Life and Death Planning for Retirement Benefits

74

Life and Death Planning for Retirement Benefits

RMDs after Rowena’s death. If Rowena had not taken the RMD for Year 3 by the deadline of December 31, Year 3, then such failure to take the RMD would have been deemed an election by Rowena to treat the IRA as her own, in which case a whole other set of rules would apply after her death; see ¶ 3.2.03 (D)(3) regarding this deemed election and ¶ 1.6.03 (B) for how to compute RMDs to the spouse’s beneficiaries in that case. C. Post-death rules applied as if spouse is participant. If the (B)(iv)(II) rule applies (see “A” and “B”), then the benefits must be distributed, following the spouse’s death, either by the end of the year that contains the fifth anniversary of the spouse’s death (5-year rule; ¶ 1.5.06 ) or (if the benefits are payable to a Designated Beneficiary of the surviving spouse ) in annual installments over the life expectancy of the spouse’s Designated Beneficiary, commencing no later than December 31 of the year following the year of the spouse’s death. ¶ 1.5.05 ; Reg. § 1.401(a)(9)-3 , A-5, A-6, § 1.401(a)(9)-4 , A-4(b). Essentially, the surviving spouse is treated as a “new” participant who died before his RBD . The beneficiary to whom the benefits are paid at the spouse’s death could be a successor beneficiary named by the surviving spouse (Reg. § 1.401(a)(9)-4 , A-2) or by the plan; see ¶ 1.5.12 , ¶ 1.7.02 . The identity and status of the spouse’s beneficiary will be determined as of the date of the spouse’s death, and finalized on September 30 of the year after the year of the spouse’s death (see ¶ 1.8.03 ). Note, however, that even if the surviving spouse has remarried, and named her new 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