Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

establishment of the separate accounts on a pro rata basis in a reasonable and consistent manner among the separate accounts.” Reg. § 1.401(a)(9)-8 , A-3. Chloe Example: Chloe dies in Year 1, leaving her IRA to her husband and daughter equally. They divide the inherited IRA into two separate inherited IRAs that qualify as separate accounts. Between the time Chloe died and the time the husband and daughter divide up the IRA into separate accounts some assets in the account decline in value and some increase, but no distributions are taken. The division must result in two accounts that are equal in value on the date of the division. They cannot (for example) give a larger share of the total account to daughter based on the theory that the assets that increased in value belonged to the daughter’s share of the inherited IRA and the assets that declined belonged to the father’s share. Such pro rata sharing would be the norm for fractional or percentage interests in the benefits. A pecuniary gift will not meet this definition of “separate account” unless (under local law or under the terms of the plan documents) it will share in post-death pre-division gains and losses pro rata with the other beneficiaries’ shares. If the beneficiary designation contains any pecuniary gifts that would not so share, the beneficiaries of the pecuniary gifts can be “eliminated” by distributing their gifts to them prior to the Beneficiary Finalization Date (see ¶ 1.8.03 ); if only fractional or percentage interest beneficiaries remain as beneficiaries on the Beneficiary Finalization Date, then this requirement is met. E. If beneficiaries inherit through a trust or estate . Multiple beneficiaries who inherit their shares of an IRA through a trust or estate can establish separate accounts for their respective shares for all RMD purposes except determination of the ADP. See ¶ 6.3.02 . F. When the separate accounts become effective. The division of a single account into separate accounts is generally effective for RMD purposes beginning with the year after the year in which the division occurs, and for subsequent years. Reg. § 1.401(a)(9)-8 , A- 2(a)(2), first sentence. However, if the separate accounts are established either in the year of the participant’s death or in the following year, the division will be effective for purposes of calculating RMDs beginning with the year after the year of the participant’s death. T.D. 9130, 2004-26 IRB 1082, “Explanation of Provisions,” “Separate accounts under defined contribution plans.” 1.8.02 How do you “establish” separate accounts? The way most often used to “establish” separate accounts in an inherited IRA is to transfer the account assets directly, via IRA-to-IRA transfer ( ¶ 2.6.08 ), from the single IRA that the deceased participant owned at his death into separate “inherited IRAs” payable to the respective beneficiaries. In the case of a typical IRA payable to, for example, “my three children A, B, and C, equally,” immediately before the participant’s death the account is titled “John Doe, IRA.” As a result of John Doe’s death, the account becomes an “inherited IRA,” titled “John Doe, deceased, IRA payable to A, B, and C, as beneficiaries” (or “A, B, and C, as beneficiaries of John Doe”). See ¶ 4.2.01 . Upon instruction from the beneficiaries, the IRA provider creates three new empty inherited IRAs, titled “John Doe, deceased, IRA payable to A [or B, or C] as beneficiary” or “A [or B, or C] as beneficiary of John Doe,” and transfers equal amounts directly into the new accounts. Separate accounts have been established.