Source: http://iraplanning.com/Quircksand%20Remains.htm
Timestamp: 2019-04-24 10:06:49+00:00

Document:
Yes indeed, the Internal Revenue Service has been hard at work. On April 17, 2002 it published final regulations that provide an abundance of well-marked routes to follow when planning required distributions from IRAs, qualified retirement plans and §403(b) plans. The Service even managed to clarify most, but not all, of the ambiguities that existed in the 2001 reproposed regulations. Finally, Marjorie Hoffman, Cathy Vohs and their respective staffs at the IRS and Department of Treasury threw in a surprise bonus -- a new set of life expectancy tables. Granted, the text of the final regulations covers approximately 104 printed pages compared to only 39 pages for the original 1987 proposed edition, but the results are worthwhile.
Most taxpayers mistakenly believe that the required distribution rules spelled out in §401(a)(9) of the Internal Revenue Code only apply to lifetime distributions beginning at age 70½. Failure to consider the numerous financial and estate planning implications of those tax provisions can lead to unpleasant complications during retirement and substantial financial loss for survivors. Everyone with assets in a retirement plan, regardless of their age, needs to have a reasonable understanding of minimum required distributions. In certain circumstances, that understanding can be more valuable than the selection of a prudent investment.
Unfortunately, the complexity associated with this area of the tax law intimidates many taxpayers. If you readily identify with that group, rest assured you have plenty of company. Even competent tax practitioners often miss the financial and estate planning implications associated with required distributions although they understand how to apply those rules when preparing a tax return.
The following questions provide a quick way to gauge your knowledge of this subject.
If a QTIP trust is used as a beneficiary for a qualified plan, what resource document spells out the guidelines that such a trust must follow in order to qualify for the marital deduction and also satisfy the minimum distribution rules?
If you feel hesitant about your answers to these questions, seek assistance from a knowledgeable tax professional. You will know that person truly understands this subject if he or she can readily answer the same questions. If you receive a vague or evasive response, please contact another professional. The decisions you must make are too important to rely on guesswork or incompetent advice.
The 2002 Rules of the Road and 2002 Assorted Planning Pointers that follow this introduction provide technical assistance for those wishing to improve their understanding or research a specific question. Please note, however, that this document should not be used as a substitute for the knowledge and insights available from a well-trained professional who routinely deals with these issues. Readers who undertake their own planning are urged to double-check their conclusions by obtaining a professional opinion before implementing those plans. In addition, please peruse the following disclaimer.
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.
George Coughlin is NOT responsible for, and cannot control the content of, the material listed in Other Resources below. In fact, those reference items, software programs and web sites may provide incorrect information, produce inaccurate results or make false statements. Furthermore, any investment or insurance advice as well as recommendations to purchase or sell securities you receive from a resource listed on IRAplanning.com does NOT involve George Coughlin or George Harper Coughlin II Registered Investment Advisor. Please use appropriate caution.
Which Retirement Plans Are Impacted and When Do The New Rules Take Effect?
The final regulations on required distributions published by the Service on April 17, 2002 apply to both defined contribution and defined benefit plans under §401(a). They also impact individual retirement accounts and individual retirement annuities under §408. In addition, they cover §403(b) tax sheltered annuity (TSA) contracts purchased, or custodial accounts or retirement income accounts established, by a §501(c)(3) organization or public school. Lastly, the 2002 rules pertain to required distributions from certain deferred compensation plans for employees of state and local governments under §457(d)(2).
The final regulations apply to distributions for calendar years beginning on or after January 1, 2003 that come from all account balances and benefits in existence on or after January 1, 1985. [§1.401(a)(9)-1, A-2] For distributions for the 2002 calendar year, taxpayers may rely on the final regulations, the 2001 proposed regulations or the 1987 proposed regulations. In the case of distributions during a participants lifetime, the final regulations will produce the lowest required distribution in all cases that the author has explored. The same is true when calculating most, but NOT all, postmortem distributions. Therefore, beneficiaries would be wise to compute minimum distributions under all three possibilities so they can be certain that their choice is the most favorable.
Please note that throughout this text the expression qualified retirement plan(s) or qualified plan(s) is used to denote pension plans, profit sharing plans, stock bonus plans, traditional individual retirement accounts (IRAs) under IRC §408, Roth IRAs under IRC §408A and tax sheltered annuities under IRC §403(b). Whenever IRC §401(a)(9) does not apply uniformly to all six entities, the exception will be noted. None of the comments on these pages address the application of IRC §401(a)(9) to so-called Section 457 Plans for government workers. Furthermore, the text does not include a discussion of annuity payments from a defined benefit plan, an individual retirement annuity or an annuity contract purchased by an individual account in a defined contribution plan.
It is important to remember that a Roth IRA provides several significant exemptions from IRC §401(a)(9). The first is an avoidance of required distributions during the owners lifetime. That is to say, Roth IRAs are immune from IRC §401(a)(9)(A). They are also exempt from the Minimum Distribution Incidental Benefit provisions of IRC §401(a). Furthermore, Roth IRAs are not impacted by IRC §401(a)(9)(B)(i) when the owner dies. Instead, beneficiaries need only adhere to the relatively straightforward procedures of IRC §401(a)(9)(B)(ii) and (iii). Essentially, those are the same rules that apply to non-spouse beneficiaries when traditional IRA owners die before their required beginning date. That means beneficiaries have only one set of rules to follow regardless of the age of the Roth IRA owner on his/her date of death.
Why Were The Minimum Distribution Rules Created?
Simply put, money set aside and accumulated in qualified retirement plans is granted favorable tax treatment with the expectation that it will be used for retirement income purposes. To curtail one potential abuse of that opportunity, Congress decided to set duration limits on the tax deferral aspect of all qualified retirement plans. IRC §401(a)(9) is the mechanism to accomplish that objective. Under the guidelines contained in that paragraph, everyone is forced to begin making withdrawals at a prescribed level from all their retirement plans at a specified date even if they do not need the extra revenue and/or would prefer to leave the capital in their respective plans.
When When Do The Rules Come Into Play and How Do They Operate?
The minimum distribution rules are best known for their impact on taxpayers that have reached age 70½. Those are the so-called living requirements. However, they have an equally important impact following the death of the plan participant.
A. Unless a limited exception applies (see page 6), the living aspects of the required distribution provisions found in IRC §401(a)(9)(A) kick into gear during the year a participant reaches age 70½.
1. Technically speaking, the withdrawal for the first distribution calendar year may be delayed until April 1 of the year immediately following the year in which someone attains age 70½. That date is referred to as their Required Beginning Date or RBD. [§401(a)(9)(C)] Please follow the hyperlink in the preceding sentence for a complete definition of RBD -- including an exception for certain participants as well as a definition of distribution calendar year.
B. The same paragraph of the Internal Revenue Code that mandates lifetime withdrawals also stipulates the minimum distributions that must be carried out following the death of a participant. The postmortem rules break down into two subcategories depending on when the participant dies.
1. If death takes place before the required beginning date, the final regulations closely parallel the provisions of the 2001 and 1987 proposed regulations. It should be noted, however, that if the account has a Designated Beneficiary, the default method in the final regulations is the life expectancy rule, referred to below as the General and Spousal Exceptions. In the 1987 proposed regulations, the Five-Year Rule served as the default. Under certain circumstances, that subtle shift can have a favorable impact on beneficiaries that are otherwise eligible to use the General Exception but failed to meet the requisite deadline to commence those distributions. See item S in the Assorted Planning Pointers for more details.
2. If the participant dies on or after the RBD, his/her assets remaining in the qualified plan must be distributed at least as rapidly as under the METHOD of distribution being used to satisfy the MRD rules on the date of the participants death. [§401(a)(9)(B)(i)] The final regulations published on April 17, 2002 significantly modify the Services previous interpretation of the at least as rapidly rule that was explained in the original proposed regulations published in 1987. [§1.401(a)(9)-2, A-5] The postmortem provisions of the final regulations appear in flow chart format on Tables 25A and 25B of this document. The financial implications of those rules are illustrated on Tables 27A through 29C.
What Is The Minimum Annual Distribution During Your Lifetime?
A. Calculating minimum required distributions during a participants lifetime is relatively straightforward. The process is represented by the following mathematical equation.
1. With one rather unique exception outlined immediately below, the Applicable Distribution Period used in the formula for each year, including the year of the participants death, is the factor shown on the Uniform Lifetime Table shown in §1.401(a)(9)-9, A-2 that corresponds to the participants age as of that persons birthday in the relevant distribution calendar year.
3. Table 21A of this document entitled Calculating Minimum Required Distributions During Participants Lifetime provides an example of the calculation process. Also attached is Table 21B listing all the distribution periods from the Uniform Lifetime Table.
2. It is not permissible to take IRA minimum required distributions from a low yielding TSA or vice versa. Furthermore, withdrawals from a Roth IRA will not satisfy the distribution requirements applicable to Traditional IRAs or §403(b) accounts. In addition, assets removed from those accounts cannot be used to fulfill the postmortem MRDs from Roth IRAs.
While the final regulations issued by the Service in April of 2002 are a lot less complex than the original ones published in 1987, they do not fall under the heading tax simplification. These 2002 Rules of the Road still require travelers to know the definition of a few important terms and have a working knowledge of several interdependent concepts before leaving home for a trip across town.
A. Required Beginning Date (RBD): All IRA owners as well as participants in qualified plans that own more than five percent of the sponsoring employer must begin distributions no later than April 1 of the year following the year in which the participant attains age 70½. The RBD for all other employees and §403(b) plan participants is April 1 of the calendar year following the later of either: (1) the calendar year in which the employee attains age 70½, or (2) the calendar year in which the employee retires from employment with the employer maintaining the plan. [§401(a)(9)(C)] Note, however, that under §1.401(a)(9)-2, A-2(e) a plan may elect to use the RBD rules mandated for IRAs for all employees, i.e., April 1 of the year following the year the employee attains age 70½. Therefore, it is necessary to determine if such an election has been made for the plan in question before it is possible to be certain about the Required Beginning Date for its participants. It is also important to keep in mind that the special rule for extending the RBD only applies to qualified plans and §403(b) plans maintained by the participants current employer. The RBD rules for all plans associated with a former employer are the same as for IRAs.
E. Designated Beneficiary (DB): A Designated Beneficiary is an individual who is entitled to receive a portion of the benefits of a qualified plan following the death of the participant or another specified event. It is important to note that it is possible to name a beneficiary for a qualified plan but NOT have a Designated Beneficiary. (See item J below for examples.) Please refer to Item G below for a discussion of how to identify a DB when a trust serves as beneficiary. Readers should also become familiar with the comments in Item L below that deal with the necessity to redetermine the identify of an accounts DBs if the participant died before 2003.
a) It is not valid if merely stipulated under state law.
b) It is not valid to simply use a joint and last survivor annuity settlement without also naming a beneficiary.
3. Under the final regulations, a Designated Beneficiary must be a beneficiary as of the participants date of death and remain a beneficiary on the Designation Date. Consequently, any person who is a beneficiary as of the date of the participants death, but is not a beneficiary on September 30 of the following year, is ignored. [§1.401(a)(9)-4, A-4(a)] That same citation in the final regulations mentions two circumstances in which a beneficiary on the participants date of death would not be considered a beneficiary as of Designation Date.
a) If a beneficiary executes a qualified disclaimer under I.R.C. §2518 by the Designation Date, that person will not be taken into account in determining the participants Designated Beneficiaries. When reading this provision please remember that unless a participant actually died on December 31, the deadline for making a qualified disclaimer differs from the September 30 Designation Date.
b) If a beneficiary receives the entire benefit to which he or she is entitled before September 30 of the year following the year in which the participant died, that person or entity will not be considered a beneficiary for designated beneficiary purposes.
F. Designation Date: The designation date is September 30 of the year immediately following the year of a participants death. This is the date of record used when determining if an account has one or more Designated Beneficiaries. See paragraph 3 in item E above for more details. Please note that this term is the authors own creation. It does not appear in the Code or Regulations.
G. Trust As Beneficiary: Under certain circumstances specified in the final regulations, DB status can be achieved if a trust is named as beneficiary. Please note that the trust itself is not the Designated Beneficiary since only an individual human being may be a DB. However, the beneficiaries of the trust will qualify as DBs if the trust meets certain requirements. [§1.401(a)(9)-4, A-5(a)] Table 23 lists a summary of those requirements that are spelled out in detail below.
a) The trust is valid under state law, or would be but for the fact that there is no corpus.
b) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the participant.
c) The trusts own beneficiaries who will be receiving proceeds from the qualified plan are named individuals or identifiable from the trust instrument, e.g., a class of beneficiaries such as spouse, children, etc. is acceptable. The members of a class of beneficiaries capable of expansion or contraction will be treated as identifiable if it is possible to identify the class member with the shortest life expectancy.
a) The participant provides a copy of the trust instrument to the plan administrator and agrees that if the trust instrument is amended at any time in the future, he/she will, within a reasonable time, provide to the plan administrator a copy of each such amendment.
b) The participant provides the plan administrator with a list of all the beneficiaries of the trust (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. He or she must certify that, to the best of his/her knowledge, the list is correct and complete and that the requirements of 1 a), b), c) and d) above are satisfied. In addition, the plan participant must agree to provide corrected certifications if an amendment changes any information previously certified. Finally, the participant agrees to provide a copy of the trust instrument to the plan administrator upon demand.
a) The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.
b) The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of October 31 of the year following the year the participant died (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. The trustee must certify that, to the best of the trustees knowledge, the list is correct and complete and that the requirements of 1 a), b) and c) above are satisfied. In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.
H. Calculation-DB: If a group of individuals are DBs, the person with the shortest life expectancy will be the Designated Beneficiary for purposes of selecting the life expectancy factor to use in MRD calculations. [§1.401(a)(9)-5, A-7(a)(1)] This person is sometimes referred to as the calculation-DB although that term does not appear in the Code or Regulations.
K. Spousal Rollover IRA: There are three methods by which a person that is a beneficiary of his or her deceased spouses qualified plan or IRA may reposition those assets into an individual retirement account and elect to treat the new account as his or her own. This is true regardless of when the participant dies. Throughout this document, that new account is referred to as a Spousal Rollover IRA  regardless of the steps taken to create it.
1. A surviving spouse beneficiary may create a spousal rollover IRA by simply assuming ownership of the deceased owners individual retirement account. It is important to note that this method is only available with IRAs, not other forms of qualified retirement plans. Furthermore, the surviving spouse must be the sole Designated Beneficiary of the entire account or a separate share and have the unlimited right to withdraw amounts from the IRA.
a) If an election is made to treat the account as the surviving spouse's own during the IRA owners year of death, the surviving spouse beneficiary may NOT assume ownership of the portion of the decedents account equal to the MRD for the current year that somehow failed to be distributed to the participant before death. [§1.408-8, A-5(a)] Instead, the spouse must withdraw the previously undistributed amount of the MRD and recognize its taxable portion on that years income tax return.
2. A surviving spouse beneficiary may create a spousal rollover IRA under §402(c)(9) by rolling over assets distributed to him or her from a qualified retirement plan such as a pension, profit sharing or stock bonus plan. Provided the surviving spouse subsequently elects to treat the new IRA as his or her own, the tax ramifications are identical to the explanation found in paragraph 3 immediately below. [§1.408-8, A-7] Please note, however, that a surviving spouse need not elect to treat the IRA as his or her own following the rollover of assets from a deceased participant's pension, profit sharing or stock bonus plan. In such a case, the surviving spouse remains the beneficiary of the Individual Retirement Account without assuming ownership. Hence, the IRA remains a beneficiary distribution account instead of becoming a spousal rollover IRA and required distributions must be determined under the postmortem guidelines when a spouse is beneficiary.
Can The Qualified Plan Limit Your Planning Options?
All the distribution planning in the world may be for naught if the plan document blocks the desired implementation. The tax rules and regulations previously cited are contingent, in many ways, on the provisions of the qualified plan. This means that a participants tax and estate planning preferences may not be available through the current trustee. Of course, a participant or Designated Beneficiary can execute a trustee-to-trustee transfer between IRAs and TSAs to obtain more flexible distribution options or a wider array of investment opportunities. Unfortunately, that remedy is not available to participants of pension, profit sharing or stock bonus plans unless they terminate their participation and roll over a lump sum distribution from the plan into an IRA. Of course, a surviving spouse named as beneficiary of any of those QRP's can work around the problem by using a spousal rollover IRA, but even that solution may interfere with the estate plan. Unlike a spouse who is named as a beneficiary, a non-spouse beneficiary of such plans is not allowed to roll over the QRP into an IRA in their own name. Starting in 2007, however, a non-spouse beneficiary of a pension, profit sharing or stock bonus plan may execute a trustee-to-trustee transfer of the QRP assets into an inherited IRA. The latter must be titled in the name of the deceased participant for the benefit of the same beneficiary and list that beneficiary's Social Security Account Number (SSAN) as the Taxpayer Identification Number (TIN) for the account. The same rules apply if a trust, rather than an individual, is the non-spouse beneficiary.
A. When a participant DIES BEFORE THE REQUIRED BEGINNING DATE, the applicability of the five-year rule and its two exceptions depends as much on the plans language as it does on the wishes of the beneficiary. (See the flow chart on Table 24 entitled Plan Restrictions Control Postmortem Distribution Options Before The Required Beginning Date) Please note that a qualified plan is allowed to effectively eliminate all the postmortem options available under the tax rules by requiring a complete distribution at some point before the deadline imposed by the Five-Year Rule. This could be a major blow to postmortem planning by the survivors unless a trustee-to-trustee transfer can be used to reposition the assets to a plan with more liberal provisions.
1. If the plan does not include a provision describing the method of distribution after the death of a participant, the final regulations specify that distributions MUST conform to the following rules.
a) Every beneficiary could be forced to withdraw under the provisions of the Five-Year Rule or before an earlier date.
b) A Surviving spouse might be allowed to use the General Exception or Spousal Exception while all others would be restricted to the Five-Year Rule or an earlier withdrawal deadline.
c) Non-spouse beneficiaries might be permitted to use the General Exception but a spouse would be limited to the Five-Year Rule or an earlier withdrawal deadline.
d) All beneficiaries could be required to use either the General Exception or the Spousal Exception depending on their relationship with the deceased participant. NOTE: This does not present a problem because a beneficiary may always accelerate withdrawals if he/she wants to rapidly drain the account.
(2) December 31 of the calendar year that contains the fifth anniversary of the participants death.
b) As of such date, the election must be irrevocable with respect to the beneficiary and all subsequent beneficiaries.
c) The election must apply to all subsequent years.
4. The final regulations provide a transition rule that will allow certain Designated Beneficiaries of participants that died before their Required Beginning Date to use the General Exception, even though the beneficiary failed to take the MRDs starting in the year following the year of the participants death. [§1.401(a)(9)-1, A-2(b)(2)] A thorough explanation of this point is available in Planning Pointer S.
1. Although having plan provisions that are more restrictive than the tax rules may appear to place a firm at a competitive disadvantage, corporate-sponsored retirement plans often use them to protect the plan from failing to make minimum required distributions and, hence, fall out of compliance. In a majority of instances, the offending provisions are so deeply imbedded in the plans disclosure documents that innocent participants hardly ever stumble onto them. Even knowledgeable practitioners can overlook these minute snags. It is possible that the more streamlined rules under the final regulations may bring forth a positive change, but the author has serious reservations that plan administrators will ever want to shoulder responsibility for fulfilling required distributions over fifty or sixty years to a participants grandchild.
2. On a more positive note, IRAs and §403(b) plans are usually quick to incorporate all the stretch-out provisions of the tax rules in order to encourage the retention of assets. In many cases, the final regulations allow longer tax-deferred accumulation by beneficiaries than under the original 1987 rules or even the 2001 proposed regulations. Do not be surprised if you soon hear IRA and §403(b) providers trumpeting the elongated stretch-out aspects of the final regulations. While it is true that the final regulations do impose an additional reporting requirement on IRA providers beginning in 2003, the extra burden will not be a deterrent. By the way, those reports will only be necessary during the lifetime of an IRA owner. Beneficiary distribution accounts are exempt.
3. The intertwining alternatives that deal with minimum required distributions following a participants post-RBD death seem to outnumber the freeways in Los Angeles. If not, they certainly match the twists and turns of the latter. Rather than attempt to describe those intricacies in outline format, it is far more effective for readers to view them on flow charts. Those charts, located on Tables 25A and 25B, provide a map that will help beneficiaries navigate though the maze. To effectively use the tables you must first know if the sole Designated Beneficiary is the participants spouse. If so, turn to Table 25A. In all other cases, begin by perusing Table 25B. The black tab near the top left corner of each table will also help guide you to the proper one. Once on the correct table, start at the oval identifying the facts and circumstances that match your case and then follow the arrows.
The text on the preceding pages provides a reasonable primer to use when beginning to explore the financial and estate planning implications of the minimum distribution rules under IRC §401(a)(9) and the final regulations published by the Internal Revenue Service on April 17, 2002. The "2002 Assorted Planning Pointers" listed below provide important reminders to individual participants, their beneficiaries and planning professionals. Further insights will soon be available on the web page entitled 2002 Practical Considerations. Once posted, that page will furnish a detailed explanation of Tables 26 through 29C.
Serious students need to go far beyond the limited areas addressed by the author. The final regulations provide a detailed map of the terrain that must be traversed. An excellent interpretation of the minute details on that map is available in the 7th edition 2011 of Life and Death Planning For Retirement Benefits by Natalie B. Choate, Esq. Ms. Choate has a tremendous depth of knowledge in this subject. Her telephone number in Boston is (617) 951-8817. Her web site is www.ataxplan.com. That site lists a number of valuable resources and provides updates to Ms. Choate's book. Another grand master of this subject is Noel C. Ice, Esq. in Fort Worth, Texas. His office telephone number is (817) 877-2885. His web site at www.trustsandestates.net is full of authoritative commentary on this and other subjects. Both Ms. Choate and Mr. Ice provide forms and sample language to assist members of the legal profession.
Practitioners looking for software are encouraged to contact Brentmark Software. Their telephone in Winter Park, Florida is (800) 879-6665. The companys web site is www.brentmark.com. At that site, you can download free demonstration software for the Retirement Distribution Planner as well as their Retirement Plan Analyzer. Those programs offer a viable means to deal with many routine situations.
The following planning pointers illustrate various required distribution issues encountered in typical circumstances. The author welcomes suggested additions.
F. Every case involving a participant that died before January 1, 2003 should be reviewed to make sure that MRDs for years 2003 and later are based on the life expectancy of the correct calculation-DB as well as the new single life expectancy table in the final regulations. For a further discussion of this very important point, please refer to the Redesignation/Reconstruction Rule in the Technical Terms section of the 2002 Rules of the Road.
G. Unlike a spouse who is named as beneficiary of a pension, profit sharing or stock bonus plan (QRP's), a non-spouse beneficiary of such plans is not allowed to roll over the QRP into an IRA in their own name, à la a spousal rollover IRA. Effective for distributions made after 2006, however, a non-spouse beneficiary of a pension, profit sharing or stock bonus plan may execute a trustee-to-trustee transfer of the QRP assets into an inherited IRA. The latter must be titled in the name of the deceased participant for the benefit of the same beneficiary and list that beneficiary's Social Security Account Number (SSAN) as the Taxpayer Identification Number (TIN) for the account. The same rules apply if a trust, rather than an individual, is the non-spouse beneficiary.
I. 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. Even under the more generous rules of the final regulations, this could result in the loss of valuable tax deferral. Had the rollover to the spousal IRA taken place, the surviving spouse would likely have specified the couples children as his or her own beneficiaries. Following the death of the surviving spouse, the beneficiaries of that spousal rollover IRA would be eligible to compute MRDs using the life expectancy of the oldest DB. Without a spousal rollover, the ultimate recipients of the account, most likely the couples children, will be forced to use the considerably shorter single life expectancy of the second deceased parent when computing required distributions. [§1.401(a)(9)-4, A-4(c) and §1.401(a)(9)-5, A-5] There is one possible remedy if the non-participant spouse beneficiary happens to die within nine months of the participant. Provided state law permits, the executor for the surviving spouse can disclaim that second decedents rights to the qualified plan benefits. Such action effectively returns control of the assets to the participants own beneficiary election form. If the couples children are listed as contingent beneficiaries on that form, the qualified plan assets will pass directly to them. As a minimum, the latter will also be able to use the oldest siblings life expectancy to stretch out required distributions.
J. The final regulations clearly establish the Services willingness to recognize disclaimers for purposes of required distributions under IRC §401(a)(9). [§1.401(a)(9)-4, A-4(a)] Hence, a primary beneficiary that executes a qualified disclaimer by the nine-month deadline following the participants death will not be considered a beneficiary when it comes time to determine DBs on the designation date. This technique creates a number of postmortem planning opportunities. Unfortunately, most beneficiary election forms provided by qualified retirement plans, IRAs and TSAs do not readily accommodate disclaimers if several individuals (children) are listed as primary beneficiaries. In the event one of the latter executes a qualified disclaimer, his or her share is usually divided among the other primary beneficiaries (siblings). This occurs even if the participant named contingent beneficiaries (grandchildren). In order to overcome this dilemma, planning professionals need to encourage 401(k) administrators, IRA custodians and TSA trustees to add language to their beneficiary forms that will allow participants to direct benefits to specific contingent beneficiaries if a particular primary beneficiary elects to disclaim his or her rights.
K. 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 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)-4, A-6 of the final regulations, in a timely manner to the plan administrator. For more details, peruse the Trust As Beneficiary discussion in the Technical Terms section of the 2002 Rules of the Road. Then be sure to review the language of §1.401(a)(9)-4, A-5 and A-6 in the final regulations. Lastly, be sure to peruse Chapter 6 in the 6th edition 2006 of Natalie Choate's Life and Death Planning for Retirement Benefits.
M. 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.
O. If the rights to receive plan assets pass 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 35.0% 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 bypass 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 that the trust defines income and principal as the two words apply to distributions from a qualified plan. This last tip may also help overcome the artificial assumption built into many state uniform principal and income acts that limit income to a very small percentage (only 10% in California) of a required distribution from qualified plans.
Q. Following the death of a participant, a spouse or 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 only a surviving spouse was allowed to name a subsequent beneficiary. Fortunately, §1.401(a)(9)-4, A-4(c) and §1.401(a)(9)-5, A-7(c)(2) of the final regulations grant the same privilege to non-spouse DB's.
R. A surviving spouse that is the sole primary beneficiary of a decedents account may decide NOT to elect to treat the account as the spouse's own. In essence, the survivor maintains his or her status as beneficiary of the decedent's account. This is possible even if the surviving spouse rolls over the decedent's qualified retirement plan into an IRA or transfers the decedent's IRA directly to a new IRA. [§1.408-8, A-7] By remaining the beneficiary of the account, rather than becoming its owner, the survivor is permitted to postpone required distributions until the year the deceased participant would have attained age 70½. Using this Spousal Exception under §401(a)(9)(B)(iv) to delay mandatory withdrawals is often considered when the surviving spouse is younger than age 59½ because the 10% Federal excise tax on pre-59½ distributions will NOT apply if he or she taps the account. In contrast, the excise tax will apply to early withdrawals from a spousal rollover account. Unfortunately, a surviving spouse that has avoided the 10% excise tax on early distributions because of the exclusion under IRC §72(t)(2)(A)(ii) may lose the right to subsequently transfer the deceased participants qualified plan to a spousal rollover IRA of his/her own. (See LTRs 9418034 and 9608042 but be sure to contrast them with LTR 200110033.) Please keep in mind that when required distributions finally begin under IRC §401(a)(9)(B)(iv), minimum withdrawals must be computed using the surviving spouses single life expectancy on an attained age basis, rather than the more favorable values found on the Uniform Lifetime Table that would apply if the surviving spouse were to treat the account as his or her own. During the survivors lifetime, that differential could produce a significant disadvantage in the form of larger taxable distributions. [§1.401(a)(9)-5, A-5(c)(2)] The Spousal Exception is also detrimental if the survivor dies after commencement of required withdrawals. Under those circumstances, the final regulations force the ultimate beneficiaries (probably the couples children) to complete those required distributions based on the fixed-period single life expectancy of the surviving spouse established on his or her birthday in the year of death. [§1.401(a)(9)-5, A-5] That new rule effectively compels the children to greatly accelerate withdrawals and, hence, forego the tremendous stretch-out potential that would have been available to them as beneficiaries of an account that the surviving spouse elected to treat as his or her own.
S. The final regulations list the life expectancy rule as the default method when participants die before the RBD  provided there is a Designated Beneficiary. This change may prevent non-spouse DBs from being forced to adhere to the Five-Year Rule if they forget to withdraw the first required distribution by December 31 of the year after the participants death. Unfortunately, there is no escape from that quicksand if a qualified plan mandates the Five-Year Rule or uses it as its default in the event a beneficiary fails to make an election to the contrary. However, rescue is possible in cases where a plan stipulates that a non-spouse DB must use the General Exception to the Five-Year Rule, lists that exception as the plans default if the DB forgets to make an election to use it, or is silent as to what method must be followed if no election is made. In each of the latter three scenarios, the DB may escape from the clutches of the Five-Year Rule by switching to the General Exception under §401(a)(9)(B)(iii). To accomplish that change, any amounts that would have been required to be distributed under the General Exception for all distribution calendar years before 2004 must be distributed by the earlier of December 31, 2003 or the end of the fifth year following the year of the participants death. (See §1.401(a)(9)-3, A-4, §1.401(a)(9)-1, A-2(b)(2) and Table 24 on this web site.
T. If a participant wishes to name a minor as beneficiary of his or her qualified retirement plan (QRP), individual retirement account or §403(b) tax sheltered annuity (TSA) contract, difficulties often arise because state laws restrict the transfer of assets to anyone that has not yet attained a certain age. While a minor can be listed as a beneficiary, IRA custodians and plan administrators will not distribute assets directly to a minor. They will distribute assets to a court-appointed legal guardian of a minor or the custodian of an account established for a minor under the Uniform Transfers to Minors Act. In addition, IRA custodians and QRP administrators are happy to make postmortem distributions to the trustee of a trust for the benefit of a minor. While the options outlined in the two preceding sentences may appear to resolve the dilemma, each introduces its own list of complications and considerations that are beyond the scope of this Planning Pointer. Fortunately, an in-depth discussion of this topic is available in ¶6.3.12 of the 6th edition 2006 of Natalie Choate's Life and Death Planning for Retirement Benefits.
U. If a participant dies on or after his or her required beginning date, the required distribution for the year of death (YOD) must be taken on or before December 31 of that same year. The Code and Regulations do not provide a grace period for the participant's beneficiaries. That is to say, the beneficiaries need to withdraw the required distribution by the same deadline the participant would face if he or she were alive. The year-of-death's required distribution is computed as if the participant were alive throughout the entire year -- even if he or she died on January 1. If a participant withdrew a portion of the year's required distribution prior to dying sometime during that year, the beneficiaries must withdraw the remainder of the required distribution by year's end. Although the remainder of the required distribution belongs to the beneficiaries, it is includable in the decedent's estate and represents income in respect of a decedent (IRD). Note too that 100% of the YOD's required distribution must be taken before effecting a spousal rollover or trustee-to-trustee transfer of a qualified retirement plan by a non-spouse beneficiary to an inherited IRA.

References: §403
 §401
 §401
 §408
 §403
 §501
 §457
 §408
 §408
 §403
 §401
 §401
 §401
 §401
 §401
 §401
 §401
 §401
 §401
 §1
 §403
 §403
 §1
 §403
 §2518
 §402
 §403
 §403
 §401
 §1
 §401
 §1
 §1
 §1
 §1
 §401
 §72
 §401
 §401
 §1
 §1
 §403