Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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spouse as sole beneficiary, the special rule of § 401(a)(9)(B)(iv) does NOT apply a second time, to the new surviving spouse. Reg. § 1.401(a)(9)-3 , A-5 (last sentence).

The effects of the “(B)(iv)(II) rule” are not harmful if the spouse has a Designated Beneficiary: The benefits can be distributed in annual installments over that Designated Beneficiary’s life expectancy. Unfortunately, in most cases when the (B)(iv)(II) rule applies the spouse does not have a Designated Beneficiary:  If spouse holds as beneficiary: Typically, the surviving spouse will have died without having had the time and/or the proper planning advice to name a successor beneficiary for her interest. If the surviving spouse dies before designating a successor beneficiary for her interest, the benefits (under most plans’ and IRAs’ default provisions; see ¶ 1.7.02 ) will pass to the spouse’s estate —meaning that the benefits will not pass to a Designated Beneficiary and the 5-year rule will apply. ¶ 1.5.03 (E). Alphonse Example: Alphonse died at age 65, leaving his IRA to his wife, Heloise. Heloise died after Alphonse, but before the end of the year in which Alphonse would have reached age 70½, still holding the IRA as beneficiary. She had neither elected to treat the IRA as her own ( ¶ 3.2.03 ), nor named a successor beneficiary for her interest in Alphonse’s IRA ( ¶ 1.5.12 (A)). Under the terms of Alphonse’s IRA, if a beneficiary has inherited the account, and dies without having named a successor beneficiary, any remaining balance in the account becomes payable to the beneficiary’s estate. Under the special rule of § 401(a)(9)(B)(iv)(II) , the minimum distribution rules now apply to this account “as if” Heloise were the participant and died before her RBD. Thus, the “new beneficiary” of the account is Heloise’s estate and the 5-year rule applies because Heloise did not have a Designated Beneficiary. ¶ 1.5.07 .  If benefits are left to a conduit trust for the spouse: In PLR 2006-44022, a participant died before his RBD leaving an IRA to a trust. Litigation ensued among the participant’s surviving spouse and other family members. The litigation was settled by an agreement reforming the trust, so that it became either a conduit trust ( ¶ 6.3.05 ) or a 100 percent grantor trust ( ¶ 6.3.10 ) (the ruling is not clear) for the surviving spouse’s benefit, with remainder to her son. The surviving spouse then later died before she reached age 70½. (Actually, the wife’s age at her death was not relevant; despite the wording of this ruling, the question under § 401(a)(9)(B)(iv)(II) is whether she died before the end of the year the deceased participant would have reached age 70½; see “B.”) The IRS then applied the special (B)(iv)(II) rule. The IRS ruled that the son was not the spouse’s Designated Beneficiary, because she “had not named a beneficiary of her interest in IRA X prior to her death.” The result was that the 5-year rule applied to the IRA after the spouse’s death. This result seems erroneous based on the IRS’s own definition of Designated Beneficiary ( ¶ 1.7.03 ). When is a trust for the spouse the same as the spouse? A trust for the spouse’s sole or primary benefit may be entitled to some of the special privileges that apply when the spouse individually is named as beneficiary.