©  George H. Coughlin II  2002  All Rights Reserved          Return to Home Page

The following planning pointers provide important reminders concerning required distributions from IRA's, qualified retirement plans and TSA's. They are identical to the alerts listed in the second part of Financial and Estate Planning Implications of the Minimum Distribution Rules:  Turning Quicksand Into Terra Firma. The first and third segments of "Quicksand" are located on separate pages of this web site entitled "Rules Of The Road" and "Practical Considerations" respectively. The former outlines various facets of the tax law while the latter reviews the impact of those rules on participants and their beneficiaries. These pointers serve as important reminders to those individuals as well as planning professionals. The author welcomes suggested additions. 

Readers must take note that information presented in this document reflects the author’s attempt to describe various points of the Federal tax law.  Some important topics have been omitted.  Keep in mind that state tax laws may differ from the Federal rules.  While every effort has been made to accurately report the provisions of the Internal Revenue Code and the Regulations pertaining thereto, it is possible that a misrepresentation has occurred.  Naturally, the Code and Regulations control the tax treatment of any situation, not the author’s interpretation.  Therefore, taxpayers should rely on the tax law rather than positions put forth in this paper. 

1. ALWAYS have a beneficiary election on file with the plan administrator regardless of the age of the participant. Whenever possible, the named beneficiary should also qualify as a Designated Beneficiary. This is especially important on or after the RBD because it is not possible to return to DB configuration once an account has lapsed into non-DB status. Without a DB the participant is forced to use Table V rather than the more advantageous Table VI of §1.72-9 when computing MRD’s. If a participant dies before the required beginning date, Designated Beneficiaries usually have more flexibility than non-DB’s. (See item "J" below.)
   
2. If a non-DB is a beneficiary of an income and/or remainder interest, NONE of the beneficiaries will be treated as a Designated Beneficiary, even if the rest of the named beneficiaries would otherwise qualify as DB’s. This is true under all circumstances controlled by §401(a)(9). [§1.401(a)(9)-1, D-2A(b) & E-5(a)]
   
3. When a surviving spouse creates a spousal rollover IRA, be sure to simultaneously establish a Designated Beneficiary. The reasons parallel those stated in "A" and "B" above. If that rollover IRA comes into being after the surviving spouse’s RBD, make certain to specify a primary method for calculating MRD’s under §401(a)(9)(A)(ii) even though it may be necessary to use the applicable divisor of §1.401(a)(9)-2, Q-4(a)(2) to satisfy MDIB rules.
   
4. File an affirmative election with the plan administrator for all qualified plans, including TSA’s, before the RBD telling them the election being made concerning redetermination of the life expectancy factor. E-7(c) of the proposed regulations is silent about how to accomplish that step. Send a written notice to the plan administrator describing the participant’s intentions. State that the election becomes irrevocable on the RBD so it can be amended before that date. Even if that election may not appear to make much difference to the participant, it may be vitally important to the beneficiaries.
   
5. Extra care should be taken if you are considering using an estate, charity, partnership or corporation as a beneficiary. Those four entities do not qualify as a Designated Beneficiary. (See item "B".)
   
6. Avoid naming a participant’s parent as a joint beneficiary with members of a younger generation. If a large age differential exists among beneficiaries, even siblings, split the assets into multiple accounts before the RBD. This will prevent the younger beneficiaries from being penalized by the shorter life expectancy of the oldest beneficiary if death occurs after the RBD. Use non-prorata MRD’s each year to keep the various accounts proportionately balanced.
   
7. Terminally ill participants in corporate qualified plans should seriously consider taking a lump sum distribution so the assets can be rolled over into one or more IRA’s -- especially if there is a non-spouse beneficiary. An IRA will provide the heirs greater flexibility than a pension, profit sharing or stock bonus plan following the participant’s death. Make sure you will not lose valuable medical, dental, life and other insurance coverage if it is necessary to separate from service to become eligible for a lump sum distribution.
   
8. Establish a separate account exclusively for qualified plan assets that will fund gifts to charity. This is important regardless of the participant’s age. (See items "B", "E", "J" and "R".) Remember, the participant will be forced to use a single L.E. when computing required distributions for that account during his or her lifetime.
   
9. The year a participant attains age 70½ is used as the reference year when determining life expectancies. The participant and calculation-DB’s ages on their respective birthday in that reference year dictate what ages to use when ascertaining the initial year’s L.E. factor. This approach holds even for a spousal rollover IRA that is put in place several years after the survivor’s normal RBD. In the latter case, the year that the spouse became age 70½ is the reference year for the new account. Determine the spouse’s age as well as the age of the DB’s named for the spousal rollover IRA on each person’s respective birthday in that reference year. The first required distribution from the spousal rollover IRA is determined as though the method chosen for calculations had been used on an ongoing basis starting in the reference year. [§1.401(a)(9)-1, E-1(a)]
   
10. The spousal exception to the five-year rule in pre-RBD death cases is prohibited if the spouse is not the sole primary beneficiary of a separate account. Assuming the other beneficiaries qualify as DB’s, the spouse and the other beneficiaries could use the general exception to the five-year rule -- provided it is permitted under the plan provisions. If one or more of the other primary beneficiaries do not meet the DB requirements, ALL beneficiaries must use the five-year rule. (See item "B".) [§1.401(a)(9)-1, C-3(a), D-2A(b), D-4(a) & E-5(a)]
    
11. Letter Ruling 9237038 points out that an EXECUTOR for a surviving spouse that dies before making an election to treat the first deceased spouse’s IRA as his or her own IRA cannot make that election for the deceased surviving spouse. In other words, an executor for the second to die cannot carry out a spousal rollover if the surviving marriage partner fails to do so before his or her own death. This results in the loss of valuable tax deferral. Had the rollover to the spousal IRA taken place, the surviving spouse would have been allowed to specify his or her own Designated Beneficiary. Following the death of the surviving spouse, the DB of the spousal rollover IRA would be permitted to compute MRD’s using the METHOD employed for the rollover account. The time period for the latter would have been considerably longer than the one allowed under the METHOD used by the original IRA.
    
12. If a beneficiary decides to use a disclaimer following the death of a plan participant on or after the RBD, read Letter Rulings 9037048 and 9450040. Considering those two letter rulings, it appears that the Service will not treat a disclaiming spouse as "dead" for purposes of §1.401(a)(9)-1, E-8(a). Therefore, the recipient of a disclaimed qualified plan benefit may continue to use the disclaiming spouse’s redetermined life expectancy when computing required distributions from the disclaimed qualified plan. Of course, that life expectancy becomes zero the year following the disclaiming spouse’s actual death. One way to avoid a potential reversal of the Service’s position is to elect NOT to redetermine the life expectancy of the non-participant spouse (NPS). That approach also offers the disclaimer beneficiaries a possible chance to postpone total liquidation of the qualified plan following the subsequent death of the NPS. However, the latter possibility evaporates if the spouse outlives his or her original single life expectancy. (See item "P".)
    
13. If a trust is to be used as a beneficiary for a qualified plan, do so only after a thorough review of the distribution rules for trusts and how they interact with the other estate planning needs. Pay special attention to the possibility that a trust may contain language that prevents it from qualifying under the Designated Beneficiary Rules. Finally, be sure to DELIVER A COPY of the trust instrument, or the substitute documentation specified in §1.401(a)(9)-1, D-7 of the Proposed Regulations, to the plan administrator when filing the beneficiary form and on a timely basis whenever the trust is amended. Be sure to reread the language of §1.401(a)(9)-1, D-5, D-6 and D-7.
    
14. If a QTIP trust is to be used as a beneficiary for qualified plans, peruse Rev. Rul. 2000-2. This new ruling provides specific guidance to insure that such a trust agreement qualifies for the marital deduction. Please note that an executor needs to make the QTIP election under §2056(b)(7) for BOTH the qualified retirement plan or IRA as well as the trust that is named as its beneficiary.   Remember too, a QTIP trust must adhere to all the normal distribution rules for trusts. (See item "M".)    
    
15. Although an irrevocable trust may be named as the beneficiary of a qualified plan, it is permissible to change to a new irrevocable trust as often as necessary to facilitate alterations in the estate plan.
    
16. Married participants often select their spouse as the primary beneficiary for qualified plans and specify a family trust as the contingent. This is not a concern when death occurs on or after the RBD. However, it may cause problems if the participant dies before the required beginning date and the non-participant spouse wishes to disclaim all or a portion of the plan benefits. (See item "L".) While the disclaimer may be valid, one portion (the survivor's trust) of the typical family trust that is named as the contingent beneficiary remains revocable after the death of the first trustor. Proposed Regulation §1.401(a)(9)-1, D-5(b)(2) states that a trust named as the beneficiary of a retirement plan or IRA must become irrevocable on or before the participant's death to satisfy the Designated Beneficiary Rules. Failure to achieve DB status limits distributions to the living trust to the five-year rule described in §401(a)(9)(B)(ii). Please note that some commentators feel that the grantor trust provisions spelled out in IRC §671-679 allow the survivor's trust under these circumstances to overcome the irrevocability clause of the Proposed Regulations mentioned above. In fact, at least one private letter ruling (LTR 199903050) appears to embrace this conclusion. However, the proposed regulations mention no exceptions to §1.401(a)(9)-1, D-5(b)(2). Fortunately, there is one sure means by which a plan participant can preserve his or her survivors' right to use the general exception under §401(a)(9)(B)(iii) when a trust is named as the contingent beneficiary and the surviving spouse is the primary beneficiary. To do so, make the contingent beneficiary the portion of the family trust that becomes irrevocable upon death of the plan participant -- not the whole family trust. That is to say, be specific and name the bypass, credit shelter or QTIP trust as the contingent beneficiary. [§1.401-(a)(9)-1, D-6(a)]
    
17. If the right to receive plan assets passes to a trust upon the death of a participant, the required distributions will eventually exceed the income earnings of the qualified plan. From then on, the trust will be forced to recognize the principal portion of the required distributions as taxable income to the trust. If the trust in turn passes out that principal to the income beneficiary to avoid a potential 39.6% Federal tax rate, the basic purpose of the trust may be compromised. Imagine the uproar that would emanate from the beneficiary of a remainder interest in a credit shelter (bypass) trust or QTIP trust if the surviving spouse, in a second marriage situation, started receiving principal. If a trust needs to be the beneficiary for a qualified plan, be sure the trust defines income and principal as the two words apply to distributions from a qualified plan.
    
18. Beneficiaries of the remainder interest in a bypass or credit shelter trust as well as a QTIP trust may have to wait for the death of the income beneficiary, usually the surviving spouse, before receiving benefits, but that is only a timing issue. The remainder persons will receive something, albeit delayed. Therefore, the life expectancy of the remainder beneficiaries must be considered when deciding the proper L.E. factor to use for MRD calculations during a participant’s lifetime. Furthermore, the spousal exception to the MDIB rule does NOT apply in this situation because there are multiple beneficiaries. [§1.401(a)(9)-2, Q&A-7(b)] Therefore, the applicable divisor must be used to compute required distributions during a participant’s lifetime if a non-participant spouse who is more than ten years younger also serves as the income beneficiary of a DB-trust that is named as the primary beneficiary of a qualified plan. Remember that if a charity or other non-DB has a remainder interest, you have "non-DB status". (See items "B" and "H".)
    
19. A surviving spouse loses the right to transfer a deceased spouse’s qualified plan to a spousal IRA rollover in his/her own name if postmortem withdrawals from the decedent’s plan have been sheltered from the 10% excise tax on pre-59½ distributions under IRC §72(t)(2). [LTR’s 9418034 and 9608042]
    
20. Following the death of a participant, a non-spouse DB may name a beneficiary of his/her own to receive the balance of the participant's account if the original DB dies before withdrawing all the funds. The beneficiary's action does not impact the required distribution calculations. For a prolonged period many IRA custodians and trustees felt that this approach ran contrary to the prohibitions in §1.401(a)(9)-1, E-5(f) concerning post-mortem alteration of the participant's DB. Fortunately, a number of large organizations have recently come to realize that the proposed regulations do allow the DB to name his/her own beneficiary without changing the method used to calculate required distributions. After all, the participant's DB is NOT being altered. LTR 199936052 lends further support to this common sense approach.