved that this policy on pledges was limited to whether there had been a “more thanincidental benefit” under Section 4967. Thus, other ramifications of paying a thirdparty’s legally binding pledge, such as a gift tax liability, could still apply.43 Even undercurrent law, though, the payment of a legally binding pledge should not trigger taxablecancellation-of-indebtedness income to the person whose pledge is satisfied by a thirdparty.44

OBSERVATIONS: The Services proposal to permit pledges to be paid is a very welcomedevelopment. The payment of pledges was a situation frequently faced by DAFadministrators.

Nobody has a problem with the second and third proposed requirements, since they arebasic elements of the rules that should govern DAFs and charitable contributions. However, the Service has received comments that are critical of the first proposedrequirement. Why should any reference to a pledge trigger a 125% penalty on the donoradvisor? Many in the charitable field are referring to this proposal as a “don’t ask, don’ttell” policy.

42 “For example, assume that charity Z, an organization described in §§ 501(c)(3) and170(b)(1)(A)(vi), holds an annual fundraising drive, and in response to the annual fundraisingsolicitation, individual B promises to contribute $1,000x to Z. B has advisory privileges with respect to aDAF and advises that the sponsoring organization distribute $1,000x from the DAF to Z. The sponsoringorganization makes the advised distribution. Assume further that in its transmittal letter to Z, thesponsoring organization identifies B as the individual who advised the distribution, but makes noreference to a charitable pledge by B or any other person. Z chooses to treat the sponsoringorganization’s distribution as satisfying B’s pledge. Z also publicly recognizes B for B’s role infacilitating the distribution from the sponsoring organization, but Z provides no other benefit to B. Bdoes not attempt to claim a § 170 deduction with respect to the distribution. Under these facts, theTreasury Department and the IRS are currently of the view that the DAF distribution does not result in amore than incidental benefit to B under § 4967 merely because Z treats the distribution as satisfying B’s

pledge.” SECTION FOUR of IRS Notice 2017–73, 2017–51 I.R.B. 562, at 565.

43 Footnote 1 of IRS Notice 2017-73 gives an example: “See, e.g., Revenue Ruling 81-110,1981-CB 479 (January 1, 1981) (a payment by a third party to a charitable organization that explicitly ismade to pay the legally enforceable pledge of a donor is treated as a [taxable gift, for gift tax purposes]from the third party to the donor and then a charitable contribution from the donor to the organization). Treas. Reg. § 53.4941(d)-2(f)(1).” IRS Notice 2017–73, 2017–51 I.R.B. 562, at 565.

44 See Section 108(e)(2) which provides for an exclusion from income when a third party pays alegal liability which, if paid by the original debtor, would have produced an income tax deduction. Thiswould apply to the satisfaction of a pledge since the payment by the person who made the pledge would

be entitled to claim a charitable income tax deduction.

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4. Bifurcated grants

a. Defined

A typical bifurcated grant is a ticket to a charitable fund-raising event where the donorproposes to personally pay the non-deductible portion of the cost (e.g., the value of thedinner) and then a private foundation or donor advised fund is requested to pay theportion allocable to the charitable contribution for the fund-raising event.

b. Private foundation rules - PLR 9021066

The only written guidance on this issue is Private Letter Ruling 9021066 (March 1,1990). The Service concluded that it would be a self-dealing transaction for a privatefoundation to pay the charitable portion of a ticket to a charitable fund-raising event thatwould permit the donor corporation’s employees to attend the event. The directeconomic benefit to the corporation – the ability for its employees to attend the event –was considered not sufficiently tenuous or incidental so that it could be ignored. In otherwords, the donor corporation would have received a “more than incidental benefit.”

c. DAF proposed rules under IRS Notice 2017-73

The Service proposes that a DAF’s payment of the charitable portion of a bifurcated giftwill trigger the penalties for a “more than incidental benefit,” even though the donorwould be entitled to claim a charitable income tax deduction if she or he personally paidthat charitable portion. Similarly, a payment of a bifurcated membership fee could triggersuch a penalty. The Service concluded that a DAF payment under these circumstanceswould be “a direct benefit to the Donor/Advisor that is more than incidental.”45

45 “The Treasury Department and the IRS currently agree that the relief of the Donor/Advisor’sobligation to pay the full price of a ticket to a charity-sponsored event can be considered a direct benefitto the Donor/Advisor that is more than incidental. Therefore, proposed regulations under § 4967 would,if finalized, provide, that a distribution from a DAF pursuant to the advice of a Donor/Advisor thatsubsidizes the Donor/Advisor’s attendance or participation in a charity-sponsored event confers on theDonor/Advisor a more than incidental benefit under § 4967. The Treasury Department and the IRS donot currently agree that, for purposes of § 4967, a distribution made by a sponsoring organization from aDAF to a charity upon advice of a Donor/Advisor should be analyzed the same as a hypothetical, directcontribution by the Donor/Advisor to the charity. A Donor/Advisor who wishes to receive goods orservices (such as tickets to an event) offered by a charity in exchange for a contribution of a specifiedamount can make the contribution directly, without the involvement of a DAF.

“The Treasury Department and the IRS recognize that a similar issue arises if a sponsoringorganization makes a distribution from a DAF to a charity to pay, on behalf of a Donor/Advisor, thedeductible portion of a membership fee charged by the charity, and the Donor/Advisor separately paysthe nondeductible portion of the membership fee. Therefore, The Treasury Department and the IRSanticipate that the same analysis would apply to a case where the Donor/Advisor receives these types of

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VIII. Public support test for DAF grants - IRS Notice 2017-73

In earlier private letter rulings, the Service concluded that a grant from a DAF to a charitywould be treated as a grant received from a publicly-supported charity.46 This wasbecause the sponsoring organization that administered the DAF was a public charity. Thus, in theory, a charity’s sole support might be grants received from a single DAF andthe charity would be able to avoid private foundation status because all of its supportcame from a public charity.

In IRS Notice 2017-73, the Service proposes to reverse this outcome. It proposes that acharity that receives grants from organizations that sponsor DAFs and from anonymousdonors be treated in the following manner for purposes of the public support test:

“(1) a sponsoring organization’s distribution from a DAF [will be treated] as comingfrom the donor (or donors) that funded the DAF rather than from the sponsoringorganization;

(2) all anonymous contributions received (including a DAF distribution for which thesponsoring organization fails to identify the donor that funded the DAF) [will betreated] as being made by one person; and

(3) distributions from a sponsoring organization [will be treated] as public supportwithout limitation only if the sponsoring organization specifies that the distribution isnot from a DAF or states that no donor or donor advisor advised the distribution.

OBSERVATION: For this proposal to operate effectively, a sponsoring organizationshould inform a recipient charity that a grant was made from a DAF. Except when grantsare received from a well-known sponsoring organization, such as a national donoradvised fund or a community foundation, it may not be obvious whether a grant-makingcharity administers DAFs or not. Many sponsoring organizations (such as universitiesthat hold DAFs) might have only a few DAFs that are dwarfed by the larger operations ofthe organization. It should not be burdensome to disclose when a grant was made from aDAF. But to reduce administrative burdens, there should not be a duty on the sponsoringorganization to disclose the identity of the donors of that particular DAF, unless asked bythe recipient charities.

membership benefits, so that the sponsoring organization cannot pay the deductible portion of themembership fee without conferring more than an incidental benefit on the Donor/Advisor.” SECTIONTHREE of IRS Notice 2017–73, 2017–51 I.R.B. 562, at 564.

46 Private Letter Ruling 200037053 (June 22, 2000).

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IX. Private Foundations and DAFs

Under existing law, a distribution from a private foundation to a DAF will qualify as adistribution to a public charity, for purposes of the Section 4942 rules that require privatefoundations to annually distribute at least 5 percent of the value of their marketablefinancial assets. The Service would like to learn what is going on, It requested commentsin IRS Notice 2017-73: 47

“The Treasury Department and the IRS request comments regarding the issues addressedin this notice and suggestions for future guidance with respect to DAFs. In addition, theTreasury Department and the IRS request comments with respect to the following:

“(1) How private foundations use DAFs in support of their purposes.(2) Whether, consistent with § 4942 and its purposes, a transfer of funds by a privatefoundation to a DAF should be treated as a “qualifying distribution” only if the DAFsponsoring organization agrees to distribute the funds for § 170(c)(2)(B) purposes (or totransfer the funds to its general fund) within a certain timeframe.”

X. Choice of Entity: DAF vs. PF [ and vs. SO]

A. Definitions

1. Private Foundation - A charity that does not receive contributions from numerousunrelated individuals but, instead, receives most of its financial support eitherfrom endowment income or from one family or business.

-- private non-operating foundation - a grant-making organization.

-- private operating foundation - a private foundation that actively engagesin a physical activity (e.g., the Getty Art Museum used to be a privateoperating foundation). Secs. 170(b)(1)(E)(I) and 4942(j)(3).

2. Supporting Organization - A charity that is classified as a public charity ratherthan a private foundation because it supports a publicly supported charity. Sec.509(a)(3).

A supporting organization is one of the few organizations that qualifies asa public charity without having to satisfy the public support test. Thus, asupporting organization will be classified as a public charity even if thereis only one donor. Congress concluded that the indirect public scrutiny ofa supporting organization by way of a publicly supported charity exemptedthese organizations from private foundation tax status.

47 SECTION SIX of IRS Notice 2017–73, 2017–51 I.R.B. 562.

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Type I – Operated, Supervised Or Controlled By [A Publicly Supported Charity]Where the majority of the governing body of the supporting organization isappointed by the publicly supported charity (oversimplified).

Type II – Supervised Or Controlled In Connection With...Where the governing body of the supporting organization is identical to thegoverning body of the publicly supported charity (oversimplified). Very rare.

Type III - Operated In Connection With...Where the majority of the governing body of the supporting organization isnot appointed by the publicly supported charity yet is not controlled by a

disqualified person (oversimplified). An example might be a board of directorswhere two are appointed by the charity, two are appointed by the donor and thetie-breaker is selected by a neutral method.

Functionally integrated Type III - Generally, a functionally integrated typeIII supporting organization is a supporting organization that performsfunctions of or carries out purposes of the supported organization that, butfor the supporting organization, the supported organization would engagein directly. An example would be a Type III supporting organization thatserves as the linchpin for multiple corporations that operate a non-profithospital.

Non-Functionally Integrated Type III - (“NFI”) – Any supportingorganization that is not functionally integrated, such as one that makesgrants to the supported charity. The 2006 legislation made NFI a virtualpariah. An NFI cannot receive a grant from a private foundation and issubject to burdens that other supporting organizations are not subject to. Many NFIs terminated their supporting organization status in 2007.

3. Donor Advised Fund - A fund that is part of a larger charity where the donor mayrecommend investments or eligible charitable recipients of grants from the fund. Sec. 4966(d)(2). The governing body can accept or reject each recommendation,although as a practical matter charities usually follow the donor's recommendationwhenever the recipient is an eligible public charity.

A donor advised fund of a community trust can be administered in aseparate trust and be considered a component part of the community trust. Reg. Sec. 1.170A-9(e)(11)(ii). Instead, the overwhelming majority ofdonor advised funds are basically accounting entries on the books of alarger charity. Such funds are administered under fund accountingprinciples.

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Legal Definition: Sec. 4966(d)(2): The term `donor advised fund' means a fund or account–

(I) which is separately identified by reference to contributions of a donor or donors,

(ii) which is owned and controlled by a sponsoring organization, and

(iii) with respect to which a donor (or any person appointed or designated by such donor) has,or reasonably expects to have, advisory privileges with respect to the distribution or investmentof amounts held in such fund or account by reason of the donor's status as a donor.

Exempted from the definition are funds where all distributions are made to one charity andscholarship funds where a non-controlling member of the selection committee made acontribution to the scholarship fund. fund.

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B. Possible Legal Sanctions Under Tax Laws

1. Revoke 501(c)(3) status for not being a charity (excess lobbying, politicalactivity, etc.)?

2. Intermediate sanctions for excess benefit transactions under Sec. 4958? (Excess benefit transaction taxes are supercharged for DAFs and SOs)

3. Private foundation excise taxes

-- The 2 percent excise tax on net investment income. Sec. 4940.

-- Prohibitions on self-dealing / excess benefits with donors. - Absolute prohibition on paying a donor (or family member) for services?

Secs. 4958( c)(2) and 4958( c)(3) - compare Sec. 4941(d)(2)(E).

- Prohibition on property transaction with donor? Sec. 4941(d)(1)(A)

-- The excise tax for failure to distribute income. Sec. 4942. Privatefoundations are required to make annual "qualifying distributions" of their"minimum investment return" (generally, 5% of the foundation's netinvestment assets).

-- The excise tax on excess business holdings. Sec. 4943. A privatefoundation must dispose of stock in a business within five years if it (or ifit and "disqualified persons" such as family members) holds more than20% of the stock of the business.

-- The excise tax on investments that may jeopardize charitable purposes.Sec. 4944. Jeopardizing investments generally include those that showlack of business prudence, such as trading in uncovered puts and calls.

-- The excise tax for "taxable expenditures" and "expenditure responsibility"requirements. Sec. 4945. A payment for any non-charitable purpose is ataxable expenditure. In addition, a taxable expenditure includes a grant toany person or organization (other than a public charity) unless the privatefoundation exercises "expenditure responsibility" to follow up on theoutcome of the grant.

PF

Yes

No

Yes

No

Yes

Yes

Yes

Yes

Yes

SO

Yes

Yes

No

Yes !

No

No(Yes- TypeIIINFI)

No(Yes- TypeIIINFI)

No

No

DAF

*

Yes

No

Yes!

No

No

Yes!

No

No

* It depends. If a DAF is a separate trust that is a component part of a community trust, then it could be reclassified asa separate charity, such as a private foundation. Reg. Sec. 1.170A-9(e)(11)(ii). If the DAF is basically an accountingentry on the books of a larger charity, it would not (in the author's opinion) qualify as a separate charity, since acharity must be a trust, corporation or association and meet the other requirements under Form 1023 to be a charity. In the author's opinion, a checking account cannot qualify as a charity. There are, however, others who feel thatDAFs that are accounting entries could be classified as separate charities. Assuming that a DAF that is only an

accounting entry on the books of a larger charity cannot be made into a separate charity, then any potential sanctionswould be imposed on the larger charity rather than on the fund.

** A “non-functionally integrated” supporting organization must annually distribute 3.5% of its marketableassets.

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Appendix A - Timeline - History of Donor Advised Funds

1914 The genesis of community foundations traces back to Frederick Goff's establishment of theCleveland Foundation in 1914. The Cleveland Trust Company held several small endowedcharitable trusts and was having difficulty making grants in an effective manner. Many of thesetrusts were restricted to a specific charitable purpose, such as education or health, but otherswere simply established to benefit the residents of greater Cleveland. A separate committee(later a corporation) was established to identify the most worthy grant recipients of the incomefrom the trusts. Other Cleveland banks later joined in the arrangement.

1920-40 The multiple-trust community foundation became a model that was adopted in other cities. TheNew York Community Trust, for example, had seventeen banks acting as its trustees, eachholding one or more of its trusts and funds.

Unlike most other charities, community trusts often have a separation of the investment functionfrom the disbursement function. The structure permits the trustee banks to do what they do best(make investments) and the community foundation to do what it does best (make grants).

1930 The first donor advised fund is established. There are conflicting reports as to whether it wasThe Barstow Fund at The New York Community Trust or a different fund at the Winston-SalemFoundation. The New York Community Trust worked with many trusts that were established byliving donors whereas, by comparison, the charitable trusts at The Cleveland Foundation andmany other community foundations were generally established as bequests. Living donors werevery interested in the charitable grants made from the trusts that they established and, hence, theywere consulted.

1969 Congress enacts extensive private foundation laws as part of The Tax Reform Act of 1969. Dilemma: Are trusts in bank trust departments separate private foundations even when thecommunity trust controls all of the grant disbursements?

1977 The Department of Treasury recognized the unique structure of community trusts and issued taxregulations that gave community trusts the unique advantage of being able to treat multiple trustsand corporations as part of the community foundation ("component funds") rather than asseparate organizations. Reg. Sec. 1.170A-9(e)(11)(ii). Any other type of public charity wouldhave to try to have each such trust classified as a "supporting organization" rather than as a partof the charity.

The regulations contain tests to determine whether donor advised funds at community trusts willbe component funds or whether they will be separate private foundations. The community trustregulations adopted the private foundation "material restriction" regulations to determinewhether any given fund qualifies or fails. Those regulations adopt a vague “facts andcircumstances” test rather than a bright line legal standard. The regulation lists a series offavorable and unfavorable factors to determine whether a donor had, directly or indirectly,imposed a material restriction on a gift with respect to a donor advised fund. Reg. Sec. 1.507-2(a)(8)(iv)(A)(1), in conjunction with Reg. Sec. 1.170A-9(e)(11)(ii)

1978 Several universities receive IRS approval to establish donor advised funds, demonstrating thatcommunity foundations did not have a legal monopoly on the activity. Private Letter Rulings7821096 (Feb. 27, 1978) and 7827015 (March 31, 1978) and 8021079 (Feb 28, 1980).

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1980 New community foundations abandon using the traditional method of having bank trusteesestablish a trust for each fund. Instead, these community foundations were formed ascorporations that directly held and administered contributed property. They established accountson their books to carry out the charitable purposes specified by the donors.

1991 Fidelity Charitable Gift Fund receives IRS approval to operate a national donor advised fund. Each fund is an account rather than a separate trust. Other “commercial” gift funds – donoradvised funds affiliated with for-profit financial organizations – spring up.

1998 The Wall Street Journal reports that distributions from donor advised funds at one charity weremade to the children of donors in order to pay them for their volunteer services. In anotherarticle concerning a Sec. 509(a)(3) supporting organization, Carl Icahn stated that he, rather thanthe supported charity, effectively controlled the supporting organization.

2000 President Clinton's budget proposal requests a new law for donor advised funds.

2002 IRS imposes five conditions for approval of new “commercial” gift funds. An example was theIRS approval of funds at National Fiduciary Services of Houston, Texas:1. A governing body where the majority could not be affiliated with the bank,2. Adopting a policy of a minimum 5% charitable payout (aggregate, not fund-by-fund),3. Donors and grantees should be informed that grants may be used only for charitable

purposes and not for the benefit of the private donor,4. A duty to investigate grants where the bank "has reason to believe that grant funds are

being used for the donor's private benefit or other purposes than exclusively charitablepurposes, and where such is the case, you will take the necessary steps (including legalaction, if necessary) to ensure that the grant is refunded to you or otherwise used forcharitable purposes intended by you", and

5. A conflict of interest policy.

2003 Tim Mosley receives a five month jail sentence for tax evasion when distributions from his donoradvised fund at the National Heritage Foundation were used to pay private school tuition for hischild.

2004 Newspapers disclose abuses with supporting organizations. A repeated scenario: donorbusinesses set up a supporting organization and contribute large amounts (e.g., $750,000) andclaim a charitable deduction. The next day the donors borrow the money back and give apromissory note for the entire amount. They make interest payments (which they deduct as abusiness expense) that the supporting organizations immediately distribute as charitable grants. Whereas private foundations cannot lend money to donors because of the self-dealing penaltytaxes, supporting organizations are public charities that are not subject to private foundationstaxes. Supporting organizations are automatically considered public charities because Congressassumed that they were indirectly policed by the publicly-supported charities that they support. Sec. 509(a)(3). When one of the donor businesses failed, the supporting organization’s assetsbecame worthless. The Chronicle on Philanthropy identified ten supporting organizations thatlent out over half their assets to donors, most of them using the same Salt Lake City attorney. Harvey Lipman and Grant Williams “One Utah Lawyer Helped Create 8 Groups That LentMoney to Donors or Officers” Chronicle on Philanthropy, February 5, 2004

2004 Senate Finance Committee holds hearings on charitable abuses. Donor advised funds andsupporting organizations receive attention.

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2004 A California Federal District Court reverses its decision to shut down the Xelan Foundation afterthe IRS uncovered over $1 million of grants from 22 donor advised funds were used to pay thetuition of the donors’ children. Reason: the foundation had over $42 million of other assets thatwere doing good things. Why shut down an entire charity for some abuses? The courtsuggested that the IRS disallow the charitable income tax deductions claimed by those particulardonors rather than shut down the charity. The government was also ordered to pay the charity’slegal defense costs. United States v. L. Donald Guess et al.; No. 04 CV 2184-LAB (AJB) (Calif.D.C. Dec. 3, 2004).

2005 Senate Tax Bill S. 2020 (later renumbered H.R. 4297) includes provisions to define and regulatedonor advised funds and also impose new restrictions on supporting organizations. IndependentSector organized the Panel on the Nonprofit Sector with representatives from 24 charities tomake formal recommendations on such legislation. http://www.nonprofitpanel.org/final/

2006 The Pension Protection Act of 2006 regulates donor advised funds and supporting organizations,especially Type III non-functionally integrated supporting organizations.

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Documents

PRESENTER: CHRISTOPHER HOYT