Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

A. When to use the participant’s life expectancy as the ADP. There are two situations in which the participant’s single life expectancy (i.e., what would have been his life expectancy if he had not died) is the ADP for distributions to a beneficiary. Both arise only if the participant died on or after his RBD:  If the participant dies on or after his RBD with no Designated Beneficiary , the ADP is the participant’s remaining single life expectancy. Reg. § 1.401(a)(9)-5 , A- 5(a)(2). This is the “no-DB” rule that applies in cases of death on or after the RBD. ¶ 1.5.04 (E).  If the participant dies on or after his RBD leaving the benefits to a Designated Beneficiary, then the ADP is the beneficiary’s life expectancy or the participant’s life expectancy, whichever is longer. Reg. § 1.401(a)(9)-5 , A-5(a)(1). So if the Designated Beneficiary is older than the participant was, the beneficiary uses the participant’s life expectancy as the ADP, not the beneficiary’s own life expectancy. There is no election or choice involved in this situation; the RMDs are calculated based on the longer of the beneficiary’s life expectancy or the participant’s life expectancy. Of course, as always, regardless of who is the beneficiary, the plan may require an even faster payout, see ¶ 1.5.10 ; or the beneficiary may choose to take a faster payout, or a lump sum, if permitted by the plan, ¶ 1.2.01 , #4. B. How to calculate the participant’s life expectancy. Use the IRS’s Single Life Table ( ¶ 1.2.03 ) and find the divisor or “applicable distribution period” (ADP) based on the age the participant had attained (or would have attained had he lived long enough) on his birthday in the year of death. This number, reduced by one, is the divisor for the year after the year of the participant’s death. The divisor is reduced by one each year thereafter (fixed- term method; ¶ 1.2.04 (B)). Reg. § 1.401(a)(9)-5 , A-5(c)(3). Cookie Example: Cookie died in July, 2016, at age 73, leaving her IRA to her estate. She had already taken her RMD for 2016. The estate’s ADP is computed as follows. Cookie was born in November, 1942, so she would have turned age 74 on her 2016 birthday had she lived. The life expectancy factor for age 74 from the Single Life Table is 14.1. Therefore, the estate’s divisor for 2017 is 13.1 (14.1 minus one). The first RMD to the estate (payable in 2017) is the account balance as of December 31, 2016, divided by 13.1. This RMD must be taken by 12/31/17. In 2018, the RMD will be the 12/31/17 account balance divided by 12.1, and so on. C. Other aspects. Here are some points to note about the calculation of RMDs using what would have been the remaining single life expectancy of the deceased participant as the ADP:  Longest possible payout period is 15 years. The largest divisor that could apply under this rule is 15.3. If the participant turned age 70 on his birthday in the year he reached age 70½, then died in the following year (but after his RBD), his age on his year-of-death birthday would be 71, for which the life expectancy is 16.3 years,