Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

 The “separate accounts rule,” discussed at ¶ 1.8.01 – ¶ 1.8.02 ; and  The ability to “remove” a beneficiary prior to the “Beneficiary Finalization Date”; see ¶ 1.8.03 . 1.7.06 Multiple beneficiaries: Who must take the RMD? If there are multiple beneficiaries, and the separate accounts rule applies (see ¶ 1.8.01 ), then each beneficiary is responsible to take the RMD from such beneficiary’s own separate account. What is not clear is, if there are multiple beneficiaries, and the separate accounts rule does NOT apply, to what extent do the minimum distribution regulations “care” about which beneficiary takes each year’s RMD (provided the terms of the participant’s beneficiary designation form are not violated)? A. Must year-of-death RMD be apportioned? If there are multiple beneficiaries, it appears that the RMD rules are satisfied as long as ANY beneficiary takes the balance of the year- of-death distribution; it is not required that each beneficiary take a pro rata share of the year-of-death RMD. See ¶ 1.5.04 (A). Of course the parties need to keep track of which beneficiary’s share any distribution comes out of. Dorian Example: Dorian’s IRA beneficiary designation form for his $1 million IRA specified that $50,000 was to be paid to his church and the balance equally to his two children. Assume the RMD for the year of his death is $40,000, of which Dorian had taken none. Prior to the end of the year of his death, $50,000 is distributed from the IRA to the church in full satisfaction of its share of the account. Since this distribution exceeded the RMD for the year, there is no need for the children to take any RMDs for that year from their shares. Percy Example: Percy dies in Year 1, leaving his $1 million IRA equally to his two daughters Daisy and Lily. They immediately divide the inherited IRA into separate accounts (two $500,000 inherited IRAs), one payable to each of them (see ¶ 1.8.01 ). Assume Percy’s RMD for Year 1 is $40,000, which he had not yet taken at the time of his death. Daisy withdraws $40,000 from her share of the inherited IRA in Year 1. This distribution satisfies the distribution requirement for Year 1, and accordingly Lily does not have to take any RMD from her share of the IRA until Year 2. The conclusion that the year-of-death RMD is not required to be distributed proportionately to all of the multiple beneficiaries is based on three IRS pronouncements: First, Reg. § 1.401(a)(9)- 5 , A-4(a), says that the year-of-death RMD must be distributed to “a” beneficiary, implying “any” beneficiary. Second, the separate accounts rule ( ¶ 1.8.01 ) provides that the entire account is treated as a single account for RMD purposes unless and until separate accounts are “established”; and the establishment of separate accounts during the year the participant died is not recognized for RMD purposes until the year after the year of death. Reg. § 1.401(a)(9)-8 , A-2(a)(2). Third, in Rev. Rul. 2005-36 ( ¶ 4.4.05 (A)) the distribution requirement for the year of death was satisfied where the distribution was made to only one beneficiary, even though (as a result of that beneficiary’s later partial disclaimer) that beneficiary was not the sole beneficiary of the account.