Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

court in a position of interpreting the federal minimum distribution regulations. Furthermor e, it attempted an end-run around the IRS’s rule that (even if a trust IS named as beneficiary), all trust beneficiaries must use the life expectancy of the OLDEST trust beneficiary as the ADP ( ¶ 6.3.02 ). The IRS refused to accept the state court order in any respect, ruling that the beneficiary designation form failed to indicate ANY beneficiary, therefore the benefits were payable by default to the participant’s estate. One can only speculate whether, if the court order had been limiting to just interpreting the beneficiary designation form as naming the trust as beneficiary, the IRS might have accepted it. A. When to seek reformation and avoid disclaimer. If the decedent tried to do something, or thought he had done something, or had agreed to do something, but that “something” did not end up getting done in the actual documents in effect on his death, the correct strategy wis to reform the documents so they reflect what the decedent tried to do, thought he had done, or was supposed to do. A disclaimer is usually not the right strategy in this situation. See PLR 2008-46003, discussed at ¶ 4.4.08 (A). B. When and how to use disclaimer. If there is no evidence that the decedent had tried or agreed to do something that did not in fact get done, but the beneficiaries just don’t like whatever it is the decedent did, then reformation is not the right remedy. Disclaimer may be an appropriate way for the beneficiaries to try to get things to be the way they want them to be. Elmer Example: Elmer has three children, X, Y, and Z. He dies. He leaves his probate estate to all three children equally, but names only X as beneficiary of his IRA. He named no contingent beneficiary; the IRA documents provide that Elmer’s estate is the default beneficiary. X wants to share the IRA equally with his siblings, for the sake of fairness. Seeking reformation of the beneficiary designation form is not advisable, because there is no evidence that Elmer tried to name all three children as IRA beneficiaries but was thwarted by the IRA provider’s mistake, or that Elmer believed he had named all three children; no one knows why X ended up as sole beneficiary of the IRA. Even if a court and the IRA provider went along with the reformation, the IRS probably would not accept it (see ¶ 4.5.05 – ¶ 4.5.06 ), with the result that X might be treated as having made an income taxable assignment and taxable gift of the IRA to his siblings, and also causing loss of Designated Beneficiary treatment. Instead, X should disclaim an undivided two- thirds interest in the IRA and also disclaim any right he has (as a beneficiary of Elmer’s estate) to share in this particular asset. The disclaimer will allow X to keep his one-third of the IRA as Designated Beneficiary, and allow the other two siblings to receive one-third each through the estate. Inheriting their shares through the estate will have less favorable income tax consequences (no life expectancy payout), but under these facts it is just not possible to achieve the goal of shifting part of the IRA to them and also get them Designated Beneficiary treatment. 4.6 Income in Respect of a Decedent (IRD) When the participant dies, the plan benefits become payable to his beneficiaries. The beneficiaries must pay income tax on the inherited benefits because such benefits are “income in respect of a decedent” (IRD) under § 691 . § 61(a)(14) . This ¶ 4.6 provides the basics of the IRD rules, with emphasis on how the rules apply to retirement benefits. For any questions not answered here, see the highly-recommended book The Estate Planner’s Guide to Income in Respect of a Decedent, by Alan S. Acker ( Bibliography ).