Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

C. If there is only one Designated Beneficiary, and he withdraws all of the benefits by the end of the 5-year rule period ( ¶ 1.5.06 ), the penalty for any missed RMDs in earlier years is automatically waived, so to that limited extent a beneficiary can make a penalty-free switch from the life expectancy method to the 5-year rule even after the “election deadline” ( ¶ 1.5.07 (B), (C)). Reg. § 54.4974-2 , A-7(b). It is not clear why the IRS limits this reasonable provision to the situation in which there is only one Designated Beneficiary. D. If the nonspouse Designated Beneficiary of a QRP or 403(b) plan completes a direct rollover from the inherited plan to an inherited IRA by the end of the year after the year of the participant’s death (or by the end of 2010, if the participant died in 2008), the Designated Beneficiary can elect to use the life expectancy payout method for the “inherited” IRA, even if under the original plan he would have been required to use the 5- year rule. See ¶ 4.2.04 (J). 1.5.12 Who gets the benefits when the beneficiary dies When the participant dies, the beneficiary becomes entitled to the benefits. ¶ 1.7.02 , ¶ 4.2.01 . This ¶ 1.5.12 explains who is entitled to receive the inherited benefits if the beneficiary, having survived the participant, and thus become entitled to the benefits, later dies before having withdrawn all the benefits from the plan. The person or entity entitled to the benefits after the death of the original beneficiary is called the successor beneficiary . Reg. § 1.401(a)(9)-4 , A-4(c), § 1.401(a)(9)-5 , A-7(c). Who the successor beneficiary is depends on the terms of the plan or IRA agreement. The IRS doesn’t really care who the account passes to at that point, since that has no effect on the ADP (see ¶ 1.5.13 ). Here are the alternatives: A. Beneficiary names successor beneficiary . Some plans and IRA providers allow the original beneficiary to name his own successor beneficiary. If the original beneficiary has named a successor beneficiary, the successor beneficiary steps into the shoes of the original beneficiary as owner of the account. See ¶ 4.4.04 (C) regarding how designating a successor beneficiary affects the original beneficiary’s ability to disclaim. B. Beneficiary’s estate . Some plans and IRAs require the benefits to be paid to the original beneficiary’s estate if the beneficiary dies before having withdrawn all the benefits he is entitled to. This is also likely to be where the benefits go if the original beneficiary dies without having named a successor beneficiary (but see “C”). In either case, the estate of the original beneficiary steps into the shoes of the original beneficiary as owner of the account. See ¶ 6.1.05 for ability to transfer the account out of the beneficiary’s estate. C. Successor beneficiary named by the plan . At least one IRA provider spells out, in its IRA documents, individuals (for example, the deceased beneficiary’s surviving spouse or children) who will succeed to the account if the original beneficiary (having survived the participant) dies before having withdrawn all of the benefits. Unlike with designating individuals to take if the participant dies without having named a beneficiary (see ¶ 1.7.03 ), there is no RMD advantage to having the plan specify individual successor beneficiaries, since the identity of the successor beneficiary has no effect on the ADP (see ¶ 1.5.13 ; see ¶ 1.6.05 (C) for a rarely-applicable exception to this rule). See ¶ 4.4.12 (A) for possible