Beneficiary relationship to 72t calculation

L1: Beneficiary relationship to 72t calculationHello Seasoned Professionals,
I know you have the answer to my question but first I want to thank all who have responded in the past to my questions. I am 6 months into this 72t market and I am finally working on my first case of 1.1 million. I am grateful to those who have helped me understand the complexities of a SEPP. Lunch is on me when I am compensated from this first case.
I have noticed that when I list a beneficiary of the SEPP applicant the resulting numbers of the plan are significantly different than if I had not listed a beneficiary. And different ages affect the outcome differently as well. SO WHAT IS THE REALTIONSHIP HERE WHEN A BENEFICIARY IS LISTED AND WHEN NO BENEFICIARY IS LISTED? WHAT IS GOING ON?
IN THE CASE OF A COUPLE, IS IT MANDATORY TO LIST THE SPOUSE AND IF IT IS NOT MANDATORY, IN MOST CASES YOU WOULD WANT TO LIST THE SPOUSE ANYWAY.
BUT IN THE CASE OF A SINGLE PERSON WHO HAS TWO CHILDREN, WHAT CHILD SHOULD YOU LIST AS BENEFICIARY, THE OLDER OF THE TWO OR THE YOUNGEST? The program does not allow for more than one beneficiary to be listed.
I would appreciated any and all responses and if you could give as much of an in depth explanation as your time allows; it would help me to understand fully rather than just know the right answer.
Sincerely,
Keith James2005-08-20 16:57, By: Keith James, IP: [66.127.235.249]

L2: Beneficiary relationship to 72t calculationI think you are confusing the Beneficiary with the individual you are using for joint calculations.
If you are doing joint calculations, they would be the same, butthere is no reason why the beneficiary has to be used for joint calculations.
In fact, I see no real reason to use anything but the single life table with a SEPP.2005-08-20 17:24, By: Gfw, IP: [172.16.1.71]

L2: Beneficiary relationship to 72t calculationHello Keith:
Your 6 months into this market and some one is entrusting their $1.1mm to you for 72(t) advise!!! Please (re)read the following which I posted in February, 2005:
What follows is essentially a personal opinion or editorial & is not (necessarily) the opinion of www.72t.net. Further, I will tell you in advance that Gordon & I actually disagree, at least in part, regarding my new opinions on SEPP plan risk assumption versus risk transfer.
I have thought as well as written on this subject before. I am now changing my opinion. Although I have not kept good contact records; my best estimate is that somewhere between 1/3rd and _ of the emails and phone calls I get start with either: (a) I started my plan in 2003 and since then I have executed transactions X, Y & Z; I am now being told that this is wrong. Can you help, can you fix it?۝ or (b) I relied upon Mr. Smith with ABC to set this up right. I am now being told it is wrong. Can you help, can you fix it?۝
The unfortunate answer is that 75% or more of the time, I can not fix it. Further, let’s all remember that the all the risks associated with an error are downside risks; there is zero upside potential.
Many individuals are thoroughly capable of designing and implementing their own SEPP programs; an equal number are not. Each taxpayer should self-evaluate and determine his or her abilities to go it alone versus seeking professional assistance.۝ Any guesses on who said that? I did on pages 112-113 of the book. The weight of practical evidence forces me to change my words to:
Irrespective of SEPP program complexity, every taxpayer should receive a formal written opinion from a qualified professional before commencing their distributions.۝
Why would I say the above? I originally thought the issuance of Revenue Ruling 2002-62 would clear the air۝ and make everything much more straight forward. The exact opposite has occurred. Taxpayers are making more errors than ever, most of which are irreversible. Taxpayers face four distinct risks in the design & execution of a SEPP plan:
(1) Strategy. Does the design of my SEPP plan(s) fit: today’s needs; tomorrow’s needs; and the flexibility to change 3 – 10 years down the road.
(2) Tactical. Did I do my math right? Did I in fact properly interpret the rules so I selected the correct interest rate?
(3) Execution. Both before the 1st distribution and all of the required subsequent distributions.
(4) Legal. Did the law (the IRC) or some pronouncement (the IRS) change in the last 30 to 360 days that either creates new opportunities or worse, closes a door?
Given the increased complexity of the SEPP landscape coupled with the harsh realities of an error; I am now of the opinion that going it alone۝ is the equivalent of performing financial open heart surgery by oneself. That said, where should a taxpayer turn for professional help? There are two places: a CPA (who specializes in tax and 72 matters; a tax attorney. Any other professional resource is unacceptable. Any other resource is either: unqualified, uninsured or has a conflict of interest. This includes: CFP’s, RIA’s, RA’s, CFA’s, brokers, your trustee, your brother-in-law and the IRS.

Every taxpayer should transfer the risk۝, e.g. buy a SEPP plan insurance policy by seeing a qualified professional (CPA or lawyer) before they start. Further, that professional should opine in writing with some language to the effect: It is my professional opinion that the SEPP plan computed in the manner and methods described are in compliance with IRC 72(t)(2)(A)(iv), and thus avoid the imposition of the 10% additional tax as described in 72(t)(1) & (4). Additionally, it is my professional opinion that the computational method, as described, is in compliance with Revenue Ruling 2002-62. Further, you are free to rely upon this opinion and distribute this letter in full to all other interested parties.۝
TheBadgerwjstecker@wispertel.net
2005-08-20 17:29, By: TheBadger, IP: [66.250.23.21]

L2: Beneficiary relationship to 72t calculationBefore I address Keith”s questions, let me pose one to TheBadger. When you list the “trustee” as an unqualified resource for 72(t) calculations, I know you are referring to the entity which holds the IRA assets. And we have established that CPA”s or a tax attorney are qualified to calculate and give the opinion about the correctness and legality of a SEPP plan. But what is your opinion about using a commercial trust firm as another resource besides a CPA or tax attorney? I would think theyalready have the appropriate personnel on staff already.
Keith. I assume that your are a “planner” like me. So here are a few suggestions I have learned since dealing with this subject:
1. Buy Bill”s book. It”s a great resource and it”s deductible for you.
2. Find a local CPA or tax attorney you can work with to do the 72(t) calculations and give the opinion Bill referred to in his response. You may be able to do totally accurate calculations, but your want someone else to put on the hook for any legal action that may result.
3. In your example of the single person with two children, consider the following:
a. Are the children of legal age in your state? If not then naming them “Beneficiary” creates more problems. You might need some legal work to deal effectively with this problem, or have a UTMA or existing UGMA account named as beneficiary.
b. Instead of one IRA use two, naming each child or UTMA / UGMA as beneficiary. This way you get to “streatch out” the IRA for the children”s benefit.
Good luck.
Jim2005-08-22 09:49, By: Jim, IP: [70.184.1.35]

L2: Beneficiary relationship to 72t calculationKeith-I have been working exclusively with 72t’s since1993. I have dealt with tax lawyers, estate planning lawyers, tax preparers, and many CPA’s. Not once have I found anyone who has a clear understanding of 72t’s. If one of this group calculates a 72t for you, they will be using software, maybe even this web site.
The ONLY person I have found who has a clear and ongoing understanding is the Badger. This should not be surprising because the 72t rules are very complex and confusing unless you make them a specialty and keep up with them regularly. Even then, there is confusion-I consult with a firm that specializes in qualified plans (to the point of offering testimony before Congress) and has been in business for 20 years and there is still disagreement between them and the Badger on a few points. Even on this site, there is disagreement and confusion among those who work with 72t’s regularly.
If you want to be sure of all the 72t info you get, not just the calculation, is on target,the only way I know is to have the Badger or someone like him give you an opinion letter and advice for which they will assume legal responsibility. Short of this, it’s a crapshoot.2005-08-22 13:25, By: john, IP: [68.187.171.50]

L2: Beneficiary relationship to 72t calculationI agree, The Badger is one of the most knowledgeable people that I have met with regard to 72(t) plans.
However, as The Badger pointed out in his post, there are a few points where we do disagree. The first point is that for someone who is willing to read and study the subject, they can easily set up a SEPP using the information on this site and perhaps Bill’s book.
If they don’t want to take the time or they want to take the time to learn, they want to indulge in plans that fall outside the basic SEPP outline or simply want a little reassurance, then I suggest getting a professional.
Just my thoughts. 2005-08-22 13:35, By: Gfw, IP: [172.16.1.77]

L2: Beneficiary relationship to 72t calculationThe time for ‘agree and disagree’ has come into this discussion.
If an individual wishes to set up their own SEPP plan, then I agree with Gordon that reading TheBadger’s book and using this site and other reference materials will work just fine. But that individual must accept the consequences of their own work and not go looking for someone to blame when and if their plan blows up.
However, for someone in the financial services business that is not a CPA or tax attorney to try setting up a SEPP plan, that person is asking for trouble. E&O protection for financial services professionals does NOT extend to providing tax advice, and setting up a SEPP is clearly providing tax advice. So in this case I agree with TheBadger.
Jim2005-08-22 15:05, By: Jim, IP: [70.184.1.35]

L2: Beneficiary relationship to 72t calculationLet’s see if we can differentiate just a little bit to see who needs what & who gets what. Let’s further phrase it in terms of some questions:
1. Probability of a program error potentially resulting in penalties and interest.
2. Probability of achieving the best designed plan(s) to meet one’s needs.
3. Probability of having easy recourse to some one in the case of failures of (1) or (2) above.
First case; an individual taxpayer who learns about 72(t)(2)(A)(iv) and reads the online literature from any of the big brokerage houses / trustees. Q1: modest to medium. Q2: zero to low. Q3: zero.
Second case: same taxpayer spends time at www.72t.net and gains additional information through reading the articles and browsing the discussion forum. Certainly better than the 1st case, however, our taxpayer is getting his knowledge in fragments as opposed to seeing the whole picture. Q1: zero to low. Q2: low or modest. Q3: zero.
Third case: same taxpayer buys the book; READS IT. Designs. Reads it again. Maybe even calls TheBadger to clarify a few points. Q1: zero to low. Q2: modest or better. Q3: zero.
Fourth case: engages a professional tax CPA or attorney to opine on the plan. Q1: zero. Q2: high. Q3: high.
Fifth case: engages a professional who is not a tax CPA or attorney. Q1: low. Q2: modest. Q3: low, but not zero.
A professional (CFP, RIA, broker, etc.) who designs SEPP plans for clients runs a triple set of risks which correspond to the questions above: (1) if (s)he incorrectly designs the SEPP plan; everyone on the planet (bosses and clients) are really angry (as in losing one’s job angry); (2) if (s)he makes no errors but does not design a correct set of plans to meet the client’s needs then only _ the planet is angry; namely the client group; (3) in either (1) or (2) above, an angry or angry and penalized client brings action against the designer or the designer’s firm, we are back to everyone is big time۝ angry at the designer again. Furthermore, a number of the investment advisory firms, albeit the smaller ones, are producing documents to give to clients that would appear to state the accuracy and/or compliance of a specific plan with IRS rules. Most of the time, they are technically accurate, but not always. Nonetheless, these documents take on the air of an opinion; or at least an opinion in the eyes of the common client. This is enough for the client to prevail in a court of law or in NYSE/NASDAQ arbitration hearings I should know. I am currently the expert witness (for the client) in two such cases where the brokerage/advisor/trustee just flat out screwed up. One case is significant enough (given the amounts and years involved) that it is going to cost an un-named (but actually large) brokerage firm somewhere in excess of $250,000. Lastly, this will be an uninsured loss to the brokerage because their insurance does not cover it.
Lastly, I would like to at least partially answer Jim’s earlier question about what if a trustee opines on a taxpayer’s SEPP plan. Is the opinion any good? The answer, I think, is maybe. Most big firms like ML or MSDW, etc. are brokerages/investment advisors/custodians/trustees all wrapped up in one organization. I think the opinion is good/binding/compensable as long as the opinion is signed by some one within the organization who has the apparent authority to do so (we are essentially litigating this issue next spring). Furthermore, the big guys are all around for the next 100 years so they are relatively easy to find and drag into litigation or arbitration. What a court or arbitration board will do remains an open question. Conversely, let’s say the client claim is one of a poorly designed plan to meet the client’s needs as opposed to an error. Here I think the client is disadvantaged and will likely not prevail. However, I have to admit I have seen no such litigation/arbitration to date.
In summary, I remain of the opinion that everyone should be like the 4th case above; it’s relatively cheap and everyone sleeps well at night.
TheBadger
wjstecker@wispertel.net
2005-08-22 15:55, By: TheBadger, IP: [66.250.23.21]

L2: Beneficiary relationship to 72t calculationBill – let”s assume for a moment that I agree with you – then as I said before in a prior post, I may as well just take down the site.
Our purpose is not to sell or promote any individuals services(professional or otherwise)or to suggest that to set up a SEPPprofessioal services are required – I really don”t think they are. We are here to promote information and the sharing of ideas. 2005-08-22 17:00, By: Gfw, IP: [172.16.1.77]