Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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Effect of taking a distribution; partial disclaimers

Taking a distribution from an inherited retirement plan does not necessarily constitute acceptance of the entire plan. A. Taking RMD for year of death not acceptance of entire plan. The IRS has issued a safe- harbor ruling that a beneficiary can receive and keep the required minimum distribution RMD) from the decedent’s IRA for the year of the participant’s death ( ¶ 1.5.04 (A)) and still disclaim all or part of the rest of such beneficiary’s interest in the decedent’s IRA. Rev. Rul. 2005-36, 2005-26 IRB 1368. There is one minor limitation: By taking the RMD, the beneficiary is deemed to have accepted not only the RMD itself but also the “income” that the plan earned on that “pecuniary amount” (as the IRS calls it) between the date of death and the date the RMD is distributed to the beneficiary. See the Ruling for how to compute this income. B. Taking other distributions from the plan. If the beneficiary takes out more than just the year-of-death RMD (and income thereon), such excess distribution is not within the safe harbor of Rev. Rul. 2005-36. However, he has still not necessarily accepted the entire plan; the Code permits a beneficiary to disclaim part of an inheritance while accepting other parts of it. A person may disclaim “any interest” in property. § 2518(a) . Reg. § 25.2518-3 is entirely devoted to disclaimers of “less than an entire interest.” Several types of partial disclaimers are recognized, including a disclaimer relating to “severable property.” Severable property is “property which can be divided into separate parts each of which, after severance, maintains a complete and independent existence. For example, a legatee of shares of corporate stock may accept some shares of the stock and make a qualified disclaimer of the remaining shares.” Reg. § 25.2518-3(a)(1)(ii) . When a beneficiary inherits an estate, or a joint securities account, the beneficiary has inherited in effect a collection of severable property. The beneficiary can take some assets from the inherited collection and disclaim others. See Reg. § 25.2518-3(d) , Example (17). The IRS has in rulings allowed beneficiaries to accept some assets from an estate, trust, or joint investment account and later disclaim other assets. Although they did not involve retirement plan accounts, PLRs 8113061, 8619002, 9036028, 9214022, and 2005-03024 support the conclusion that a beneficiary may take a distribution from a typical self-directed IRA (which is, like an estate or a joint investment account, a collection of severable property) without being deemed to have accepted the entire account and therefore without being precluded from disclaiming all or part of the rest of the account. (The only exception would be if the distributions taken could somehow be construed as representing the “income” of the entire account; see ¶ 4.4.04 .) Rev. Rul. 2005-36 also supports this conclusion, in that it created a safe harbor for one type of partial acceptance (taking the RMD for the year of death), and did not rule out the possibility of a qualified disclaimer even if other distributions had been taken. If the beneficiary thinks of this issue before he takes a distribution, he can eliminate the concerns by either executing a partial disclaimer before he takes the distribution, or sending in to the IRA provider, along with the request for a distribution, a statement that the beneficiary is not accepting the entire account, just the amount of this distribution.