Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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for each beneficiary (see ¶ 6.1.05 ). These are separate accounts for most minimum distribution purposes, but not for purposes of determining the ADP, because the IRA was left to a single funding trust and the division into separate shares/accounts occurred at the “trust level” not at the “beneficiary designation form level” (see ¶ 1.8.01 (E), ¶ 6.3.02 (A)). Accordingly, the ADP for all of the beneficiaries will be the life expectancy of the oldest trust beneficiary ( ¶ 1.5.04 (D)) who remains as a beneficiary as of the Beneficiary Finalization Date ( ¶ 1.8.03 ). As of the date of death, the oldest beneficiary is Shelly’s sister, but she cashes out her entire inherited IRA prior to September 30, Year 2; accordingly, she is no longer a beneficiary as of the Beneficiary Finalization Date. Shelly’s nephew, who was the second oldest beneficiary as of the date of death, now becomes the oldest beneficiary. X, Y, and Z wish the nephew would cash out his share prior to the Beneficiary Finalization Date, so they could use the 50+-year life expectancy of the oldest one of them as their ADP. However, the nephew wants a payout over his 30-something year life expectancy, so he does not cash out his share. As of the Beneficiary Finalization Date, the oldest beneficiary is Shelly’s nephew and his life expectancy becomes the ADP for all of the remaining beneficiaries. C. Effect of death prior to the BFD . A person who is a beneficiary as of the date of death, but then dies prior to the Beneficiary Finalization Date, does NOT thereby lose his status as a beneficiary for purposes of determining the ADP. Reg. § 1.401(a)(9)-4 , A-4(c). He will still be considered a beneficiary—unless his benefits are entirely distributed (to him or to his estate) or disclaimed (by him or by his estate) prior to the Beneficiary Finalization Date. For what happens to the deceased beneficiary’s interest at that point, see ¶ 1.5.12 – ¶ 1.5.13 . The exception to this rule would be a beneficiary whose death erased his right to the benefits, due to his failure to survive long enough to meet a minimum survival period (see ¶ 1.7.07 ) or because his death caused him to “drop out” of the pool of beneficiaries (under a trust, for example). 1.9 Enforcement of the RMD Rules 1.9.01 Who enforces the minimum distribution rules Compliance with the minimum distribution rules is one of the more than 30 requirements a qualified retirement plan (QRP) must meet to stay “qualified.” § 401(a) . The plan administrator is the enforcer of the QRP minimum distribution rules. Since disqualification of the plan would be a disaster for all concerned, the plan administrator is extremely concerned to make sure RMDs are distributed—even though the penalty for missing an RMD is imposed on the “payee” rather than on the plan. ¶ 1.9.02 . An IRA does not have to be “qualified” in the same way that QRPs must be qualified; the IRS does not issue individual determination letters for IRAs. Rev. Proc. 87-50, 1987-2 C.B. 647, § 4.03. The penalty tax for failure to take the RMD falls on the payee, not on the IRA provider. However, IRA providers are required to report to the IRS annually, on Form 5498, the year-end account value of each IRA they hold and also whether an RMD is required from the account for the year in question. Reg. § 1.408-8 , A-10. The IRA provider is also required to inform the IRA account holder that a distribution is required, and to either calculate or offer to calculate the amount of the RMD for the account holder. Notice 2002-27 , 2002-1 CB 814. 1.9.02 Failure to take an RMD: 50% penalty and other effects