Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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1.7 The Beneficiary and the “ Designated Beneficiary”

This ¶ 1.7 explains what a “beneficiary” is ( ¶ 1.7.02 ); the difference between a “beneficiary” and a “Designated Beneficiary” ( ¶ 1.7.03 ); the problems when an estate is a beneficiary ( ¶ 1.7.04 ); and special rules that apply when there are multiple beneficiaries ( ¶ 1.7.05 – ¶ 1.7.06 ). See ¶ 1.8 for the “separate accounts” rule and how to modify the RMD results after the participant’s death. The valuable income tax deferral permitted under the “life expectancy of the beneficiary” or “stretch” payout method ( ¶ 1.1.03 , ¶ 1.5.05 (C)) is available only for retirement plan death benefits that pass to a Designated Beneficiary. Not every beneficiary is a Designated Beneficiary. If there is deemed to be no Designated Beneficiary, the payout options (under the applicable “no- DB rule”) will generally be less favorable than a payout over the life expectancy of an individual Designated Beneficiary. Therefore, estate planners must understand the meaning of the termDesignated Beneficiary and in most cases will want to take steps to assure that clients have a Designated Beneficiary so as to maximize the value of the client’s retirement plans for the benefit of the client’s chosen beneficiaries. However, there are situations in which it doesn’t matter whether there is a Designated Beneficiary; see ¶ 6.2.01 . Like life insurance proceeds, retirement benefits generally pass, as nonprobate property, by contract, to the beneficiary named on the participant’s beneficiary designation form for the plan in question. Unless otherwise provided in the beneficiary designation form or in the documents establishing the retirement plan, the provisions of the participant’s will are irrelevant in determining who inherits his retirement benefits. Most retirement plans and IRAs have a printed or on-line form the participant must use to name a beneficiary for his death benefits. Some plans and IRA providers will accept attachments to the printed form, or even a separate instrument in place of the plan’s form. For purposes of the post-death minimum distribution rules, the beneficiary means the person or persons who inherit the plan on the participant’s death. For example, a beneficiary designation form typically names a primary beneficiary (such as the participant’s spouse) and one or more contingent beneficiaries (such as the participant’s issue) who will take the benefits if the primary beneficiary does not survive the participant. If the primary beneficiary survives the participant, the primary beneficiary is “the” beneficiary, unless the primary beneficiary “disclaims” the benefits (see ¶ 4.4.10 ). Significance of having a Designated Beneficiary Who is the participant’s beneficiary?

If the primary beneficiary does not survive the participant, the contingent beneficiary becomes “the” beneficiary: