Life and Death Planning for Retirement Benefits

86

Life and Death Planning for Retirement Benefits

There is a disconnect between the Beneficiary Finalization Date (September 30 of the year after the year of the participant’s death) and the deadline for establishing separate accounts for ADP purposes (December 31 of the year after the year of the participant’s death; see ¶ 1.8.01 ). Establishment of separate accounts during the year after the participant’s death is effective retroactively to the beginning of the year; see ¶ 1.8.01 (F). So an account that appears to have multiple beneficiaries as of the Beneficiary Finalization Date may actually be treated for RMD purposes as multiple separate accounts, with different beneficiaries, if separate accounts are established by 12/31 of the year after the year of death because (in that year) the establishment of separate accounts is retroactive to the beginning of the year. For how the “removal” concept applies to beneficiaries of a trust that is beneficiary of an IRA, see ¶ 6.3.03 . For use of disclaimers to “remove” beneficiaries, see ¶ 4.4.11 (A). B. Removal by distributing beneficiary’s share of benefits. One way to cure the multiple beneficiary problem is to distribute, to any nonindividual (or older) beneficiaries, the shares payable to them. If the amounts payable to the nonindividual (or older) beneficiaries are entirely distributed to them by the Beneficiary Finalization Date, then only the remaining (younger, individual) beneficiaries who still have an interest in the benefit will “count” for purposes of determining who is the Designated Beneficiary. Reg. § 1.401(a)(9)-4 , A-4(a). Distributing these shares of course means that any “undesirable” beneficiary who is being cashed out loses the benefit of continued deferral of distributions, the goal that the other beneficiaries are trying to achieve by cashing out the older or nonindividual beneficiary. This fact may or may not be a problem. It is not a problem if the “undesirable” beneficiary is a tax-exempt charity, which gets no tax advantage from deferring plan distributions, and which is “undesirable” only because it is a nonindividual. See “Frank Example” at ¶ 7.2.02 (C). It is also no problem if the “older individual” beneficiary being cashed out is the participant’s surviving spouse who can roll over the benefits tax-free to her own retirement plan (¶ 3.2) and get continued deferral that way; see “Luther Example” below. Even with a nonspouse non-tax-exempt individual beneficiary, the cashout may be “no problem” if the beneficiary wants to be cashed out because he wants to spend the money immediately anyway. But if the older individual beneficiary does not want to take immediate distribution of his share this approach will not work; see “Shelly Example” below. Luther Example: Luther dies in Year 1. His IRA beneficiary designation leaves the first $1 million of the account (a fixed dollar amount) to his wife, and the balance to their three children. The children would like to use “separate accounts” treatment for their shares, so each child’s ADP would be based on his own life expectancy, but their mother is the oldest beneficiary of the IRA and her share does not qualify for separate account treatment because (as a fixed dollar amount) it does not share in gains and losses after Luther’s death ( ¶ 1.8.01 (D)). Before September 30 of Year 2, Luther’s widow takes distribution of her $1 million share of the account in full, and rolls it over tax-free to her own IRA. Now she “doesn’t count” as a beneficiary any more, and the children can establish separate accounts for their respective interests by 12/31 of Year 2. Shelly Example: Shelly died in Year 1 at age 82, leaving her $1 million IRA to a see-through trust ( ¶ 6.2.03 ). The trust is to terminate at her death and be distributed in five equal shares to her sister (age 78), her nephew (age 52), and the three children (X, Y, and Z, ages 20, 24, and 25) of her deceased niece. The trustee transfers equal portions of the IRA to five separate inherited IRAs, one