Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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two separate IRAs, one payable to each of the respective beneficiaries. Such separate IRAs have the nontax advantage of not requiring the beneficiaries to interact with each other after the participant’s death. The disadvantages of having multiple IRAs while the participant is still alive include the additional paperwork, the difficulty of keeping the IRAs in the same relative proportion to each other when each contains different investments, and increased investment management fees applicable to multiple smaller accounts compared with one larger account. Establishing separate accounts for multiple beneficiaries ( ¶ 1.8.01 – ¶ 1.8.02 ) is one way to improve the RMD situation after the participant’s death. Another is to prune the list of beneficiaries, eliminating “undesirable” beneficiaries by means of distributions and/or disclaimers prior to the “Beneficiary Finalization Date.” A. The Beneficiary Finalization Date. The participant’s beneficiaries for minimum distribution purposes are all the beneficiaries who, as of the date of the participant’s death, are or might become entitled to inherit his benefits, minus any beneficiary who ceases to have an interest in the benefits by a certain deadline: “[T]he employee’s designated beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of September 30 of the calendar year following the calendar year of the employee’s death.” Reg. § 1.401(a)(9)-4 , A-4(a), second sentence. That deadline is called the Beneficiary Finalization Date in this book, though that term is not used in the regulations. Post-death planning cannot somehow designate a new crop of beneficiaries. Rather, “...any person who was a beneficiary as of the date of the employee’s death, but is not a beneficiary as of that September 30 ( e.g. , because the person receives the entire benefit to which the person is entitled before that September 30) is not taken into account in determining the employee’s designated beneficiary for purposes of determining the distribution period for required minimum distributions after the employee’s death.” Reg. § 1.401(a)(9)-4 , A-4(a), third sentence. So, if there are “good” beneficiaries ( e.g. , individual beneficiaries with long life expectancies) who are already named by the deceased participant ( e.g. , as contingent beneficiaries, or among a group of multiple beneficiaries), it is possible to eliminate other ( e.g. , older or nonindividual) beneficiaries, so that by September 30 of the year after the year of death only the “good” beneficiaries are left. There is a disconnect between the Beneficiary Finalization Date (September 30 of the year after the year of the participant’s death) and the deadline for establishing separate accounts for ADP purposes (December 31 of the year after the year of the participant’s death; see ¶ 1.8.01 ). Establishment of separate accounts during the year after the participant’s death is effective retroactively to the beginning of the year; see ¶ 1.8.01 (F). So an account that appears to have multiple beneficiaries as of the Beneficiary Finalization Date may actually be treated for RMD purposes as multiple separate accounts, with different beneficiaries, if separate accounts are “Removing” beneficiaries by Beneficiary Finalization Date