P R O B A T E   &   P R O P E R T Y
January/February 2004
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Retirement Benefits Planning Update

Retirement Benefits Planning Update Editor: Harvey B. Wallace II, Berry Moorman, P.C., The Buhl Building, 535 Griswold Avenue, Suite 1900, Detroit, MI 48228–3679, hwallace@berrymoorman.com.

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.

Plan and IRA Agreements Updated

Since October 1, 2002, sponsors of Individual Retirement Accounts (IRAs) have been permitted to establish new IRAs only under IRA agreements that have been updated to reflect the minimum requireddistribution (MRD) rule changes of EGTRRA and the final Treasury regulations under section 401(a)(9), published April 17, 2002. 67 Fed. Reg. 18,988. The March 2002 revision of Internal Revenue Service Form 5305-A, “Traditional Individual Retirement Custodial Account,” includes seven articles the content of which must be contained in an sponsor’s IRA agreement that, inter alia, recites the MRD rules and incorporate the final regulations by reference. The form contemplates that additional provisions not inconsistent with state law and the Internal Revenue Code may be added. Updated IRA agreements incorporate Form 5305-A’s initial articles, sometimes verbatim, but diverge in the nature and scope of additional provisions included.

The chart on page 44*, titled “Express Provisions Included in a Sampling of Updated IRA Agreements,” indicates in abbreviated form whether or not the six identified IRA sponsors expressly include certain dispositive or administrative provisions in their traditional IRA agreements amended for the final MRD regulations. The absence of an express provision in an IRA agreement does not necessarily mean that the dispositive/administrative option is foreclosed or that the sponsor will reject the planning objective, but does mean that an inquiry (or negotiation) may be needed or that a customized beneficiary designation may be required.

* RPTE members can access this chart in .pdf format

Window Period Distributions, Disclaimers, and Separate Accounts

As outlined in the September/October 2002 “Retirement Benefits Planning Update,” the final MRD regulations provide for three actions that, if taken in a timely fashion following a participant’s death (whether the participant dies before or after the required beginning date), allow some flexibility in determining the participant’s designated beneficiary or beneficiaries and thus the post-death applicable distribution period (or periods) over which the participant’s benefits must be distributed. Treas. Reg. § 1.401(a)(9)-4, A-4(a). If one of a group of beneficiaries named by the participant (or by the IRA’s terms), for example, receives a distribution of his share of a participant’s benefits before September 30 of the year following the participant’s death (referred to hereafter as the “designation date”), that beneficiary is ignored in determining who is the oldest beneficiary (over whose life expectancy distributions must generally be made beginning in the year following the year of the participant’s death) or whether there is a non-individual beneficiary. In the later case, the participant is deemed to have no designated beneficiary so that benefits must be paid (1) in full by the end of the year in which the fifth anniversary of the participant’s death occurs (if the participant dies before the required beginning date) or (2) over the fixed single life expectancy of the participant (if the participant dies after the required beginning date).

During the 9-to-21-month window period between the participant’s date of death and the designation date, a beneficiary may also disclaim his share of the participant’s benefits and similarly be disregarded for purposes of determining the applicable distribution period for the participant’s benefits.

Finally, if separate accounts (or separate IRAs in the participant’s name) are established before the designation date, the MRD rules will be separately applied based upon the beneficiary or beneficiaries of each separate account without regard to the beneficiaries of other separate accounts. To be recognized for the purpose of applying the MRD rules separately, the final regulations provide that separate accounts must be established by the end of the year following the participant’s year of death. Moreover, separate accounts will be recognized for a particular year only if established before the end of the preceding year. Treas. Reg. §1.401(a)(9)-8, A-2 and 3. The effect of establishing separate accounts in the three-month period after the designation date (when the identity of the participant’s designated beneficiaries is to be determined) and the year-end deadline for establishing separate accounts is not clear. Even if the separate accounts set up during this period are “recognized” at the beginning of the following year, it is possible that MRDs from all of the accounts will be measured by the life expectancy of the oldest designation date beneficiary unless the accounts are established before the designation date (or better yet, in the year of the participant’s death).

IRA Amendments and Post-Death Planning

It was expected (or hoped) that amendments made to conform IRA agreements to the provisions of the final regulations would go beyond the mere recitation of the MRD rules and would include specific administrative provisions regarding the establishment of separate accounts for differing designated beneficiaries and for the disclaimer of benefits. Only two of the six IRA agreements shown on the chart specifically provide for the establishment of separate accounts upon a primary beneficiary’s request. One (Comerica) provides for the automatic creation of separate IRAs upon the participant’s death, one in the name of each surviving primary beneficiary. None of the sample IRAs provides for beneficiary disclaimers.

Participant’s Dispositive Power Ends at Death

If IRA benefits are not made payable to a trust, the plan or IRA agreement will control the disposition of these benefits not only upon the participant’s death but also upon the later death of any designated individual beneficiary who survives the participant. Unlike a trust agreement prepared for estate planning purposes that typically carries out the grantor’s plan for the succession of trust benefits upon a beneficiary’s death, IRA sponsors have adopted the administratively simple approach of shifting the control over the disposition of benefits from the participant to the surviving beneficiaries upon the participant’s death.

Each of the beneficiary designation forms for the IRA agreements listed in the chart provides entry lines for one or more “primary beneficiaries” and one or more “contingent beneficiaries.” The named contingent beneficiaries are entitled to receive benefits only if none of the primary beneficiaries survives the participant (or, in some cases, only if a specified primary beneficiary fails to survive). If a primary beneficiary predeceases the participant, the remaining primary beneficiaries (or, if none, the contingent beneficiaries) generally share the benefits. Unless a customized beneficiary designation that identifies the contingent beneficiaries as also being “successor beneficiaries” is filed and accepted by the plan sponsor, any potential interest in the IRA benefits of the contingent beneficiaries named by the participant ceases upon the participant’s death if at least one primary beneficiary survives the participant (regardless whether the surviving primary beneficiary dies before or following the designation date).

Under all of the IRA agreements listed, a beneficiary who survives the participant has the right to designate the primary and contingent beneficiaries who will receive the IRA benefits upon the beneficiary’s death. Under the Merrill Lynch IRA agreement (though not provided for in the beneficiary designation form), the participant has the power to name successor beneficiaries and, if the participant stipulates a successor beneficiary to receive the IRA benefits upon a beneficiary’s death, the participant’s designation will take precedence over the deceased beneficiary’s designation.

If no beneficiary designation has been filed by a deceased beneficiary who has survived the participant (and no designation of successor beneficiaries, if applicable, has been made by the participant), each of the IRA agreements (except the Merrill Lynch agreement) provides that the plan benefits are payable to the beneficiary’s estate. In the case of the Merrill Lynch agreement, the beneficiary’s surviving spouse or, if none, the beneficiary’s estate is the successor. Under the MRD rules, if a deceased beneficiary who is the only beneficiary (or is the oldest named beneficiary) of the participant’s account dies before the designation date, distributions would be made to the beneficiary’s estate or its assignees, beginning in the calendar year following the participant’s death, over the single life expectancy of the deceased beneficiary if the beneficiary dies “without disclaiming” the benefits. Treas. Reg. § 1.401(a)(9)-4, A-4(c). If state law permits the beneficiary’s personal representative to disclaim the benefits and the regulatory wording does not bar a post-death disclaimer, a post-death disclaimer may remove a deceased beneficiary who dies before the designation date from the participant’s designated beneficiary pool. Although MRDs are not accelerated if the beneficiary’s estate is the default beneficiary in the event of a window period death because the deceased beneficiary’s life expectancy controls the payout period, probate proceedings and the risk of an unintended intestate succession can be avoided if the surviving beneficiary files a beneficiary designation immediately after the participant’s death.

Provisions for Surviving Spouses

Each of the IRA agreements summarized in the chart includes the special MRD provisions that apply to a participant’s surviving spouse and permits the surviving spouse to designate successor beneficiaries on the surviving spouse’s death. Because the maximum stretch out of benefit payments can typically be obtained by a surviving spouse’s rollover to the spouse’s own IRA, a decision will often be made to name the participant’s spouse (directly or via post-death disclaimers) as the sole designated beneficiary of all or a portion of a participant’s IRA benefits. The spouse’s failure to file a beneficiary designation with respect to the inherited IRA or the spouse’s own IRA funded by a post-death rollover will sabotage the hoped-for extended applicable distribution period.

Under each of the IRA agreements, the default beneficiary of a surviving spouse who survives the participant and then dies is the spouse’s estate. If a surviving spouse of a participant who has died before the participant’s required beginning date subsequently dies before the end of the year in which the deceased participant would have attained age 70 1/2 without having named a beneficiary, the five-year rule will apply (and the opportunity to have the benefits paid out over the single life expectancy of the spouse’s designated beneficiary will be lost). In the case of the surviving spouse of a participant who has died after the participant’s RBD who subsequently dies without having filed a beneficiary designation, distributions beginning in the year following the spouse’s death will be made to the spouse’s estate over the longer of the spouse’s or the deceased participant’s fixed single life expectancy. If the surviving spouse has rolled the benefits over to the spouse’s own IRA and the surviving spouse’s required beginning date has not occurred, the five-year rule will similarly apply if the spouse has not filed a beneficiary designation. If the surviving spouse’s required beginning date has occurred at the time of the spouse’s death, distributions will be made from the rollover account to the spouse’s estate over the fixed single life expectancy of the spouse. In either case, the opportunity to take advantage of a younger beneficiary’s fixed life expectancy is lost if there is no designated beneficiary of the rollover account.

Durable Powers of Attorney

Each of the IRA agreements in the chart (except for the Comerica agreement) provides, directly or indirectly, for the recognition of an authorized agent acting under a durable power of attorney. Merrill Lynch has a specific form for its IRA power of attorney; several other sponsors provide a certificate to which a custom durable power (once vetted by the IRA sponsor) may be attached. In the case of a surviving spouse beneficiary, the submission of a power of attorney that authorizes the agent (either in all events or only in the event of the surviving spouse’s incapacity) to make an own-account election, to initiate rollover transfers, and to designate beneficiaries may increase the potential that the deferral objectives will be accomplished. In the case of a nonspouse beneficiary, an agent’s power to designate a beneficiary for an incapacitated beneficiary may avoid probate proceedings upon the beneficiary’s death.