Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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effect of such a provision on the ability of the original beneficiary’s executor to disclaim the benefits. D. Contingent beneficiary. Some practitioners assume that, if the original beneficiary dies after the participant, the account passes to the contingent beneficiary named by the participant. This would typically NOT be true. A contingent beneficiary is not the same as a successor beneficiary . Usually, the participant’s beneficiary designation form provides that the contingent beneficiary will receive the benefits only if the primary beneficiary predeceases the participant (or disclaims the benefits). Once the primary beneficiary survives the participant, the primary beneficiary (unless he disclaims the benefits; see ¶ 4.4) becomes the absolute owner of the account and the contingent beneficiary’s interest is completely eliminated. The plan documents (including the participant’s beneficiary designation; see “E”) could provide otherwise, but typically they don’t. E. Participant names successor beneficiary . Some participants would like to include provisions dictating what happens to the benefits remaining in the account if the original beneficiary dies after the participant but before withdrawing all the benefits. As noted at “D,” this is something above and beyond naming a “contingent beneficiary” to take the benefits if the primary beneficiary does not survive the participant. There is nothing illegal about having the participant name a successor beneficiary, but it does raise property law and estate tax issues beyond the scope of this book. Most IRA providers do not allow this approach, unless the account is an individual retirement trust (IRT; ¶ 6.1.07 ). See ¶ 3.3.11 for marital deduction effects, ¶ 4.4.12 (A) for possible disclaimer effects. 1.5.13 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. Subject to two rarely-applicable exceptions, 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 . 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