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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.
Disclaimer of Retirement Benefits
With advance planning, the disclaimer of qualified plan and IRA benefits may permit the designated beneficiaries of a plan participant or IRA account owner (a "participant") to modify the disposition of benefits based on circumstances at the time of the participant's death. To rely on a disclaimer plan, careful attention should be paid to the beneficiary designation (and the sequence of contingent beneficiaries); the authority to make disclaimers should be expressly granted to the beneficiaries (and, if trusts are beneficiaries, the trust agreements should grant such authority to the trustees); and the plan or IRA plan sponsor must be willing to accept the beneficiary designation and honor disclaimers. Assuming that these elements are in place, the transfer tax consequences of a timely disclaimer are clear, the income tax consequences are reasonably clear, and the results under the minimum required distribution (MRD) rules of Code § 401(a)(9) are less clear, but evolving.
Transfer, GST and Income Tax
For federal transfer (gift and estate) tax purposes, the effect of a qualified disclaimer under Code § 2518(a) is that the disclaimed interest in property is treated as if it had never been transferred to the person making the qualified disclaimer and, instead, had passed, ab initio, directly from the transferor of the property (the participant) to the person entitled to receive the property as a result of the disclaimer. Treas. Reg. § 25.2518-1(b). Code § 2654(c) specifically provides that Code § 2518 controls the effect of a qualified disclaimer for purposes of the generation-skipping transfer tax. PLR 9203028. GCM 39858 (published in 1991) held that a disclaimer that satisfies the requirements of state law and Code § 2518(b) is not an assignment for income tax purposes and that a plan or IRA distribution is includable in the recipient's taxable income when distributed (rather than in the disclaimant's income when disclaimed). PLR 9319020 addresses Code § 691; PLR 9037048 addresses Code § 408(d)(1); and PLR 9303027 addresses Code § 402(a), each identifying the recipient as the income taxpayer as long as the disclaimer is valid under state law.
Disclaimers are not contemplated by the Proposed Treasury Regulations promulgated under Code § 401(a)(9). The designated beneficiary (or the oldest designated beneficiary) whose life expectancy may be taken into account in computing the MRD payments to be made during a participant's lifetime is determined on the participant's required beginning date (RBD). The proposed regulations include two rules for post-RBD changes in beneficiaries. The "beneficiary death" rule of Prop. Treas. Reg. § 1.401(a)(9)-1, E-5(e)(2) provides that, if the designated beneficiary dies after the RBD, the designated beneficiary's remaining life expectancy will continue to apply to determine the subsequent MRDs even if the successor beneficiary has a shorter life expectancy (or is a nonindividual deemed to have no life expectancy). Following the RBD, the participant, while living, may change beneficiaries. Under the "beneficiary change" rule of Prop. Treas. Reg. § 1.401(a)(9)-1, E-5(c), the participant's post-RBD naming of a replacement or additional beneficiary who is an older beneficiary or a nonindividual beneficiary results in an acceleration of the MRD period (in the immediately following calendar year) as if the new beneficiary had been the designated beneficiary on the RBD. If a participant dies before the RBD, a beneficiary who predeceases the participant is disregarded for MRD purposes. Prop. Treas. Reg. § 1.401(a)(9)-1, D-4.
MRDs ifDeath After RBD
In PLR 9450040, an IRA participant died following the commencement of MRDs based on the joint recalculated life expectancies of the participant and his spouse. The surviving spouse proposed to disclaim the IRA benefits in favor of the participant's children, the secondary beneficiaries entitled to receive benefits if the spouse predeceased the participant. Because the spouse's life expectancy was being recalculated, an acceleration of benefit distributions would have occurred if the spouse, as a result of the disclaimer, were deemed to have died (her life expectancy becoming zero in the calendar year after her deemed death). Noting that the surviving spouse was, in fact, living and that the applicable state's disclaimer statute literally provided that a disclaimant is deemed to predecease the decedent only if the decedent has not provided for another disposition of the disclaimed interest, the IRS declined to treat the surviving spouse as deceased under the beneficiary death rule. Instead, the IRS applied the beneficiary change rule as of the participant's death to conclude that MRDs could be made over the spouse's remaining life expectancy, as recalculated.
In PLR 9537005, a surviving spouse's disclaimer was also treated as a beneficiary change with post-disclaimer payments being made to a residuary trust over the spouse's recalculated life expectancy. The state disclaimer statute provided that a disclaimed property interest was to be disposed of as if the disclaimant had died immediately preceding the decedent. That statute did not trigger an application of the beneficiary death rule.
In the post-RBD disclaimer setting, the life expectancy of the disclaiming designated beneficiary has already been taken into account in determining the MRD payments made during the participant's lifetime. Under Code § 401(a)(9)(B)(i), MRD payments made after a participant's post-RBD death must continue to be made at least as rapidly as they were being made during the participant's lifetime. Thus, whether the IRS applies the beneficiary death rule or the beneficiary change rule, the post-RBD payout period cannot be extended by virtue of a disclaimer in favor of a younger beneficiary.
In the case of income, transfer and GST tax, specific state disclaimer statutes are relevant, if at all, only to determine that a valid disclaimer has been made. With the caveat that the disclaimer by a primary beneficiary in favor of a charitable institution or older beneficiary will accelerate the post-disclaimer MRD payments, the use of the beneficiary change rule for all post-RBD disclaimers (regardless of state disclaimer laws), if this approach is adopted by the IRS, represents a workable approach in the case of post-RBD disclaimers (where the disclaimer concept does not easily align itself with the MRD rules).
MRDs if Death Before RBD
In the case of a pre-RBD death, there would appear to be no reason to require, contrary to the disclaimer concept, that the disclaimant's life expectancy be taken into account because no post-RBD distributions have been made in reliance on the primary beneficiary's identity. Until recently, the IRS has declined to rule on the status of a disclaimant as a designated beneficiary in the case of a participant's pre-RBD death. See PLR 9226058. In PLR 200013041, a husband and wife, neither of whom had reached the RBD, each designated the other as primary beneficiary of an IRA and secondary beneficiary of a joint trust. Both spouses died as a result of a car accident, the husband surviving by a few days. The husband's personal representatives disclaimed his interests in the wife's IRA and his interests (beneficial and fiduciary) in the joint trust, the surviving beneficiaries of which were the couple's children. Recognizing the children as designated beneficiaries under the trust "look through" rule, the IRS disregarded the disclaimant as an IRA beneficiary and concluded that MRD payments could be made to the trust, under the Code § 401(a)(9)(b)(iii) exception to the five year rule, over the life expectancy of the oldest child.
Retirement Benefits Planning Update Editor: Harvey B. Wallace II, Joslyn Keydel & Wallace, LLP, Albert Kahn Building, 9th Floor, 7430 Second Ave, Detroit, MI 48202-2717, email@example.com.