Probate & Property Magazine

Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers.

1999 PLRs Clarify MRD Rules

Although limited to the unique facts of a taxpayer's request and binding on the IRS only for the requesting taxpayer, private letter rulings (PLRs) provide an indication of the evolving interpretation of the minimum required distribution (MRD) rules of Code § 401(a)(9) and Prop. Treas. Reg. § 1.401(a)(9)-1. Three 1999 PLRs interpret and clarify the meaning of proposed regulation sections in a manner that provides helpful confirmation and, in at least one case, unexpected guidance.

Payment Over Separate Beneficiary Life Expectancies 

In PLR 199931048, an IRA account owner who in 1997 had inherited eight IRAs from his deceased spouse designated six beneficiaries, stating in the designation form that each beneficiary would be entitled to a one-sixth interest in the IRAs. After the inheriting IRA account owner died one year later, in 1998, the designated beneficiaries directed the IRA custodian to allocate gains and losses from and after the date of the inheriting account owner's death to each beneficiary's interest and to create separate accounts for each of them by direct transfer before the end of 1998.

Prop. Treas. Reg. § 1.401(a)(9)-1, H-2(b) provides an exception to the general rule that separate accounts (or shares) of an IRA are to be aggregated to determine the designated beneficiary whose life expectancy may be taken into account for MRD payout purposes (the oldest beneficiary, if there are multiple beneficiaries). The aggregation rule does not apply if separate accounts (or separate shares) have different beneficiaries as of the required beginning date (RBD) or, in the case of distributions made following the pre-RBD death of an account owner (or spouse when applicable), as of the date of death. Because an inheriting account owner's RBD is not deemed to occur until the end of the year following the year in which the account is inherited (in this case, the end of 1998), the separate accounts of the designated beneficiaries were recognized as being created as of the account owner's death.

Keys to the Separate Share Ruling

By electing to receive benefits before the end of 1999 under the Code § 401(a)(9)(B)(iii) exception to the rule that otherwise requires distribution of the entire account by the end of the fifth year following the year of the account owner's death, each of the beneficiaries may have the IRA benefits distributed over his or her separate life expectancy based on the beneficiary's age attained in 1999. The keys to this favorable result in the case of the pre-RBD death of an account owner were a beneficiary designation that specified separate shares and an accounting for the separate shares from the date of the account owner's death. Note that, in PLR 199903050, the IRS refused to recognize separate trusts created as of the death of a plan participant under the terms of a trust named as beneficiary as separate accounts. In that ruling, the IRS stated: "In order to satisfy the separate account rule under the regulations, plan benefits must be divided into separate accounts in the governing beneficiary instruments."

Designated Beneficiary Allowed to Designate Successor 

An account owner may provide for the possibility that a designated beneficiary may die before the full amount of the IRA has been distributed by naming successive designated beneficiaries. Many standard IRA beneficiary designation forms, however, only provide for the naming of alternative designated beneficiaries who are to become beneficiaries in the event that a prior named beneficiary predeceases the account owner. If no provision for a successor beneficiary is made, some IRAs provide (or are administered as if they provided) for an immediate distribution on the designated beneficiary's death to default takers under the IRA such as the beneficiary's estate.

In PLR 199936052, the designated beneficiary survived the account owner and, by an election letter, proposed to name his spouse as contingent beneficiary, as permitted by the IRA custodian, to receive benefits in the event of his death before the end of the life expectancy payout period. The IRS concluded that the life expectancy payout period was fixed as of the account owner's death and that the naming of a contingent beneficiary would not change the payout period. Because the designated beneficiary and the spouse successor beneficiary will each have the power, exercisable alone and in all events, to accelerate withdrawals of the IRA, the IRS also concluded that the IRA would be includable in the designated beneficiary's taxable estate on his death and would qualify for the estate tax marital deduction if the spouse survived.

Prop. Treas. Reg. § 1.401(a)(9)-1, E-5(f) provides that an account owner will be deemed to have no designated beneficiary if the IRA vests the discretion to change beneficiaries in any person after the account owner's death. The taxpayer beneficiary did not request a ruling to confirm that his power to name a successor beneficiary to receive benefits on his death was not a vested power to change the account owner's beneficiaries under the proposed regulations. The ruling clearly implies, however, that the ability to add a successor beneficiary, at least if no current successor has been named, is not considered to be a power to change beneficiaries.

Recalculation Does Not Accelerate Death Benefit 

Code § 401(a)(9)(B)(i) provides that, if minimum distributions have begun as of an account owner's RBD over the life expectancy of the account owner (or life expectancies of the account owner and a designated beneficiary), the portion of the IRA remaining on the account owner's death must be distributed at least as rapidly as under the method of distribution being used as of the date of the account owner's death.  In PLR 199951053, an account owner elected to receive distributions over her recalculated life expectancy, notwithstanding the fact that she had named her three sons as designated beneficiaries. Prop. Treas. Reg. § 1.401(a)(9)-1, E-8 provides that, if the account owner's life expectancy is being recalculated, the recalculated life expectancy is reduced to "0" at the end of the year following the account owner's death and that, if the account owner's life expectancy is the "last applicable life expectancy," the entire benefit must be distributed by the end of that year.

Observing that the account owner could have elected to receive distributions over the longer joint life expectancy period but instead chose to accelerate the pace of the otherwise required minimum distributions, the IRS concluded that the payment of post-death distributions over the life expectancy of the oldest designated beneficiary (reduced by one year for each year elapsed from the RBD) does not violate the "at least as rapidly" rule. Similarly, in PLR 199915063, an account owner who had designated beneficiaries at his RBD received payments over his recalculated life expectancy under the IRA default provision that applied in the absence of any election being made. The IRS allowed deferred post-death payments, stating that the account owner's life expectancy was not the last applicable life expectancy because the account owner had timely designated his beneficiaries by his RBD.

Retirement Benefits Planning Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, LLP, 7430 Second Ave., 9th Fl., Detroit, MI 48202-2717.




Insert additional links