afan wrote:Thank you so much NMJack and bsteiner. Particularly for pointing me to Natalie Choate. Still working my way through, but she is clear that many important points are either unresolved, or inferred based on PLRs. She does not seem concerned about this and she certainly appears to be THE authority on the subject. ....
I've known Natalie for many years, and she is definitely the leading authority on IRA matters.
afan wrote:... From what i gather, there is little to lose by going accumulation rather than conduit. For either, the retirement plan will be empty if the beneficiary on whose life expectancy the required distributions are based lives to their average expected age as of the time they inherit. With the conduit, that money will then have gone to the beneficiary, with no asset protection and it will be added to their estate. With the accumulation, the retirement plan will still be empty and the tax deferral lost, but the funds will stay protected in the trust and out of the beneficiary's estate. ...
That's the way I see it.
The conduit may make sense if you want to have a charity as a remainder beneficiary, but if you really want to benefit charity this might not work. If the beneficiary lives to life expectancy (which will happen at least half the time) nothing will be left for the charity.
It also slows down the required distributions in a trust for the spouse, since in that case you can recalculate the spouse's life expectancy each year. However, that doesn't come up very often since leaving IRA benefits to the spouse in trust gives up the rollover and the possible Roth conversion. It also gives the spouse control over the amounts required to be distributed, which may be counter to the reasons for leaving the IRA to the spouse in trust.
I think people who mandate that trusts for children end at age 30 or 35 like the conduit trust since it's simple and the mandatory distributions before age 35 are small. However, as previously discussed, I don't like to mandate that trusts end at a specified age.
afan wrote:... With proposals to eliminate the stretch for non-spouse heirs, this could become a huge problem if the retirement plan had to be emptied out in 5 years, or even immediately, rather than over decades.
This brings up the value of Roth conversions. If one is able to substantially fund an accumulation trust with Roth assets, the situation becomes much better. Even if Washington eliminates the stretch, the Roth dollars won't generate an immediate tax liability for the trust. They can remain in an accumulation trust in an after-tax brokerage account invested in one or more index funds. Only the dividends and occasional capital gains distributions would need to be considered for immediate distribution to the beneficiary (to avoid the higher trust tax rates). The principle would still benefit from long term tax deferral. I need to educate myself more on the tax treatment of LTCGs and QDs generated by assets held in a trust. ...
The Roth conversion generally adds much more value than most people realize.
Trusts reach the 39.6% rate on ordinary income and the 20% rate on qualified dividends and long-term capital gains, and become subject to the 3.8% net investment income, beginning at $12,400. So there's often a tradeoff between making distributions to beneficiaries in lower tax brackets and accumulating income to continue the asset protection. The Roth conversion eliminates this tradeoff, at least as to the IRA distributions.
I usually don't give much thought to proposed legislation until it appears likely to be enacted. A large number of bills are introduced each year, and there's not enough time to analyze them. However, this one has a reasonable chance of being enacted. It's already come close once or twice. It would raise revenue without increasing tax rates. We had something similar before the proposed regulations were revised in 2001. IRA owners reaching the required beginning date had to choose between term certain or recalculation (or, if they were married, hybrid methods). The workaround for those who chose recalculation and didn't have a spouse beneficiary was to leave the IRA to a charitable remainder trust (CRT), with "income" to one or more individuals and then remainder to charity. While CRTs aren't very flexible, and the requirements for CRTs have been tightened since then, they still essentially offer the equivalent of a stretch. If this passes, we'll go back to naming CRTs as beneficiaries. In any event, there's nothing we can do about it. Putting money into retirement plans and IRAs is still better than not putting money into retirement plans and IRAs.
afan wrote:... Although I am still worried about the uncertainty of relying on PLR's for guidance, it seems there are no other alternatives. One either uses the trust, preferably accumulation, or leaves the funds outright in the retirement plan, with no protection at all.
In effect, using the trust provides a different form of insurance against the sorts of claims for which conventional liability insurance would not be available. If it works and the situation arises, then the beneficiaries are protected. If it does not work because of all the uncertainties about IRS interpretations, it was a relatively small amount to spend on the best attempt to protect the funds. In either case, the accumulation trust should keep money out of the beneficiaries' estates.
I agree with your analysis. For better or worse, all we have are the regulations and the PLRs.