Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

“separate account.” He is considered the sole beneficiary of that separate account. Reg. § 1.401(a)(9)-8 , A-2(a)(2).

The drawback of relying on this exception is that the beneficiaries may not meet the deadline for establishing separate accounts, which is December 31 of the year after the year of the participant’s death. If they miss that deadline, the beneficiaries will be limited to taking benefits under whichever “no-Designated Beneficiary” (no-DB) rule applies: The benefits will have to be distributed by the end of the year that contains the fifth anniversary of the participant’s death, if he died before his Required Beginning Date (RBD). This is called the “5-year rule.” If the participant died on or after his RBD, the applicable “no-DB rule” would require distribution of the benefits over what would have been the remaining life expectancy of the participant had he lived. See ¶ 1.5.06 – ¶ 1.5.08 . C. Second exception: distribution or disclaimer by Sept. 30. The other exception is that a beneficiary is “disregarded” (doesn’t count as a beneficiary for purposes of determining the ADP) if such beneficiary ceases to have any interest in the benefits by September 30 of the year after the year of the participant’s death (called the “Beneficiary Finalization Date” in this book). Reg. § 1.401(a)(9)-4 , A-4(a); see ¶ 1.8 . Thus, the charity’s share can be paid out after the participant’s death at any time up to the Beneficiary Finalization Date, and the remaining beneficiaries (assuming they are all individuals) will be entitled to use the life expectancy payout method. As of the magic date there is no nonindividual beneficiary on the account, so the plan complies with the “all-beneficiaries-must-be-individuals” rule. Frank Example: Frank dies in Year 1. The beneficiary designation for his $1 million IRA provides that “$10,000 shall be paid to Charity X and the balance shall be paid to my son.” Charity X takes full distribution of its $10,000 share of the account shortly after Frank’s death. As of the Beneficiary Finalization Date (September 30, Year 2), the son is the sole remaining beneficiary of the IRA, because the charity’s interest has been terminated by distribution. As an individual, the son is a Designated Beneficiary, and RMDs will be determined based on the son’s life expectancy. The drawback of relying on the distribute-by-the-Beneficiary Finalization Date exception is that time passes quickly and people miss deadlines. If for any reason the charity’s interest is not entirely distributed (or disclaimed) by the deadline, the charity still “counts” as a beneficiary and the individuals would lose out on the life-expectancy-of-the-beneficiary payout method. D. When to rely (or not rely) on the exceptions. As explained at “B” and “C,” it is possible to name both individuals and charities as co-beneficiaries of one IRA, without necessarily losing the option for the individual beneficiaries to use the life-expectancy-of-the- beneficiary payout method, because of the two exceptions to the multiple-beneficiaries rule. The next question is whether it is advisable to rely on these exceptions, or to avoid the whole problem by not using this approach. Relying on the exceptions makes sense in some cases but not others. If use of the life- expectancy-of-the-beneficiary payout method would be extremely desirable and advantageous for the individual beneficiaries, it may not be wise to rely on the exceptions. Instead, consider establishing separate IRAs during the participant’s life, one payable to the charitable