An Anatomy
of a Beneficiary Designation Form.
We all have clients who have large rollover IRAs or large interests in a qualified plan, or who are married to someone who does. It is obvious that the manner in which these benefits pass on death can dramatically affect the estate plan. Consider, as a common instance, a joint community estate consisting of a $200,000 home, $300,000 in other probate assets, and a $1 million rollover IRA.
The disposition of the $1 million IRA is not going to be affected by the participant’s will unless the beneficiary of the IRA is the participant’s probate estate. Rather, this valuable asset, representing two-thirds of the estate, is going to pass in accordance with the language found in the beneficiary designation, if any, or by the default provisions under the plan or IRA if a designation is not completed. The interest is a nonprobate asset.
The passage of the community property interest of the participant’s spouse (the nonparticipant spouse or NPS), should the spouse predecease the participant, is slightly more problematic. It will probably pass under the spouse’s will, as a probate asset,[1] or it might pass under a beneficiary designation, if the spouse has signed one and if the interest is held under an IRA. But, if the interest is in a qualified plan the interest may not pass at all, depending on whether the qualified plan is subject to ERISA,[2] and if so whether ERISA preempts state probate law.[3]
Of all of the various property interests that can pass to a beneficiary at the death of an individual, the one that is the most fraught with complex tax and uncertain property law issues is the IRA or qualified plan. There are a number of taxes that can apply to an interest in a qualified plan or IRA.
1. Income Taxes.
2. Premature Distribution Tax.[4]
3. Estate Tax.
All of these taxes are affected by the form of the beneficiary designation. In Texas, California, New Mexico, Arizona, Louisiana, Washington, Idaho, Nevada (and, to a limited extent, a few other states) all of these taxes must be applied with the community property system in mind.
Consider the following issues:
Issues Common in All States
• Does a beneficiary have the right to withdraw the entire benefit at will? If not, is the participant’s estate entitled to a marital deduction if the beneficiary is the spouse? Does the answer to this question turn on whether the participant elected installment distributions upon reaching his required beginning date. (Note now for future reference that the required beginning date, or RBD, means April 1 of the calendar year following the calendar year in which the participant turned 701/2.[5])
• How soon must a participant’s benefit be paid out following his death?
• What happens to the undistributed interest of the participant’s beneficiary after the beneficiary’s death (following the death of the participant)?
• Is a marital deduction available in the participant’s estate if the spouse is the beneficiary, if the undistributed interest can pass to a third party?
• Can a trust be named as beneficiary? If a QTIP trust is named as beneficiary, will the participant’s estate be entitled to claim a marital deduction for it? Does the fact that a trust is a beneficiary mean that the benefits must be paid out (and taxed) within five years of the participant’s death, or can we look to the life expectancy of the beneficiary of the trust?
• Can a beneficiary rollover the participant’s benefit? Can the beneficiary make a plan to plan or IRA to IRA transfer of the benefit?
• If the beneficiary is under age 591/2 at the time of the distribution, does the beneficiary have to pay the 10% early distribution penalty tax under §72(t)? Does it make any difference if the beneficiary is the participant’s spouse, and the spouse either rolled over the benefit or elected to treat it as his own, pursuant to IRC §§402(c)(9), 403(b)(8)(B) or 408(d)(3)(C)(ii)(II)?
• If the participant’s estate is the beneficiary, but the beneficiary of the participant’s estate is the participant’s spouse, can the spouse take the distribution and roll it over?
Community Property Issues
• What happens to the community property interest of the nonparticipant spouse (the NPS)— (a) on the spouse’s death, (b) on the participant’s death? Does this interest of the NPS pass by will or by beneficiary designation or neither? Does this interest qualify for the marital deduction if the participant is the beneficiary? Who is taxed for income tax purposes on the distribution of the nonparticipant spouse’s interest, and when is the tax due? If the participant is under age 591/2 at the time of the distribution, does the 10% early distribution penalty tax under §72(t) apply, and if so, who pays it?
* * * *
Most of these questions and a few more will be addressed below in the context of a clause by clause analysis of certain provisions of a model IRA/qualified plan beneficiary designation form. The author makes no warranties or representations at all regarding the effect or efficacy of these clauses, as they are set forth for discussion purposes only. This form, of which the clauses are a part, is intended to be used as an attachment to whatever form (if any) is required by the sponsor of a qualified plan or IRA. Whether it is appropriate or acceptable to the sponsor is definitely a matter to be considered, but it is the author’s experience that most sponsors have no problems with individually designed forms, in contrast to insurance companies, most of whom do not seem to care what problems their forms cause after the policy has been sold.
The beneficiary designation clauses found below are surrounded by a border. Most word processing programs allow the user to define variables the answers to which determine what will be inserted in a merged document. I have retained, a few of the variables and conditional instructions that I use (indicated within the internatio
DESIGNATION OF BENEFICIARY and ELECTION AS TO FORM OF BENEFITS UNDER IRC §401(a)(9)
This document is an attachment to any beneficiary designation form required by the terms of the IRA and is incorporated into such form. If there is no specified beneficiary designation form required by the terms of the IRA, then this document shall be the beneficiary designation form.
If possible, it is best to actually sign any form that the Plan or IRA provides or requires, with the words “see attached” filled in appropriately.
Spousal Rollover. Here, if the original owner is deceased, the owner’s spouse was the designated beneficiary, and the spouse wishes to treat the IRA as his own (pursuant to IRC §408(d)(3)(C)(ii)(II)), then this clause manifesting that intent would be appropriate. There are many important tax consequences to consider if a spouse is a beneficiary of an IRA or qualified plan. Most important is that IRC §§402(c)(9), 403(b)(8)(B) and 408(d)(3)(C)(ii)(II) allow spouses, and only spouses, to rollover from qualified plans, tax sheltered annuities and IRAs, into an IRA that will become the spouse’s own IRA (i.e., it will be treated as owned directly rather than as a beneficiary). The spousal rollover rule is clearly applicable even after the RBD has been reached.[7]
Application of Minimum Distribution Rules. The general rule is that, after death and after the RBD—the required beginning date, April 1 of the calendar year following the calendar year in which the participant reaches age 701/2—distributions must continue at least as rapidly as before death. Before death, minimum distributions will have commenced as of the RBD, usually over the joint life expectancy of the participant and the participant’s beneficiary. If death occurs before the RBD, distributions must either be made (a) over the life expectancy of the beneficiary, or (b) within five years, usually at the election of the beneficiary.
Spousal Rollover
Postpones or Suspends IRC §401(a)(9). A post mortem technique that
effectively suspends or postpones the application of both rules is to name the
spouse as beneficiary, and then have the spouse rollover the benefit or treat
the IRA as his or her own under the spousal IRA rules. This is an extremely
important planning opportunity and is key to most of the various post death
distribution strategies. This means, in effect, that the spouse could (1) defer
distribution until the April 1 of the calendar year following the calendar year
in which the spouse attained age 701/2, and, more importantly, (2) begin a fresh payout period,
using a new beneficiary as another joint measuring life.[8]
Special Rule For Spouses Delays Application of Minimum Distribution Rules. If the spouse desires to be treated as a beneficiary, rather than as an owner, a special exception to the exception to the five year rule applies if the surviving spouse is the beneficiary of a participant who dies prior to the RBD. In that case, the spouse may delay distributions based upon the spouse’s life or life expectancy until the participant would have attained age 701/2, and if the spouse dies before that date, the minimum distributions are applied as if the spouse were the participant.[9]
If Spouse is Under Age 591/2, Premature Distribution Tax May Apply. If a distribution from a spousal rollover IRA is made to a spouse who is under age 591/2 at the time, it may be that the premature distribution tax of IRC §72(t) applies, since the spouse in such case is treated as if he were the employee. However, §72(t) expressly does not apply to distributions “made to a beneficiary . . . on or after the death of an employee.”[10] Though the question is by no means free from doubt, the express exception to the premature distribution tax for distributions on account of death ought to apply, even after a spousal rollover.
Rollover Where
Estate is Beneficiary. A question that frequently arises in a post mortem
setting is whether a spouse may rollover a benefit to which the spouse is only
indirectly the recipient. For example, the decedent’s estate, or even a trust,
may be the designated beneficiary of the benefit, but the spouse is the
principal beneficiary of the estate or trust. In such case, can the spouse take
a distribution to which he is entitled under the estate or trust and roll it
over under the spousal rollover rules? Surprisingly, there are several private
letter rulings that have allowed this under appropriate ci
Revocation of Prior Designations. I revoke all previous beneficiary designations. This beneficiary designation shall remain in effect until such time as I have filed another designation with the trustee or custodian of the IRA, bearing a subsequent date.
This is a standard provision that can prove helpful on occasion.
Identification of IRA. The IRA has been described as the
Largest Bank in
Many times a participant will have several IRAs with the same sponsor, or one IRA held in several subaccounts, depending upon the nature of the investments. In either case, the identifying account numbers may differ. In that case, if the beneficiaries of each are to be the same, then a statement to that effect may avoid a construction problem in the future.
Approximate Value. The approximate value as of June 30, 1996 was $5,456,999. (I may be mistaken as to the approximate value of the IRA. Such mistake, if any, shall have absolutely no effect on this beneficiary designation.)
This information will often prove useful in reviewing the file and all of the various IRA and qualified plan beneficiary designations, as a reminder of what was intended to go where.
Identification of IRA Sponsor. The sponsor of the IRA is
believed to be Largest Bank in
Identification of Designated Participant/Designated IRA Owner. I,
Moore Money (the “Participant” or
IRA “Owner”), named Morris Edward Money at birth, also know as Mo Money and
M.E. Money, am the designated owner of the above referenced IRA. I am presently
a domiciliary and resident of Enterprise County, Texas. My Texas domicile was
established at birth. I am a citizen of the United States.
|
Identification
of Spouse. I am married to Lotta Money.
All references in this Will to “my Wife” or to “my spouse” are to Lotta Money alone. My Wife, Lotta
Money, was born on October 1, 1929. My Wife is presently a domiciliary and
resident of Enterprise County, Texas. Her
Texas domicile was established
at birth. My Wife is a citizen of the United States. I have not been
previously married to any other person. |
|
Identification
of Children. I have two children, now living. |
|
E. C. Money (Cosmic Charlie) I have no child now deceased leaving descendants now living. |
|
Definition of the Word “Children”/Children Born or Adopted After Signing of Instrument. All references in this instrument to “the Participant’s children,” “my children,” “my child” or a “child of mine” include only the above named child and any child or children hereafter born to or adopted by me. This provision is to be interpreted literally and strictly. |
|
Identification
of Descendants. All references in this instrument to “the
Participant’s descendants,” "my descendants," a "descendant of
mine," or similar designation, shall include only "my
children" and their descendants and no others. This provision is to be
interpreted literally and strictly. |
Most of this information, though not necessary, will have
to be ascertained sooner or later, and might as well be set forth in full in
the beneficiary designation. Fo
Identifying descendants can save a lot of trouble later on. Consider the example of President Clinton, who discovered two siblings after being elected. If there are any deceased children who are survived by descendants, the beneficiary designation is a good time to recognize the situation, and the contrary is equally true. If there are any descendants whom the participant does not wish to be considered (illegitimates, perhaps), then the approach taken above is a tactful way of dealing with the issue.
Table of Beneficiaries
|
Class |
Beneficiary(ies) |
|
1. First Beneficiary |
Lotta Money if she survives me (my Wife). |
|
2. Second Beneficiary |
My Descendants who survive me, per stirpes |
|
3. Third Beneficiary |
My Probate Estate |
|
4. Fourth Beneficiary |
N/A |
|
5. Fifth Beneficiary |
N/A |
After quite a bit of experimentation as to how to list primary and contingent beneficiaries, I have recently adopted the approach represented by the above table as being the most flexible.
Except
as otherwise designated or provided in this Designation, the following
rules of construction shall apply:
• The
Beneficiaries identified above shall be entitled to Death Benefits in ascending
numerical order. That is, the person(s) identified as the First Beneficiary
shall be entitled to Death Benefits first, and the Second Beneficiaries shall
be entitled to Death Benefits only if there is no First Beneficiary surviving.
And so forth. (The lower the number the higher the Class.) Beneficiaries below
the First Beneficiary level are contingent beneficiaries.
•• A
Beneficiary must survive me in order to be eligible to receive Death Benefits
under this designation. Further, a Beneficiary must survive all other
Beneficiaries of a higher Class in order to be eligible to receive Death
Benefits. A Beneficiary’s interest shall vest absolutely at my death, whether
or not the Beneficiary subsequently survives the complete distribution of his
benefits under the IRA.
•• In the case of a gift to a Class “by right of representation” or “per stirpes,” Death Benefits shall pass in accordance with the definition of those terms. For example, if a person was survived by four children, and two grandchildren who were the only children (surviving or otherwise) of a predeceased child, a division by right of representation would provide two equal shares for each child who survived, and one share for each of the children of the predeceased child (ten shares in all). This would be true regardless of whether the surviving children had children then living, or whether the surviving grandchildren had living descendants.
• The
Death Benefits as to which a trust is the Beneficiary (by virtue of disclaimer)
shall be paid, in trust, to the person who is the trustee under the trust (at
the time the Death Benefits are paid), under the trust provisions contained and
described in the trust instrument as it may exist at the first to occur of (1)
my death, (2) my Required Beginning Date or (3) the date of this designation if
made after my Required Beginning Date. Unless otherwise clearly specified, a
reference to a beneficiary is a reference to the person then serving as
trustee, if a trust is the beneficiary.
• A copy of The Credit Shelter Trust Under The Moore Family Trust is delivered to the IRA trustee or custodian contemporaneously with the delivery of this instrument. The Credit Shelter Trust Under The Moore Family Trust is for some purposes revocable and amendable, but my share of the Trust becomes irrevocable upon my death. As a general rule, therefore, this Designation shall apply to the Trust as it exists at the date of my death, if my death is prior to my Required Beginning Date, whether or not it is amended or restated following this Designation. However, if or when I have reached my Required Beginning Date, then the trust by its express terms has previously been made irrevocable for purposes of Benefits passing pursuant to this Beneficiary Designation, and the trust terms in effect on the later of (i) my Required Beginning Date, or (ii) the date I have signed this designation, shall apply whether or not the trust has in other respects been thereafter amended. If, for whatever reason, The Credit Shelter Trust Under The Moore Family Trust as beneficiary is ineffective, such designation shall be ignored (as if the trust were an individual who had predeceased me).
Note that by granting the beneficiaries a right of acceleration and withdrawal, i.e., fully vesting the benefit, the beneficiary will have a power of appointment and any undistributed benefits will be taxed for estate tax purposes in the beneficiary’s estate, if the beneficiary is an individual. Estate tax exclusion could be arranged, in an appropriate case, by not vesting the benefit. However, if the beneficiary powers are to be limited, one must carefully consider the effect this might have on the marital deduction, the possible imposition of the generation skipping tax, and the impact on the size of any credit shelter gift under the will. Since an IRA or qualified plan benefit is a wasting asset, it will likely end up in the beneficiary’s estate anyway, wasting either the unified credit or the generation skipping transfer tax exemption under IRC §2631 or both. Therefore, if plan and IRA benefits are to be excluded from the beneficiary’s estate, a trust should ordinarily be used as a medium. A power of withdrawal and acceleration in the trustee should have no adverse estate tax consequences.
It is generally advisable to leave at least half of the benefits to the surviving spouse, if any. This disposes of any problems or inequities in attempting to dispose of the spouse’s community property to someone other than the spouse. Further, the spouse is an ideal beneficiary since all of the tax laws (income, excise and estate) favor such a disposition.
Although naming the spouse is the ideal, since income
taxes, certain excise taxes and estate taxes, can all be postponed, sometimes
this is just not feasible, either because of family ci
• Disposition of State Property Law Interest of Spouse. To the extent that my Wife is a designated beneficiary under this instrument, the Benefits to which she is thereby entitled shall be satisfied first out of any community property or other legal interest that she may otherwise have in my Benefits, and second, out of property in which she does not have such an interest. Further, any Benefits passing to my Wife in fee simple and free of trust shall be satisfied first out of her community property interest in the Death Benefits before resorting to my separate or community property interest.
These clauses are self-explanatory, but they do bear reflection. If the participant is married, it is almost a certainty that a portion of the benefits will be community property. If at all possible, I suggest leaving the surviving spouse at least half of the benefit outright. This at once disposes of quite a few thorny characterization and control issues.
For those readers who think it silly to specify that any benefits passing to the spouse are to be satisfied first out of the spouse’s community property, I direct your attention to Employee Savings Plan of Mobil Oil Corp. v. Geer,[12] where the beneficiary designation left the spouse half and the children the other half of the participant’s pension benefits. The spouse claimed that she was entitled to three-fourths of the benefits— her one half, plus half of what was left!
If my Wife predeceases or has predeceased me, and if she has left her
community property interest (if any) in my Benefits to someone other than me,
then to the extent that this disposition was effective as a matter of law, such
interest shall pass as she has directed, rather than in accordance with this
designation. However, the custodian or trustee shall be fully protected in
paying or withholding payment of Benefits without regard to the preceding
sentence.
Predeceased Spouse With Community Property Interest in the IRA. DOUBLECHECKxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx(I acknowledge that as of the date I am signing this beneficiary designation, one-half of my Benefit is owned by the Moore Family Trust. This one-half belonged to my Wife during her lifetime under Texas law, and was a part of her probate estate. At my death, the Moore Family Trust terminates and passes to my Wife’s descendants by right of representation. At the present time, the descendants by right of representation of my Wife are xxxyyy, whose names are listed above. Therefore, the entire Benefit will pass to xxxyyy, if they survive me, whether the interest owned by the trust under state law has been completely distributed to it at my death or not.)
If a spouse having a community property interest has predeceased the participant, and no nonprorata partition of the interest has taken place, then on the participant’s death it is important for practical reasons that the participant’s beneficiary designation be consistent with the spouse’s will. It may also be important for estate tax reasons to recognize that the spouse’s interest is not to be included in the participant’s estate. Also, by making the NPS’s direction the participant’s designation, one may be able to avoid violating the rule that only the participant may designate a beneficiary under the minimum distribution rules.[13]
The community property interest of the participant’s spouse should not be includible in the participant’s gross estate for federal estate tax purposes, any more than such interest would be includible if the interest were a life insurance policy.[14] It is well established in Texas that a predeceased spouse’s successors in interest will own half of any community property life insurance on the life of the survivor, if that right is not “settled away.”[15] However, because it is common for community property estates to be partitioned nonprorata, it may be difficult to tell long after the fact whether assets under the nominal control of a decedent in fact belong to the decedent’s spouse’s successors in interest, or whether the decedent’s interest was in effect or in actuality transferred to the survivor as a part of a settlement of the first estate. Therefore, it may be helpful for the participant to formally recognize the existence and legitimacy of the predeceased spouse’s interest, particularly if it is desired to exclude the interest from the participant’s estate for estate tax purposes. Otherwise, the IRS may attempt to argue that the participant converted or “settled away” the spouse’s interest.
There are quite a few troubling tax issues associated with the payment of community property benefits to the successors in interest of the participant’s spouse, particularly while the participant is still living. To name a few: (1) Who pays the income tax? (2) Who pays the premature distribution tax under §72(t) if the participant is still living and is under 591/2?
(1) There is some authority that the participant will not have to pay the income tax on distributions to the beneficiaries of the participant’s spouse’s estate, despite the admonition in IRC §408(g) that the IRA rules “shall be applied without regard to any community property laws.”[16]
(2) The exception to the 10% premature distribution tax under §72(t)(2)(A)(i), for distributions made on account of death, does not apply here because the death referred to is that of the employee. However, the tax does not apply unless the distribution is includible in gross income.[17] Further, the tax is on amounts received by the taxpayer. Therefore, if the tax applies at all, it is arguable that it is owed by the beneficiary of the nonparticipant spouse’s interest.
Disclaimer Provisions.
As expressly permitted by Texas Probate Code §37A(c), I make the following provision in this instrument for the making of disclaimers by a beneficiary.
Except where it has been specifically provided to the contrary elsewhere in this designation, if a disclaimant disclaims all of his or her interest in all (or any portion) of any trust, the trust (or the affected portion) shall be administered and distributed as if the disclaimant died after having survived me, even if this results in the acceleration of a remainder interest or closes an otherwise open class, and even if this results in the removal of the property from the trust (which in many cases it would). Except where it has been specifically provided to the contrary elsewhere in this designation, if a disclaimant disclaims less than all of his or her interest in all (or any portion) of any trust, the trust (or the affected portion) shall be administered and distributed as if the disclaimed interest had been omitted from the terms of the trust.
Except where it has been
specifically provided to the contrary elsewhere in this designation, if any
property that is not to be held in trust is disclaimed by a beneficiary, other
than my Wife, such property shall pass to the then living descendants of the disclaimant,
by right of representation, if any, and if none, then such property shall pass
as if the disclaimant predeceased me.
If my Wife disclaims all or a portion of the Death Benefits to which she is otherwise entitled under this instrument, the disclaimed portion shall be payable to The Credit Shelter Trust Under The Moore Family Trust.
If my Wife makes a further
disclaimer of her interest hereunder that is payable to the Credit Shelter
Trust Under The Moore Family Trust, such interest shall be payable to My
Descendants Per Stirpes.
If, as a result of disclaimer, an
interest would otherwise pass to The Credit Shelter Trust Under The Moore
Family Trust, but for the fact that The Credit Shelter Trust Under The Moore
Family Trust does not exist or is otherwise incapable of taking, the disclaimed
interest shall instead pass as if the disclaimant had predeceased me.
At least consider where you wish the benefit to go in the event of disclaimer. This is a very important provision. In fact, if one is concerned with using trusts as beneficiaries because of the uncertainties regarding the application of the minimum distribution rules during lifetime, following the RBD, it may be worthwhile to consider naming the spouse as the beneficiary, with the bypass trust (or even the participant’s estate) as the beneficiary if the spouse disclaims. There will be little uncertainty in the use of the joint life expectancy method if the spouse is the participant’s designated beneficiary. If the spouse disclaims, and if the trust is treated as a contingent beneficiary as of the RBD (which seems likely), and if recalculation is not involved, it would appear that the payout period would be fixed at the RBD, just as if the spouse survived the RBD and then predeceased the participant.
There are a number of issues associated with the disclaimer of qualified plan and IRA benefits. First of all, one must consult state law to determine whether the disclaimer of nonprobate assets is even contemplated by the applicable disclaimer statute. Other issues that come immediately to mind are whether, in the case of a qualified plan, the antialienation rule applies, and whether, in the case of an IRA, a disclaimer will be treated as an assignment. Finally, we have a concern as to how the minimum distribution rules are to interact with a disclaimer that takes place after the required beginning date.
Another question this technique raises is this: If benefits have begun to be distributed after the participant has attained 701/2, based upon the joint life expectancy of the participant and the life or life expectancy of a designated beneficiary, and following the death of the participant, the designated beneficiary disclaims, is the life expectancy of the beneficiary of the disclaimer substituted for that of the disclaimant, or is the disclaimant treated as predeceasing the participant after having first survived the required beginning date (the RBD)?
In PLR 9037048 the decedent designated his wife as primary beneficiary and a testamentary trust as the contingent beneficiary. Upon reaching his RBD, the decedent elected to take distributions over the unrecalculated joint life expectancy of himself and his wife. The facts of the ruling state that the trust was a valid trust under state law and was also irrevocable. Of course, since the trust was a testamentary trust, it obviously was not irrevocable during the decedent’s lifetime, much less at the RBD.
The spouse made two disclaimers. She first disclaimed the right to the benefits individually, and then disclaimed the right to benefit from the residuary (testamentary) trust. As a result, the interest passed to the trustee of the trust for the benefit of the decedent’s child. The Service ruled (a) that the disclaimers were qualified under IRC §2518 and (b) that the original payout period established during the lifetime of the decedent, under IRC §§401(a)(9) and 408(a)(6), continued to govern the payout period following the disclaimer.[18]
The ruling specifically states that the disclaimed interest “will be treated for federal tax purposes as if that Surviving Spouse never had been named as the IRA beneficiary; rather, benefits will be distributed from the Account to the Contingent Beneficiary’s Trustee according to the terms of the Decedent’s will.”[19] However, with regard to the minimum distribution rules, a different rule appears to have obtained, since the original payout period remained unchanged. This latter treatment is precisely what would have been the result if, in fact, the spouse had died (rather than disclaimed) after the RBD, and after having been named as the beneficiary; since in that case the payout period is fixed, and even designating a beneficiary with a shorter life expectancy will not shorten the payout period.[20]
This technique is apparently effective to preserve the original payout period based upon the life expectancy of the disclaimant, rather than the life expectancy of the person who receives the benefit as a result of the disclaimer, and presumably, the recipient of the benefits need not even be a “designated beneficiary.” I can see no theoretical distinction between the case where an estate or nonqualified trust is the “contingent beneficiary” who takes in the event of a disclaimer, and anyone else whose life expectancy is ignored, once the original payout period is established.
The facts of the ruling carefully recite (a) the trust was valid under state law, (b) the trust was irrevocable, and (c) a copy of the trust was held by the owner of the account. As pointed out above, the trust was revocable on and after the RBD and did not become irrevocable until death. The fact that the IRA owner had a copy of his will is hardly surprising, but the fact that the Service saw fit to stress this point has caused some people to opine that this is an indication that the delivery requirement applicable to trusts under the minimum distribution rules may be satisfied by delivery to the IRA owner, rather than the trustee. (The last of the four requirements listed in the D-5 Proposed Regulations for a trust to be treated as a designated beneficiary is that “a copy of the trust instrument must be provided to the plan.”[21]) However, one is hard put to see the relevance of this point in this context, unless the Service is suggesting that the contingent beneficiary must meet the requirements of a “designated beneficiary.” A contingent beneficiary need not be a designated beneficiary in the absence of a disclaimer, and in any event, the testamentary trust was certainly not a designated beneficiary on the RBD, though perhaps it was at death. The only conclusion that I can logically draw is that the particular characteristics of the trust were completely superfluous to the ruling— but then again, one never knows for sure in this area.
• Identification of
Form or Time of Payment/Beneficiary Shall Have Draw Down Power. Benefits
payable as a result of my death shall be paid in such form and manner and at
such time as may be permitted by the IRA or law and as the beneficiary shall
elect. If there is more than one beneficiary, then each beneficiary may make an
election with respect to that beneficiary’s separate account. Further, each
beneficiary shall have at all times, the unrestricted power and right to draw
down and take a distribution to himself of all or any portion of the Benefits
to which he is entitled under this designation, including the unrestricted
power to accelerate any installment distributions elected. (If a trust is a
beneficiary, the powers described under this paragraph shall belong to the
trustee of that trust.)
• Death of
Beneficiary. If an individual who is a beneficiary survives me, but
dies prior to the complete distribution of his interest in my Benefit, the
beneficiary’s share of any remaining interest shall be paid to such secondary
beneficiary or beneficiaries as are designated by the deceased beneficiary by
written instrument delivered to the IRA custodian or trustee. If no such
designation has been made, then the beneficiary’s share of any remaining
interest shall be paid to the beneficiary's personal representative to be
administered as a part of the beneficiary's general probate estate. Such
distribution and designation shall be in such form and at such time as may be
permitted by the IRA or law and as the secondary beneficiary or beneficiary’s
personal representative (as the case may be) elects.
The question of what to do with the beneficiary’s interest upon the death of the beneficiary can be a troubling one. Lest there be a question, I recommend that the beneficiary designation address the issue.
The clauses set forth above clear up a number of questions that may otherwise be in doubt, the resolution of some of which directly affect the availability of the marital deduction. For example, the existence of an unrestricted draw down power may be crucial if the beneficiary is the spouse and if a marital deduction for the interest is needed. If the spouse does not have a draw down power, the benefit may be a nondeductible terminable interest, unless any undistributed benefit remaining at the spouse’s death is payable to the spouse’s estate! My contention is that the existence of the draw down power is to be implied (in the absence of a specific direction to the contrary), and, also by implication, any undistributed benefits remaining at the spouse’s death should be payable to the spouse’s estate (likewise in the absence of an affirmative direction to the contrary); but not everyone agrees with me. I strongly recommend the use of these clauses in the interest of avoiding ambiguity.
If a spouse has an unrestricted right to draw down all of the income, the interest in the plan or IRA should qualify for QTIP treatment,[22] particularly if this right is coupled with the right in the spouse or the duty of the trustee/custodian to make the property productive. Further, if the spouse has an unrestricted draw down power over corpus and income, the participant’s estate will be entitled to a marital deduction, even if the power lapses at death.[23] Finally, if any undistributed benefit remaining at the spouse’s death is payable to his estate, then the interest qualifies for the marital deduction no matter what the lifetime distribution terms, so long as the interest was payable to no one other than the spouse during the spouse’s life.[24]
True, giving the beneficiary an unlimited draw down power places the benefits in the beneficiary’s estate, pursuant to IRC §2041; however, for the reasons previously indicated, I believe that if estate tax exclusion in the beneficiaries’ estate is desired, an accumulation trust should be the beneficiary.
The proposed regulations contain a provision that could conceivably make it dangerous to allow a beneficiary to designate who will take the beneficiary’s interest upon the beneficiary’s death:
(f) Designations by beneficiaries. If the plan provides (or allows the employee to specify) that, after the employee’s death, any person or persons have the discretion to change the beneficiaries of the employee, then, for purposes of determining the distribution period for both distributions before and after the employee’s death, the employee will be treated as not having designated a beneficiary.[25]
Does this regulation apply at the beneficiary’s death, or only so long as the beneficiary is living? In any case, would it apply to a distribution to the beneficiary’s estate, since the beneficiary designates the beneficiaries of his will? An affirmative answer to this question would be an inappropriate and overbroad reading of the regulation, but not impossible. In a conversation I had with the IRS National Office in Washington, I was assured that this regulation was not meant to apply to a case where the remainder interest passes to the beneficiary’s estate or as the beneficiary directs upon the beneficiary’s death. Rather, the intent behind the regulation is that the interest not be diverted to someone other than the beneficiary during the beneficiary’s lifetime.
The regulation provides an exception:
However, such discretion will not be found to exist merely because the employee’s surviving spouse may designate a beneficiary for distribution purposes pursuant to section 401(a)(9)(B)(iv)(II). [26]
The IRC section referred to is an exception to the exception to the five year rule, that applies if the surviving spouse is the beneficiary of a participant who dies prior to the RBD; in which case the spouse may delay distributions based upon the spouse’s life or life expectancy until the participant would have attained age 701/2, but if the spouse dies before that date, the minimum distributions are applied as if the spouse were the participant. This exception was thought by the Treasury to be a special case worth addressing because in that case the designation would indeed establish a new distribution payout period.
• Uniform Gifts to Minors Act. Any distribution that would be made to a minor beneficiary may be made under the Uniform Gifts (or Transfers) to Minors Act of Texas or any other jurisdiction.
• Power of Legal Representative to Act Under IRA. Any distribution that can be made to an individual may be made to the individual’s legal representative, including the holder of such individual’s power of attorney. Such representative shall also have the power to make (on the individual’s behalf) any elections or designations that the individual is empowered to make, to the extent otherwise consistent with the scope of the representative’s legal authority.
• Revocation of This Designation. This designation may be revoked or changed by me at any time by written notice to the IRA custodian or trustee, and this beneficiary designation shall remain in effect until such time, or until such time as I have filed another designation with the IRA custodian or trustee bearing a subsequent signature date.
These clauses are self-explanatory. I did not include a survivorship period clause (e.g., 90 days) because I am unsure of the effect of such a clause under IRC §401(a)(9).
Election as to Form of Benefit Under the Minimum Distribution Rules.
I was born on 10/1/29. I believe that my Required Beginning Date will be 4/1/2001, because I will be 701/2 in the
immediately preceding calendar year. In “the first distribution calendar year,”
(i.e., in the year that I attain age 701/2), I elect that distributions shall
commence to me over the joint life expectancy of myself and my designated
beneficiary. If permitted by the IRA, I elect that my life expectancy shall be recalculated for purposes of
complying with the minimum distribution rules. However, if my Wife is living on
the required beginning date, and is at that time a designated beneficiary, then
I further direct that my Wife’s life expectancy shall NOT be recalculated.
This forum does not lend itself to a detailed discussion of the §401(a)(9) minimum distribution rules, but I encourage the reader to peruse this clause carefully and consider the issues that are being dealt with. A decision must be made as to whether or not to recalculate life expectancies each year. Life expectancies can only be recalculated in the case of the participant and (or) the participant’s spouse. Although recalculation can result in a longer payout period in some cases, it can also result in the rapid acceleration of income following the year of death, because a person has a life expectancy of zero upon death, not surprisingly.
Essentially, distributions where death occurs before the RBD must be made either (a) within five years of death, or (b) over the life expectancy of the beneficiary.[27] Once the participant reaches the RBD, distributions must begin to be made over the joint life expectancy of the participant and the participant’s beneficiary.[28] Any benefits remaining at the participant’s death following the RBD must continue to be made at least as rapidly as before.[29] The beneficiary designation form assumes greater significance once one realizes that the rapidity with which distributions must be made (and tax paid) is dependent upon who the participant’s beneficiary is.
Some beneficiaries do not have lives or life expectancies, an estate or a charity, for example. Trusts are a special case.
• Beneficiary of
Trust Is a Designated Beneficiary. If and to the extent that The Credit
Shelter Trust Under The Moore Family Trust is or becomes a primary beneficiary,
the beneficiary The Credit Shelter Trust Under The Moore Family Trust should
qualify as a “designated beneficiary” for purposes of IRC §401(a)(9) because (1) the trust is a valid trust under
state law, (2) the trust has
expressly been made irrevocable for purposes of Benefits passing pursuant to
this beneficiary designation, (3)
the beneficiaries of the trust who are beneficiaries with respect to the
trust’s interest in the Benefit hereunder are identifiable from the trust
instrument, and (4) a copy of the
trust instrument has been provided to the trustee or custodian of the IRA
contemporaneously with the delivery of this beneficiary designation. The
beneficiaries of the trust who are beneficiaries with respect to the trust’s
interest in the Benefits hereunder are my Wife and my descendants who survive
me.
A trust may, of course, be a beneficiary of an IRA or qualified plan, unless the document for some reason does not allow it. The problem is found under IRC §401(a)(9), which provides that in the case of the death of the participant before the RBD (the age 701/2 rule), the entire interest must be paid out in five years (the “five year rule”), unless the beneficiary is a “designated beneficiary,” in which case the payout can be made over the beneficiary’s life expectancy (the “life expectancy method”). If the participant survives until the RBD, then distributions must begin to be made under one of two life expectancy methods. Under the first option, distributions may be made over the participant’s life expectancy. Under the second option, the participant is allowed to use the joint life expectancy of the participant and a “designated [death benefit] beneficiary,” subject to the minimum benefit incidental death benefit (MDIB) rule.
The MDIB rule treats beneficiaries other than spouses as if they were no more than approximately ten years younger than the participant.[30] However, this rule is in effect only so long as the participant is alive. After the participant’s death, the unreduced life expectancy of the participant can be used.[31] This fact cannot be emphasized too strongly.
Note that after the RBD, a sixteen year payout can be assured, by reference to the participant’s life alone, even if there is no “designated beneficiary,” provided that recalculation of life expectancy is not elected. If one is satisfied with this, one may ignore the special rules applicable to trusts, and can even name the estate as beneficiary without shortening the otherwise applicable sixteen year payout period. The payout period after death could be as long as sixteen years, or as short as one year, depending on the participant’s age at the time. In contrast, prior to the RBD, the absence of a “designated beneficiary” places the outer limit for withdrawal without penalty at five years, no matter what the age of the participant at death. In order to lengthen the post death payout period either before or after the RBD, the participant must have a “designated beneficiary.”
Under the proposed regulations to IRC §401(a)(9), a the beneficiaries of a trust may be treated as “designated beneficiaries” —so that the beneficiaries can be used as the measuring lives or joint measuring lives— if four conditions are met: (1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus. (2) The trust is irrevocable. (3) The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument within the meaning of the regulations.[32] And (4) a copy of the trust instrument is provided to the plan.[33] The model clauses quoted above serve as nothing more than a reminder of what the requirements are for treating trust beneficiaries as designated beneficiaries for purposes of the minimum distribution rules, and indicates compliance with those rules.
The irrevocability problem is a nuisance, and serves no real policy purpose. But since it is there, it must be addressed. It is permissible to change beneficiaries.[34] However, the minimum distribution period cannot be lengthened by this technique. There therefore appears to be nothing to prevent substituting one irrevocable trust after another, after the RBD, in order to work around the irrevocability problem. I have taken a creative approach for dealing with this issue. My intervivos revocable trust contains the following clause.
Notwithstanding anything else herein to the contrary, if Maker is alive on Maker’s “required beginning date” as that term is used and defined in this document and in IRC §401(a)(9) and the regulations under it (“Maker’s RBD”), and if Maker has designated the trustee as beneficiary of Maker’s interest in a qualified plan or IRA, then in that event, and to that extent, and at the time of such designation (or the RBD if the RBD is later), this trust shall be irrevocable and unamendable with respect to the property in such qualified plan or IRA as to which this trust is the beneficiary. For this purpose, the trust shall be interpreted, and the beneficiaries determined, as if Maker’s death occurred at the time of such designation (or the RBD if the RBD is later). Of course, if the trust is otherwise amended or revoked, Maker may change the beneficiary designation, including a change in favor of the amended trust, although this ordinarily will not have the effect of lengthening the minimum payout period under the IRA or qualified plan. Since this trust may not be amended or revoked on or after the time of such designation (or the RBD if the RBD is later) with respect to the property in such qualified plan or IRA as to which this trust is the beneficiary, then, unless and until Maker changes the beneficiary designation, the trust as it existed prior to any amendment or revocation will continue in existence in the form it had prior to such amendment or revocation with respect to property in such qualified plan or IRA as to which this trust is the beneficiary. The corpus of this irrevocable trust shall at all times during Maker’s life include at least half of the ten dollar bill, previously described, that was transferred to the trust estate and that may not be expended during Maker’s lifetime.
Be wary of the requirement that the beneficiaries of the trust be identifiable from the trust instrument. If the beneficiary is a trust that is to split up into several trusts in proportions that are within the discretion of the trustee (as in the case of the A-B marital trust/bypass trust plan), it may be that the beneficiaries are not ascertainable. On the other hand, it would seem that so long as the beneficiary with the shortest measuring life is used, there ought to be no policy against such a designation.
Consider the following suggested trust provision:
Coordination With
Minimum Distribution Rules. If the trustee is named as the beneficiary
of retirement plan death benefits (“the death benefits”) that are subject to
the minimum distribution rules, and if, under the ci
(1) So long as the trust beneficiary or beneficiaries are living, such retirement plan benefits (1) shall be used exclusively for the benefit of the “designated beneficiary(ies)” (within the meaning of that phrase under IRC §401(a)(9) and the regulations under it), and (2) shall not be used to pay debts or expenses or pecuniary bequests, or to benefit persons other than the designated beneficiary(ies), if other assets are available for those purposes, notwithstanding the rules otherwise applicable to apportionment, abatement and the payment of debts and expenses. Further, the rules otherwise applicable to apportionment and abatement of death taxes are hereby expressly limited to provide that in no event shall retirement plan benefits be used to pay death taxes that are not directly attributable and proportionate to the estate tax value of the benefits.
(2) If the trust estate of a trust that is the beneficiary of retirement plan benefits is itself to be divided into fractional shares, the interests of the trustee (and the beneficiaries) of that trust in such retirement plan benefits shall be likewise divided, proportionately.
(3) Notwithstanding anything else to the contrary, no one other than a beneficiary who is living at the participant’s death shall be entitled to receive the participant’s (employee’s) retirement plan benefits from the trust, unless such beneficiary’s entitlement to such benefits is contingent on the death of a prior beneficiary who died after the applicable date.
It is the purpose of these rules to insure that the trust is considered irrevocable and that the beneficiaries of the trusts be identifiable, so that the life expectancies of the beneficiaries may be used to calculate the minimum distributions required by the IRC, and this paragraph shall be interpreted with this intent being paramount to any other direction in it, because that is the intent of the Maker.
These clauses are still evolving, and great care should be taken before using them. Exempting the benefits from being used to pay debts, taxes and expenses could place the remaining trust estate under considerable strain. On the other hand, using the assets for such purposes may be physically incompatible with a long term payout, even if permissible. However, because of the possibility that the estate tax burden could be severe, I believe it may be prudent to leave open the option to charge the benefits with its proportionate share of those taxes, as more particularly specified in the estate tax apportionment provisions of the instrument.
Perhaps these clauses should be included in the beneficiary designation form too; otherwise the size of the gift to the A or the B trust cannot be ascertained without reference to action taken outside the designation. It has been suggested to me that leaving open the tax apportionment question may be enough to disqualify the trust from being treated as an individual at the RBD. If this is true, then presumably leaving this question open ought to disqualify an individual beneficiary as well, and here, the politics would be so strong against such a result that I cannot take the issue seriously. I certainly hope that the mere possibility of tax apportionment not limit one’s ability to use the joint life expectancy method or escape the application of the five year rule, but again, we just do not know.
WHICHTRUST=2• The Marital Deduction Trust As Designated Beneficiary. Further, notwithstanding anything else herein to the contrary, my Husband, at any and all times, shall have the unfettered right to demand from the trustee of the Marital Deduction Trust an immediate distribution, from that portion of my Benefits with respect to which the trustee of the Marital Deduction Trust is the beneficiary, of all the income from such portion (determined as if the portion of IRA in which the trustee is a beneficiary were itself a trust in which my Husband had a qualifying income interest for life), and the trustee of the Marital Deduction Trust shall comply with such request and shall distribute the income to my Husband. Alternatively, my Husband may (in her sole, unrestricted and absolute discretion) demand and receive such distributions of income directly from the IRA. The word “income” for this purpose shall be construed in a manner that will guaranty that my Husband has a “qualifying income interest for life” (within the meaning of IRC §2056(b)(7)) in that portion of my Benefits with respect to which the Trustee is the beneficiary.
Returning again to the painful but inescapable problem of what to do with trusts as beneficiaries, we consider the particularly delicate issues encountered with marital deduction trusts. The IRS has ruled that a QTIP trust may be named as a beneficiary of an IRA or qualified plan, and a marital deduction obtained. However, in each case, the facts were so favorable that it would be hard to imagine why the ruling would not likewise be favorable.[35] The primary impediment is that, even under the minimum distribution rules, there is ordinarily no guarantee that the plan or IRA will distribute all of its income or that the income distributed will in turn be distributed by the QTIP trust.
In the case of the marital deduction trust, consideration must be given to the terms of the plan, if the benefit is in a qualified plan. An IRA will almost always allow acceleration of the beneficiary’s benefit (perhaps only by implication), but a plan might or might not. I am hesitant to appoint a marital deduction trust as the beneficiary of a qualified plan or IRA because of the uncertainties involved and because the state of the law and regulations in this area are still undeveloped and primitive. However, if appropriate clauses are also found in the marital trust itself, a marital deduction should be available.
Consider the following provisions found in a marital deduction trust, but not in the beneficiary designation itself.
Provisions Respecting the Marital Deduction. Notwithstanding the following or anything else in this instrument to the contrary, a trust in which the Surviving Spouse has a qualifying income interest for life may not be funded with property that does not constitute Eligible Marital Deduction Property if there is any other alternative available to the fiduciary. Subject to this rule, Maker recognizes that there may be situations in which a Surviving Spouse has a “qualifying income interest for life in a retirement plan,” or in which The Marital Deduction Trust estate has an interest in a retirement plan. For example, the trust may own the right to receive distributions from a retirement plan that constitutes Eligible Marital Deduction Property. In such event, the interest shall be held, invested, reinvested and maintained, and income attributable to the interest shall be determined, in a manner that guarantees that the Surviving Spouse has a qualifying income interest for life with respect to such interest. [But see TAM 9220007.]
The rule that the Surviving Spouse is guaranteed a qualifying income interest for life in such cases is overriding and shall govern in case of conflict with the following rules, which Maker nevertheless believes to be consistent with it.
(1) Determination of Fiduciary Accounting Income. Subject to the overriding rule that the Surviving Spouse is guaranteed a qualifying income interest for life in any retirement plan in which the trust has an interest, income from an interest in a retirement plan shall be determined by reference to state statutory law, if any, or if none, by applying general equitable principles, having due regard for the interest of the income beneficiary and the remaindermen.
Further, in the case of any retirement plan in which the trust has an interest, fiduciary accounting income, if greater, shall be determined and distributed in the same manner as if the retirement plan in which the trust has an interest was itself “qualified terminable interest property” within the meaning of IRC §2056.
Income is an accounting notion representing a value, and not representing particular assets. Therefore, whether or not all of the income from a retirement plan (in which The Marital Deduction Trust has an interest) is distributed by the plan in a given year, an amount representing the income shall nevertheless be credited to the income account and shall be distributable by the trust, in the manner otherwise provided under the terms of the trust. If the other assets available for distribution in The Marital Deduction Trust are insufficient for that purpose, then the trustee shall compel a distribution from the retirement plan of such an amount as is necessary to satisfy the obligation to the spouse.
(2) Additional Demand Rights Granted to Surviving Spouse. In addition to the above, and notwithstanding anything else herein to the contrary, the Surviving Spouse, at any and all times, shall have the unfettered right to demand an immediate distribution from each retirement plan in which the trustee of The Marital Deduction Trust has an interest, of all (or any part of) the income from such plan (determined as if the plan were itself a trust in which the Spouse had a qualifying income interest for life), and the trustee shall comply with such request. (Any distribution under this Paragraph shall be credited against any rights the spouse would otherwise have had to such income, of course.) This right shall survive and continue with respect to any assets, including their proceeds, distributed from the retirement plan to the trustee of The Marital Deduction Trust, so that there will be no question but that the Surviving Spouse at all times has a qualifying income interest for life in such retirement plan (and its proceeds) that will continue under all events and contingencies.
[N.B. This paragraph should not really be necessary. It is included as a matter of caution, or perhaps overkill. In fact, if this clause is used, the preceding paragraph is probably not necessary.]
(2) Additional Demand Rights Granted to Surviving Spouse. In addition to the above, and notwithstanding anything else herein to the contrary, the Surviving Spouse, at any and all times, shall have the unfettered right to demand an immediate distribution from each retirement plan in which the trustee of The Marital Deduction Trust has an interest, of all (or any part of) the income from such plan (determined as if the plan were itself a trust in which the Spouse had a qualifying income interest for life), and the trustee shall comply with such request. (Any distribution under this Paragraph shall be credited against any rights the spouse would otherwise have had to such income, of course.) This right shall survive and continue with respect to any assets, including their proceeds, distributed from the retirement plan to the trustee of The Marital Deduction Trust, so that there will be no question but that the Surviving Spouse at all times has a qualifying income interest for life in such retirement plan (and its proceeds) that will continue under all events and contingencies.
(3) Explicit Provisions Regarding Distributions and Acceleration of Installment Distributions. For so long as The Marital Deduction Trust has any interest in a retirement plan, the trustee shall take whatever steps are required to assure that such interest, to the extent not previously distributed, is (and will at all times remain) immediately distributable on demand to the trust. Accordingly, the trustee shall retain the unrestricted power to accelerate any installment distributions elected under the minimum distribution rules or otherwise; otherwise, the trustee shall not make an installment distribution election.
If The Marital Deduction Trust has an interest in a retirement plan, no distribution of all or any part of such interest shall be made to anyone other than the Surviving Spouse (or to the trustee, as such) during the Surviving Spouse’s lifetime, and no distribution of all or any part of such interest shall be made directly out of the retirement plan to anyone else (other than the trustee, as such), following the Surviving Spouse’s lifetime.
(4) Unproductive Property In Retirement Plan. If the assets of a retirement plan in which the Surviving Spouse has (or is treated as having) a qualifying income interest for life, or in which The Marital Deduction Trust has an interest, ever include unproductive or under productive property, then the Surviving Spouse (or the Surviving Spouse’s guardian or other legal representative) is specifically permitted to require the trustee of The Marital Deduction Trust and the trustee or custodian of the retirement plan to either make the property productive or convert it within a reasonable time. This right shall include the power, to the extent necessary, to cause the retirement plan interest to be distributed directly to the trustee, or rolled over or transferred to another eligible retirement plan, where, in either case, the property can be made productive.
* * * *
• Separate Accounts. If there is more than one beneficiary of my Benefit, at least one of whom is a “designated beneficiary” within the meaning of the minimum distribution rules, then, as of my Required Beginning Date, or as of my date of death if sooner, for purposes of complying with the minimum distribution rules described in IRC §401(a)(9), a separate account shall be maintained for each such beneficiary in proportion to his or her interest, by initially determining the benefits that are or would be owing to such beneficiary under this designation in the event of my death at such time. From that time forward, each such account must bear its own prorata share of gains and losses and shall otherwise be separately accounted for. It is intended that such separate account will be a separate account within the meaning of Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-2(b) and H-2A. Unless otherwise specified by me, all distributions to me after my Required Beginning Date shall be charged against each separate account in the proportions that such accounts originally bear to one another.
In the event of my death after my Required Beginning Date, the beneficiary with respect to whom a separate account is being maintained shall be the beneficiary of that account on my death, if the beneficiary survives me. If such beneficiary does not survive me, then the beneficiary of the separate account shall be the person(s) who is designated above to take the share of the predeceasing beneficiary in the event the beneficiary does not survive me. For example, in the case of a per stirpital distribution pattern, the beneficiaries of a separate account would be the descendants per stirpes (if any) of the predeceased beneficiary. Otherwise, the beneficiaries of the account may simply be determined as generally provided above. In the case of a trust as beneficiary, the term “survive me” shall mean is in existence as of the date of my death.
Notwithstanding the above, if I am living on my Required Beginning Date, and if all of my beneficiaries are designated beneficiaries who are treated as having the same life expectancy for purposes of the minimum distribution rules (not including the minimum distribution incidental benefit rule), then separate accounts shall not be maintained. For example, if a trust is a designated beneficiary, the life expectancy of the oldest beneficiary of the trust is ordinarily used to determine the minimum distributions under the minimum distribution rules. If the designated beneficiary under the trust is my Wife, and if my Wife is the designated beneficiary with respect to any other benefits, then there shall be no necessity for maintaining separate accounts, since the joint life expectancy of myself and my Wife are to be used for determining the minimum distributions in any event.
It is my understanding that the minimum incidental benefit rule (MDIB) described in the regulations to IRC §401(a)(9) is not applicable after my death. If the IRA indicates that benefits be paid out following my death and after the Required Beginning Date as least as rapidly as during my life, then, for purposes of this beneficiary designation, I intend that such reference be construed in order to comply with the minimum required distributions described in IRC §401(a)(9), after taking into account the fact that the MDIB rule no longer applies.
Consider these clauses as still evolving, as we await final regulations under §401(a)(9). The proposed regulations addressing this issue are helpful, but there is room for further clarification.
The Multiple Beneficiary Rule
The general rule is that if there is more than one death beneficiary, the beneficiary with the shortest life expectancy is used as the measuring life or joint measuring life with the participant (the “Multiple Beneficiary Rule”).[36] There is, however, an important exception to this rule. The exception applies where the benefit is held in a separate account or segregated share.[37] In that case, the single beneficiary of each separate account or segregated share may be used as the measuring life with respect to that share. This avoids application of the otherwise applicable rule that the beneficiary with the shortest life expectancy must be used as the measuring life.[38]
The proposed regulations provide rules under which a separate account will qualify as an exception to the Multiple Beneficiary Rule. An account under a defined contribution plan or IRA must bear its own prorata share of gains and losses and otherwise be separately accounted for,[39] and a benefit under a defined benefit plan must consist of separate identifiable components which may be separately distributed.[40]
If separate accounts were not maintained during lifetime, and the participant dies after the RBD, the separate account rule cannot be applied based on post death segregation. However, if separate accounts were not maintained during lifetime, but the participant dies prior to the RBD, it is not entirely clear whether or not it is sufficient if the shares are thereafter maintained separately. It ought to be sufficient, because before the RBD and prior to death, there is no function served by a separate accounting. Further, under normal legal principles, if there is more than one beneficiary, a separate accounting from and after (“as of”) date of death will almost certainly be required as a matter of state law (and ERISA) as the only method of preserving each beneficiary’s separate interest.
If separate accounts are to be established prior to death and after the RBD, it may appear at first blush that distributions will have to be taken during the lifetime of the participant in differing proportions depending on the age of the beneficiary of each separate account. However, if the beneficiaries are each more than ten years younger than the participant (as will always be the case where the beneficiaries are descendants, one hopes) then, if none of the beneficiaries is the spouse of the participant, the minimum distribution incidental death benefit rule (MDIB) will insure that all of the distributions will be based on the same joint life expectancy table,[41] since under the MDIB rule each beneficiary will be treated as being approximately ten years younger than the participant. The MDIB rule does not apply after the death of the participant,[42] and so the longer individualized payout periods can then be utilized, which is of course the whole point.
In applying the Multiple Beneficiary Rule, not only is the
beneficiary with the shortest life expectancy to be used as the measuring life,
but if any beneficiary is not an individual
or a qualifying trust, then the life expectancy method is not available at all![43]
Fortunately, there is another rule, the “Contingent Beneficiary Rule” that
provides that under certain ci
The Contingent Beneficiary Rule
If the class of beneficiaries include someone who is not an individual or a qualified trust, then the Multiple Beneficiary Rule will provide that no one can be treated as a designated beneficiary, unless the (otherwise) nonqualifying beneficiary’s “entitlement to an employee’s benefit is contingent on the death of a prior beneficiary.”[44]
This Contingent Beneficiary Rule is found in E-5(e)(1) of the proposed regulations[45]:
(e) Death contingency. (1) If a beneficiary’s entitlement to an employee’s benefit is contingent on the death of a prior beneficiary, such contingent beneficiary will not be considered a beneficiary for purposes of determining who is the designated beneficiary with the shortest life expectancy under paragraph (a) or whether a beneficiary who is not an individual is a beneficiary. This rule does not apply if the death [of the beneficiary] occurs prior to the applicable date[46] for determining the designated beneficiary.[47] [Emphasis added.]
We have reason for believing that the Service feels that the Contingent Beneficiary Rule does not apply if there is charitable remainderman. The question is “why?”
Perhaps the Service is worried that distributions made from the IRA or Qualified Plan will ultimately be enjoyed by someone other than the person whose life expectancy is being used to measure the payout period. If that is the case, then we have reason to worry, because trusts, by their very nature, are ordinarily designed to make distributions (particularly of corpus) on the basis of need, and ultimately to distribute the trust property to the remaindermen whose lives were not used to calculate the payout period.
We know that distributions made to a trust under the minimum
distribution rules are not required to be redistributed to the trust
beneficiaries at the same time received.[48]
If trust accumulations are simply to be prohibited beyond the life of the
beneficiary, the use of trusts in this context would be very narrowly ci
All well drafted trusts are going to provide for the contingency that all of the named beneficiaries might die prior to the complete distribution of the trust estate. At that point, the remaining trust estate could (a) be distributed to the beneficiaries’ probate estates, (b) be distributed as the beneficiaries might appoint, with gift over in default, or (c) be distributed to other individuals, such as heirs at law determined under the laws of intestate succession. None of these alternatives, with the possible exception of (b),[49] can be drafted to assure that no one other than an individual younger than the oldest primary beneficiary will ever receive the remainder of the trust estate. Moreover, the rule against perpetuities requires that a beneficiary’s interest in a trust must vest sooner or later, and, if the beneficiary has died, the only way it can vest is to be distributed to the beneficiary’s estate or distributed pursuant to a general power of appointment in the beneficiary. The fact that it is virtually impossible to draft a trust instrument that will assure that the ultimate beneficiary will under every contingency be an individual younger than the oldest primary beneficiary is a persuasive reason for believing that the Contingent Beneficiary Rule is equally applicable to accumulation trusts as to individual beneficiaries.
Perhaps the Service is merely concerned that there be a “high probability” that distributions to a trust will in turn be distributed to the beneficiary whose life expectancy is being used to calculate the minimum payout, or to a remainderman who is an individual younger than the primary beneficiary. However, the proposed regulations give no basis for forming this conclusion, and if the test is “probability” the application of such a rule would be very imprecise.
It may be that the reason a charitable remainderman violates the Contingent Beneficiary Rule —if indeed it really does, which is a point not conceded here— is that charities do not have limited lives (at least in theory). A charity’s benefit is not contingent, even if the probability of enjoyment is remote. Unlike individuals, charities can theoretically live forever and will be presumed to survive.
Note that the only contingency recognized under the exception is the death of the primary beneficiary, assuming the primary beneficiary is living on the participant’s date of death or the RBD if earlier. Note further, that since the primary beneficiary will be an individual, the death of the primary beneficiary is not a contingency, it is a certainty. And finally, note that it is entitlement to the benefit, not enjoyment, that must be contingent. Entitlement is definitely not the right to present enjoyment nor even the certainty of future enjoyment. The focus, therefore, is certainly not on whether the primary beneficiary will die; rather, the application of the Contingent Beneficiary Rule (literally read) could be said to hinge on whether the secondary beneficiary’s entitlement to any interest remaining at that time is contingent on this death.
If the secondary beneficiary is an individual, survivorship will usually be a condition of vesting. (An interest in a remainderman that is expressly contingent on surviving the holder of a predecessor interest is normally considered contingent.) If this analysis is correct, we could frame the Contingent Beneficiary Rule by stating that it will apply if “a beneficiary’s entitlement to an employee’s benefit is contingent on [surviving] the death of a prior beneficiary.”
It is mind boggling to view the contingency from this aspect, given that the death of the primary beneficiary is not itself contingent, but it does explain the notion that charitable remaindermen are somehow different. Nevertheless, it is not at all clear that such a strict construction of the rule was intended.
We certainly hope that the final regulations will make it clear
that we can simply ignore secondary beneficiaries altogether, no matter what
their nature, provided only that the primary beneficiary is an individual
(including the life beneficiary of a trust having a more than nominal
interest). Since distributions, whether made to an accumulation trust or not, [50]will
be taxed when made, the potential for abuse of such a rule is remote in the
extreme. If this simple solution is not taken, we will be fo
* * * *
Consider the following three clauses. I admit that the first clause raises questions.
• Inconsistent Provisions. If any part of this Beneficiary Designation is inconsistent with the IRA, the IRA shall be considered amended to the extent that such amendment is permitted by the Sponsor and does not cause the account to cease to be an individual retirement account within the meaning of IRC §408(a).
• Acceptance of Form By Sponsor. If the IRA Sponsor accepts this instrument without change, the Sponsor shall be fully indemnified and protected by the IRA Owner, the Owner’s estate and heirs, from any liability arising by virtue of such acceptance. The Sponsor can manifest its acceptance of this Designation by allowing any further transactions in the account or by accepting any fees or charges in connection with it, without objecting in writing to this Designation. If the objection is only to part of this Designation, the remaining provisions shall be effective, as set forth below.
• Unenfo
* * * *
In the interest of simplicity, this discussion, and accompanying forms, have so far omitted the effects of the Retirement Equity Act of 1984 (REA). REA considerably complicates matters because the participant is not free to dispose of her benefits in any way she chooses. The situation is particularly acute in a profit sharing plan that has elected out of the joint and survivor annuity rules, because in that case there is only one permissible death beneficiary (in the absence of waiver), and that is the spouse.[51] In most other defined contribution plans, the joint and survivor annuity rules apply.[52] However, in such cases, the law only requires that the preretirement survivor annuity (QPSA) —applicable at the death of the participant before retirement— be paid out of half of the account balance. This is likely to approximate the spouse’s community one-half interest and can be waived by the spouse post mortem in favor of a single sum distribution. Note, though, that some plans set the QPSA at 100% rather than 50%, either for reasons of simplicity or out of ignorance.
In any case, my general recommendation is that clients approaching
retirement or having substantial qualified plan benefits withdraw any interests
they may have and roll the benefit over into an IRA just as soon as the plan
and other ci
Once the benefit is in an IRA it is exceedingly easier to deal with. The REA rules do not apply. ERISA preemption of the nonparticipant spouse’s interest need not be considered, and most importantly, the interest will never have to be distributed on account of termination of the plan! Note this last point well because it is an important one. If it is felt desirable to pay income taxes on the benefit later rather than sooner, then an IRA may be preferable to a qualified plan, because of the latter’s lack of permanency. A qualified plan will not exist forever. Sooner or later it will be terminated, either because the employer goes out of existence or for other reasons. It is rare for even large corporations to exist for over a lifetime, and small professional corporations are usually liquidated at the death of the principal owner. The only death beneficiary that can rollover a qualified plan benefit is the participant’s surviving spouse —whether on termination of the plan or otherwise; no one else can. However, an IRA can be transferred (not rolled over) from sponsor to sponsor by anyone without limit, even if at the instigation of the participant or beneficiary.[54]
The distinction between a rollover and a transfer is admittedly becoming blurred of late, especially with the advent of the direct rollover rules under the 1992 UCA[55] and the direct transfer rules under the IRC §411(d)(6) regulations.[56] Rollovers traditionally involved delivery of the funds to the participant, followed by the independent decision of the participant to rollover the funds to an IRA or qualified plan within 60 days. Under the UCA, a direct rollover can now be made by a qualified plan to another qualified plan or IRA, but this is a special case. A true plan to plan transfer or an IRA to IRA transfer may be similar in effect to a rollover, but there are substantive differences.[57] The direct rollover rules do not apply to IRAs unless the IRA is a recipient of a rollover from a qualified plan. A true non rollover “transfer” can never be made between an IRA and a qualified plan.[58]
Finally, the beneficiary’s distribution options under an IRA are practically unlimited. In all but the most unusual of cases, an IRA beneficiary can draw down or transfer to another IRA all or any part of his benefit at any time. This is not always the case with a qualified plan. As discussed above, the unambiguous existence of such options is quite important if the marital deduction is a consideration, or if a trust is to be a beneficiary.
* * * *
'
NOEL C. ICE METRO
LINE 429-3815
TELEX
75-8631
BOARD CERTIFIED TELECOPY
817/877-2807
ESTATE PLANNING AND PROBATE LAW FRONT
DESK
TEXAS BOARD OF LEGAL SPECIALIZATION (817)
877-2800
SECRETARY’S
DIRECT DIAL
ATTORNEY'S DIRECT DIAL (817)
878-2944
(817) 877-2885
ATTORNEY'S DIRECT FAX Our
File No.
(817)
878-6085
ATTORNEY'S DIRECT E-Mail
Teleice@earthlink.net
CERTIFIED MAIL
RETURN RECEIPT NO.: Error! Reference source not found.
RE: Plan
Dear :
RE: The Minimum-Maximum Distribution Rules.
|
Participant’s Date of Birth |
|
|
Date of Birth of Spouse |
|
|
Date Participant Turns 70&1/2 |
|
|
Minimum Distributions Must Begin |
|
|
Life Expectancy in First Distribution Calendar Year |
Error! Reference source not found. |
|
Joint Life Expectancy of Participant and Spouse in First Distribution Calendar Year |
Error! Reference source not found. |
|
|
|
Dear :
The following is an abstract of some of the rules governing the distribution requirements of qualified plans and IRAs. As complicated as it may appear, it is but an oversimplification, believe it or not. I hope that it is adequate and that it addresses the relevant issues, but I must caution you that if this letter covered all of the issues and contingencies in this area it would be unreadable (and it is difficult enough to read as is).
Distributions Must Begin No Later Than April 1 Following The Calendar Year In Which The Participant Attains Age 701/2 (The Required Beginning Date or RBD): Because benefits under a qualified plan, tax sheltered annuity (403(b) plan) or IRA (including the income) are not taxed until distributed, the tax laws now require that distributions must commence to you no later than the April 1 of the calendar year following the calendar year in which you attain age 701/2. This is known as the required beginning date (RBD). The minimum distribution rules apply to qualified plans, SEPs, IRAs, tax sheltered annuities and unfunded deferred compensation plans under §457. If you are not a “5% owner”[59] of the employer sponsoring the plan, the law allows you to postpone distributions until retirement (if you retire later than your normal RBD),[60] but the plan may require earlier distribution notwithstanding this exception. The exception to the normal distribution rule does not apply to IRAs.
Note at the outset that it is not required that the entire fund be distributed in one year, but only that distributions begin at that time. The rate at which the distributions must be made depends on a number of factors. The tax on failure to comply with the rules is 50% of the amount which should have been distributed.
Distributions Are Keyed To Life Expectancy After The RBD: Once
the required beginning date has been reached, the Plan or IRA is required to
distribute your benefits ratably over your life or life expectancy, or over the
joint life or life expectancy of you and a designated beneficiary.[62] The beneficiary must be designated by the
required beginning date, for the joint life approach to work. If your
designated beneficiary is someone other than your , the "incidental death
benefit rule" fo
Subject to the specific terms of the plan or IRA, the life expectancy of you and (or) may be redetermined annually, if you so elect.[63] You cannot recalculate the life expectancy of anyone else. Recalculation generally allows for a longer payout if you both live, but because (not surprisingly) life expectancy is reduced to zero in the year of death, recalculation will have a pronounced effect upon how long the survivor can defer receipt.
The required minimum is generally determined by taking your account balance for the preceding year (with certain adjustments) and dividing it by the multiple corresponding with your age, or the joint ages of you and your designated beneficiary (taking the incidental death benefit limitation into account if your beneficiary is not ).[64] Each year the denominator would be reduced by one if recalculation is not used; otherwise, life expectancies will have to be refigured following special procedures. It is easier not to recalculate life expectancy, since the table need be consulted only once, instead of each year. It also means that the payment term can continue on the basis originally determined, regardless of an intervening death.
If is your beneficiary, then I recommend that you use joint life expectancies and recalculate your life but not ’s life. That way, if survives you, will have the option of treating the plan or IRA benefit as own, under the “fresh start” rule discussed below.
Life expectancy is first determined as of your birthday in the year you turn 701/2. This is known as the “first distribution calendar year.” You should note that if your birthday falls within the first half of the year you will be age 70 on your birthday occurring during the year you turn 701/2, but if your birthday is in the last half of the year you will be age 71 on your birthday occurring during the year you turn 701/2.
Under the tables, an individual has a life expectancy at age 70 of 16 years; an individual’s life expectancy at age 71 is 15.3 years. Therefore, if you have no designated beneficiary or elect not use joint life expectancies, and if recalculation is not elected, and if your birthday occurs in January through June, then, as of the year you turn 701/2, you would draw down 1/16th of your benefit; the next year 1/15th; 1/14th in the third year, and so on, until the fund is exhausted in the 16th year (1/1). If recalculation is used the fund will never be completely exhausted during your life. If Joint tables are used, the factor cannot be greater than the maximum allowed by the incidental benefit rule, if it is applicable.
Combining the two rules into the following table, you can see that if your 70th birthday occurs in the year you reach 701/2, you can draw your benefit down in 16 installments, if only your life is used as the measuring life, without recalculation. If you used 's life and your own, jointly, the number of installments could be increased according to your joint life expectancy. But if the joint life was someone other than , 25.3 installments would be the maximum during your life, because of the minimum distribution incidental death benefit rule (MDIB).[65] However, at death, the MDIB rule no longer applies and a longer term payout may be available, based upon the joint life expectancy of you and your beneficiary, determined without regard to the following table.[66]
Life Expectancy Incidental
DB Limit
Age Factor Age Factor
65 20.0 70 26.2
66 19.2 71 25.3
67 18.4 72 24.4
68 17.6 73 23.5
69 16.8 74 22.7
70 16.0 75 21.8
71 15.3 76 20.9
72 14.6 77 20.1
73 13.9 78 19.2
74 13.2 79 18.4
75 12.5 80 17.6
76 11.9 81 16.8
77 11.2 82 16.0
78 10.6 83 15.3
79 10.0 84 14.5
80 9.5 85 13.8
81 8.9 86 13.1
82 8.4 87 12.4
83 7.9 88 11.8
84 7.4 89 11.1
85 6.9 90 10.5
86 6.5 91 9.9
87 6.1 92 9.4
88 5.7 93 8.8
89 5.3 94 8.3
I am attaching as an exhibit a joint life expectancy table (Table
VI) taken from the IRS regulations.[67]
This table should give you an idea as to how long distributions can be
deferred, depending upon who your beneficiaries are.
The value of your benefit is generally determined as of the
accounting date for the preceding year, with some adjustments. The distribution
attributable to the year you reach 701/2 is based on your benefit on the accounting date in the preceding
year, but certain anomalies arise since it is not required to be made until
April 1 of the following year. For example, in the year following the year you
reach 701/2 you
may be required to take two distributions, one on account of the preceding year
(due by April 1) and one on account of the immediate year (due by December 31).
Each distribution is based upon the value of your benefit at the end of the
year on account of which the distribution is being made. These years are
different, which is the reason for the complication and the anomaly. Although
you may wait until April 1 of the year following the year you reach age 701/2 to take your
first minimum distribution, you may instead take it in the year you reach 701/2 and thus avoid
doubling up the distributions.
The beneficiary chosen may be changed after the RBD. If so, the change may result in a shorter payout period, but it cannot result in a longer payout period. If your beneficiary predeceases you, and you appoint a new beneficiary, the payout period will not be affected, unless the beneficiary is your spouse whose life expectancy was being recalculated. If multiple beneficiaries are used, the oldest beneficiary is the measuring joint life, unless the separate account rule applies. Generally, to qualify as a separate account under a defined contribution plan or IRA, the account must bear its own prorata share of gains and losses and otherwise be separately accounted for,[68] and a benefit under a defined benefit plan must consist of separate identifiable components which may be separately distributed.[69]
If distributions have begun after age 701/2, and you die before your entire interest has been distributed, the remaining interest must be distributed at least as rapidly as the method of distribution being used at the time of death, except that the incidental benefit rule ceases to operate as a limitation.
Distributions Where Death Occurs Before The RBD: If you
die before the required beginning
date, the general rule is said to be that your entire interest must be
distributed within 5 years of your death, whether or not benefits have
commenced. However, the exceptions swallow the rule. For instance, If any
portion of your interest is payable to (or for the benefit of) a “designated beneficiary,” that portion
of the benefits may be payable over the life or life expectancy of the
beneficiary,[70]
provided distributions begin no later than one year after your death. Under an
exception to the exception, if the designated beneficiary is your , distributions need not begin
any earlier than the date at which you would have attained 701/2.[71]
If your dies before such distributions begin, the
minimum distribution rules are applied as if were the participant.[72] A
"designated beneficiary" is
an individual (or individuals)
designated as a beneficiary by you to receive any benefits remaining at your
death.[73] However, if the terms of the plan or IRA
specify an individual beneficiary or beneficiaries by default (in the event you
fail to designate someone yourself), then the specified default beneficiary is
the "designated beneficiary" for purposes of the rule.[74] A
trust can be treated as a designated beneficiary under some ci
Inherited IRAs and the Fresh Start Rule: A spouse who is a beneficiary of a participant’s interest in a qualified plan, tax sheltered annuity or IRA, may roll it over to an IRA.[75] In such a case §401(a)(9) will apply solely with reference to the surviving spouse.[76] This would appear to allow the spouse to defer distribution until the April 1 of the calendar year following the calendar year in which the spouse attained age 701/2. And it would also appear to allow the spouse to choose new beneficiaries to use as measuring lives under the joint life expectancy rules. For this reason, the inherited IRA rules must be considered as a valuable planning opportunity.
An election will be considered to have been made to treat the remaining interest as the surviving spouse’s own if (1) the minimum distributions that would otherwise have been required (in the absence of an election) are not made or (2) if the spouse makes a contribution to the account that is subject to the minimum distribution rules.[77]
Distributions To Trusts: A trust may be treated as a designated beneficiary, but only under certain conditions. The trust must be irrevocable. Prior to the RBD (but not afterwards), it is sufficient if the trust will become irrevocable at death. This means that a testamentary trust will not qualify as a “designated beneficiary” after the RBD. The trust must have identifiable beneficiaries. Finally, the Plan must have a copy of the trust instrument by the RBD.[78] The life expectancy of the oldest beneficiary of the trust is generally used to determine the maximum permissible payment period (unless the separate account rule is applicable).[79] If a trust does not qualify as a designated beneficiary, the benefit must be paid out no later than 5 years following death, unless death occurs after the RBD and life expectancy was not being recalculated.[80] There remain many unanswered questions respecting the application of the rules to irrevocable trusts.
If life expectancy is not being recalculated, then if death occurs after the RBD, it would appear that distributions to a trust or to any other beneficiary that is not a “designated beneficiary” may continue to be made on the same payout schedule without regard to the five year rule and without regard to any of the other rules applicable to trusts that qualify as “designated beneficiaries.”
Special Transition Rules and Elections: The minimum distribution rules may not apply if you made a special written designation before January 1, 1984, called a “TEFRA 242(b)(2) election.”[81] Even if this election was made, it can be lost if the form or timing of the designated benefit is changed.[82] In the year that the protection is lost, the plan or IRA may be required to distribute all of the benefits that would have been required to have been distributed in previous years if the election had not been made in the first place.[83]
Application of Rules and Recommendations: It is difficult for me to recommend a definite course of action because there are so many variables to consider. These rules are not particularly easy to apply. In general, we may assume that it will probably be beneficial to postpone distributions as long as possible in order to postpone paying taxes as long as possible. As indicated above, your RBD is (that is the year following the year you will reach age 701/2), and by this date you will have to make an election that will determine the maximum permissible payout period. In the meantime, you should not draw down any of your benefits, if you can afford to defer the payment, unless the benefits are rolled over.
Prior to , the maximum payout period in the event of your death will be determined by the form of the beneficiary designation. Between now and , any benefits payable as a result of your death can be paid out over the life expectancy of the designated beneficiary. I do not believe that the trust should be the beneficiary, because of the problems indicated above. This leaves your descendants and as potential “designated” beneficiaries, if deferral is of importance.
Life expectancies for any given year and for any given beneficiary can be determined by reference to the tables that accompany this letter.[85] However, if your children are your designated beneficiaries (and if you die prior to the RBD), then benefits must either (a) commence within a year of your death or (b) be completely paid out within the five year period following your death. But if is your designated beneficiary, would not need to begin to receive distributions until . (Prior to , the MDIB rule is not a factor.) Moreover, if is your beneficiary can rollover the benefit to an IRA and proceed as if the account is , for all purposes, including, perhaps,[86] establishing a new minimum distribution period with new designated beneficiaries.
Beginning , benefit payments will have to begin, and, after your death following that date, distributions will have to continue at least as rapidly as during life, unless the spousal rollover rule is invoked and except that the MDIB rule may be disregarded. If your life were used as the measuring life, benefits could be distributed over your life expectancy, which will be Error! Reference source not found. years in the year you reach age 701/2. However, the joint life expectancy tables allow the distribution to be delayed much longer, again, depending upon whom your designated beneficiary is. The joint life expectancy of you and in the year you reach age 701/2 is Error! Reference source not found. years. The joint life expectancy of you and your children in can be determined by reference to the Tables, but 25.3 years is the maximum factor that the MDIB rule will allow during your life if someone other than is your designated beneficiary. After your death, however, the MDIB rule is no longer applicable and the child’s actual life expectancy (which is longer) will govern future distributions. (See Table V.)
If is the beneficiary, distributions (and the income tax thereon) could be postponed for almost Error! Reference source not found. years, but probably not for as long as if the children were the beneficiaries. However, it appears to be the law that if survives you could rollover the distribution, name the children as beneficiaries, and start benefit payment calculations all over, and that this can be done even after you have reached 701/2.
Deferral is important because the tax free compounding of earnings during the deferral period can be very significant. One problem is that distributions to , to the extent not consumed during life, will be added to estate, to be taxed for estate tax purposes at death. Further, if the assets in your living trust and probate estate are worth less than $600,000 at your death, you will be wasting some of your available tax credits if is the designated beneficiary.
If your children were the designated beneficiaries, a long deferral can be guaranteed, and your available unified credit could be utilized to avoid estate taxes at your death. In any event, great care will have to be taken in executing the beneficiary designation form, and I should be involved in reviewing the designation in advance to make sure that the plan or IRA allows the form of distribution desired.
TABLE V - ORDINARY LIFE ANNUITIES
ONE LIFE - EXPECTED RETURN MULTIPLES
Treas. Reg. 1.72-9
AGE MULTIPLE AGE MULTIPLE AGE MULTIPLE
5 76.6 42 40.6 79 10.0
6 75.6 43 39.6 80 9.5
7 74.7 44 38.7 81 8.9
8 73.7 45 37.7 82 8.4
9 72.7 46 36.8 83 7.9
10 71.7 47 35.9 84 7.4
11 70.7 48 34.9 85 6.9
12 69.7 49 34.0 86 6.5
13 68.8 50 33.1 87 6.1
14 67.8 51 32.2 88 5.7
15 66.8 52 31.3 89 5.3
16 65.8 53 30.4 90 5.0
17 64.8 54 29.5 91 4.7
18 63.9 55 28.6 92 4.4
19 62.9 56 27.7 93 4.1
20 61.9 57 26.8 94 3.9
21 60.9 58 25.9 95 3.7
22 59.9 59 25.0 96 3.4
23 59.0 60 24.2 97 3.2
24 58.0 61 23.3 98 3.0
25 57.0 62 22.5 99 2.8
26 56.0 63 21.6 100 2.7
27 55.1 64 20.8 101 2.5
28 54.1 65 20.0 102 2.3
29 53.1 66 19.2 103 2.1
30 52.2 67 18.4 104 1.9
31 51.2 68 17.6 105 1.8
32 50.2 69 16.8 106 1.6
33 49.3 70 16.0 107 1.4
34 48.3 71 15.3 108 1.3
35 47.3 72 14.6 109 1.1
36 46.4 73 13.9 110 1.0
37 45.4 74 13.2 111 .9
38 44.4 75 12.5 112 .8
39 43.5 76 11.9 113 .7
40 42.5 77 11.2 114 .6
41 41.5 78 10.6 115 .5
TABLE VI:
ORDINARY JOINT LIFE AND LAST SURVIVOR FACTORS
Treas. Reg. §1.72-9
Age
of
Benef. Age
of Employee
70 71 72 73 74 75 76 77 78 79 80 81 82
35 47.5 47.5 47.5 47.5 47.5 47.4 47.4 47.4 47.4 47.4 47.4 47.4 47.4
36 46.6 46.6 46.6 46.5 46.5 46.5 46.5 46.5 46.4 46.4 46.4 46.4 46.4
37 45.7 45.6 45.6 45.6 45.6 45.5 45.5 45.5 45.5 45.5 45.5 45.5 45.4
38 44.7 44.7 44.7 44.6 44.6 44.6 44.6 44.6 44.5 44.5 44.5 44.5 44.5
39 43.8 43.8 43.7 43.7 43.7 43.6 43.6 43.6 43.6 43.6 43.6 43.5 43.5
40 42.9 42.8 42.8 42.8 42.7 42.7 42.7 42.7 42.6 42.6 42.6 42.6 42.6
41 41.9 41.9 41.9 41.8 41.8 41.8 41.7 41.7 41.7 41.7 41.7 41.6 41.6
42 41.0 41.0 40.9 40.9 40.9 40.8 40.8 40.8 40.7 40.7 40.7 40.7 40.7
43 40.1 40.1 40.0 40.0 39.9 39.9 39.9 39.8 39.8 39.8 39.8 39.8 39.7
44 39.2 39.1 39.1 39.0 39.0 39.0 38.9 38.9 38.9 38.9 38.8 38.8 38.8
45 38.3 38.2 38.2 38.1 38.1 38.1 38.0 38.0 38.0 37.9 37.9 37.9 37.9
46 37.4 37.3 37.3 37.2 37.2 37.1 37.1 37.1 37.0 37.0 37.0 37.0 36.9
47 36.5 36.5 36.4 36.3 36.3 36.2 36.2 36.2 36.1 36.1 36.1 36.0 36.0
48 35.7 35.6 35.5 35.4 35.4 35.3 35.3 35.3 35.2 35.2 35.2 35.1 35.1
49 34.8 34.7 34.6 34.6 34.5 34.5 34.4 34.4 34.3 34.3 34.2 34.2 34.2
50 34.0 33.9 33.8 33.7 33.6 33.6 33.5 33.5 33.4 33.4 33.4 33.3 33.3
51 33.1 33.0 32.9 32.8 32.8 32.7 32.6 32.6 32.5 32.5 32.5 32.4 32.4
52 32.3 32.2 32.1 32.0 31.9 31.8 31.8 31.7 31.7 31.6 31.6 31.5 31.5
53 31.5 31.4 31.2 31.1 31.1 31.0 30.9 30.8 30.8 30.7 30.7 30.7 30.6
54 30.7 30.5 30.4 30.3 30.2 30.1 30.1 30.0 29.9 29.9 29.8 29.8 29.7
55 29.9 29.7 29.6 29.5 29.4 29.3 29.2 29.1 29.1 29.0 29.0 28.9 28.9
56 29.1 29.0 28.8 28.7 28.6 28.5 28.4 28.3 28.2 28.2 28.1 28.1 28.0
57 28.4 28.2 28.1 27.9 27.8 27.7 27.6 27.5 27.4 27.3 27.3 27.2 27.2
58 27.6 27.5 27.3 27.1 27.0 26.9 26.8 26.7 26.6 26.5 26.4 26.4 26.3
59 26.9 26.7 26.5 26.4 26.2 26.1 26.0 25.9 25.8 25.7 25.6 25.5 25.5
60 26.2 26.0 25.8 25.6 25.5 25.3 25.2 25.1 25.0 24.9 24.8 24.7 24.6
61 25.6 25.3 25.1 24.9 24.7 24.6 24.4 24.3 24.2 24.1 24.0 23.9 23.8
62 24.9 24.7 24.4 24.2 24.0 23.8 23.7 23.6 23.4 23.3 23.2 23.1 23.0
63 24.3 24.0 23.8 23.5 23.3 23.1 23.0 22.8 22.7 22.6 22.4 22.3 22.3
64 23.7 23.4 23.1 22.9 22.7 22.4 22.3 22.1 21.9 21.8 21.7 21.6 21.5
65 23.1 22.8 22.5 22.2 22.0 21.8 21.6 21.4 21.2 21.1 21.0 20.8 20.7
66 22.5 22.2 21.9 21.6 21.4 21.1 20.9 20.7 20.5 20.4 20.2 20.1 20.0
67 22.0 21.7 21.3 21.0 20.8 20.5 20.3 20.1 19.9 19.7 19.5 19.4 19.3
68 21.5 21.2 20.8 20.5 20.2 19.9 19.7 19.4 19.2 19.0 18.9 18.7 18.6
69 21.1 20.7 20.3 20.0 19.6 19.3 19.1 18.8 18.6 18.4 18.2 18.1 17.9
70 20.6 20.2 19.8 19.4 19.1 18.8 18.5 18.3 18.0 17.8 17.6 17.4 17.3
71 20.2 19.8 19.4 19.0 18.6 18.3 18.0 17.7 17.5 17.2 17.0 16.8 16.6
72 19.8 19.4 18.9 18.5 18.2 17.8 17.5 17.2 16.9 16.7 16.4 16.2 16.0
73 19.4 19.0 18.5 18.1 17.7 17.3 17.0 16.7 16.4 16.1 15.9 15.7 15.5
74 19.1 18.6 18.2 17.7 17.3 16.9 16.5 16.2 15.9 15.6 15.4 15.1 14.9
75 18.8 18.3 17.8 17.3 16.9 16.5 16.1 15.8 15.4 15.1 14.9 14.6 14.4
76 18.5 18.0 17.5 17.0 16.5 16.1 15.7 15.4 15.0 14.7 14.4 14.1 13.9
77 18.3 17.7 17.2 16.7 16.2 15.8 15.4 15.0 14.6 14.3 14.0 13.7 13.4
78 18.0 17.5 16.9 16.4 15.9 15.4 15.0 14.6 14.2 13.9 13.5 13.2 13.0
79 17.8 17.2 16.7 16.1 15.6 15.1 14.7 14.3 13.9 13.5 13.2 12.8 12.5
80 17.6 17.0 16.4 15.9 15.4 14.9 14.4 14.0 13.5 13.2 12.8 12.5 12.2
TABLE VI (continued)
Age
of
Benef. Age
of Employee
83 84 85 86 87 88 89 90 91 92 93 94 95
35 47.4 47.4 47.4 47.3 47.3 47.3 47.3 47.3 47.3 47.3 47.3 47.3 47.3
36 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4 46.4
37 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4 45.4
38 44.5 44.5 44.5 44.5 44.5 44.5 44.4 44.4 44.4 44.4 44.4* 44.4 44.4
39 43.5 43.5 43.5 43.5 43.5 43.5 43.5 43.5 43.5 43.5* 43.5* 43.5 43.5
40 42.6 42.6 42.6 42.5 42.5 42.5 42.5 42.5 42.5 42.5* 42.5* 42.5 42.5
41 41.6 41.6 41.6 41.6 41.6 41.6 41.6 41.6 41.6 41.6* 41.6* 41.6 41.6
42 40.7 40.7 40.7 40.6 40.6 40.6 40.6 40.6 40.6 40.6* 40.6* 40.6 40.6
43 39.7 39.7 39.7 39.7 39.7 39.7 39.7 39.7 39.7 39.7* 39.7 39.7 39.7
44 38.8 38.8 38.8 38.8 38.7 38.7 38.7 38.7 38.7* 38.7 38.7 38.7 38.7
45 37.9 37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8 37.8
46 36.9 36.9 36.9 36.9 36.9 36.9 36.9 36.9 36.8 36.8 36.8 36.8 36.8
47 36.0 36.0 36.0 36.0 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9 35.9
48 35.1 35.1 35.1 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0 35.0
49 34.2 34.2 34.1 34.1 34.1 34.1 34.1 34.1 34.1 34.1 34.1 34.1 34.1
50 33.3 33.2 33.2 33.2 33.2 33.2 33.2 33.2 33.2 33.2 33.1 33.1 33.1
51 32.4 32.3 32.3 32.3 32.3 32.3 32.3 32.3 32.2 32.2 32.2 32.2 32.2
52 31.5 31.4 31.4 31.4 31.4 31.4 31.4 31.3 31.3 31.3 31.3 31.3 31.3
53 30.6 30.6 30.5 30.5 30.5 30.5 30.5 30.5 30.4 30.4 30.4 30.4 30.4
54 29.7 29.7 29.6 29.6 29.6 29.6 29.6 29.6 29.5 29.5 29.5 29.5 29.5
55 28.8 28.8 28.8 28.7 28.7 28.7 28.7 28.7 28.7 28.6 28.6 28.6 28.6
56 28.0 27.9 27.9 27.9 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.7 27.7
57 27.1 27.1 27.0 27.0 27.0 27.0 26.9 26.9 26.9 26.9 26.9 26.9 26.9
58 26.3 26.2 26.2 26.1 26.1 26.1 26.1 26.1 26.0 26.0 26.0 26.0 26.0
59 25.4 25.4 25.3 25.3 25.3 25.2 25.2 25.2 25.2 25.2 25.1 25.1 25.1
60 24.6 24.5 24.5 24.5 24.4 24.4 24.4 24.3 24.3 24.3 24.3 24.3 24.3
61 23.8 23.7 23.7 23.6 23.6 23.5 23.5 23.5 23.5 23.5 23.4 23.4 23.4
62 23.0 22.9 22.8 22.8 22.8 22.7 22.7 22.7 22.6 22.6 22.6 22.6 22.6
63 22.2 22.1 22.0 22.0 21.9 21.9 21.9 21.8 21.8 21.8 21.8 21.7 21.7
64 21.4 21.3 21.3 21.2 21.1 21.1 21.1 21.0 21.0 21.0 20.9 20.9 20.9
65 20.6 20.5 20.5 20.4 20.4 20.3 20.3 20.2 20.2 20.2 20.1 20.1 20.1
66 19.9 19.8 19.7 19.6 19.6 19.5 19.5 19.4 19.4 19.4 19.3 19.3 19.3
67 19.2 19.1 19.0 18.9 18.8 18.8 18.7 18.7 18.6 18.6 18.6 18.5 18.5
68 18.5 18.4 18.3 18.2 18.1 18.0 18.0 17.9 17.9 17.8 17.8 17.8 17.8
69 17.8 17.7 17.6 17.5 17.4 17.3 17.2 17.2 17.1 17.1 17.1 17.0 17.0
70 17.1 17.0 16.9 16.8 16.7 16.6 16.5 16.5 16.4 16.4 16.3 16.3 16.3
71 16.5 16.3 16.2 16.1 16.0 15.9 15.8 15.8 15.7 15.7 15.6 15.6 15.6
72 15.9 15.7 15.6 15.5 15.4 15.3 15.2 15.1 15.0 15.0 14.9 14.9 14.9
73 15.3 15.1 15.0 14.8 14.7 14.6 14.5 14.5 14.4 14.3 14.3 14.2 14.2
74 14.7 14.5 14.4 14.2 14.1 14.0 13.9 13.8 13.7 13.7 13.6 13.6 13.5
75 14.2 14.0 13.8 13.7 13.5 13.4 13.3 13.2 13.1 13.1 13.0 12.9 12.9
76 13.7 13.5 13.3 13.1 13.0 12.8 12.7 12.6 12.5 12.5 12.4 12.3 12.3
77 13.2 13.0 12.8 12.6 12.4 12.3 12.2 12.1 12.0 11.9 11.8 11.7 11.7
78 12.7 12.5 12.3 12.1 11.9 11.8 11.6 11.5 11.4 11.3 11.3 11.2 11.1
79 12.3 12.0 11.8 11.6 11.4 11.3 11.1 11.0 10.9 10.8 10.7 10.6 10.6
80 11.9 11.6 11.4 11.2 11.0 10.8 10.7 10.5 10.4 10.3 10.2 10.1 10.1
Yours very truly,
Noel C. Ice
NCI/Error! Reference source not found.
'
NOEL C. ICE * METRO
LINE 429-3815
TELEX
75-8631
TELECOPY
817/877-2807
* BOARD CERTIFIED ATTORNEY'S
DIRECT DIAL
ESTATE PLANNING AND PROBATE LAW 877-2885
TEXAS BOARD OF LEGAL SPECIALIZATION
Our
File No.
CERTIFIED MAIL
RETURN RECEIPT NO.: Error! Reference source not found.
RE: IRA Beneficiary Designations
Dear :
The Problem: The most beneficial estate tax savings component of your estate plan is the ability to shelter up to $600,000 in a trust (the Tax Shelter Trust) which will escape estate taxation in the surviving spouse’s estate. If your net estate subject to estate taxes is less than $600,000 (keeping in mind the fact that only 1/2 of the community property is initially subject to tax), then this trust will shelter whatever is available.
However, certain assets pass outside of a person’s will. These assets are called nonprobate assets. Common examples of nonprobate assets include life insurance death benefits and payments from an IRA, qualified plan or nonqualified deferred compensation plan. If the nonprobate assets pass to your Living Trust, all will be taken care of, since so much of this trust as is necessary can be used to fund the Tax Shelter Trust. For example, if the beneficiary of your life insurance were , the insurance proceeds would be properly coordinated with the estate plan, even though the assets did not pass through your probate estate.
It would therefore seem at first blush to be appropriate to designate as the beneficiary of your IRA. In fact, since your net estate will be less than $600,000 if the IRA is not a part of it, there is all the more reason to make the trust a recipient or partial recipient of the IRA. On the other hand, there are some very significant income tax savings that will be lost if money is taken out of the IRA earlier than otherwise required. As long as the money is in the IRA it is not subject to income taxation.
Further complicating the analysis is that distributions must be made from the IRA beginning April 1 of the calendar year following the calendar year in which the IRA owner attains age 701/2. Shortly prior to Error! Reference source not found.’s 70th birthday he should consult me about the various elections that will become irrevocable in the year after he attains age 701/2. The proposed IRS regulations –dealing with how much needs to be paid out and when– take up more than 60 pages of fine print. There are numerous exceptions and special rules, including special exceptions and rules applicable if the beneficiary is a trust or if the beneficiary is a spouse.
All of these rules may be affected by any special elections you may have made to grandfather certain benefits. I am not aware that any special elections were made by you, but you should please let me know if there were any.
Coordinating all of these rules is a difficult task, particularly since I have to guess at how large the IRA balance will be at the relevant period.
General Advice With Respect to Distributions Following Age 701/2: Beginning April 1 of the year following the year in which Error! Reference source not found. reaches age 701/2, minimum distributions will need to begin to be made from the IRA. Prior to that time we will need to revisit the strategy outlined in this letter, and perhaps sign new beneficiary designations. If the trust is to be a beneficiary at that time, it may be advisable to make the trust (or a part of it) irrevocable during life. However, since the law in this area is so volatile and likely to change, it may be worthwhile to take a wait and see approach for now.
The Beneficiary
Designation
Recall that the IRA is community property, so the question of whom to name as your death beneficiary must be analyzed by considering what will happen on the death of the wife and what will happen on the death of the husband.
There is no ideal solution. By far the simplest most flexible solution for income tax purposes is to name Error! Reference source not found. as the beneficiary of Error! Reference source not found.’s IRA, and for Error! Reference source not found. to name Error! Reference source not found. as the sole beneficiary of her community property interest. As indicated above, this may however result in underfunding the Tax Shelter Trust.
Generally, Error! Reference source not found.’s interest in the IRA will be a nonprobate asset, the ownership at death of which will be controlled by the beneficiary designation form. On the other hand, Error! Reference source not found.’s community property interest will be a probate asset, the ownership at death of which may be controlled by her will. This is not always true, however. Some IRA beneficiary designations purport to give the spouse of the designated owner beneficiary designation rights applicable on the death of the spouse. I am not sure that this is effective. Whether such a designation would be effective may turn on whether or not it may be construed to be a community property survivorship agreement under Part 3 of Chapter XI of the Texas Probate Code. If the designation purports to be an agreement, is signed by both of you and clearly states that the community property shall pass to the surviving spouse, then it is probably effective; otherwise it is very possibly ineffective.
My general recommendation begins by following the simple solution suggested above, with two slightly complicated variations:
Error! Reference source not found.’s Interest If Error! Reference source not found. Outlives Error! Reference source not found.: In Error! Reference source not found.’s case, she has left her interest in Error! Reference source not found.’s IRA to Error! Reference source not found. under her will. If we leave it at that, then if Error! Reference source not found. outlives Error! Reference source not found., he can simply continue to maintain and deal with the IRA much as he did during Error! Reference source not found.’s life. However, if it later appears that this will result in underfunding the Tax Shelter Trust, Error! Reference source not found. can “disclaim” this gift, in whole or in part. The will provides that if this gift is disclaimed, it will become a part of the Tax Shelter Trust. This gives us the flexibility we may need.
Even better, when the community property in the estate is partitioned, Error! Reference source not found. might exchange his interest in other community property belonging to him for the estate’s interest in the IRA. Does a non prorata division result in taxable sale or exchange treatment requiring the estate to pay income tax on the estate’s interest in the IRA? I think not, but there is no authority directly on point. What authority there is would seem to support the no taxation theory.[87] In any event, the partition approach is one that can be reevaluated at the time, and the law may be more fully developed by then. Until the law is further clarified, a private letter ruling on the question should be obtained if this approach is to be used.
Error! Reference source not found.’s Interest If Error! Reference source not found. Outlives Error! Reference source not found.: In Error! Reference source not found.’s case, the beneficiary of the IRA will largely be controlled by the beneficiary designation, rather than his will. We may be able in this case to use a technique similar to the one contemplated if Error! Reference source not found. predeceased Error! Reference source not found.; i.e., Error! Reference source not found. could designate Error! Reference source not found. as the sole beneficiary, except that the designation would not be made under his will because the interest will not be a probate asset. In this case, Error! Reference source not found. can leave the money in Error! Reference source not found.’s IRA, or rollover the money to an IRA of her own.
Because the IRA will not be a probate asset, the disclaimer alternative procedure is not as straight forward as where Error! Reference source not found. predeceased Error! Reference source not found.. The beneficiary designation could provide that in the event of Error! Reference source not found.’s disclaimer of all or a portion of Error! Reference source not found.’s community half interest, the disclaimed portion would be payable to Error! Reference source not found.’s estate. This estate’s interest might be transferred (or more correctly “partitioned”) back to Error! Reference source not found. in exchange for other community assets belonging to her. Here, however, there may be more of a likelihood that the partition would be taxable, and in any event it will be difficult to explain what has transpired to the IRA trustee or custodian who would probably not even have to be made aware of what we were doing if Error! Reference source not found. predeceased Error! Reference source not found..
In either case, the disclaimer route at least safely allows the option of using the IRA interest to fund the bypass trust. The added technique of subsequently partitioning the IRA back to the survivor, with the attendant tax uncertainties, can be availed of or avoided by reconsidering these issues at the relevant time.
The Interest Of The Survivor: In any event, the surviving spouse will end up with all or at least half of the IRA. Therefore, it will ultimately be necessary to choose a non-spouse beneficiary to take on the death of the survivor. Once Error! Reference source not found. has reached the April 1 following the year he reaches age 701/2, his options will be fixed and limited. Prior to that time you have more flexibility and can change your mind freely. You could, for example name as the beneficiary, in the event you are not survived by your spouse. This is what I recommend. It will be necessary to give a copy of the trust instrument to the IRA trustee in order for this to be effective.
I am attaching beneficiary designations along the lines suggested above. If you approve of them, please have them signed and delivered to XXX and send me a copy of what you gave the Bank. If you have any questions or changes, please call.
Yours very truly,
Noel C. Ice
NCI/dsb
Enclosures:
<><>
Annotated
Sample
DESIGNATION OF BENEFICIARY and ELECTION AS TO FORM OF BENEFITS UNDER IRC
§401(a)(9)
By
MOORE MONEY
Primary Beneficiary is Wife
This document is an attachment to any beneficiary designation form required by the terms of the IRA and is incorporated into such form. If there is no specified beneficiary designation form required by the terms of the IRA, then this document shall be the beneficiary designation form.[88]
Identification of Designated Participant/Designated IRA Owner. I, Moore Money (the “Participant” or IRA “Owner”), named Morris Edward Money at birth, also know as Mo Money and M.E. Money, am the designated owner of the above referenced IRA. My social security number is 009-999-9999. I am presently a domiciliary and resident of Ripple City, Clear Water County, Texas. My Texas domicile was established at birth. I am a citizen of the United States.
Revocation of Prior Designations. I revoke all previous beneficiary designations. This beneficiary designation shall remain in effect until such time as I have filed another designation with the trustee or custodian of the IRA, bearing a subsequent date.
Identification of IRA Sponsor. The sponsor of the IRA is believed to be Infidelity Investments (the IRA “Sponsor”).
Identification of IRA. The IRA has been described as the Infidelity Investments Rollover IRA and is believed to have been assigned account number 1234-5678A. This IRA will sometimes be referred to herein simply as “the IRA,” “this IRA,” or “my IRA.” I wish to make the beneficiary designation change as set forth herein, even if the foregoing description or account number is incorrect in any respect, so long as the IRA can reasonably be identified. Further, except as otherwise provided by any other beneficiary designation signed by me in the future, this designation shall apply to any other IRA I may now have or later establish with Infidelity Investments, no matter what the account number.[89]
Approximate Value. The approximate value as of April 1, 1996 was $900,000. (I may be mistaken as to the approximate value of the IRA. Such mistake, if any, shall have absolutely no effect on this beneficiary designation.)
Date of Birth of Designated Participant/Designated IRA Owner. I was born on October 5, 1956, in Desert City, Lion’s Den County, Texas.
Identification of Spouse.
I am married to Lotta Money, named “Lotta
Darlene Cash” at birth, and also known as Lotta Cash,
and Mrs. Moore Money. All references in this Will to “my Wife” or to “my
spouse” are to Lotta Money alone. My Wife, Lotta Money, was born on Tuesday, January 15, 1957 in Terrapin
Station, Dark Star County, California. My Wife’s social security number is
007-999-9999. My Wife is presently a domiciliary and resident of Ripple City,
Clear Water County, Texas. Her Texas domicile was established at birth. My
Wife is a citizen of the United States. I have not been previously married to
any other person.[90]
Identification of Children. I have 2 children, now living.
E. C. Money (Cosmic Charlie)
007 Mars Hotel
Worthless, TX 76999
SSN 449-666-99(9
(415) 457-8457
Faith N. Money (Faithful)
221B New Minglewood Ave.
Cucamonga, CA
SSN 549-666-99(9
(900) 123-4567
I have no child now deceased leaving descendants now living.
Definition of the Word “Children”/Children Born or Adopted After Signing of Instrument. All references in this instrument to “the Participant’s children,” “my children,” “my child” or a “child of mine” include only the above named children and any child or children hereafter born to or adopted by me. This provision is to be interpreted literally and strictly.
Identification of Descendants. All references in this instrument to “the Participant’s descendants,” "my descendants," a "descendant of mine," or similar designation, shall include only "my children" and their descendants and no others. This provision is to be interpreted literally and strictly.[91]
Identification of Beneficiaries. Pursuant to the provisions of the IRA permitting the designation of a beneficiary or beneficiaries by me, I, the undersigned Participant, hereby designate the following person or persons, individual or individuals, as the beneficiary or beneficiaries of the balance to my credit under the IRA, payable by reason of my death.
Table of Beneficiaries
|
Class |
Beneficiary(ies) |
|
1. First Beneficiary |
Lotta Money if she survives me (my Wife).[92] |
|
2. Second Beneficiary |
My Descendants who survive me, by right of representation |
|
3. Third Beneficiary |
My Probate Estate |
|
4. Fourth Beneficiary |
N/A |
|
5. Fifth Beneficiary |
N/A |
Disclaimer Provisions.
As expressly permitted by Texas Probate Code §37A(c), I make the following provision in this instrument for the making of disclaimers by a beneficiary.
Except where it has been specifically provided to the
contrary elsewhere in this designation, if any property that is not to be held
in trust is disclaimed by a beneficiary, other than my Wife, such property
shall pass to the then living descendants of the disclaimant, by right of
representation, if any, and if none, then such property shall pass as if the
disclaimant predeceased me.
If any property that is not to be held in trust is disclaimed by my Wife, the disclaimed property shall be payable to The Credit Shelter Trust Under The Money Family Trust.[93]
If (as a result of a further disclaimer by my Wife or otherwise) a disclaimant disclaims all of his or her interest in all (or any portion) of any trust, the trust (or the affected portion) shall be administered and distributed as if the disclaimant died after having survived me, even if this results in the acceleration of a remainder interest or closes an otherwise open class, and even if this results in the removal of the property from the trust (which in many cases it would). If a disclaimant disclaims less than all of his or her interest in all (or any portion) of any trust, the trust (or the affected portion) shall be administered and distributed as if the disclaimed interest had been omitted from the terms of the trust.[94]
If, as a result of disclaimer, an interest would otherwise pass to
The Credit Shelter Trust Under The Money Family Trust, but for the fact that
The Credit Shelter Trust Under The Money Family Trust does not exist or is
otherwise incapable of taking, the disclaimed interest shall instead pass as if
the disclaimant had predeceased me.
Except as otherwise designated or provided in this Designation, the following rules of construction shall apply:
• The Beneficiaries identified above shall be entitled to Death Benefits in ascending numerical order. That is, the person(s) identified as the First Beneficiary shall be entitled to Death Benefits first, and the Second Beneficiaries shall be entitled to Death Benefits only if there is no First Beneficiary surviving, existing or otherwise eligible to take. And so forth. (The lower the number the higher the Class.) Beneficiaries below the First Beneficiary level are contingent beneficiaries.
• A Beneficiary must survive me in order to be eligible to receive Death Benefits under this designation.[95] Further, a Beneficiary must survive all other Beneficiaries of a higher Class in order to be eligible to receive Death Benefits. A Beneficiary’s interest shall vest absolutely at my death, whether or not the Beneficiary subsequently survives the complete distribution of his benefits under the IRA. If The Credit Shelter Trust Under The Money Family Trust does not exist or is otherwise incapable of taking as of the date of my death, the trust shall be treated for this purpose as not surviving me.
• If there is more than one Beneficiary named in the same Class (First Beneficiary Class, Second Beneficiary Class, etc.), and one or more fails to survive me, the Death Benefits to which members of that Class are entitled shall pass to the remaining members of the Class, if any, in the same proportions in which the surviving Class members are otherwise receiving benefits. For example, if A, B & C are each to receive a 1/3rd interest if surviving, A & B will each be entitled to a 1/2 interest if C does not survive me. If A is to receive half, B is to receive 1/4, and C is to receive 1/4, but C does not survive me, A’s share of the whole will become 2/3rds.
• In the case of a gift to a Class “by right of representation” or “per stirpes,” Death Benefits shall pass in accordance with the definition of those terms. For example, if a person was survived by four children, and two grandchildren who were the only children (surviving or otherwise) of a predeceased child, a division by right of representation would provide two equal shares for each child who survived, and one share for each of the children of the predeceased child (ten shares in all). This would be true regardless of whether the surviving children had children then living, or whether the surviving grandchildren had living descendants.
• The Death Benefits as to which a trust is the Beneficiary (by virtue of disclaimer) shall be paid, in trust, to the person who is the trustee under the trust (at the time the Death Benefits are paid), under the trust provisions contained and described in the trust instrument as it may exist at the first to occur of (1) my death, (2) my Required Beginning Date or (3) the date of this designation if made after my Required Beginning Date. Unless otherwise clearly specified, a reference to a beneficiary is a reference to the person then serving as trustee, if a trust is the beneficiary.
A copy of The Credit Shelter Trust Under The Money Family Trust is delivered to the IRA trustee or custodian contemporaneously with the delivery of this instrument. The Credit Shelter Trust Under The Money Family Trust is for some purposes revocable and amendable, but my share of the Trust becomes irrevocable upon my death. As a general rule, therefore, this Designation shall apply to the Trust as it exists at the date of my death, if my death is prior to my Required Beginning Date, whether or not it is amended or restated following this Designation. However, if or when I have reached my Required Beginning Date, then the trust by its express terms has previously been made irrevocable for purposes of Benefits passing pursuant to this Beneficiary Designation, and the trust terms in effect on the later of (i) my Required Beginning Date, or (ii) the date I have signed this designation, shall apply whether or not the trust has in other respects been thereafter amended. If, for whatever reason, The Credit Shelter Trust Under The Money Family Trust as beneficiary is ineffective, such designation shall be ignored (as if the trust were an individual who had predeceased me).
· Disposition of State Property Law Interest of Spouse. It is my intention to dispose of all of the Benefits under the IRA over which I have a power of disposition as a result of my death. In this regard, it is my understanding that if any such Benefits are community property they are my sole management community property, and, as such, I have a limited power of disposition over both halves of such community property. A spouse may not accept Benefits under my Will, or under any Trust upon my death, or under this instrument, and also claim an interest in my Benefits in excess of that otherwise provided by this designation.[96]
To the extent that my Wife is a Designated Beneficiary under this
instrument, the Benefits to which she is thereby entitled shall be satisfied
first out of any community property or other legal interest that she may
otherwise have in my Benefits, and second, out of property in which she does
not have such an interest.
If my Wife predeceases or has predeceased me, and if she has left her community property interest (if any) in my Benefits to someone other than me, then to the extent that this disposition was effective as a matter of law, such interest shall pass as she has directed, rather than in accordance with this designation. However, the custodian or trustee shall be fully protected in paying or withholding payment of Benefits without regard to the preceding sentence.
Benefits payable as a result of my death shall be paid in such form and manner and at such time as may be permitted by the IRA or law and as the beneficiary shall elect. If there is more than one beneficiary, then each beneficiary may make an election with respect to that beneficiary’s separate account. Further, each beneficiary shall have at all times, the unrestricted power and right to draw down and take a distribution to himself of all or any portion of the Benefits to which he is entitled under this designation, including the unrestricted power to accelerate any installment distributions elected. (If a trust is a beneficiary, the powers described under this paragraph shall belong to the trustee of that trust.)
If an individual who is a beneficiary survives me, but dies prior to the complete distribution of his interest in my Benefit, the beneficiary’s share of any remaining interest shall be paid to such secondary beneficiary or beneficiaries as are designated by the deceased beneficiary by written instrument delivered to the IRA custodian or trustee. If no such designation has been made, then the beneficiary’s share of any remaining interest shall be paid to the beneficiary's personal representative to be administered as a part of the beneficiary's general probate estate. Such distribution and designation shall be in such form and at such time as may be permitted by the IRA or law and as the secondary beneficiary or beneficiary’s personal representative (as the case may be) elects.[98]
If any part of this Beneficiary Designation is inconsistent with the IRA, the IRA shall be considered amended to the extent that such amendment does not cause the account to cease to be an individual retirement account within the meaning of IRC §408(a).
If the IRA Sponsor accepts this instrument without change, the Sponsor is and shall be fully indemnified and protected by the IRA Owner, the IRA Owner’s estate and the IRA Owner’s heirs, from any liability arising by virtue of such acceptance. The Sponsor can manifest its acceptance of this Designation by allowing any further transactions in the account or by accepting any fees or charges in connection with it, without objecting in writing to this Designation. If the objection is only to part of this Designation, the remaining provisions shall be effective, as set forth below.
If any provision of this Beneficiary Designation or the
application of it to any person or ci
• Uniform Transfers to Minors Act. Any distribution that would be made to a minor beneficiary may be made under the Uniform Transfers (or Gifts) to Minors Act of Texas or any other jurisdiction.
• Power of Legal Representative to Act Under IRA. Any distribution that can be made to an individual may be made to the individual’s legal representative, including the holder of such individual’s power of attorney. Such representative shall also have the power to make (on the individual’s behalf) any elections or designations that the individual is empowered to make, to the extent otherwise consistent with the scope of the representative’s legal authority.
• Revocation of This Designation. This designation may be revoked or changed by me at any time by written notice to the IRA custodian or trustee, and this beneficiary designation shall remain in effect until such time, or until such time as I have filed another designation with the IRA custodian or trustee bearing a subsequent signature date.
• Election as to Form of Benefit Under the Minimum Distribution Rules.[99] I was born on October 5, 1956. I believe that my Required Beginning Date (RBD) will be Saturday, April 1, 2028, because I will be 701/2 in the immediately preceding calendar year. In “the first distribution calendar year,” (i.e., in the year that I attain age 701/2), I elect that distributions shall commence to me over the joint life expectancy of myself and my Designated Beneficiary.
• Election Regarding Recalculation. If I have a Designated Beneficiary as of my Required Beginning Date, I elect that my life expectancy shall be recalculated for purposes of complying with the minimum distribution rules. If my Wife is living on the Required Beginning Date, and is at that time a Designated Beneficiary, then I further direct that my Wife’s life expectancy shall NOT be recalculated. If I do not have a Designated Beneficiary as of my Required Beginning Date, I elect that my life expectancy shall not be recalculated, however.
• Retention of Draw Down
(Withdrawal) Power and Right to Transfer During Life of IRA Owner. During
my life, my IRA shall be payable to me without restriction, in such form and
manner and at such time as permitted by law and as I elect. Further, unless
otherwise provided below, I shall have at all times, the unrestricted power and
right to withdraw or draw down and take a distribution to myself of all or any
portion of my IRA, including the unrestricted power to accelerate any
installment distributions elected. I retain the enfo
• Beneficiary of Trust Is a Designated Beneficiary. If and to the extent that The Credit Shelter Trust Under The Moore Family Trust is or becomes a primary beneficiary, the beneficiary of The Credit Shelter Trust Under The Moore Family Trust should qualify as a “designated beneficiary” for purposes of IRC §401(a)(9) because (1) the trust is a valid trust under state law, (2) the trust has expressly been made irrevocable for purposes of Benefits passing pursuant to this beneficiary designation, (3) the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the Benefit hereunder are identifiable from the trust instrument, and (4) a copy of the trust instrument has been provided to the trustee or custodian of the IRA contemporaneously with the delivery of this beneficiary designation. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the Benefits hereunder are my Wife and my descendants who survive me.[100]
• Separate Accounts.[101] If there is more than one beneficiary of my Benefit, at least one of whom is a “Designated Beneficiary” within the meaning of the minimum distribution rules, then, as of my Required Beginning Date, or as of my date of death if sooner, for purposes of complying with the minimum distribution rules described in IRC §401(a)(9), a separate account shall be maintained for each such beneficiary in proportion to his or her interest, by initially determining the benefits that are or would be owing to such beneficiary under this designation in the event of my death at such time. From that time forward, each such account must bear its own prorata share of gains and losses and shall otherwise be separately accounted for. It is intended that such separate account will be a separate account within the meaning of Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-2(b) and H-2A. Unless otherwise specified by me, all distributions to me after my Required Beginning Date shall be charged against each separate account in the proportions that such accounts originally bear to one another.
In the event of my death after my Required Beginning Date, the beneficiary with respect to whom a separate account is being maintained shall be the beneficiary of that account on my death, if the beneficiary survives me. If such beneficiary does not survive me, then the beneficiary of the separate account shall be the person(s) who is designated above to take the share of the predeceasing beneficiary in the event the beneficiary does not survive me. For example, in the case of a per stirpital distribution pattern, the beneficiaries of a separate account would be the descendants per stirpes (if any) of the predeceased beneficiary. Otherwise, the beneficiaries of the account may simply be determined as generally provided above. In the case of a trust as beneficiary, the term “survive me” shall mean is in existence as of the date of my death.
Notwithstanding the above, if I am living on my Required Beginning Date, and if all of my beneficiaries are designated beneficiaries who are treated as having the same life expectancy for purposes of the minimum distribution rules (not including the minimum distribution incidental benefit rule), then separate accounts shall not be maintained. For example, if a trust is a Designated Beneficiary, the life expectancy of the oldest beneficiary of the trust is ordinarily used to determine the minimum distributions under the minimum distribution rules. If the Designated Beneficiary under the trust is my Wife, then there shall be no necessity for maintaining separate accounts, since the joint life expectancy of myself and my Wife are to be used for determining the minimum distributions in any event.
It is my understanding that the minimum incidental benefit
rule (MDIB) described in the regulations to IRC §401(a)(9) is not applicable
after my death. If the IRA indicates that benefits be paid out following my
death and after the Required Beginning Date at least as rapidly as during my
life, then, for purposes of this beneficiary designation, I intend that such
reference be construed in order to comply with the minimum required
distributions described in IRC §401(a)(9), after taking into account the fact
that the MDIB rule no longer applies.
Definitions
As used in this instrument, the following terms, whether or not capitalized, shall be given the following meanings, unless the context very clearly indicates otherwise.
• Participant. All references to the “Participant” are to Moore Money.
• Estate/Probate Estate. A distribution to the "Estate" or “Probate Estate” of a deceased individual means a distribution to the deceased individual’s personal representative, if any, to be administered and distributed as part of the individual’s general probate estate; or if there is no personal representative at the time of distribution, then to the persons entitled under applicable state law to succeed to the ownership of the deceased individual’s property as a result of the death of the individual.
• Survive/Surviving. Wherever it is
provided in this instrument that a person must "survive" someone, or must be living at the date of a
person's death, or where any other survivorship condition is explicitly
expressed, it is intended that such survivorship requirement override, and be
construed without regard to, any anti-lapse or similar statute that would
defeat such express provision. Wherever it is provided in this instrument that
a person must "survive" or
must be “surviving” some other
person, it means that such person must not have predeceased such other person,
and must be living at the other person’s death. Other provisions of this
instrument may require survival for an additional specified period. If a
beneficiary is not a human being, the beneficiary must be eligible to take
(entitled by law to receive the benefit), and if not eligible to take, (e.g.,
if not in existence), the person shall be treated as if not surviving. A spouse
of the IRA Owner shall be treated as having failed to survive the Owner, if at
the Owner’s death there was pending or in effect a legal or equitable action
for, or decree or order of, annulment, divo
• Gender Pronouns. As used in this instrument, whenever the context so indicates, the masculine, feminine or neuter gender, and the singular or plural number, shall include the others.
• Beneficiary/Beneficiaries. The term “Beneficiary” shall mean “Beneficiaries” and vice-versa, unless the context clearly indicates otherwise.
• IRC. Unless otherwise indicated, the references contained in this instrument to the "Code" or the “IRC” are to the Internal Revenue Code of 1986, as amended, and as may be from time to time hereafter amended, or any corresponding provisions of any subsequent federal tax laws. Unless clearly contrary to the manifest intent otherwise expressed in this instrument, any reference to a specific IRC section or other provision of law shall be interpreted as a reference to such IRC section or other law as amended, changed or redesignated after the signing of this instrument.
• Person/Individual. The term “person” includes an individual, trust, estate, partnership, association, company or corporation. An “individual,” on the other hand, means a person who is a human being.
• Conjunctive/Disjunctive. When the sense so indicates, use of the conjunctive (e.g., “and”) may include the disjunctive (e.g., “or”), and vice versa.
• Death Benefits. “Death Benefits” or “Benefits” generally include all of my interest in the IRA over which I have the power to designate one or more Beneficiaries to succeed to such Benefits upon my death, determined without regard to the community property laws.
• By Right of Representation-Per Stirpes.
(a) The term "by right of representation," or “per stirpes” as used in this instrument, means per stirpes, as further defined in subsection (b) below. This means that lineal descendants shall represent their ancestor, that is, shall stand in the same place as such ancestor would have had he been living. For this purpose, a living descendant excludes his own descendants, and a dead descendant is represented by his own descendants. A division "by right of representation" may sometimes be referred to as a division on a "representational basis." The shares created in a division on a representational basis may sometimes be referred to as "representational shares." Such a division may also be referred to as a "representational division."
(b) Unless otherwise clearly indicated, the stirpes (i.e., the roots or stocks selected for the purpose of making the first division of the estate on a per stirpital or representational basis) are to be those of the generation nearest the decedent of which one or more of the members survived the decedent, and for this purpose, a disclaimant shall be treated as if he survived. This is not necessarily strict per stirpes and is sometimes referred to as “per capita with right of representation,” since, for example, the grandchildren of a decedent will take equal shares, if no children were living at the time the division is determined.
• Designated Beneficiary. The term “Designated Beneficiary” shall have the
same meaning as that it has under IRC §401(a)(9).
• Designation. The term “the Designation” or “Designation Form” means this document and includes any designation form that incorporates this document or which this document incorporates.