John Olsen

It sounds as though you should each designate your spouse as PRIMARY beneficiary of your IRA, and the children as CONTINGENT beneficiaries. Alas, if you use something is common and simple, for that designation, as "my wife, Carol, if living; otherwise, my children, equally, per stirpes", you could be out of luck, because MANY IRA CUSTODIANS WILL NOT ACCOMODATE A "PER STIRPES" DESIGNATION. Of course, you might want to name the Credit Shelter ("B") Trust as contingent, but you'll want to make sure, if so, that the Trust will qualify as a "designated beneficiary trust". That is a LOT trickier than it might seem. For example, if the Trust doesn't include language which FORBIDS the Trustee from paying any estate tax or debts of the estate from IRA proceeds, that Trust could fail to qualify. If that trust is funded by a "pecuniary formula", it could fail to qualify. Bottom line: Have this issue examined by somebody who REALLY UNDERSTANDS how all these rules work and interact. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

John, Obviously, I've done a rotten job of communicating. I DO NOT UNDERSTAND THE USE OF THE TERM "LOW BASIS" HERE. Moving IRA money to an annuity has ZERO effect on the owner's basis. What's the POINT to buying the annuity at ALL, much less in installments? That is not clear (to me, at least). Can you get specifics of what is being proposed? Because what's being described simply MAKES NO SENSE. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

John, It seems to me that there are two "threads" here. On the one hand, the client is moving SEP money to a Keogh plan. So far, I understand it. But you go on to say "where the purchase of a variable annuity would occur over the span of a few years. Since the value in the account would be low from the purchase of insurance". I do not understand that at all. What's the point to purchasing the variable annuity "over a span of years"? It's all qualified money (GOT to be), right? Why not purchase the VA in a lump sum - assuming that a VA makes sense. Frankly, I'd question that point. WHY the VA in the first place? But, assuming there's a good reason for changing the investment "wrapper" of this qualified money from whatever it's in now to a VA, I still don't understand why the VA should be purchased in installments. Where's the benefit? That said, what does "Since the value in the account would be low from the purchase of insurance" mean? Almost ALL variable annuities assess no front-end sales charge, so why would there be less money in it after the purchase? As to the second "thread", I THINK I might know what's being suggested. There's a technique (which has been around forever, I think) which I call an "end run around double taxation" or, sometimes, "the IRA Rescue Kit". It simply illustrates that, if one liquidates an IRA or qualified plan (either in a lump sum or in installments. I MUCH prefer the latter), pays the tax, and gifts the net to an Irrevocable Life Insurance Trust, which then buys life insurance on the estate owner/plan participant/trustor, the NET WEALTH TRANSFERRED TO HEIRS can often be significantly greater than if no changes were made, and the QP or IRA asset were subjected to BOTH the Estate Tax AND Income Tax (IRD). It works very well, much of the time. Sometimes, it doesn't work at all. You gotta crunch the numbers. If that's what is being proposed, I can understand it. But I am mystified as to how a variable annuity enters into that strategy at all. Could you supply any particulars as the proposal? ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

John, If money in an IRA account is moved to a variable annuity, that annuity must, itself, be IRA-qualified - else, the move is a DISTRIBUTION. The "basis", on which Minimum Required Distributions is based is the account balance as of 12/31 of the year preceding the distribution year in question. I can't think of what the "low basis" would refer to, unless - just possibly - the idea you heard about concerns ANNUITIZING the IRA and gifting the after-tax proceeds to an Irrevocable Life Insurance Trust, which then buys life insurance on the estate owner. The effect of that procedure (which I refer to as an "end run around the estate tax" or "the IRD Rescue Kit") can produce more net wealth tranferred to heirs. And there MAY be some income tax savings, to the extent that the annuitized IRA distributions may be taxed at a lower marginal rate than would have applied to a lump sum distribution to the IRA owner or to beneficiaries. But you could get the same effect by making WITHDRAWALS from the account, rather than ANNUITIZING it. The chief reason for the latter is to provide a GUARANTEED income stream as a source for the gifts-cum ILIT insurance premiums. Could you get some more particulars on the idea you've heard about? ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

Barry, Could you review the circumstances in which the DECEDENT'S SSN should be on an account for the beneficiaries and when the BENEFICIARY'S SSN should be used. Clearly, there is much confusion on this point. John Olsen

I believe that the PLR's language is pretty straightforward. What matters is not that the participant "elected" to have MRDs calculated on the basis of Single Life Expectancy, but, rather, that she "COULD have used" the JOINT LE of herself and the oldest beneficiary. I have, for some time, been of the opinion that "checking the box" next to SINGLE LIFE EXPECTANCY is nothing more than a request to take LARGER THAN REQUIRED distributions. I see NO authority in the Code or Regs to suggest that, in making this "affirmative election" , one waives, much less forfeits, one's RIGHT to the Joint LE, so long as there is a designated beneficiary as of RBD. The PLR in question would appear to say precisely that. "At least as rapidly as" is a USELESS rule if the baseline isn't determinable. An election to take precisely one's MRD under a SINGLE LIFE EXPECTANCY is, indeed, a baseline. One can determine next year's divisor, because that SLE schedule is available. But what if one took MORE than the JOINT LE MRD but NOT EXACTLY the Single Life LE MRD? How would one apply the "at least as rapidly" test? To apply the Single LE divisors would not be accurate. That wasn't the schedule being used. There would be no FUTURE YEAR'S DIVISORS to look to. The problem is solved - for that scenario AS WELL AS FOR THE SINGLE LE SCENARIO, simply by appying "at least as rapidly as" to the ONE SCHEDULE WHICH BOTH MAKES SENSE AND IS EXPLICITLY GRANTED IN THE CODE AND REGS - the JOINT LE schedule, using the LE of the oldest designated beneficiary, as of RBD. I would argue that this is what we ought to use, even in cleanup mode. Bear in mind that the relevant regs are NOT FINAL REGS. They do NOT have the FORCE OF LAW which FINAL regs do. (They have, as Natalie Choate observes, been described by one court as being nothing more than the IRS' OPINION of the law). Absent any CODE provision clearly barring use of the Joint LE (and there is none) and absent any FINAL regs clearly barring it - one can, I believe, argue that use of the Joint LE - as used in this PLR - is a "reasonable interpretation" of the law. For the IRS to argue otherwise would be for them to argue that their own PLR was not "reasonable". When I encountered this line of argument in Natalie Choate's all day seminar on "Life and Death Planning For Retirement Benefits" (a 6-hr audio tape set of which is available for $126 and is one of the better investments I've made recently; her web site [www.atax.plan.com]), I thought it made sense. I still do. Of course, one test for how intelligent a person is is how much she agrees with you. [grin] ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

It is possible that this woman could take distributions from the IRA now, pay tax on same, buy life insurance with the net (or, if the Federal Estate Tax is an issue, gift the net to an ILIT and have the ILIT buy insurance on her life), and the NET wealth transferred to heirs will be greater than it will be (given assumptions) in the present scenario. It's also possible that the reverse will be true. I've done a LOT of analyses of this type, and the big factors appear to be (a) Federal Estate Tax - the more FET, the better this "end run" technique works. It often does NOT work well if there is no FET liability (B) growth rate assumed on the IRA and on the insurance death benefit (if any), and © the insurance rate she can qualify for. Some insurers offer this type of analysis, but I've seen some that leave a LOT to be desired in the way of precision (not to say "honesty"). A program called "catalyst" is perhaps the clearest and easiest illustration of this technique I've yet seen. It's the brainchild of Ron and Scott Thevenot, and info on same is available on www.catmarkinc.com. As was noted, life insurance cannot be purchased with IRA money. A purported way around this is currently being touted, using a FLP, and relying VERY heavily on the scanty authority of the Swanson case. In my opinion, the idea ranks right up there with Charitable Reverse Split Dollar. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

I must be missing something, because I don't see the problem. The plan is an IRA and was, as of 12/31/99. You use the 12/31 balance, for purposes of determining MRD. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

OOPS!, that last post got garbled. I MEANT to ask if your institution allows beneficiaries to name their own beneficiaries - where the accountholder has ALREADY died, NOT where the accountholder is still living. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

Danmar: Does your institution allow beneficiaries of an IRA to name their own beneficiaries (who will take only on the death of the accountholder, and, then, only if the primary [naming] beneficiary has predeceased)? ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

I thought the PLRs simply interpreted the law and regs correctly. Nothing in the regs or Code suggests (to me, at least) that, if one elects to take MORE than the MRD, the baseline for "at least as rapidly as" changes from the MRD to the amount one has actually been taking. One does not, by taking MORE, waive (much less, forfeit) one's right to take over the COMBINED life expectancies of oneself and a timely designated beneficiary. As the most recent PLR states flatly, it is the fact that the participant COULD HAVE TAKEN distributions based on that JOINT life expectancy which is relevant, not whether she decided to take MORE. Were "at least as rapidly as" to refer to the ACTUAL DISTRIUTION TAKEN, it would be literally IMPOSSIBLE to produce a schedule which would comply with "at least as rapidly as", if the "baseline" were distributions of different amounts each year. How would one extrapolate such a "schedule", in the absence of any divisors for future years - with linear regression, perhaps? ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

I was working on a case last night that may be of some interest in this connection. Clients are couple age 60 and 58. Total estate - 3 million, of which 1 mill is qual plan. Non qp assets include rental real estate, which is producing a nice income. Goal is to maximize wealth transfer to heirs. I ran four scenarios through Brentmarks' "Pension and Roth IRA Analyzer". A: Do nothing. Take only RMDs from QP. B: "End run". Begin taking distribs from QP now, pay tax on same, gift net to ILIT, which buys 2nd to Die life insurance on clients. C: Convert entire 1 mill to Roth (by first rolling to traditional IRA) D: Convert to Roth and then do "end run" "B", except pay premiums from NON-Roth assets. There are a LOT of variables interacting here. But holding tax rates, desired income, return on investments, life expectancies, etc. constant, the "best" scenario is either the Roth conversion or the Roth conversion Plus End Run. When maximum deferral was checked (in which it's assumed that 2nd generation heirs will take Roth money only on RMD schedule), the Roth looked best for about fifteen years, with the Roth Plus End Run looking best after that point. Changing ROR, income needed, sources of income, tax rates, etc. all had the effect of changing the "winners'" pattern. My take on this, having done similar analyses more than a few times, is that GENERALLY the Roth conversion will beat no conversion, provided (a) there is a desire to stretch out deferral to the max (B) there is an Estate Tax liability © the income tax rate is not GREATLY lower after retirement than at present © conversion tax is paid from outside assets. The End Run scenario, by itself, OFTEN beats the "do nothing" Present Case plan, BUT, MANY TIMES, ONLY FOR A PERIOD OF YEARS, following which it becomes "more expensive". The End Run Plus Roth scenario has, in several cases I've done, produced the best numbers. I would NEVER presume to suggest that this is a Rule Of Thumb. ... for what it's worth... ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

Art, If you've the time and inclination to try to verify the numbers that program produces, more power to you. I showed the output to Kit Mueller, the developer of "Second 1/2" software, and his response was similar to mine. We can't figure out what the thing is trying to tell us, and are pretty sure we wouldn't believe it if we could figure it out. It's unclear - INCREDIBLY unclear. Personally, I can't abide that in a program which is supposed to CLARIFY complex problems for users. As to the strategy of taking very large distributions from the IRA - earlier and larger than required - that is one of the BEST moves possible in a LOT of scenarios. If the client takes those early distributions, pays tax on 'em, and gifts the net to an Irrev Trust, which then buys life insurance on the client, the additional wealth tranferred to heirs can be significant. But, as good as that technique can look, it can look EVEN BETTER if the client FIRST converts that IRA to a Roth, and then proceeds with the "end run" technique described above. If you're looking for a software package that will model a LOT of distribution alternatives, check out Ocaso's "Second 1/2". (www.ocaso.com) The brand-new version has a lot of improvements and is more flexible than Brentmark's "Pension and IRA Analyzer", although the output isn't nearly as customizable. Best of luck (and I hope you've got a BIG bottle of Excedrin!) John Olsen

Ah, it's not an IRA! My mistake. It's got to STAY whatever type of plan it is, and, for that matter, stay subject to the specific plan rules regarding distributions. Some plans, for example, require lump sum distributions. Some (usually, defined benefit plans) won't permit lump sum distributions. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

Art sent me the analysis he was referring to. I confess that I cannot make head or tails of it. That is NOT any reflection on Art. It isn't his analysis, as he told me. And I am perfectly willing to concede that someone smarter might be able to decipher the reports. But I can't. In the first place, there is SO MUCH information on each page, and the print is so incredibly tiny, that I can barely read the legends. But, even reading them, I have no idea how the resulting figures were obtained. It's all summary. There are several graphs, and huge "detail" ledger, but without a code, describing each line, what it is supposed to represent - and, most importantly, how the values are obtained - it's just a matrix of numbers. Art, who markets this analysis? Surely, there is some EXPLANATION for what it produces. I am not all that unfamiliar with sophisticated financial software. In fact, I am a beta tester for some of the best programs out there. Wealthtec's "Advanced Pro", for example, is VERY powerful, and considers elements not considered by most analyses. And, quite frankly, it's full analyses are VERY complicated and can be pretty confusing. But I can work my way through that program, because I can read the labels and ascertain what is being done with the data (even without formulas). This thing, however, has me just plain stumped. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

Oops! I forgot to give my email address. It's "olsenfin@ebal.com". ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

I, too, find Art's results to be unconvincing. In the original scenario, it was stated that there would be "equal post-tax withdrawals annually". Later, it was explained that, in the Regular IRA scenario, there would be nothing left. I would be interested to see the actual output of this analysis. The described results do not make sense. I'd be happy to look at the actual analysis and inputs, if Art would care to email same to me. For what it's worth, I'll chime in on the difficulty of comparing alternatives, where the scenarios involve numerous changed variables. I'm the the process of researching an article on this very topic - using Brentmark's "Pension and Roth IRA Analyzer", Impact's "Qualified Plan Distribution Analysis", Richard Franklin's "RPlanner", Ocaso's "Second 1/2", and Wealthtec's "Advanced Pro" Excel add-on. Each of those programs offers a different set of strengths and weaknesses. Some analyses are cash flow based; others are NPV-based. Not all allow the same manipulations of variables (e.g.: tax rates in each year of the analysis; breakout of CG vs. OI components of the non-IRA accounts). I'm trying to establish baseline planning cases which are both germane to all the programs and (more importantly) reflective of Real World planning. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO 314-909-8818

The term "rollover" is incorrect in this connection, as only SPOUSAL beneficiaries can make "rollovers". A BENEFICIARY can - IF THE TRUSTEE PERMITS (some DON'T!) - make a Trustee-To-Trustee TRANSFER of the account. But the account MUST be maintained in the name AND SOCIAL SECURITY NUMBER of the DECEDENT IRA OWNER (e.g.: "John Jones, deceased, SSN 444-55-6666, for the benefit of Kiddo Jones"). Sy Goldberg cites several horror stories of Trustees who inadvertently or "by policy" issued the check to the new Trustee IN THE NAME OF THE BENEFICIARY. When that happens, the beneficiary must report the entire distribution. John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

The Red Queen's IRA Rules (Part Two): I just finished talking to a Fidelity Retirement Plans rep. He confirmed that the IRA beneficiary form does, indeed, replace ALL prior beneficiary designations for ALL IRAs owned by the signator. He did allow as how Fidelity will grant an EXCEPTION to that rule, if the client has at least $200,000 with Fidelity. In that case, the client can, if he insists, have separate designations for separate IRA accounts. But if you have less than $200,000, it works like this - and I am not kidding: The last beneficiary designation keyed into the system will overwrite all prior designations. Period. So... if you want to have three separate IRA accounts for your three kids, and you fill out three separate IRA beneficiary forms, the one at the bottom of the pile controls, and that kid wins the FIDELITY IRA LOTTERY! When I expressed astonishment at this, the rep told me that I was not the first person to bring this to his department's attention, and that Fidelity's legal department is "studying this problem", and that they [in his department ] HOPE that a change will be made, SOMETIME NEXT YEAR. Sometimes, folks, Bigger Ain't Better! John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

IRA “Time Bomb”. Let’s suppose that your unmarried client has an IRA at Fidelity, and, following your sound advice to split that IRA into several accounts so that the life expectancy of each beneficiary can be used for Joint Life Expectancy, for Required Minimum Distribution purposes, she splits the account into several accounts - each with a different child or grandchild as beneficiary. Fidelity remains the custodian for all accounts. Now, suppose that she later decides, for whatever reason, to change the beneficiary of one of those accounts or adds a new IRA account, and, for that newer account, she wants to name her church as beneficiary. She uses the Fidelity form to do that. But the boilerplate just above the signature block on that form says that this beneficiary information shall be effective for ALL IRAs of which Fidelity is custodian,including Roth, rollover, SEP-IRAs, and Traditional IRAs, and SHALL REPLACE ALL PREVIOUS BENEFICIARY DESIGNATIONS ON ALL FIDELITY IRAS. She’s just made the church the beneficiary of ALL her Fidelity IRAs! Would a "heads up" to our clients who have Fidelity IRAs be in order? John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

I can think of relatively few situations in which the election to Annually Recalculate the life expectancies of both the participant and the beneficiary is a good choice. To be sure, you get a SLIGHTLY smaller MRD than if you used Term Certain, and the distributions will last longer, but at the risk of requiring heirs to lose any opportunity to stretch out distributions. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

Yes, you can. I recommend writing two checks, with a notation on each check as to the year for which the contribution is intended. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

Roth IRAs sitused in Missouri, have, as of this summer, the same creditor protections as regular IRAs. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

There are several programs which will do the tasks you describe. Steve Leimberg's "NumberCruncher" is one (www.leimberg.com). I'm in the process, as it happens, of evaluating several IRA/Qualified Plan Distribution Analysis programs for a series of articles I'll be doing. (It becames obvious, early on, that one article wasn't going to do it). They are: RPlanner - a fine, and VERY easy package. Not as comprehensive as Brentmark's or Ocaso's, or with the presentation quality of Impact's, but what it does, it does very well, and it doesn't have a vertical learning curve. (www.rplanner.com) Brentmark's "Pension and Roth IRA Analyzer" - long a favorite tool of retirement planners, this tool allows you to compare a LOT of scenarios, and custom design reports to include only those columns you want. Its limitation to one retirement plan, one Roth IRA, and one "other assets" can be pretty limiting. (www.brentmark.com) Ocasos's "Second 1/2" - lets you analyze as many plans as you want, of various types, and do a side-by-side comparison of several distribution schemes. The Estate Planning aspects are somewhat limited (it won't let you play with partial spousal disclaimers, for example), and the "Windows Explorer"-like navigation takes a bit of getting used to (as does the fact that if you enter a folder you later decide you don't need, you're obliged to START ALL OVER AGAIN, because the thing won't let you quit without providing the input that folder requires). However, there are things it does that no other program I have seen will do. (www.ocaso.net) Impact Technology's "Qualified Plan Distribution Analysis" is still in beta (I'm one of the beta testers), but is VERY impressive. It links with what is, in my opinion, perhaps the best overall estate planning software out there, and combines considerable "ledger number crunching" with the "motivate to action" presentation graphics Impact is famous for. But there are things you can do with Ocaso's or Brentmark's package that you cannot do with Impact's. (www.impact-tech.com) Wealthtec's "Advanced Pro Series" is an Excel add-on, requiring the newest (beta) version of ZCalc to run. I've had a chance to look at it only briefly [i am supposed to be running a practice, I'm told], but it looks EXTRAORDINARILY strong. (www.wealthtec.com) I hope to have the first installment of this "analysis opus" completed in a few weeks. It will appear on the Financial Planning magazine website, and, I HOPE, in a couple of print magazines. I hope that this VERY abbreviated report was of some help to you. John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO

This is REALLY silly! My CORRECTION was IN ERROR! The first paragraph, in which it's explained that a total distribution is required by 12/31 of the year following death, applies if death was AFTER the RBD. The second paragraph, mentioning the Five Year Rule, applies when death is BEFORE the RBD. I will quit now, and go soak my head. ------------------ John L. Olsen, CLU, ChFC Olsen Financial Group St. Louis, MO