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NEW RULES FOR IRA AND PLAN PAYMENTS
By Lois G. Andrews
There have been important recent changes to IRS rules
governing payments from IRAs and qualified plans (such as 401(k)
and 403(b) plans). A few of the most significant are discussed
in this News Alert.
Simplification of payment
options.
The IRS has actually done something beneficial! The IRS has adopted final regulations
governing minimum distributions from qualified plans and IRAs. These regulations
substantially simplify and improve the payout options available to plan owners.
Now every owner of a qualified plan account can use the same table to calculate
minimum distributions, regardless of who is named as the beneficiary (unless
your beneficiary is a spouse who is more than 10 years younger). Because everyone
uses the same table, it usually is possible to change the beneficiary without
detrimental effect.
Once the plan owner has passed on, the designated
beneficiary can use his own life expectancy to determine the minimum
distributions that must be made from the plan.
The rules also have been modified to improve the situation where no beneficiary
has been named. However, as with the old rules, it still is extremely important
to designate a beneficiary. Furthermore, in spite of the simplification, the
rules are still full of pitfalls. As before, the failure to take the minimum
distribution is subject to heavy penalties. And, if you inherit a qualified
plan account, it is important to seek professional advice prior to changing
the account name to make sure you are able to receive the account over an extended
period of time, thereby maximizing tax-deferred growth.
Difficulty in naming a Trust
as Beneficiary.
As if to offset the good changes discussed above, the IRS has issued rulings
resulting in detrimental effects if the beneficiary of a qualified plan or
IRA is the type of trust most people set up for basic estate planning purposes.
1. Distributions Must Be Based on the Life
Expectancy of the Oldest Beneficiary.
If a trust has more than one beneficiary these new rulings will require that
the minimum distributions be based on the life expectancy of the oldest beneficiary.
This will effect the most commonly used trust provision, which provides that
the trust will be divided into equal shares for children. If the children are
close in age, it is not too detrimental, but if the beneficiaries have a significant
age spread, this ruling has an adverse effect on the younger beneficiaries.
For example, if the youngest beneficiary is 48 and the oldest is 58, the 48
year old beneficiary will be forced to withdraw the account over 27 years even
though he has a 36 year life-expectancy. The result is that he will receive
more income at an earlier age, when he is less likely to need it, will lose
out on tax-deferred growth that he would have otherwise been entitled to, and
will deplete his portion of the account by the time he is 75, even though he
is likely to live to age 84.
2. The Life Expectancies of Contingent
Beneficiaries Are Considered in Determining the Oldest Beneficiary.
The second detrimental ruling provides that contingent beneficiaries must be
considered unless the trustee is required to pay out all minimum distributions
in the year received. For example, let’s say that your trust names your
children as beneficiaries. If your children die prior to distribution, their
children are beneficiaries. However, if no children or more remote descendants
survive you, your brother would be beneficiary. Because your brother is named,
his life expectancy would be used in determining the minimum distributions
to your children, even though it is extremely unlikely that your brother would
ever be a beneficiary.
Worse, if instead of (or in addition to) naming
your brother, you name a charity, the IRS position is that there
is no designated beneficiary, and your children would be required
to take the entire qualified plan account over a very short time
period.
Consequently, if you have named a trust as beneficiary (or contingent beneficiary)
of your IRA or qualified plan, it is important to review the trust provisions.
Note: This alert is intended to give only
general information and should not be construed as legal advice
for any particular client or specific situation. Legal advice should
be sought prior to making decisions. It also should be noted that
the law, interpretations of the law and the position of the IRS
on various matters frequently change and may change again at any
time.
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