Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

1.6.03 Road Map: How to determine RMDs of surviving spouse ............................................... 70 1.6.04 Required Commencement Date: Distributions to spouse ................................................. 72 1.6.05 Special “(B)(iv)(II) rule” if both spouses die young......................................................... 72 1.6.06 When is a trust for the spouse the same as the spouse? .................................................... 75 1.7 T HE B ENEFICIARY AND THE “ D ESIGNATED B ENEFICIARY ” .............................................. 76 1.7.01 Significance of having a Designated Beneficiary............................................................. 76 1.7.02 Who is the participant’s beneficiary? ............................................................................... 76 1.7.03 Definition of Designated Beneficiary ............................................................................... 77 1.7.04 Estate cannot be a Designated Beneficiary....................................................................... 79 1.7.05 Multiple beneficiary rules and how to escape them.......................................................... 79 1.7.06 Multiple beneficiaries: Who must take the RMD? ........................................................... 80 1.7.07 Simultaneous and close-in-time deaths............................................................................. 81 1.8 M ODIFYING RMD R ESULTS AFTER THE P ARTICIPANT ’ S D EATH ..................................... 82 1.8.01 The separate accounts rule ................................................................................................ 82 A. IRS’s statement of the separate accounts rule....................................................... 82 B. Separate accounts for ADP purposes .................................................................... 83 C. Separate accounts for all other RMD purposes..................................................... 83 1.8.02 How do you “establish” separate accounts? ..................................................................... 84 1.8.03 “Removing” beneficiaries by Beneficiary Finalization Date............................................ 85 A. The Beneficiary Finalization Date ........................................................................ 85 B. Removal by distributing beneficiary’s share of benefits ...................................... 86 C. Effect of death prior to the BFD ........................................................................... 87 1.9 E NFORCEMENT OF THE RMD R ULES ................................................................................. 87 1.9.01 Who enforces the minimum distribution rules.................................................................. 87 1.9.02 Failure to take an RMD: 50% penalty and other effects................................................... 87 1.9.03 IRS waiver of the 50 percent penalty................................................................................ 88 1.9.04 Statute of limitations on the 50 percent penalty................................................................ 89 CHAPTER 2: INCOME TAX ISSUES ................................................................................... 91 2.1 I NCOME T AX T REATMENT : G ENERAL &M ISCELLANEOUS ............................................. 91 2.1.01 Plan distributions taxable as ordinary income .................................................................. 91 2.1.02 Post-2010 tax increases; surtax on investment income..................................................... 92 2.1.03 When does a “distribution” occur? ................................................................................... 93 2.1.04 Actual distributions and deemed distributions.................................................................. 94 2.1.05 Whose income is it? Community property etc.................................................................. 95 2.1.06 List of no-tax and low-tax distributions............................................................................ 95 A. Roth plans ............................................................................................................. 96 B. Tax-free rollovers and transfers ............................................................................ 96 C. Life insurance proceeds, contracts ........................................................................ 96 D. Recovery of basis .................................................................................................. 96 E. Special averaging for lump sum distributions ...................................................... 96 F. Net unrealized appreciation of employer securities (NUA) ................................. 96 G. No tax on distribution of annuity contract ............................................................ 96