Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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such beneficiary(ies) for purposes of determining post-death RMDs; see the Road Map at ¶ 1.5.02 , Step 5. For example, if the surviving spouse is the sole beneficiary of a separate account payable to her, her account will be subject to the special minimum distribution rules applicable when the surviving spouse is sole beneficiary ( ¶ 1.6.03 – ¶ 1.6.05 ), even though the IRA was originally left to multiple beneficiaries. Reg. § 1.401(a)(9)-8 , A-2(a)(2), fourth sentence. C. Separate accounts for all other RMD purposes . Multiple beneficiaries can establish separate accounts for their respective interests even after the deadline described at “B.” Reg. § 1.401(a)(9)-8 , A-2(a)(2). The advantage of establishing “late” separate accounts is that, even though the ADP will continue to be the same for all of the separate accounts, each beneficiary’s RMD will be determined solely based on his separate account balance for Distribution Years following the establishment of the separate accounts. Each beneficiary will be responsible only for taking the RMD from his respective account; there is no need to worry about a penalty because some other beneficiary fails to take his RMD ( ¶ 1.9.02 ). Separate accounts allow each beneficiary to choose his own investments. The ADP for all the late-established separate accounts will continue to be the ADP that applied to the combined accounts on the Beneficiary Finalization Date ( ¶ 1.8.03 ). See also ¶ 6.3.02 (B). D. Pro rata sharing in gains and losses. In order to establish separate accounts for any purpose, the beneficiaries’ interests must share pro rata in post-death gains and losses occurring prior to the division. This requirement comes from the definition of separate accounts: “[S]eparate accounts in an employee’s account are separate portions of an employee’s benefit reflecting the separate interests of the employee’s beneficiaries under the plan as of the date of the employee’s death for which separate accounting is maintained. The separate accounting must allocate all post-death investment gains and losses, contributions, and forfeitures, for the period prior to the establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the separate accounts.” Reg. § 1.401(a)(9)-8 , A-3. Chloe Example: Chloe dies in Year 1, leaving her IRA to her husband and daughter equally. They divide the inherited IRA into two separate inherited IRAs that qualify as separate accounts. Between the time Chloe died and the time the husband and daughter divide up the IRA into separate accounts some assets in the account decline in value and some increase, but no distributions are taken. The division must result in two accounts that are equal in value on the date of the division. They cannot (for example) give a larger share of the total account to daughter based on the theory that the assets that increased in value belonged to the daughter’s share of the inherited IRA and the assets that declined belonged to the father’s share. Such pro rata sharing would be the norm for beneficiaries who are to receive fractional or percentage interests in the benefits. A pecuniary gift will not meet this definition of “separate account” unless (under local law or under the terms of the plan documents) it will share in post - death pre-division gains and losses pro rata with the other beneficiaries’ shares. If the beneficiary designation contains any pecuniary gifts that would not so share, the beneficiaries of the pecuniary gifts can be “eliminated” by distributing their gifts to them prior to the Beneficiary Finalization Date ( ¶ 1.8.03 ); if following distribution of the pecuniary gift(s) only fractional or percentage