Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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C. Effect of the plan’s “state law” provision . Some plan documents, as in Kennedy, explicitly recognize disclaimers. Such a plan is obviously required to honor a disclaimer that satisfies the plan’s requirements regarding disclaimers. Other plans do not specifically mention disclaimers, but do recite that they are governed by a particular state’s laws to the extent not preempted by ERISA. Under Egelhoff and Boggs, state law is pre-empted only to the extent it would require the plan administrator to do something that is not in accordance with the plan documents. With respect to disclaimers, however, the Supreme Court has stated in Kennedy that there is a federal common law right of waiver and/or disclaimer and that these rights do not, per se, violate ERISA. Since ERISA does not preempt disclaimers, and in fact federal law favors the right of disclaimer, according to Kennedy, it would appear that a plan that is to be administered in accordance with the law of a particular state (except to the extent preempted) is required by the terms of the plan document to honor a disclaimer that complies with such state’s law. Who is liable for the § 4974 penalty for a missed RMD ( ¶ 1.9.02 ) for the year of the participant’s death if a qualified disclaimer causes the identity of the beneficiary to change after the end of the year? Howard Example: Howard died in November, Year 1, after his RBD, leaving his IRA to his daughter Stephanie. Howard’s RMD for Year 1 was $30,000; he had not yet taken that distribution at the time of his death. In January, Year 2, Stephanie disclaimed the entire IRA by means of a qualified disclaimer. As a result of Stephanie’s disclaimer, the contingent beneficiary, Howard’s son Milton, became “the” beneficiary. Accordingly, it appears that Milton is liable for the 50 percent penalty for failure to take the Year 1 RMD—even though at no time in Year 1 could he have legally accessed the account! Disclaimers have proven to be of great value in cleaning up beneficiary designations where the deceased participant named the “wrong” beneficiary. See, e.g. , PLR 9442032 where a disclaimer was used to allow retirement benefits to flow to the decedent’s “credit shelter trust” that otherwise would have been unfunded. A. Changing the Designated Beneficiary. A qualified disclaimer made by September 30 of the year after the year of the participant’s death (the “Beneficiary Finalization Date”; see ¶ 1.8.03 ) is effective to “remove” the disclaimant as a beneficiary of the disclaimed portion for purposes of determining who is the participant’s Designated Beneficiary under the minimum distribution rules. Reg. § 1.401(a)(9)-4 , A-4(a). The fact that the Beneficiary Finalization Date is not until September 30 of the year after the year of death does not extend the deadline for making a qualified disclaimer. ¶ 4.4.06 . By means of a qualified disclaimer, an older beneficiary (such as a surviving spouse or child) can disclaim the benefits and allow them to pass to a younger contingent beneficiary (such as a child or grandchild) and the younger beneficiary will then be “the Designated Beneficiary” with respect to the disclaimed portion. RMDs with respect to the disclaimed portion will be determined based on the identity of the beneficiary who takes as a result of the disclaimer rather than on the identity of the original beneficiary who disclaimed. Disclaimers and the minimum distribution rules How a disclaimer can help after the participant’s death