Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

What is the ADP after the beneficiary’s death?

¶ 1.5.12 explained how to determine who is the successor beneficiary. This ¶ 1.5.13 explains the Applicable Distribution Period (ADP; ¶ 1.2.03 ) that applies to the successor beneficiary. GENERAL RULE: Subject to two rarely-applicable exceptions (see below), the death (in the case of an individual beneficiary) or termination of existence (in the case of a trust or estate named as beneficiary) of the original beneficiary has no effect on the ADP. The successor beneficiary simply steps into the shoes of the original beneficiary and continues to take out the benefits using the ADP that applied to the original beneficiary. Any such subsequent beneficiary is merely a “successor” to the original beneficiary’s interest and is ignored in determining the ADP. Reg. § 1.401(a)(9)-5 , A-7(c)(2). For example, if the benefits were payable to a Designated Beneficiary who survived the participant but then died prior to having withdrawn all the benefits, the successor beneficiary continues to withdraw over what is left of the life expectancy of the original Designated Beneficiary (or of the deceased participant if applicable; see ¶ 1.5.04 (B)–(D)), or at any faster rate required by the plan or desired by the successor beneficiary. This rule holds true even if the Designated Beneficiary, having survived the participant, dies before the Beneficiary Finalization Date; see ¶ 1.8.03 (C). Hugh Example: Hugh, as beneficiary of his mother’s IRA, is taking RMDs in annual installments over his 34-year life expectancy. He dies 10 years into his 34-year ADP. At Hugh’s death, ownership of the IRA passes to Regis, a successor beneficiary named by Hugh. RMDs to Regis continue to be calculated based on Hugh’s life expectancy. Regis uses what’s left of Hugh’s 34 - year ADP established at the time of Hugh’s mother’s death. Similarly, if the benefits were payable to the participant’s estate under the 5-year rule ( ¶ 1.5.03 (E)) or over the participant’s remaining life expectancy ( ¶ 1.5.04 (E)), and the estate closes and transfers the inherited retirement plan out to the estate’s beneficiaries (see ¶ 6.1.05 ), the estate beneficiaries can use up whatever is left of the 5-year rule or of the participant’s life expectancy— but the transfer does not allow the beneficiaries to switch over to using a life expectancy payout.  If the participant’s sole Designated Beneficiary was the participant’s surviving spouse, the ADP and/or method of computing life expectancy may change on the spouse’s subsequent death; see ¶ 1.6.05 (C) (if both the participant and his surviving spouse died before the end of the year in which the participant reached or would have reached age 70½) or ¶ 1.6.03 (E) (otherwise) instead of this section.  If the plan documents (or the participant’s beneficiary designation form) required the original beneficiary to survive by a certain period of time in order to be entitled to the benefits, and the named beneficiary survived the participant but failed to meet that condition, see ¶ 1.7.07 . EXCEPTIONS: Here are the exceptions to the general rule: