Hot Topics and Recent developments in The IRA/Qualified Plan Distribution arena
From the Sublime to the Ridiculous

Marital Deduction Issues
Spousal Rollovers
Community Property
The Separate Account Rule At Death
Disclaimers
Trusts As Beneficiaries, Etc.

1999 and 2000 (so far) have been fertile years for IRS rulings and pronouncements in the area of IRA and qualified plan minimum required distribution (MRD) rules. The purpose of this article is to acquaint the reader with a number of the rulings and pronouncements, some of them informal and unofficial, and occasionally really weird.

The source for much of what we think we know in this area has been gleaned from two ALI-ABA Programs, Estate Planning for Distributions from Qualified Plans and IRAs (1999/Q284; 2000/VLR997), held in May of 1999 and 2000, in which Marjorie Hoffman (herein “MH”), Senior Technician Reviewer, Employee Benefits and Exempt Organizations Branch - Internal Revenue Service, and principal author of the proposed regulations under §401(a)(9), gave her personal opinions of what the rules are. In 2000, Marjorie Hoffman was joined by her colleague at the IRS, George Masnik (herein “GM”), Chief, Branch 4, Office of the Assistant Chief Counsel, responsible for the development and issuance of rulings, both public and private, in the estate, gift, and GSTT areas.

In order to keep this article as brief as possible, I am going to assume that the reader is familiar with the basic minimum required distribution (MRD) rules. Those rules need to be mastered before the practitioner should even dream of injecting into the equation the subject of trusts, disclaimers and community property. An introduction to the general distribution rules can be found in my article “The Minimum Distribution Rules Affecting IRAs and Qualified Plans in a Nutshell, A Guide for the Perplexed.” This article, and my 900 page treatise, Estate Planning for Distributions From Qualified Plans and IRAs, can be found on my website: http://www.trustsandestates.net/ (go to the “Guides and Articles” page). The subject of trusts as beneficiaries is treated in excruciating detail, far beyond the treatment given in this paper, in Article VIII, “Excise Taxes on Distributions.”

ARTICLE 1
MARITAL DEDUCTION ISSUES
Revenue Ruling 2000-2 [1]

1.1 If A QTIP Trust Is The Beneficiary Of An IRA Or Qualified Plan (QP), Must All Of The Income From The Plan Or IRA Be Distributed To The QTIP Trust In Order To Qualify The Plan Or IRA For The Estate Tax Marital Deduction, Or Is It Sufficient That The Surviving Spouse Has The Right To Demand Distribution? The latter.

The answer is that it is sufficient that the surviving spouse has the right to demand distribution. There never was any doubt that this is the law with respect to other forms of property, because, under the IRC, the spouse need only be “entitled” to the income, and further, Treas. Reg. §20.2056-7(d)(2) explicitly provides—

(2) Entitled for life to all income. The principles of 20.2056(b)-5(f), relating to whether the spouse is entitled for life to all of the income from the entire interest, or a specific portion of the entire interest, apply in determining whether the surviving spouse is entitled for life to all of the income from the property regardless of whether the interest passing to the spouse is in trust.[2]

And, Treas. Reg. §20.2056(b)-5(f)(8) explicit provides—

(8) In the case of an interest passing in trust, the terms “entitled for life” and “payable annually or at more frequent intervals,” as used in the conditions set forth in paragraph (a)(1) and (2) of this section, require that under the terms of the trust the income referred to must be currently (at least annually; see paragraph (e) of this section) distributable to the spouse or that she must have such command over the income that it is virtually hers. Thus, the conditions in paragraph (a)(1) and (2) of this section are satisfied in this respect if, under the terms of the trust instrument, the spouse has the right exercisable annually (or more frequently) to require distribution to herself of the trust income, and otherwise the trust income is to be accumulated and added to corpus. . . [3]

Rev. Rul. 2000-2[4] now tells us that the regulation just quoted does indeed apply to IRAs and QPs, as in the case of any other asset; and, more importantly, that it applies where the beneficiary of the IRA or QP is a QTIP trust, provided that the trustee acts as a conduit for any income from the IRA or QP that the spouse demands be distributed to the trust, and provided the trust is required to distribute that income to the spouse. This ruling will come as no surprise to sedulous readers of ACTEC Notes, since the subject has previously been addressed in depth in an article that anticipated the holding of Rev. Rul. 2000-2 and which expressed no doubt that Treas. Reg. §20.2056(b)-5(f)(8) applies to a Spouse’s beneficial interest in an IRA and to a QP or IRA named as beneficiary.[5] It is nevertheless reassuring to have a Revenue Ruling on point.

Specifically, Rev. Rul. 2000-2 addressed the following question:

May an executor elect under section 2056(b)(7) of the Internal Revenue Code to treat an individual retirement account (IRA) and a trust as qualified terminable interest property (QTIP) if the trustee of the trust is the named beneficiary of decedent's IRA and the surviving spouse can compel the trustee to withdraw from the IRA an amount equal to all the income earned on the IRA assets at least annually and to distribute that amount to the spouse?[6]

The following facts were recited in the Ruling:

A died in 1999 at the age of 55, survived by spouse, B, who was 50 years old. Prior to death, A established an IRA described in section 408(a). The IRA is invested only in productive assets. A named the trustee of a testamentary trust established under A's will as the beneficiary of all amounts payable from the IRA after A's death. A copy of the testamentary trust and a list of the trust beneficiaries were provided to the custodian of A's IRA within nine months after A's death. As of the date of A's death, the testamentary trust was irrevocable and was a valid trust under the laws of the state of A's domicile. The IRA was includible in A's gross estate under section 2039.

Under the terms of the testamentary trust, all trust income is payable annually to B, and no one has the power to appoint trust principal to any person other than B. A's children, who are all younger than B, are the sole remainder beneficiaries of the trust. No other person has a beneficial interest in the trust. Under the terms of the trust, B has the power, exercisable annually, to compel the trustee to withdraw from the IRA an amount equal to the income earned on the assets held by the IRA during the year and to distribute that amount through the trust to B. The IRA document contains no prohibition on withdrawal from the IRA of amounts in excess of the annual minimum required distributions under section 408(a)(6). [The life expectancy exception under the look-through rule for trusts was elected, and distributions were begun in the year following death.]

* * * *

Under the terms of the testamentary trust,[7] B is given the power, exercisable annually, to compel the trustee to withdraw from the IRA an amount equal to all the income earned on the assets held in the IRA and pay that amount to B. If B exercises this power, the trustee must withdraw from the IRA the greater of the amount of income earned on the IRA assets during the year or the annual minimum required distribution. Nothing in the IRA instrument prohibits the trustee from withdrawing such amount from the IRA. If B does not exercise this power, the trustee must withdraw from the IRA only the annual minimum required distribution.[8] [Emphasis added.]

The precise holding was—

An executor may elect under section 2056(b)(7) to treat an IRA and a trust as QTIP when the trustee of the trust is the named beneficiary of the decedent's IRA, the surviving spouse can compel the trustee to withdraw from the IRA an amount equal to all the income earned on the IRA assets at least annually and to distribute that amount to the spouse, and no person has a power to appoint any part of the trust property to any person other than the spouse.[9]

Rev. Rul. 2000-2 gave the death knell to Revenue Ruling 89-89[10] by declaring it obsolete. We are all familiar with the fact that Revenue Ruling 89-89 approved a cumbrous process whereby the IRA was required to distribute all of its fiduciary accounting income (computed how?) to the QTIP trust, and the trust, in turn, would distribute the income to the spouse. Despite being rendered technically obsolete, 89-89 is still a valid approach,[11] but it has the disadvantage of requiring income in excess of the minimum required distribution (MRD) to be distributed and taxed earlier than 401(a)(9) would otherwise require. How big a disadvantage this is depends on the nature of the investment. If capital growth constitutes most of the increase in the IRA each year, and fiduciary accounting income (computed how?) is minimal (say, 3.82%[12]), then the MRD is usually going to exceed fiduciary accounting income anyway —but not always.

One advantage that the 2000-2 approach has over 89-89 is that the burden of determining fiduciary accounting income, while still there, is not so pressing. If the spouse does not make an issue out of it, then the fact that all of the true fiduciary accounting income was not distributed is not quite so critical as it might have been under 89-89.

Rev. Rul. 2000-2 is explicit that “[b]ecause the trust is a conduit for payments equal to income from the IRA to B, A's executor needs to make the QTIP election under section 2056(b)(7) for both the IRA and the testamentary trust.”[13] This is consistent with the odd notion, articulated in some of the private letter rulings, that a trusteed IRA (or QP or custodial IRA?) is itself a trust, and as such cannot be an asset of another trust, and that a 2056(b)(7)(B)(v) election must therefore be made for both the IRA interest and for the QTIP trust itself.

It seems to me that a more appropriate (if slightly less technical) approach would be simply to treat the QTIP trust as owning “the right to receive” distributions from the IRA or QP (which is undoubtedly true), and treating this “distribution right” as a property interest and asset of the QTIP trust (also undoubtedly true), the same as if the QTIP owned the right to receive insurance commissions or a royalty interest. (Query, is a separate election required for other wasting assets?) I fail to see why it is the least bit relevant where the distributions (the right to receive which is owned by the QTIP trust) come from.

Treating the right to the distributions simply as a part of the corpus of the QTIP trust has the added benefit of meaning that the trustee of the QTIP trust can credit the income account with any income from the IRA (determined under applicable state law), and can distribute an equivalent amount from the QTIP trust rather than from the IRA, in those cases where the spouse needs the money and where the income exceeds the MRD. This alternative will likely result in less income taxes being owed than if the income is forced to be disgorged by the IRA. I believe that such an alternative to 2000-2 is viable, but why rely on it exclusively when Rev. Rul. 2000-2 gives us a ready alternative? I believe that it is possible to combine both approaches.[14]

As is pointed out later in this article, a proposed regulation has no more weight in court than that of a brief filed by the Commissioner.[15] A Revenue Ruling is no different, but, like a proposed regulation, a Revenue Ruling can be used by the taxpayer as a shield against the IRS, even if it cannot be used by the IRS as a sword. Revenue Ruling 89-89 was utterly useless, in my opinion, because under the facts given, there was absolutely no way that the arrangement did not qualify for the marital deduction, and so the ruling was of zero benefit to the taxpayer. Nevertheless, the ruling was used by most of us as a roadmap for qualifying IRA/QTIP trust combinations for the marital deduction. As a roadmap, 89-89 was very poor indeed, even after considering the cartographer. Now, eleven years later, we have a new, much improved map, one that I predict will entirely supplant the 89-89 approach.

Possible Pitfalls. In 2000-2, it is not clear whether the failure of the spouse to take a distribution during the year would result in the lapse of the right to the income. A lapse in this situation is, however, expressly sanctioned by Treas. Reg. §20.2056(b)-5(f)(8) and Rev. Rul. 2000-2. Moreover, if the intent is to dissuade the spouse from taking a distribution which the spouse doesn’t need, thereby incurring an income tax earlier than otherwise, consider making the withdrawal right explicitly non-lapsing. That way the spouse will not be as likely to take a distribution which the spouse does not presently need, but which the spouse might want to take later. Moreover, there are tax advantages to making the right non-lapsing.

If the right actually lapses, what are the transfer tax consequences, if any? The estate tax consequences are nil, since the QTIP will be included in the estate in any event. Are there any gift tax consequences? There might be if the gift were complete. Is a gift of a remainder interest complete if the donor retains the right to the income, and there is no power over the remainder retained? Possibly.

Recall that the whole basis for the common law GRIT[16] as an estate planning tool was that when a grantor transferred property to a trust, retaining the right to the income, there was a completed gift of the remainder even though an income interest was retained. However, since the present value of the remainder was much less than the future value of the remainder (and, much more importantly, the income was expected to be less than the applicable federal rate), the GRIT had definite transfer tax savings features. And what was the Congressional response to the common law GRIT? §2702, which makes matters considerably worse. If it applies, §2702 would presumably operate to provide that if the spouse eschewed the right to say, $50,000, then upon the lapse there would be a gift, a gift not just of the value of the remainder interest in the $50,000, but of the $50,000 itself. This is certainly how §2702 would operate in the case of a common law GRIT.

Are the 5&5 rules helpful?

Probably not in the case of a common law GRIT because §2036 applies to actual transfers, and there is no 5&5 exception for actual transfers. The exercise or release of a power of appointment is only “deemed” to be a transfer. It is not a real transfer. That is why the Treasury needs §§2041 and 2514, because §§2036 and 2501 were thought to be insufficient. (If you think about it, you will realize that if §2036 applied to lapsed powers, then Crummey Trusts would be ineffective.) In the case of the lapse of a QTIP income right, however, I believe that §2514 would ameliorate the situation somewhat, to the extent the lapse was within the 5&5 harbor. Further, as is the case in any transaction under §2702, the taxpayer is only penalized if a gift tax is incurred (after application of the applicable exclusion), either immediately or in the future. If a gift tax is incurred, the estate tax adjustments are helpful, but never fully ameliorate the loss of the time value use of the money used to pay the tax. IRC §2514(e) provides:

(e) Lapse of power

The lapse of a power of appointment created after October 21, 1942, during the life of the individual possessing the power shall be considered a release of such power. The rule of the preceding sentence shall apply with respect to the lapse of powers during any calendar year only to the extent that the property which could have been appointed by exercise of such lapsed powers exceeds in value the greater of the following amounts:

(1) $5,000, or

(2) 5 percent of the aggregate value of the assets out of which, or the proceeds of which, the exercise of the lapsed powers could be satisfied.

Can the right to the income be satisfied out of corpus? I would argue yes; but, if not, then the 5% figure is 5% of the income, and that won’t help.

Can the gift issue be avoided by giving the spouse a nongeneral power of appointment? Presumably yes, but then giving the beneficiary of a trust a power of appointment over IRA or QP proceeds creates other problems, discussed latter on in this paper.

What about §2519? If applicable, §2519 could be a huge problem. According to the Ruling[17] under discussion, “B has a qualifying income interest for life in the IRA and the testamentary trust for purposes of sections 2519 and 2044.”[18] §2519 provides:

“Any disposition of all or part of a qualifying income interest for life in any property to which this section applies shall be treated as a transfer of all interests in such property other than the qualifying income interest.”

Is a lapse with a retained income right a “disposition”? Perhaps not. Recall the tortured nomenclature of §§2041 and 2514, where a release is taxed as a transfer and a lapse is treated as a release, unless within the 5&5 exception. Transfers, releases and lapses, I know, but “dispositions”? Treas. Reg. §25.2519-1 provides that a disposition of any part of the income interest is treated as a transfer of the value of the remainder interest in QTIP property. Is the reverse true? Is a transfer of a part of the income interest a disposition of that interest? Arguably, yes, but the real question is whether a transfer of income that has already accrued is a disposition of a part of the income interest for purposes of §2519, taking the purposes of the statute into account.

The regulation is helpful in otherwise elucidating how the statute operates in practice, but it does not define the term “disposition.” I think that once the income has actually accrued, any subsequent transfer of that income is not a disposition of the income interest (presumably the right to receive income in the future), but is, at worst, a disposition/transfer of the income itself, after the functional equivalent of receipt. This is because the right to the income matured prior to the lapse. To illustrate, if one were asked to value the income interest as of the date of lapse, would one include the income that had already accrued and was subject to demand, or only the right to future income? The latter strikes me as more correct. Well, that, at least is my litigation position. (For what it is worth, the spouse has not “disposed” of the income on the eschewed income.)

It bears noting that if a transfer for gift tax purposes is a “disposition” under §2519 (a doubtful proposition for the reasons indicated), the value of the interest actually transferred is irrelevant. §2519 taxes the value of the remainder, not the transferred income interest. What is relevant under §2519 is the value of the remainder; which, incidentally, the spouse never owned and is not empowered to transfer. It is this value that §2519 taxes. The interest that is actually being transferred is never taxed under §2519; but, instead, is taxed under §§2501/2511, arguably after application of §2702; which, as noted, may be but a minor concern after application of the 5&5 exception and the use of any available unified credit.

At the May 2000 ALI-ABA Seminar, George Masnik opined that §2519 was probably not a problem here; rather, the transaction would be viewed as a withdrawal followed by a recontribution, and not a disposition of the income interest.

I believe that §2702 is possibly applicable to the transfer of the lapsed right to income for the year of the lapse, to the extent exceeding the 5&5 harbor, and that §2519 might technically cause the spouse to be treated as having made a gift of the entire non-income interest. Not a pretty picture at first blush. The reality, however, may be that the impact of §2702 will in most cases be mitigated by the 5&5 exception, and that the courts and the IRS will be reasonable in applying §2519 (which is to say they will not apply it); but it is really too early to tell. Until these issues are resolved, I advise making the right to the income non-lapsing! That should cure the problem.

ARTICLE 2
Spousal rollovers

A spouse who is a beneficiary of a participant’s interest in a QP, tax sheltered annuity or IRA, may rollover the inherited interest; or, in the case of an IRA, treat it as his or her own[19] (which amounts to the same thing), even where death was after the participant’s RBD. For purposes of this portion of the material, I will use the word spousal rollover to include the situation where the spouse elects to treat an IRA as his or her own. The proposed regulations on the subject are worth reviewing:

Q- . May an individual's beneficiary elect to treat such beneficiary's entire interest in the trust upon the death of the individual (or the remaining part of such interest if distribution to the beneficiary has commenced) as the beneficiary's own account?

A- .(a) In the case of an individual who died before January 1, 1984, the provisions of §1.408-2(b)(7)(ii) (as in effect on December 31, 1983) continue to apply to the distribution of such individual's account. Thus, any beneficiary (whether or not the beneficiary is the individual's surviving spouse) may treat his interest in such individual's account as the beneficiary's own account in accordance with §1.408-2(b)(7)(ii), regardless of whether or not distribution to the beneficiary has commenced.

(b) In the case of an individual dying after December 31, 1983, the only beneficiary of the individual who may elect to treat the beneficiary's entire interest in the trust (or the remaining part of such interest if distribution thereof has commenced to the beneficiary) as the beneficiary's own account is the individual's surviving spouse. If the surviving spouse makes such an election, the spouse's interest in the account would then be subject to the distribution requirements of section 401(a)(9)(A), rather than those of section 401(a)(9)(B). An election will be considered to have been made by the surviving spouse if either of the following occurs: (1) any required amounts in the account (including any amounts that have been rolled over or transferred, in accordance with the requirements of section 408(d)(3)(A)(i), into an individual retirement account or individual retirement annuity for the benefit of such surviving spouse) have not been distributed within the appropriate time period applicable to the decedent under section 401(a)(9)(B), or (2) any additional amounts are contributed to the account (or to the account or annuity to which the surviving spouse has rolled such amounts over, as described in (1) above) which are subject, or deemed to be subject, to the distribution requirements of section 401(a)(9)(A). The result of such an election is that the surviving spouse shall then be considered the individual for whose benefit the trust is maintained.[20] [Emphasis added.]

2.1 Is a Minimum Required Distribution (MRD) Due in the Year of a Participant’s Death, if Death is After the RBD? Yes.

The fact that the Participant dies during the year will ordinarily have no effect on the obligation to make the MRD for the year. Once the RBD has been reached, distributions under the rule are to continue “at least as rapidly as under the method of distributions being used under subparagraph (A)(ii)[21] as of the date of his death.”[22] This would ordinarily require a distribution no later than December 31 of the calendar year of death, if death is after the RBD. If a participant, who intended taking the MRD at year-end, dies on December 30, it is unlikely that anyone will be in the proper state of mind, or even have the authority, to make a timely distribution the next day. However, this could be true of any one of a number of other tax deadlines as well (including personal income tax), so there is no presumptive reason to doubt the conclusion suggested, even if the result may be draconian in operation.

MH confirmed that a MRD is due by December 31 of the year of death after the RBD (if not made during life), but noted that the IRS does have authority to waive the 4974(a) excise tax if it finds reasonable cause for the shortfall.[23]

One solution, to corrupt an old Chicago voting adage, would be to take your MRD’s early and often.

2.2 If the Participant Has Passed the RBD, But the Participant’s MRD Was Not Made in the Year of Death, While the Participant Was Alive, Can a Spouse Beneficiary Rollover the Participant’s Entire Account Balance Including the Amount That Should Have Been Distributed Had the Participant Lived? Technically no, but the Service apparently thinks it is okay.

It is not entirely clear to me whether the spouse must deduct from the amount rolled over in the year of death of the participant the amount that would have been due had the participant lived until December 31. On balance, I believe that a deduction is technically required.

Treas. Reg. §1.402(c)-2 Q&A 7(a) provides in part:

A-7. (a) General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. . . . [24] [Emphasis added.]

Treas. Reg. §1.402(c)-2 Q&A 7(a), quoted above, suggests to me that to the extent an amount is required to be distributed by December 31 of the year of the participant’s death, after the participant’s required beginning date (RBD), as a result of the minimum distribution rules, this amount cannot be rolled over by the surviving spouse, even if the rollover takes place prior to December 31 of the year of death, and even though the minimum distribution would not otherwise have been required prior to December 31, had the participant lived so long. In reiteration of this notion, it is worth noting in this context that the Roth regulations prevent a Roth rollover in the year prior to the RBD unless the participant deducts from the rollover the MRD for the first distribution calendar year (which isn’t even due to be paid until the following year!).[25]

Arguably, Treas. Reg. §1.402(c)-2 Q&A 7(a) conflicts with the first sentence of Treas. Reg. §1.408-8, Q&A A-4(b):

“(b) In the case of an individual dying after December 31, 1983, the only beneficiary of the individual who may elect to treat the beneficiary's entire interest in the trust (or the remaining part of such interest if distribution thereof has commenced to the beneficiary)[26] as the beneficiary's own account is the individual's surviving spouse. . . . “[27] [Emphasis added.]

Unfortunately, this regulation antedates the MRD rules.

It is important to note that (1) if the participant’s life is being recalculated, and (2) if the rollover takes place in the year after death, and (3) if a minimum required distribution (MRD) is required to be made based on the status of the account prior to the rollover, then a very large minimum distribution may be required before the account can be rolled over.

Requiring a MRD prior to the rollover appears to me to fit the letter and spirit of the law, even if the result is not taxpayer friendly. However, the informal unofficial position appears to be that since the legislative history favors spousal rollovers, the spouse can rollover the participant’s last MRD.

In summary, if a participant dies after the RBD, then a MRD will ordinarily be due by December 31 of the year of death. Although as a technical matter MRDs cannot be rolled over, MH clearly indicated that the entire account, including the MRD in the year of death, can be rolled over. (In fact, it may be deemed to have been rolled over if not taken. See below.)

2.3 Assuming That A Spouse Beneficiary Is Allowed To Rollover The Participant’s Final MRD, And The Spouse Does Nothing, And The MRD Is Not Made, Is The Spouse Deemed To Have Elected Rollover Treatment? Yes, if the premise is correct.

The Deemed Election Rule. If an MRD for the year would have been due if a spousal rollover had not been elected, but that MRD was not made, the proposed regulations save the day (?) by providing that an election by the spouse to treat the IRA as his or her own will be deemed to have been made,[28] the effect of which is that no MRD is due after all.

Prior to the RBD, a minimum distribution will never be required before at least five years have expired[29]; and, if the designated beneficiary is the Participant's spouse, distributions need not begin any earlier than the end of the calendar year in which the participant would have attained 70½ (or the end of the calendar year following the year of death, if later).[30] So, it may be awhile before the deemed election rule applies. But what if the participant has passed the RBD, dies on December 31 on the way to the bank to withdraw the MRD for the year, and the bank closes before the spouse can make the withdrawal? The concern here is not the IRC §4974(a) excise tax; rather, the concern is that the spouse may have just innocently elected to treat the IRA as his or her own.

Having the IRA treated as the spouse’s own is usually a desirable result, but not always. For example, if both spouses were over 70½, but the decedent was much younger, a deemed rollover might not be the best course. Likewise, if the spouse were younger than 59½ and needed to take a distribution, a deemed rollover followed by a distribution would result in the imposition of the 10% premature distribution tax. Finally, and perhaps most important, a spouse who has rolled over a distribution would be precluded from making a qualified disclaimer under IRC §2518, if the “deemed” rollover were considered the exercise of dominion and control or the acceptance of benefits under the IRA. However, as will be discussed later, we have reason to believe that the IRS is not presently disposed to press this issue too hard.

Under my analysis, the spouse could not have rolled over the MRD anyway, so there could be no deemed election,[31] but if MH is right then I am wrong about this. If so, it follows that the spouse has fallen under the deemed rollover rule. MH suggests that the spouse might take some action, such as paying the excise tax and applying for the waiver, in order to counter the application of the deemed rollover rule. At the 2000 ALI-ABA Seminar, MH suggested that a waiver application would be a prerequisite for escaping deemed rollover treatment.

The planning point is to take the MRD early each year.

2.4 Can A Spouse Make A Rollover If The Spouse Has Previously Taken Distributions Prior To Age 59½ But Did Not Pay The Premature Distribution Tax? The PLRs are divided, but the IRS apparently now thinks the answer is yes. If the situation is reversed, however, and the spouse fails to take a distribution that was required in the absence of a rollover, the spouse cannot claim that there was no rollover.

Can a spouse elect by his or her actions to be treated as a beneficiary, thereby precluding a rollover? MH implied that she thinks the election is one way only: that if the spouse takes action that is inconsistent with beneficiary treatment (and is consistent with rollover treatment) that the spouse cannot backtrack and be treated as a beneficiary. On the other hand, she clearly implied that the spouse can take action that is consistent with beneficiary treatment, without waiving the right to subsequently make a rollover. This is one time I agree with MH. Unfortunately, her interpretation of the rules is contrary to the position taken in two PLRs discussed below.[32]

There are two private letter rulings holding that if a spouse who is under 59½ takes a distribution from an IRA without paying the §72(t) 10% early withdrawal penalty tax (which would not be applicable if the spouse were a beneficiary), the spouse is deemed to have elected beneficiary status.[33] Despite this, I understood MH to say that this is an evolving area, and that she does not think that there is such thing as an election to either (a) make a rollover or (b) forever forgo the option; which implies to me that she is not in full agreement with the cited PLRs. Rather, the election is made when the spouse takes some affirmative act that would be inconsistent with the MRD rules unless rollover treatment had been elected. My clear impression was that MH did not see much that could prevent a spouse from making an election, deemed or otherwise, to treat the IRA as his or her own; and that the problem was the other way around: if the spouse takes action that indicates that a rollover election has been made, the spouse cannot go back and claim that no rollover took place.

To recapitulate the above, MH made it clear that the spouse could take the MRD for the participant in the year of death, and then rollover the next year, even if both spouse and participant are passed 70½. At the ALI-ABA 2000 Seminar, MH reconfirmed the IRS ruling position on this point was now favorable to the taxpayer. MH sees the problem as being where a spouse fails to take a distribution that is required in the absence of a rollover, and then later tries to treat the IRA as if no rollover took place. As indicated above, she is of the opinion that the reverse of this fact pattern is not where the problem lies.

2.5 How Long May a Spouse Wait Before Making a Spousal Rollover? There is no known published time limit, but that does not mean that there is none, and the IRS is now suggesting that if the spouse if over 70½ the spouse must rollover within a year if the spouse wishes to begin a new life expectancy period!

How long may a spouse wait to rollover? We don’t know. Perhaps there is no limit. This question is somewhat related to the question of whether or not a spouse who has taken a pre-59½ distribution without paying a premature distribution penalty tax may subsequently rollover.

Of all of the pronouncements that issued from MH at the 2000 ALI-ABA Seminar, perhaps the most startling and disturbing was an opinion, given out of the blue, that although a spouse may have an unlimited time to rollover, the spouse has a limited time to rollover if the spouse wishes to use the joint life expectancy method. This pronouncement is not supported by anything written. If the spouse elects to treat the IRA as his or her own, then it would seem that the MRD rules would be applied without regard to the source of the IRA, and I can see no logical reason why the joint life expectancy method would not be available, but I very clearly heard MH say that if the rollover was more than a year after the year of death, and if the spouse was over 70½, the joint life expectancy payout method is unavailable! Merv Wilf says that MH’s position is the correct one, but no one, including Merv, has cited any authority whatsoever for the conclusion. And indeed there is none.

2.6 What is the Required Beginning Date For a Spouse Who is Over 70½ at the Time a Spousal Rollover is Made, If The MRD For The Participant Was Made In The Year Of The Rollover? December 31, of the year following the rollover.

The proposed regulations do not address the question of what the rollover RBD is for a spouse who makes a rollover after the spouse’s normal RBD has passed. This question is relevant because its answer directly affects the solution to the next three questions: (1) When is the first MRD required to be made? (2) When does the spouse have to have a designated beneficiary in order to qualify for a joint life expectancy MRD payout? When is the spouse’s life expectancy to be first determined, assuming no recalculation: the calendar year before the spouse’s regular RBD, or the calendar year of the rollover RBD?

These issues were treated in PLR 9534027. Both the decedent, A, and his wife, B, were past the normal RBD, when A died in 1994. A had already taken the MRD for 1994 prior to his death. B was A’s beneficiary. B planned to roll over A’s IRA in 1995 into three separate IRAs, simultaneously designating a different child as the beneficiary of each. Prior to the rollover, B would take the MRD using the method of distribution in effect at A's deaths. The PLR said that the first distribution was due in 1996, and would be based on the joint life expectancy of B and whichever child was the beneficiary of the particular IRA. (This makes sense because the distribution can be made based on the December 31, 1995 balance, consistent with the general rule for valuation.)

The entire balance credited to Individual A's IRA is to be transferred in 1995 from Individual A's IRA to Individual B's IRAs. Accordingly, with respect to ruling request three, for purposes of section 408(a)(6) of the Code and the income tax regulations thereunder, Individual B's required beginning date for her IRAs will be December 31, 1996.

. . . [I]t is a reasonable interpretation of the minimum distribution requirements . . . that Individual B's three children may be treated as designated beneficiaries for purposes of section 408(a)(6) of the Code, since they will have been designated before Individual B's first required distribution date of December 31, 1996.[34]

In PLR 9311037, both A and his spouse, B, were passed the normal RBD. A died in 1991, designating B as his sole beneficiary. B rolled over A’s IRA in 1991, after the MRD for A had been made for that year. B designated new beneficiaries. The ruling held that the first MRD for the rollover account was December 31, 1992, and that if B had a designated beneficiary by that date, the MRD could be computed using the joint life expectancy method.

With respect to ruling request four, once you are treated as the individual for whose benefit the IRA is maintained, there is no longer an IRA maintained for the benefit of Individual A. As stated above, section 1.401(a)(9)-1, Q&A G-2 of the proposed regulations provides that the 1991 amount rolled over to your IRA does not affect any required minimum distribution from your IRA for 1991. Because your account balance in the preceding calendar year (as of December 31, 1990) was $0.00, no distribution was required from your IRA in 1991, and no excise tax under section 4974 of the Code will be imposed with respect to your IRA, for a failure to make distributions for any calendar year prior to 1992. [35]

So, if PLRs 9534027 and 9311037 reflect the law, then if both the spouse and the decedent were passed the normal RBD, the spousal RBD will be December 31 of the calendar year following the rollover; the spouse’s MRD must be made by that date; the decedent’s MRD is presumably required to be made in the year of the rollover; and. if the MRD of the spouse is to be determined under the joint life expectancy method, there must be a designated beneficiary by that date. Presumably, the spouse’s age for MRD purposes is the spouse’s age as of his or her birthday in the year following the rollover, although this issue was not directly addressed in PLR 9534027. (The alternative would be to take the spouse’s age on her normal RBD, and to subtract one for each intervening year, in the absence of recalculation.)

2.7 What is the Required Beginning Date For a Spouse Who is Over 70½ at the Time a Spousal Rollover is Made If The MRD For The Participant Was Not Made In The Year Of The Rollove? December 31 of the year of death, according to MH.

As noted elsewhere in this article, by not taking out the decedent’s MRD for the year of death, the spouse is deemed to have elected to treat the IRA as his or her own. By virtue of this rule, the Service, in effect, permits a spouse to rollover the MRD for the year of death of a participant who was past the RBD. If the spouse is not yet 70½, then it follows that no MRD is paid in that year, which is certainly a boon. But what if the spouse is over 70½ at the time of the deemed rollover? The PLRs suggest that the spouse’s RBD for rollover purposes is December 31 of the calendar year following the rollover, as above explained. And if so, there would be no MRD for the year of death, even if the participant was passed the RBD. However, in PLRs 9534027 and 9311037 the rollovers were made in the year after death, and the MRD for the participant was in fact made in the year of death, prior to the rollover; and thus, these rulings did not address what would happen if the MRD for the participant was rolled over.

I am skeptical about the notion that the spouse can rollover the MRD otherwise due for the year of the rollover, because the result is contrary to the regulation that prohibits rollovers of MRDs. I of course welcome the IRS liberal interpretation of the spousal rollover rule as allowing a rollover of the participant’s MRD. But there are implications to any theory which supports the IRS position, and one implication that is inescapable is that there is no MRD at all in the year of the rollover because the rollover account had a zero value in the preceding valuation calendar year.

Lest we be too hopeful that logic will prevail, MH, at the 2000 ALI-ABA Seminar, said that if both spouses were over 70½, the spouse would have to take out a MRD based on the spouse’s life expectancy for the year of death!

This corrects one anomaly and creates another, but at the expense of logic and theory —a practice that unfortunately is all too common in this particular area of IRS pronouncements. Shall I explain? Logical would be to withdraw the decedent’s MRD for the year —in effect not rolling it over. Less logical, but only slightly, would be to allow the rollover, require that an MRD be made the first year, but base the MRD on the method in effect at the participant’s death. Least logical of all would be to base the MRD in the year of rollover on the spouse’s choice of beneficiary. And there is more than logic at issue.

It is one thing to expect the decedent to take MRDs early and often, and to have the good sense not to die late in the year without first satisfying 401(a)(9), but if death is on December 31, and the MRD was not previously satisfied, the poor bereaved spouse will be deemed to have rolled over the account. And what is worse, the spouse will probably be stuck with the single life expectancy payout method, unless the spouse completes a beneficiary designation form before the end of the year of death, which in the example probably means before the funeral, before the decedent has even been properly planted.

The final planning point, if planning under present circumstances can possibly be considered a serious option, would be to determine who will be the spousal rollover designated beneficiary, compare it to the method in effect at the decedent’s death, and take the MRD before or after the rollover, depending on which is most advantageous.

ARTICLE 3 COMMUNITY PROPERTY ISSUES

3.1 Does IRC §408(g) Compel an IRA Owner to Ignore the State Law Ownership Interest of a Spouse or Former Spouse For Federal Income Tax Purposes? Yes(?).

In PLR 8040101 a taxpayer asked the IRS to rule on the following issues:

“1. For purposes of section 408 of the Internal Revenue Code, should the two individual retirement accounts in the name of Taxpayer B be classified as community property in which the decedent had an individual one-half interest?

“2. When the judgment of possession in the succession is rendered recognizing the decedent's eight brothers and sisters and one niece as her testamentary legatees and as such entitled to ownership of an undivided one-half interest in the subject individual retirement accounts, can Bank C, as the custodian of said accounts, distribute one-half of the funds contained herein to the legatees?

“3. Upon receipt of these funds by said legatees, are these funds considered ordinary income to the recipients?

“4. Does this transfer of funds to the legatees of the decedent constitute a taxable distribution to Taxpayer B?”

The IRS ruled as follows:

“It follows, in the instant case, that the classification of the two IRAs as community property is clearly a matter to be determined under the laws of State D. Therefore, in response to ruling request 1, we accept your determination that the two IRAs constitute community property under the laws of State D in which Taxpayer A had an undivided one-half interest.

“With regard to ruling request 2, we conclude that Bank C, as trustee of the IRAs, may properly distribute one-half of the funds in the IRAs to Taxpayer A's legatees pursuant to the judgment of possession in Succession S recognizing the decedent's eight brothers and sisters and one niece as her testamentary legatees and as such entitled to ownership of an undivided one-half interest in the IRAs.

“With reference to ruling requests 3 and 4, section 408(d)(1) of the Code provides that any amount paid out of an individual retirement account or under an individual retirement annuity shall be included in gross income by payee or distributee, as the case may be, for the taxable year in which the payment or distribution is received.

“Therefore, in respect to ruling request 3, we conclude that upon payment of these funds by Bank C to Taxpayer A's legatees pursuant to the judgment of possession in Succession S, these amounts will be includible in the gross income of the recipients as required by section 408(d)(1).

“Accordingly, in response to ruling request 4, we conclude that the distribution of these amounts to Taxpayer A's legatees does not constitute a taxable distribution to Taxpayer B because he is not the payee or distributee of these amounts under section 408(d)(1).”

In Bunney v. Commissioner, 114 TC 17 (2000), the trial court ordered the taxpayer’s IRA “to be divided equally between the parties.” Does anyone other than President Clinton (what does “is” mean) really believe that such an order fails to comply with §408(d)(6), which provides:

“(6) Transfer of account incident to divorce. The transfer of an individual's interest in an individual retirement account or an individual retirement annuity to his former spouse under a divorce decree or under a written instrument incident to such divorce is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.”

The taxpayer husband withdrew the interest belonging to his former spouse and conveyed it to her himself. The Tax Court held that the withdrawn proceeds were taxable to the husband.

Would the result have been different if the taxpayer had instead directed the IRA custodian (husband’s agent![36]) to transfer the spouse’s interest to the spouse? If so, the case was wrongly decided, because it is a fundamental tax principal (assignment of income) that the parties should not be able to decide, after the divorce, who will be taxed on the IRA.

Of course, the real reason the case is of interest to estate planners of community property is because of the court’s statements that 408(g) is to be given literal application. The court is free to interpret 408(g) however it chooses, and since the statute says that community property laws are to be disregarded for income tax purposes, a strict constructionist approach is certainly legitimate, even if not compelled. My quarrel is with the interpretation that “to be divided” is to be distinguished from “is hereby divided.”

The issue was framed by the Tax Court as follows:

We pass for the first time on the question of whether one-half of community funds contributed to an IRA account established by an IRA participant are, upon distribution, taxable to the participant's former spouse by virtue of the fact that the former spouse has a 50-percent ownership interest in the IRA under applicable community property law. Section 408(g), as discussed below, provides explicitly that section 408 (the statutory provision governing IRA requirements and the taxability of IRA distributions) “shall be applied without regard to any community property laws”. Thus, at first blush, it appears that the answer to our question is that the husband is taxable on 100-percent of the distribution notwithstanding the fact that his former wife owned and was entitled to receive 50 percent of the distributed proceeds. As petitioner observes, however, the Commissioner administratively has recognized that section 408(g) does not preclude taking community property rights into account in allocating the tax consequences of IRA distributions. See Priv. Ltr. Rul. 80-401-01 (Jul. 15, 1980) (distribution of decedent's community property interest in surviving spouse's IRA is taxable to decedent's legatees). But see Priv. Ltr. Rul. 93-440-27 (Aug. 9, 1993) (distribution of wife's community property interest in husband's IRA under a separation agreement is taxable to husband).[37] Additionally, the courts of at least two community property States have concluded that section 408(g) does not preempt recognition of community property rights in an IRA for State law purposes.[38] See In re Mundell, 857 P.2d 631, 633 (Idaho 1993) (community property interest in wife's IRA is includable in husband's estate); Succession of McVay v. McVay, 476 So. 2d 1070, 1073-1074 (La. Ct. App. 1985) (IRA to be accounted for in division of community property at divorce).[39] [Emphasis added.]

* * * *

The theory for the holding was articulated in straightforward fashion:

Recognition of community property interests in an IRA for Federal income tax purposes would conflict with the application of section 408 in several ways. As an initial matter, an account imbued with a community property characterization would have difficulty meeting the IRA qualifications. Section 408(a) defines an IRA as a trust created or organized “for the exclusive benefit of an individual or his beneficiaries”. (Emphasis added.) An account maintained jointly for a husband and wife would be created for the benefit of two individuals and would not meet this definition. See Rodoni v. Commissioner, 105 T.C. 29, 33 (1995) (“as its name suggests, the essence of an IRA is that it is a retirement account created to provide retirement benefits to “an individual”).

Secondly, recognition of community property interests would jeopardize the participant's ability to roll over the IRA funds into a new IRA. Section 408(d)(3)(A)(i) provides that distributions out of an IRA “to the individual for whose benefit the account *** is maintained” are not taxable under section 408(d)(1) if the entire amount received is paid into an IRA “for the benefit of such individual” within 60 days. (Emphasis added.) The rollover of a community-owned IRA would doubly fail because both the distribution and contribution would involve two persons.

Thirdly, recognition of community property interests would affect the minimum distribution requirements for IRA's. Section 408(a)(6) requires that distributions from an IRA account meet the requirements of section 401(a)(9). Among those requirements is that the individual for whom an IRA is maintained withdraw the balance in the IRA or start receiving distributions from the IRA by April 1 of the year following the year in which such individual reaches 70½. See sec. 401(a)(9)(c). Recognition of a nonparticipant spouse's community property interest in the IRA might require the age of the nonparticipant spouse to be taken into account in determining the commencement date for the required distributions.

In addition, treating a nonparticipant spouse as a 50-percent distributee would create an asymmetry. Section 219(f)(2) provides that the deductibility of a contribution to an IRA is to be determined without regard to any community property laws. See Medlock v. Commissioner, T.C. Memo. 1978-464 [¶78,464 PH Memo TC]. Section 408(g) appropriately balances that provision by disregarding community property laws when the IRA funds are later distributed. These sections work in tandem to insure that an IRA participant who lives in a community property State is treated as both the sole contributor and the sole distributee of IRA funds.

In Powell v. Commissioner, 101 T.C. 489, 496 (1993), we indicated that the distribution of a community property interest in a retirement plan is taxed one-half to each spouse except where Congress has specified otherwise; e.g., in sections 219(f)(2), 402(e)(4)(G), and 408(g). In Karem v. Commissioner, 100 T.C. 521, 529 (1993), we held that a pension distribution subject to section 402(e)(4)(G) was taxable entirely to the participant even though his former spouse was considered a one-half owner under State community property law. Unlike the taxpayer in Powell, the taxpayer in Karem had elected the multi-year averaging method then available under former section 402(e) for computing the tax due [pg. 158] on lump-sum distributions. As a result, the distributions were subject to former section 402(e)(4)(G), which provided that “the provisions of this subsection *** shall be applied without regard to community property laws.” Consistent with these opinions, we hold that section 402(g) precludes taxation of petitioner's former spouse as a distributee in recognition of her State community property interest in petitioner's IRA's. Accordingly, the distributions from petitioner's IRA's are wholly taxable to petitioner.

* * * *

The part of the case that most troubled me was the finding that 408(d)(6) was inapplicable. Recall the facts:

Petitioner was formerly married. He and his former spouse were granted a Judgment of Dissolution of Marriage (dissolution judgment) on August 17, 1992. The dissolution judgment stated: “IT IS FOUND that all of MICHAEL BUNNEY'S retirement valued at approximately $120,000 was accumulated by the parties prior to their separation and ordered to be divided equally between the parties.”

Petitioner's retirement savings consisted of several IRA accounts. The money used to fund petitioner's IRA's had been community property. During 1993, petitioner withdrew $125,000 from his IRA's and deposited the proceeds in his money market savings account. During the same year, petitioner transferred $111,600 to his former spouse in a transaction in which he acquired her interest in the family residence. Petitioner reported only the remaining [pg. 156] $13,400 of the distributions on his 1993 Federal income tax returns.[40] [Emphasis added.]

These facts did not result in a good 408(d)(6) order, however:

Petitioner alternatively contends that the distribution and transfer of his IRA proceeds pursuant to the dissolution judgment was a nonrecognition event for him under section 408(d)(6).[41] We disagree.

There are two requirements that must be met for the exception of section 408(d)(6) to apply: (1) There must be a transfer of the IRA participant's “interest” in the IRA to his spouse or former spouse, and (2) such transfer must have been made under a section 71(b)(2) divorce or separation instrument.

The transaction at issue does not meet the first requirement. Petitioner did not transfer any of his interest in his IRA's to his former spouse. Rather, he cashed out his IRA's and paid her some of the proceeds.[42] The distribution itself was a taxable event for petitioner that was not covered by section 408(d)(6).[43] See Czepiel v. Commissioner, T.C. Memo. 1999-289 [1999 RIA TC Memo ¶99,289].

In my opinion, the divorce decree transferred the ownership to the spouse as a matter of state law, no matter what the parties did, pretended to do, or agreed to do afterwards. Naturally, there might be some ministerial acts that either party might need to perform, as a practical matter, to carry out the terms of the decree, but these ministerial acts(in this case, delivery) are the incidents of the transfer, and not the transfer itself. The transfer itself was made by the court, in its decree. I assume that wife could have taken the decree to the bank and forced it to honor it, if necessary, with or without the cooperation of the husband.

The Tax Court held that the taxpayer was not liable for the negligence penalty because the issue was one of first impression. The language used strongly suggests that the Tax Court will disagree with the IRS administrative position as applied to other situations, for example where the heirs of a predeceased spouse of an IRA owner take a distribution of the decedent’s community property interest in the surviving spouse’s IRA.

As to the contested adjustment, this Court has not previously addressed the issue of whether section 408(g) precludes recognition of a spouse's community property interest in allocating the taxability of an IRA distribution. While we find the text of section 408(g) to be clear and unambiguous on its face, we bear in mind that the Commissioner has interpreted section 408(g) administratively in a manner that is inconsistent with our holding herein. Under these circumstances, we conclude that petitioner had a reasonable basis for his return position that one-half of his IRA distributions were allocable to his former spouse.[44] Accordingly, we hold the negligence accuracy-related penalty is inapplicable to the taxes and penalties imposed on one-half of petitioner's 1993 IRA distributions.[45] [Emphasis added.]

* * * *

3.2 If the Beneficiary is Not the Spouse, But the Spouse’s Heirs (or Estate!) Will Have an Interest in the IRA at the IRA Owner’s Death Under the Community Property Laws, Must the Heirs (or Estate!) be Treated as Beneficiaries? I have no idea, but it is possible.

Query, to what extent are the beneficiaries of the nonparticipant spouse (under the community property laws) treated as beneficiaries for MRD purposes? It seems to me reasonable for the participant’s beneficiary designation to track state law, so that when the participant dies, the plan proceeds will pass in accordance with the designation, and not just partially in accordance with it. The IRS has not even remotely begun to contemplate this issue, nor have any of the commentators of whom I am aware; but I think it is time that we give thought to this issue.

If the nonparticipant spouse dies prior to the RBD, and someone other than the surviving spouse is entitled to the decedent’s community interest (e.g., the “estate,” worst case), then, on the participant’s RBD, is it time to trot out §408(g)? My own opinion is that the separate account rules will operate de facto to solve even this pre-RBD problem, since we know that some beneficiaries can choose the 5-year method, and others may choose the life expectancy method.[46]

The analysis post-RBD slightly more involved. If the beneficiary of the participant’s IRA is the spouse, and the spouse dies after the RBD, the MRD problem is cured:

If the designated beneficiary whose life expectancy is being used to calculate the distribution period dies on or after the applicable date, such beneficiary's remaining life expectancy will be used to determine the distribution period whether or not a [new] beneficiary with a shorter life expectancy receives the benefits.[47]

But what if the participant cleverly names a child as beneficiary, post RBD. Can we ignore the spouse’s interest, or the fact that on the spouse’s death the spouse’s estate will be the beneficiary? First of all, we note that if the spouse outlives the participant we may have a different situation, and perhaps we should treat that as a contingency. If the nonparticipant spouse (who is not the participant’s beneficiary) predeceases the participant, then perhaps we have the equivalent of a change of beneficiary, with the spouse’s estate being the beneficiary of a part of the account, destroying for all time the right of the participant to ever use the joint life expectancy method (because of the multiple beneficiary rule). Think about it.

Eventually someone besides me is going to carry the logic forward. It would be nice if the IRS would simply issue a regulation giving us a pass on this one, but I don’t see it happening. More likely, the issue will just be ignored, and that’s okay with me, but it doesn’t mean that the issue is not out there lurking. Recall that before Allard v. Frech[48] most practitioners simply ignored the nonparticipant’s interest altogether. Well, so far as I know, you heard it first here.

3.3 Is a Nonprorata Partition of a Community Property IRA Following the Death of a Spouse Treated as a Taxable Sale or Exchange for Income Tax Purposes? No.

Two recent private letter rulings address VERY favorably the issue of whether a nonprorata partition of a community property IRA following the death of a spouse is treated as a taxable sale or exchange for income tax purposes.[49] Moreover, in each case the surviving spouse was not only permitted to allocate the entire IRA to herself tax free, but was then permitted to rollover the proceeds following the allocation. Significantly, neither ruling addressed MRD issues, such as whether the power to freely allocate the IRA proceeds among various potential beneficiaries would have caused the beneficiaries to have been unascertainable or otherwise ineligible for the life expectancy method of payout.

In PLR 199912040 the decedent died after his RBD. He left his IRA to his revocable living trust. All of his property was community property. The trust provided for a pecuniary gift to children, followed by a division into a survivor’s share and a decedent’s share. The decedent’s share remaining after satisfaction of the pecuniary gifts was to be used to fund a credit shelter trust, with the remainder going to the survivor’s share. The wife (the survivor) was the trustee of all of the trusts. The trustee had the power to revoke or amend the survivor’s trust. State law and the trust instrument permitted nonprorata allocations among the trusts. The ruling was favorable on all points. The nonprorata division of the IRA was not a taxable event because it was authorized by state law; and, moreover, the spouse was free to rollover amounts she elected (as trustee) to allocate to the survivor’s share.

PLR 199925033 is an even more important ruling. A died. He was survived by his wife B. A named a revocable living trust as beneficiary of his IRA. All the property in the IRA was community property. A and B were co-settlors of the trust. At A’s death, B became the sole trustee. At A’s death, the trust was to be divided into a survivor’s trust and a credit shelter trust. B was given the power to make nonprorata allocations among the shares and subtrusts. B had the power to revoke or amend the survivor’s trust. The ruling held that the nonprorata allocation of the right to receive the IRA benefits to the survivor’s trust was a nontaxable event; and that, further, B could rollover the proceeds thus allocated to her own IRA tax free.

These rulings send a very strong signal that the IRS is not predisposed to invoke §691 income tax recognition when the right to receive IRA or qualified plan distributions is subject to discretionary apportionment, even though the ultimate recipient is not entitled to the proceeds as a “matter or right.”

3.4 Can The Best of All Possible Worlds be Obtained By Disclaiming Into a Community Property Trust That Allows For Allocation Back to the Spouse or to a Bypass Trust, As Part of a Nonprorata Division of the Community Estate? Perhaps, but there are a number of as yet untested issues to consider.

Can we provide that if the spouse disclaims an interest in a community property IRA that the proceeds will pass to a joint trust, where they may be allocated nonprorata to (a) the spouse or (b) the bypass trust, in either case making a corresponding allocation elsewhere, so that the there is no shift in value or beneficial interest? I still have this question under advisement.

PLRs 199912040 and 199925033, discussed immediately above, would seem to bless this technique in the absence of a disclaimer, if the result is that the IRA is allocated to the spouse, who then makes a rollover. If a disclaimer is how we get there, then one must consider whether the result would be the same as where no disclaimer was involved. And whether the allocation is the result of a disclaimer or not, we still have to wonder whether we will be entitled to look-through treatment for the trust if a discretionary allocation is made to the bypass trust (rather than to the spouse). The problem is that if, after the disclaimer, there are still choices to be made about where the proceeds are going to finally lodge —which, after all, is the whole point of the exercise—, then someone must have the discretion to make that decision; and that raises problems both for look-through treatment and for qualification of the disclaimer, if, in the latter case, the person making the determination of where the proceeds are going is the disclaimant.

If the beneficiary designation provides that in the event of a disclaimer, the disclaimed assets pass to a bypass trust, then the likelihood that the beneficiaries will be treated as “identifiable” ought to be increased. On the other hand, even if discretion is present, if the oldest beneficiary is in all cases the spouse, who is identifiable, and the only uncertainty with respect to the spouse is whether the spouse will receive the benefit (a) outright, (b) as beneficiary of the bypass trust, or (c) as beneficiary of marital trust (perhaps).[50] Is that good enough to qualify for look-through treatment, if the proceeds end up in (b) or (c)? I don’t think we can say for sure.[51]

Complicating things still further is that a disclaimer is not qualified if the disclaimant can direct where the disclaimed proceeds will go. This can be a problem (albeit one that often goes undetected) whenever a fiduciary disclaims property over which the fiduciary has administrative power that can affect where the property will go. Instances are legion: specific property disclaimed out of the residue is a paradigm. Who gets what, if anything, if the fiduciary sells the property and replaces it with other property of like value; or sells the property and uses it to pay debts and expenses; or uses it to fund a pecuniary bequest; or allocates it under a pick-and-choose allocation clause, to name but a few imponderables? And if it is the fiduciary making the disclaimer, I am sure you can see the problem is not made less severe. Here, not only is the qualification of the disclaimer endangered, but look-through treatment under the MRD rules is also in jeopardy. Properly handled, the exercise of discretion should not affect, other than incidentally, the value of what is received by those who take as a result of the disclaimer; but whether or not what they take are the disclaimed benefits, or something of equivalent value, has to be an issue or the technique is of no help to us.

If a trust is involved, it may be easy to provide that if the disclaimant is a fiduciary, any discretionary powers over the trust will not be exercisable by the disclaimant. But if that is the case, will the proceeds qualify for rollover if the spouse lacked the power to require the allocation that was in fact made?

ARTICLE 4
Income TAX Issues

4.1 If a Pecuniary Bequest is Funded With the Right to Receive Distributions From an IRA or Qualified Plan, Will Income Tax be Accelerated? No.

Most estate planners have been brought up to recognize and fear sale or exchange treatment in the funding of pecuniary bequests, particularly where zero basis IRD is involved. This fear is in part because of authorities like Kenan v. Commissioner, 114 F.2d 217 (2nd Cir. 1940); Suisman v. Eaton, 15 F. Supp. 113 (D. C. Conn. 1935), aff'd per cur., 83 F.2d 1019 (2nd Cir. 1936); Rev. Rul. 55-117, 1955-1 C.B. 233; Rev. Rul. 60-87, 1960-1 C.B. 286; Rev. Rul. 56-270, 1956-1 C.B. 325; Rev. Rul. 66-207, 1966-2 C.B. 243; Rev. Rul. 82-4, 1982-1 C.B. 99. Cf. Rev. Rul. 67-74, 1967-1 C.B. 194; Rev. Rul. 72-295, 1972-1 C.B. 197; Rev. Rul. 90-3, 1990-1 C.B. 174 and Treas. Reg. §1.661(a)-2(f)(1), which all strongly suggest that if a pecuniary bequest or other debt or obligation of the estate is satisfied by distributing (funding with) the right to receive an item of income in respect or a decent, or any other item of appreciated property, gain will be recognized, as if there had been a taxable sale or exchange of the item in exchange for the extinguishment of the obligation. In light of PLRs 199912040 and 199925033 (neither of which involved funding a pecuniary bequest, admittedly), discussed above, should we “get over it”?

Although Rev. Rul. 69-486, 1969-2 C.B. 159 gives us a pass on gain recognition where the fiduciary is authorized to pick-and-choose for the purpose of funding ordinary residuary assets (as confirmed by PLRs 8119040 and 8029054), I worry that 691 could cause acceleration of income tax whenever there is an allocation of an IRD item that is not allocated as a “matter of right.” Treas. Reg. §1.661(a)-2(f)(1)[52] is, after all, fairly explicit about the matter.

Nevertheless, the IRS believes that §§402 and 408 trump §691 here, and so perhaps we have been overly concerned with this issue. MH confirmed at the 2000 ALI-ABA seminar that there was no constructive receipt rule applicable to IRAs and qualified plans (constructive receipt isn’t really the issue, but never mind that), and that therefore there is no tax until the amount is actually distributed,[53] even if the right to receive the benefits is transferred in satisfaction of a pecuniary gift.[54]

At the 2000 Seminar, Merv Wilf was adamant and categorical that there is absolutely no recognition of income when a pecuniary bequest is funded with the right to receive IRD from an IRA, because §§402(a) and 408(d)(1) provide the basis for the tax, and they do not apply prior to distribution. Of course, IRC §691 provides for the recognition of tax when IRD items are sold or exchanged, and IRA and QP benefits are clearly IRD, so the question is really whether §§402(a) and 408(d)(1) are exclusive, and in effect override §691. Apparently, the answer is that they are exclusive, which is very welcome news indeed.

ARTICLE 5
The Separate Account Rule

5.1 If A Participant Dies Prior To The RBD, Naming Children A, B & C As Beneficiaries, Do We Have To Use The Life Expectancy Of The Oldest Child For Purposes Of The MRD Rules? No, assuming each child has a separate share for accounting purposes.

The IRS has virtually conceded that where death is prior to the RBD, and where the beneficiary designation names more than one beneficiary, the separate account rule will operate and each beneficiary will be able to use his or her own life expectancy.[55] MH agrees with this as well, at least where a trust is not involved.

5.2 If A Participant Has an IRA With a Designated Beneficiary, and the Participant Transfers (Rollsover) a Part of that IRA After The RBD, and Names a Charity (for example) as Beneficiary of the Transferred IRA, Is the Original IRA Tainted? No.

The IRS confirmed at the 2000 ALI-ABA Seminar that an IRA owner could, after the RBD, (1) make a rollover or other transfer of a part of an IRA and (2) designate a nonqualifying beneficiary (a charity for example) of the new IRA, without tainting the old IRA’s beneficiary designation. Of course, the new IRA would lack a designated beneficiary, and it would be tainted.

ARTICLE 6
DISCLAIMERS

6.1 Can a Spouse Disclaim After a Deemed Rollover? Perhaps.

GM indicated at the 2000 ALI-ABA seminar that affirmative action on the part of the spouse would be “accepting benefits,” precluding a rollover, but an inadvertant deemed rollover alone would not necessarily preclude a subsequent disclaimer, depending on the facts.

6.2 Can a Disclaimer Take Place After a MRD Has Been Made? Yes.

At the 2000 Seminar, GM indicated that a disclaimer could be made after a MRD had been made. His authority by analogy was Treas. Reg. §25.2518-3(c) and §25.2518-3(d), Ex. 17, which allows for a pecuniary disclaimer following the withdrawal from an account. Care must be taken, however that one does not disclaim the income on what was withdrawn; or, viewed from a different perspective, one cannot accept the income from what was disclaimed.

6.3 Is A Disclaimer Treated As If The Disclaimant Predeceased The Participant, Or As If The Participant Changed The Beneficiary Immediately Prior To Death? The latter.

I see only two possible approaches: (1) A disclaimant is treated as having predeceased the decedent, either before or after the RBD, depending on whether the decedent survived the RBD.[56] (2) The participant will be treated as having changed beneficiaries in favor of the beneficiary of the disclaimed interest, immediately prior to the participant’s death.[57] I have written on this subject extensively before, and will not repeat my earlier comments here, other than to say that I favor, and the PLRs for the most part suggest, the second alternative. (The first alternative could be bad, if recalculation was in effect; but it could also be good, if recalculation were not in effect and if one is entitled to ignore the new beneficiary, which is the way the rule would operate if a primary beneficiary actually died after the applicable date.)

At the ALI-ABA seminar, MH stated that she (MH) views a disclaimer as a change of beneficiary. However, after applying this concept to the facts, MH made it apparent that what she has in mind is some sort of hybrid idea, that represents a third alternative in practice. See below.

Worse, the IRS continues to hint that the state law disclaimer scheme may affect the outcome. Most state law disclaimer statutes provide that in the absence of a contrary provision in the governing instrument, the disclaimant will be treated as having predeceased the decedent, for whatever difference that makes.

6.4 If a Spouse Disclaims Prior To The RBD In Favor Of Child, Do Distributions To The Child Have To Be Made Over the Spouse’s Life Expectancy, Or Over a Child’s Life Expectancy? Probably the latter, but . . . .

If participant P dies prior to the RBD, naming spouse S as the primary beneficiary and child C as the contingent beneficiary, what payout period applies if S disclaims in favor of C. MH told us clearly that she favors treating the disclaimer as a change of beneficiary by P. If P had changed his beneficiary from S to C prior to death, whose life expectancy would apply under the exception to the 5-year rule? C’s, of course. Nevertheless, MH said that in the example just posed, C would take using S as the measuring life!(?)

How can such an outcome be explained? The answer is that it can’t.[58] In order to reach the unfavorable tax result, the Treasury has to abandon any theoretical basis for the outcome, and for that reason, I doubt that the attempt will succeed. The correct answer is that under both state and federal law, C, as a result of the disclaimer, is the beneficiary for all purposes, and, therefore, where death is prior to the RBD, C is the measuring life (not MH’s 1999 view).

If death is after the RBD the analysis should be different, admittedly. The reason is that the RBD fixed the ceiling on the payout period, but not the floor. A change of beneficiary after the RBD can shorten the payout period but not lengthen it. The life expectancy of a secondary or contingent beneficiary, following the death of the primary beneficiary after the RBD, is irrelevant. In fact, it is also irrelevant that the contingent beneficiary is not a human being. If a post-RBD disclaimer is treated as if P changed the beneficiary from S to C and then died, then S, being older, would serve as the measuring life, with recalculation applying or not, depending on what the rule would have been if P had changed beneficiaries during life. If the situation were treated as if S died after the RBD, and C takes by default, then if recalculation were in effect, we have a disaster. But MH, consistent with the few rulings we have on the subject,[59] was clear that a disclaimer is not going to be treated as if the disclaimant predeceased the person who takes as a result of the disclaimer. If that is correct, and I believe it is, then if the beneficiary of the disclaimer is an estate or a nonqualifying trust, there will be no designated beneficiary, and this will be true whether the disclaimer is before or after the RBD. However, it also follows that we ignore the life expectancy of the disclaimant if death is prior to the RBD, and we consider it after the RBD, but then, only insofar as it sets the outer limit for the payout period.

If, in the example given, P lives to the RBD, then what I believe happens is that the payout to C is measured by S’s life expectancy, if shorter (which we presume to be the case only if S is C’s parent), taking into effect the benefits or detriments of recalculation, if recalculation is in effect. MH would probably agree, but would apply the same rule to pre-RBD disclaimers, and that position cannot be correct.

At the 2000 Seminar, it was noted by one of the panelist, without comment from the IRS, that in PLR 200013041 a disclaimer was made by a surviving Husband pre-RBD, in favor of the children, the eldest of whom served as the measuring life, the Husband’s life expectancy being irrelevant.

ARTICLE 7
TRUSTS AS BENEFICIARIES

This is a subject that we wished would go away, but it won’t. There are simply too many instances where an estate planner is forced to use a trust as a beneficiary of an IRA or QP, or where a trust is simply the best alternative, despite some serious unresolved issues.

As a general rule, in order to use the joint life expectancy method during life after the RBD, or the life expectancy method (instead of the five year rule) after death prior to the RBD, all of the beneficiaries must, using the phraseology of the IRC, be “designated beneficiaries,” which basically means that each beneficiary must be a human being. For this purpose, however, certain contingent beneficiaries may be ignored.[60] Since an estate is not a human being, it is not a “designated beneficiary,” nor is a charity or other legal entity. Nevertheless, the beneficiaries of a trust can be treated as designated beneficiaries if the trust meets certain requirements set forth in the proposed regulations.[61]

The proposed regulations allow the beneficiaries of a trust to be treated as “designated beneficiaries” under rules that appear simple. That appearance is deceptive, however. To paraphrase the proposed regulations: “[A] trust itself may not be the designated beneficiary even though the trust is named as a beneficiary.”[62] Nevertheless, if the trust is named as the beneficiary, the human beings who are beneficiaries of the trust will be treated as designated beneficiaries under certain conditions:

(1) The trust must be valid under state law, or would be but for the fact that there is no corpus.

(2) The trust must be irrevocable or will, by its terms, become irrevocable upon the death of the employee.

(3) The beneficiaries of the employee’s interest under the trust must be identifiable from the trust instrument.

(4) Certain documentation (e.g., a copy of the trust itself or a certification of the terms and beneficiaries) must be provided to the plan administrator.[63]

(5) If death is after the RBD, then, depending on whether the trust agreement itself is delivered or whether a certification of the beneficiaries is delivered, the employee must “agree” that if the trust instrument is amended at any time in the future, the employee will, within a reasonable time, provide a copy of each such amendment, or provide a corrected certification, as the case may be. [64]

I am not too concerned with the D-5 and D-7 of the proposed regulations, referenced above. The real concern is applying the look-through rule to trusts to determine whether the beneficiaries of the trust are designated beneficiaries. And for that purpose, the E-5 Proposed Regulation is the problem.[65]

Note that the H-7 Proposed Regulation suggests that the look-through rule is not to be construed to require conduit treatment after the distribution to the trust is made. H-7 is explicit that an “estate or trust which receives a payment from a plan after the death of an employee need not distribute the amount of such payment to the beneficiaries of the estate or trust in accordance with section 401(a)(9)(B).”[66]

Most of the questions discussed below simply cannot be answered by reference to the proposed regulations. In many cases the PLRs are no help either. The answers, such as there are, are gleaned from private conversations with Treasury officials, who are speaking informally and unofficially. Some of the opinions are astonishing, contrary to any reasonable public policy respecting the collection of income taxes, and devoid of any common sense. This means, among other things, that you are not likely to figure out these rules on your own, because they are in some cases unfathomable. In virtually every case, if any leeway or choice is available, the IRS will consistently take the position most hostile to the taxpayer. The PLRs are very troubling too. They reflect a poor grasp of both the law and the issues, and this has led inevitably to greater and greater confusion.

* * * *

7.1 Do We Need Regulations To Authorize Us to Treat the Beneficiaries of a Trust as Designated Beneficiaries? Maybe not, prior to the RBD; probably so, after the RBD.

A proposed regulation has no more weight in court than that of a brief filed by the Commissioner:[67] Although a proposed regulation cannot be used by the IRS as a sword against a taxpayer, it can be used by the taxpayer as a shield against the IRS. The question here is whether we need regulations to treat the beneficiaries of a trust as designated beneficiaries. Does a reasonable interpretation of the statute allow us to treat the beneficiaries of a trust as designated beneficiaries?

Under 401(a)(9)(B)(iii)(I), the exception to the five year rule is explicitly made applicable if “any portion of the employee's interest is payable . . . for the benefit of . . . a designated beneficiary.[68] So, it seems clear to me that, at least in the case of distributions on account of death prior to the RBD, a distribution to a trust for the benefit of a human being ought to qualify, even in the absence of regulations.

This “for the benefit of” language is not found in the IRC in the case of a distribution after the RBD; so perhaps in that case regulations might (arguably) be necessary. Moreover, in the case of distributions after the RBD, IRC §401(a)(9)(A)(ii) provides that a trust is not qualified unless the plan provides that the entire interest of the employee “will be distributed, beginning not later than the required beginning date, in accordance with regulations, over the life of such employee or over the lives of such employee and a designated beneficiary.”[69] (Emphasis added.)

If one concludes that the beneficiaries of a trust can be treated as designated beneficiaries under a reasonable interpretation of the statute, IRC §401(a)(9), then the proposed regulations can be ignored, but the risk is there that final regulations will be issued someday that cannot be ignored, and by that time it might be too late to undo what has already been done, depending upon the effective dates involved. If one is relying on the proposed regulations, one can ignore all of the informal, unofficial IRS comments being made that have little or no support in the proposed regulations (and that includes most of what is discussed below). The same can be said of the PLRs, which are not binding in any event. Here too, the main concern is in anticipating what final regulations will say and when they will be effective; but that is anybody’s guess.

7.2 If a Spouse is Treated as a Beneficiary Under the Trust “Look-Through” Rule, Can MRDs From the Trust Be Postponed Until the Participant Would Have Been 70½, as Would Have Been the Case If No Trust Were Involved? Not if there are other beneficiaries of the trust.

Under the IRC, if death is prior to the RBD, and the designated beneficiary of a participant’s interest in an IRA or QP is the participant's spouse, then distributions need not begin any earlier than the end of the calendar year in which the participant would have attained 70½[70] (or, under the proposed regulations, the end of the calendar year following the year of death, if later[71]). The position of the IRS, as previously articulated in private letter rulings (not always with consistency), has been that this rule is inapplicable if a trust with multiple beneficiaries is involved. This position was reiterated in Rev. Rul. 2000-2:

Because B is not the sole beneficiary of the testamentary trust's interest in the IRA, the trustee elected to have the annual minimum required distributions from the IRA to the testamentary trust begin no later than December 31 of the year immediately following the year of A's death.[72]

Of course, the right of the other beneficiaries is “contingent” on the death of the spouse, but . . .

7.3 Can The Beneficiaries of a Testamentary Trust Qualify As Designated Beneficiaries? Yes, probably, despite technical issues.

The fact that the re-proposed regulations were not explicit on this subject is unfortunate, since a testamentary trust is not really a trust under state law until the decedent’s death.

According to MH, the IRS intended that the beneficiaries of a testamentary trust that is otherwise qualified would qualify as designated beneficiaries under the re-proposed regulations.

7.4 Who Is The Employee And Who Is The Plan Administrator Of An IRA, For Purposes Of The Notice And Delivery Requirements? Arguably the IRA owner is both, but the IRS thinks the employer is the trustee.

Although the preamble to the re-proposed regulations states that the regulations apply to IRAs, the body of the regulations refers only to employees and plan administrators, terms that are obviously inapplicable to an IRA. It is important to know who the plan administrator is because, before the beneficiaries of a trust will be treated as designated beneficiaries, certain notices must be given to and an agreement must be made with the plan administrator. If the IRA owner could notify him or herself, and also agree to notify him or her if the trust is amended, a lot more IRA beneficiary designations naming trusts will be qualified than otherwise.

Support for the notion that the IRA owner ought to be treated as the administrator can be found in a couple of PLRs, which, unfortunately, weren’t dealing with this exact issue. The notion makes sense, because the IRA owner is the person primarily responsible for complying with the MRD rules. After having had 15 years to think about deep issues such as these, the fact that the re-proposed regulations overlook so fundamental a question speaks volumes. However, in keeping with our rule of thumb, if there is a more onerous interpretation, the IRS is predisposed to favor it, and it has done so here as elsewhere.

According to MH, the IRA owner is treated as the employee and the IRA custodian/trustee is treated as the plan administrator.

7.5 Who Is A “Contingent Beneficiary” Of A Trust For Purposes Of The Proposed Regulation That Permits Us To Disregard Contingent Beneficiaries, And Why Should We Care? The answer is not clear or obvious, but whatever it is, it is not what one would expect from only reading the proposed regulations.

This is the most complex subject in this paper. I will try to highlight my summations for you, but I am also going to give you the background necessary to analyze the summaries. Please forgive and bear with me as I lay the groundwork. Please also excuse my occasional fulminations. I have reason to be frustrated and you do too.

One of the most basic of the MRD rules is that if all of the beneficiaries are human beings then we must use the life expectancy of the oldest beneficiary as our measuring life (absent a separate account), but that if one of the beneficiaries is not human, we may not use the life expectancy of any beneficiary. The proposed regulations formulate the rule in the form of a question, followed by an answer and then an exception. First the question:

“E-5. Q. If an employee has more than one designated beneficiary or if a designated beneficiary is added or replaces another designated beneficiary after the date for determining the designated beneficiary [i.e., after the RBD or date of death if sooner], which designated beneficiary's life expectancy will be used to determine the distribution period?”[73]

Then the answer:

“A. (a) General rule. (1) Except as otherwise provided in paragraph (f) [designations by beneficiaries or anyone else given the discretion to change the beneficiary], if more than one individual is designated as a beneficiary with respect to an employee as of the applicable date for determining the designated beneficiary, the designated beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the distribution period.”[74] (Emphasis added.)

And finally the exception: If one of the beneficiaries is not an individual (or a qualifying trust), then the participant will be treated as not having any designated beneficiaries.

“However, except as otherwise provided in D-5, D-6 [trusts as beneficiaries], and paragraph (e)(1) of this E-5 [death contingency], if [anyone who is not] an individual is designated as a beneficiary, the employee will be treated as not having any designated beneficiaries for purposes of section 401(a)(9) even if there are also individuals designated as beneficiaries.”[75] (Emphasis added.)

The Death Contingency Exception to the Multiple Beneficiary Rule

The treatment of so-called contingent beneficiaries under the proposed regulations is the source of much confusion. For me, this subject is far and away the most complex, uncertain and difficult to understand of all that is covered in this paper. I find the “dash 1” E-5(b) and E-5(e)(1) proposed regulations to be prolix at best, and all but unfathomable. I readily confess that my limited intelligence may be the reason that I have such difficulty in the area; alternatively, the regulation may really be as unintelligible as it appears to me. You be the judge. The source of part of the confusion is the elaborate use of cross-references in the proposed regulations, as aptly illustrated by comparing E-5(b) with E-5(e)(1), which must almost be viewed side by side to unscramble.

E-5(b)
Contingent Beneficiary is a Designated Beneficiary

E-5(e)(1)
Contingent Beneficiary is NOT a Designated Beneficiary

(b) Contingent beneficiary. Except as otherwise provided in paragraph (e)(1), if a beneficiary’s entitlement to an employee’s benefit is contingent on an event other than the employee’s death (e.g., death of another beneficiary[76]), such contingent beneficiary is considered to be a designated beneficiary for purposes of determining which designated beneficiary has the shortest life expectancy under paragraph (a).[77] [Emphasis added.]

(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 [at all, designated or otherwise] 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 prior beneficiary?] occurs prior to the applicable date for determining the designated beneficiary.[78] [Emphasis added.]

Reading E-5(b) and E-5(e)(1) Together. The E-5(e)(1) exception referred to within E-5(b) reads almost identically to E-5(b), except that the result is reversed. E-5(b) is expressly subject to the exception in E-5(e)(1). But E-5(e)(1) does not apply (i) if the death of the beneficiary is prior to the applicable date, or (ii) the beneficiary’s entitlement does not depend on the death of a prior beneficiary, which means (apparently) that E-5(b) applies without exception in those cases.[79]

E-5(b): If, after the applicable date, a beneficiary’s (including a secondary beneficiary’s) entitlement to the benefit is contingent on some event other than the death of a prior beneficiary after the applicable date, then the E-5(b) regulation applies, and the beneficiary or beneficiaries are treated as designated beneficiary(ies), for purposes of determining who is the oldest beneficiary.

E-5(e)(1): If, after the applicable date, a secondary beneficiary’s entitlement to the benefit is contingent on the death of a prior beneficiary who survived the applicable date, then the E-5(e)(1) exception to E-5(b) applies and the secondary beneficiary is NOT treated as a beneficiary; i.e., the secondary beneficiary is ignored.

A more abstruse and awkward cross-reference scheme is difficult to imagine. If the meaning is clear to you at first reading, your MENSA dues will be waived. Part of the problem is with the ill defined nomenclature. We know that the phrase “contingent beneficiary” does not have the meaning used in the law of estates and future interests, which is probably just as well. The only problem is that we don’t know what meaning to substitute for it. Personally, I would settle for the traditional meaning instead of no meaning at all. But now we also have to know what is meant by a “prior beneficiary.” Must the prior beneficiary survive the participant?

A beneficiary who dies prior to the applicable date is not covered by E-5(e)(1). Hence, a beneficiary who predeceases the participant and who dies prior to the participant’s RBD is not covered by the E-5(e)(1) exception, but neither is such person covered by E-5(b).

We entirely ignore a beneficiary whose benefit is contingent on the death of a prior beneficiary if the prior beneficiary predeceases the participant after the RBD. This is covered by E-5(e)(2):

(2) If the designated beneficiary whose life expectancy is being used to calculate the distribution period dies on or after the applicable date, such beneficiary's remaining life expectancy will be used to determine the distribution period whether or not a beneficiary with a shorter life expectancy receives the benefits.[80]

Well, who is left? Answer: a beneficiary whose “entitlement to an employee’s benefit is contingent on the death of a prior beneficiary” which prior beneficiary was living on the applicable date. We can ignore such person both “ for purposes of determining who is the designated beneficiary with the shortest life expectancy . . . or whether a beneficiary who is not an individual is a beneficiary.” If a beneficiary dies before the applicable date, then I believe the beneficiary is ignored under E-5(b) as well as E-5(e)(1), although E-5(b) does not tell us this. In all other cases, “if a beneficiary’s entitlement to an employee’s benefit is contingent on an event other than the employee’s death (e.g., death of another beneficiary), such contingent beneficiary is considered to be a designated beneficiary.”

What might be an instance of such a case? What is an example of a case where (1) a beneficiary’s entitlement to an employee’s benefit is contingent on an event other than the employee’s death (e.g., death of another beneficiary), (2) but is not subject to the E-5(e)(1) exception, meaning that it is not “contingent on the death of a prior beneficiary”? Examples are hard to come by.

One of the examples we are looking for would be one where the contingency is death of another beneficiary who is not a prior beneficiary.

A, B, C and D are to take equal shares of P’s IRA if they survive P. D dies after the RBD but before P and D’s share passes to D’s child E. That’s no good. It is covered by E-5(e)(2).

A, B, C and D are to take equal shares of P’s IRA if they survive P. D dies after the RBD but before P and D’s share passes to A, B and C. Okay, that is covered by E-5(b) but so what? They were already being considered.

P designates A as his primary beneficiary, but provides that if A is not living on P’s RBD or prior death, B will be the designated beneficiary, not A. That is explicitly not subject to the E-5(e)(2) exception if death is prior to the applicable date, but otherwise is subject to it. So, in the example given, if A dies prior to the applicable date, B is considered a designated beneficiary. Whew! Surely there is an easier way to express this rule.

I can think of only one other fact pattern that is remotely meaningful. If A takes P’s benefits if B is married at P’s death, but B takes if B is unmarried —to give an example of a contingency other than (or more properly in addition to) the employee’s death— then both A and B are considered beneficiaries and the multiple beneficiary rule therefore applies.[81] The E-5(e)(1) exception does not come into play here at all, because the contingency is not death of a prior beneficiary. Therefore E-5(b) applies and both A and B are considered designated beneficiaries. Again, surely there is an easier way to articulate the rule.

7.6 How Does The Death Contingency Rule Apply In The Case Of Trust Beneficiaries? Perhaps it doesn’t, though we think One is entitled to disregard a contingent beneficiary of a trust who takes on death of a prior beneficiary only if the prior beneficiary would take all benefits if the prior beneficiary lived out his or her life expectancy.

One well known commentator, who has now been thoroughly discredited on the subject,[82] suggested at one time that the only reasonable approach to the regulations as written was that the phrase “contingent beneficiary” should be given the common legal meaning that we all learned in law school under the topic of estates and future interests. That was never an easy subject, as every student of the law of future interests knows. However, it appears that MH ascribes a meaning to the term contingent beneficiary that is independent of the common legal usage, and instead means something like the following:

One is entitled to disregard a contingent beneficiary of a trust who takes on death of a prior beneficiary only if the prior beneficiary would take all benefits if the prior beneficiary lived out his or her life expectancy.

As thus formulated, the rule isn’t remotely implied by the proposed regulations, but it appears to be the unwritten rule nonetheless. The application of this rule would disqualify a QTIP trust with a charitable remainder, for example. But it has nothing to do with whether the beneficiary is contingent or not, and it is inconsistent with the example at E-5(e)(3).

Again, Treasury officials are intimating that in the trust context, and contrary to the proposed regulations, the real issue is not “contingency” at all, but what will happen if a prior beneficiary lives out his or her life expectancy. Is it possible that there will be any benefits in the trust at the end of that period? If so, whoever might succeed to the interest (apparently whether contingent or not) cannot be disregarded.

Why do we care whether the E-5(e)(1) death contingency exception to the multiple beneficiary rule applies? We care because if somewhere in the universe of possible outcomes, a trust could benefit someone who is not a human being —a charity or an estate, for example— and if that “beneficiary’s entitlement to [the] employee’s benefit is [NOT] contingent on the death of a prior beneficiary,” then one of our multiple beneficiaries is not a human being, and the life expectancy method does not apply. On the other hand, if E-5(e)(1) applies we can ignore the contingent beneficiary altogether.

7.7 Can The Beneficiaries Of A Dynasty Trust Ever Be Treated As Designated Beneficiaries? No, according to informal statements by the IRS, but this conclusion cannot be drawn from the proposed regulations.

By the term dynasty trust, I mean a typical trust, perhaps with spray powers, perhaps not, that will continue “to benefit” after-born beneficiaries indefinitely, so long as permitted by law.

“D-2. Q. May an individual who is not designated as a beneficiary under the plan be considered a designated beneficiary for purposes of determining the minimum distribution required under section 401(a)(9)?

“A. (a)(1) Except to the extent provided in E-5 [see discussion above, under the heading “The Death Contingency Exception to the Multiple Beneficiary Rule”] with respect to former beneficiaries, designated beneficiaries are only individuals who are designated as beneficiaries under the plan. An individual may be designated as a beneficiary under the plan either by the terms of the plan or, if the plan provides, by an affirmative election by the employee (or the employee's surviving spouse) specifying the beneficiary. A beneficiary designated as such under the plan is an individual who is entitled to a portion of an employee's benefit, contingent on the employee's death or another specified event [like what?]. For example, if a distribution is in the form of a joint and survivor annuity over the life of the employee and another individual, the plan does not satisfy section 401(a)(9) unless such other individual is a designated beneficiary under the plan. A designated beneficiary need not be specified by name in the plan or by the employee to the plan in order to be a designated beneficiary so long as the individual who is to be the beneficiary is identifiable under the plan as of the employee's required beginning date, or as of the date of the employee's death (in the case of distributions governed by section 401(a)(9)(B)(iii) and (iv)), and at all subsequent times. The members of a class of beneficiaries capable of expansion or contraction will be treated as being identifiable if it is possible at the applicable time to identify the class member with the shortest life expectancy. The fact that an employee's interest under the plan passes to a certain individual under applicable state law does not make such individual a designated beneficiary unless such individual is designated as a beneficiary under the plan.

“(2) This paragraph (a) is illustrated by the following example.

§ “Example. Employee X attains age 701½ in calendar year 1990. As of April 1, 1991, X designates as his beneficiaries under the plan his spouse and his children. X does not specify them by name. Even though X did not specify his spouse and his children by name, they are identifiable based on their relationship to X as of his required beginning date. Further, it is irrelevant that additional children of X may be born after his required beginning date and thus that the class of beneficiaries is capable of expansion.

“(b) See E-5 for the rules which apply if there is a change in beneficiaries under the plan with respect to an employee.”[83]

Does a dynasty trust violate this rule? Clearly not, “if it is possible at the applicable time to identify the class member with the shortest life expectancy.”

Does a dynasty trust violate the unwritten rule that one is entitled to disregard a contingent beneficiary who takes on death only if the prior beneficiary would take all benefits if the prior beneficiary lived out his or her life expectancy? Perhaps, but so what? As long as all of the beneficiaries are human beings who are members of a class subject to expansion or contraction, D-2 tells us that we ought to have no problem so long as we can identify with certainty the oldest member, and we can. The situation is simply no different here than if the beneficiaries were named individuals.

Remember, the death contingency rule is basically an exception to the multiple beneficiary rule. It is pro-taxpayer. We only need it if a remote beneficiary is (a) older than the primary beneficiary or (b) is not a human being. If the beneficiaries of the trust are the participant’s descendants per stirpes, then clearly we can identify the individual with the shortest life expectancy, and that is all that is required under D-2. We don’t need to avail ourselves of the contingent beneficiary rule, do we?

The 1999 ALI-ABA seminar strongly suggests that there is a problem with dynasty trusts, and all I want to know is, granted that there is a problem, just exactly what is it? Is it that everyone might die and the benefits would be payable to someone’s estate (God forbid)? This is always possible, whether or not a so-called dynasty trust is involved. So what could possibly be wrong with naming a dynasty trust as a beneficiary? I have no idea, but I do know that at the ALI-ABA seminar we were told that the beneficiaries of a dynasty trust (e.g., a trust designed to last for the period of the rule against perpetuities) will not be treated as designated beneficiaries for purposes of the MRD rules. At the 2000 Seminar, the IRS backed off a little, but MH still refused to articulate a rule or theory that can be generally applied.

Any logic to this pronouncement cannot be found in the proposed regulations, and is in direct contradiction to the D-2 regulation just quoted. So, just exactly what is the rule? We don’t know. I gather that the Treasury, having fulfilled its obligation to collect taxes —which were paid when the distribution was made to the trust— feels that some other nonstatutory, nontax related social policy is at issue here, a policy against long term trusts I guess. That is the best I can do, and I have been studying this issue closely now for many years.

We think that the rule is something like the following: All plan benefits paid to the trust must be paid out to members of the D-2 class of beneficiaries within a period of time measured by the life expectancy of the youngest member of the class who is alive on the applicable date. If all of the members of the class die prior to the expiration of the life expectancy of the youngest member who was alive on the applicable date, then it makes no difference where the benefits go, because the death contingency exception to the multiple beneficiary rule (E-5(e) to which so much attention was devoted above) applies.

I hasten to add that I am not positive that this is supposed to be the rule, but it is my best guess, based upon the comments that I have heard that Treasury officials are making.

Is this rule found in the proposed regulations? No. It actually contradicts D-2, D-5(b) and H-7. Are any of us bound by whatever it is the rule turns out to be? Not until the rule is published as a final regulation. In the meantime, we are entitled to rely on a reasonable reading of the statute and a reasonable reading of the proposed regulation, neither of which contain anything remotely resembling the gloss being put upon them informally by Treasury officials.

The PLRs are clear that there is no requirement that the trust distribute IRA or QP proceeds to the beneficiary whose life expectancy is being used as the measuring life. More to the point, however, Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-5(b) provides, in part:

. . . [I]f the requirements in paragraph (a) are met, for purposes of section 401(a)(9), distributions made to the trust will be treated as paid to the beneficiaries of the trust with respect to the trust's interest in the employee's benefit. [84]

Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-7 is equally explicit that a trust which receives a payment from a plan after the death of the participant need not distribute the amount to the beneficiaries under the MRD rules:

H-7. Will a payment by a plan after the death of an employee fail to be treated as a distribution for purposes of section 401(a)(9) solely because it is made to an estate or a trust?

A. A payment by a plan after the death of an employee will not fail to be treated as a distribution for purposes of section 401(a)(9) solely because it is made to an estate or a trust. As a result, [an] estate or trust which receives a payment from a plan after the death of an employee need not distribute the amount of such payment to the beneficiaries of the estate or trust in accordance with section 401(a)(9)(B). . . . See D-5 and D-6 for provisions under which beneficiaries of a trust with respect to the trust's interest in an employee's benefit are treated as having been designated as beneficiaries of the employee under the plan.[85]

If a trust is named as beneficiary on the applicable date, and if on that date the trust was in compliance with a reasonable reading of the proposed regulations, but final regulations are issued thereafter that would have caused the trust to fail had those rules been in effect on the applicable date, will the trust cease to be a designated beneficiary after the fact? Experience tells us that this is unlikely, but not impossible.

When do we want to use a dynasty trust as the recipient of IRA or QP benefits? The only time we really care is where the estate is not large enough to otherwise shelter the GSTT exemption. This is not a problem for the wealthy. They have $1 million in other, more appropriate assets. It is the estates that don’t have $1 million lying around to fund a GSTT dynasty trust where we are forced to resort to retirement assets. Once again, the IRS targets the middle class as its victim; for the rich, all this uncertainty the IRS has been creating in the dynasty trust area is of no concern.

7.8 Under What Circumstances Will The Fact That The Trust May Be Liable For Estate Taxes Or Debts Of The Participant Disqualify The Trust As A Designated Beneficiary? This is another murky area. At one time, the informal IRS opinion was that if the issue was addressed in the trust document, the life expectancy payout method would not be available. More recently, the IRS has indicated that it intends to be more flexible that previously indicated.

It is very possible that both state[86] and federal law will provide that a person’s IRA can be reached after death to satisfy the debts and personal income tax obligations of the IRA owner as well as of the beneficiary, and it almost certainly can be reached to satisfy the estate tax owed by the IRA owner’s estate, and possibly by the creditors of the estate tax owner, even if the decedent dies without a will. Does that mean that it is impossible to name a designated beneficiary? Apparently not. But according to MH, in 1999, if the beneficiary is a trust, and if any provision at all is made for the payment of estate taxes out of the IRA, even if the provision tracks state law word for word, then the trust does not qualify as a designated beneficiary.

In 2000, MH expressed the more sensible position that if the trust merely provided for the payment of a prorata share of taxes (even at the margin, as federal law sometimes requires) in the same manner that would otherwise be required under state and federal law, then this power would not disqualify the trust after all.

7.9 Can A Designated Trust Beneficiary Have A Testamentary Power Of Appointment? Apparently yes, if the beneficiary fails to survive his or her life expectancy; otherwise, the answer is no. Again, the proposed regulations give no clue that this is the rule.

You may have heard that the answer to the question of whether or not a trust beneficiary can have a testamentary power of appointment and still be considered a designated beneficiary is no. Since the beneficiary is the one who makes this decision, it is patently ridiculous to consider this as some form of clandestine attempt to violate the ascertainable beneficiary rule, but that is what is being suggested, at least where a trust is involved. However, I have been led to understand that it is permissible for a beneficiary to have a testamentary power of appointment if that power is only exercisable if the beneficiary fails to survive some life expectancy. Just whose life expectancy is involved here is the subject of the following discourse.

Apparently, the rule against giving the beneficiary of a trust a testamentary power of appointment (assuming there is such a rule) would only be violated if the power were exercisable after the expiration of the life expectancy of some relevant measuring life. If a beneficiary died before the expiration of that period, then under the E-5(e)(1) death contingency exception to the multiple beneficiary rule, belabored above, it would make no difference where the benefit went, and so, presumably, a testamentary power of appointment could be exercisable during the life expectancy of the beneficiary, but not afterwards.

Recall the discussion above to the effect that the IRS is suggesting informally that a trust that is the beneficiary of a QP or IRA must itself distribute the proceeds of the QP or IRA during the life expectancy of someone: either the youngest member of the class of beneficiaries who was alive on the applicable date or perhaps a sibling of such person. Apparently, a version of the contingent beneficiary rule would actually operate to provide that if some relevant beneficiary dies prior to his or her life expectancy, then the trust payout rule no longer applies because it is no longer relevant where the proceeds go.

This rule, since it is not written anywhere, is therefore not subject to close scrutiny, and is difficult to ascertain with anything approaching certainty, much less to intelligently discuss. Assuming that my understanding is at least close to the mark, then there are certain consequences that flow from it. Before going too far down that road, however, it would be nice to know whose life expectancy we are talking about. We know of two that we have to measure (a) the oldest beneficiary, necessary to determine the MRD, (b) the youngest beneficiary, or a sibling of the youngest beneficiary, necessary to determine the trust payout, and, now, (c) the beneficiary whose life expectancy can be used to invoke the version of the contingent beneficiary rule that would allow us to ignore what happens if this person fails to survive that life expectancy.

Consider a trust for spouse and descendants that roughly follows the pattern of the D-2(a)(2) proposed regulation:

Employee X attains age 701/2 in calendar year 1990. As of April 1, 1991, X designates as his beneficiaries under the plan his spouse and his children. X does not specify them by name. Even though X did not specify his spouse and his children by name, they are identifiable based on their relationship to X as of his required beginning date. Further, it is irrelevant that additional children of X may be born after his required beginning date and thus that the class of beneficiaries is capable of expansion.[87]

Let us stipulate that we have provided that all benefits from this trust will be distributed during the life expectancy of the youngest beneficiary, or a sibling of the youngest beneficiary, who is alive on the applicable date.

What happens if the youngest beneficiary (or some other person?) fails to survive his or her life expectancy? Can he or she be given a testamentary power of appointment? Can we say that if that beneficiary fails to survive life expectancy that the remainder of the trust will pass to charity? I have been assured by those who should know that the answer to both questions is yes, and that the reason is derived from the application of some form of the contingent beneficiary rule, the idea being that if the youngest beneficiary lived out his or her life expectancy the IRA or QP proceeds would no longer be in trust, but if the beneficiary failed to live out that period the subsequent taker would be a contingent beneficiary who can be ignored. Needless to say, this is not a straightforward application of the proposed regulations, but it has some modicum of logic.

Proceeding with the understanding that there are contingencies under which someone in the class of descendants can be given a testamentary power of appointment, and that the contingency under which the power may be exercised is the failure of some person to survive that person’s life expectancy, we must next pin down precisely just who this person is. My initial presumption is that the life expectancy to be used for this purpose is that of the person who is acting as the measuring life for trust termination purposes; but since that person may not be a beneficiary of the trust after the death of the spouse, due to a per stirpes division, I am not sure.

Typically, the trust will be divided per stirpes on the death of the spouse, and will be continued in separate per stirpital shares. At that point do we change the measuring life for purposes of applying the contingent beneficiary rule? Recall that we are clear that the measuring life for MRD purposes was the spouse, and that the measuring life for termination of the trust is the youngest beneficiary living on the applicable date (or a sibling). What I am asking is who is the measuring life for application of the contingent beneficiary rule?

After the trust is divided (or perhaps before), is the life expectancy that is to be used to apply the contingent beneficiary rule (i) the child who happens to be the oldest beneficiary of that trust (who may not even have been alive on the applicable date and who may or may not be a sibling of someone who was), (ii) a grandchild who happens to be the oldest beneficiary of that trust (who may or may not have been alive on the applicable date and who may or may not have been a sibling of someone who was), (iii) the youngest beneficiary living on the applicable date (or a sibling), whether or not that person is a beneficiary of this trust following the death of the spouse, or (iv) the spouse?

Note that if we cannot give a beneficiary a general power of appointment, and cannot pay benefits to the beneficiary’s estate (which amounts to the same thing) we might have a generation skipping transfer tax problem.

In summary, one would like to know for sure whether the life expectancy during which the power is exercisable is (a) the life expectancy of the youngest beneficiary whose life is being used to measure the ultimate trust payout period, (b) the life expectancy of the RBD measuring life, or (c) the life expectancy of the beneficiary exercising the power. The distinction is fairly important, for obvious reasons.

Although some well respected commentators insist that the rules under discussion can be ascertained from a close reading of the proposes regulations, I am firmly not in that camp. The rule, if it resembles anything approaching the above, is certainly not implied by Prop. Treas. Reg. §§1.401(a)(9)-1, Q&A D-2, D-5(b) or H-7 (Proposed 7/27/87 and amended 12/30/97), which, if anything, suggest that there is no trust payout rule at all.

At the ALI-ABA 2000 Seminar MH indicated that she might not have a problem if the power of appointment were limited to a class that was more or less ascertainable (e.g. descendants?), but would be very concerned about a power to appoint to charity or to others beneficiaries that were not so readily ascertainable.

7.10 Since We Don’t Know What The Rules Are Right Now, Much Less What They Will Be Under The Final Regulations, What Are We Supposed To Do In The Meantime? I have provided suggested language in a separate article, which can be viewed or down loaded from www.trustsandestates.net.

ARTICLE 8
Miscellaneous

8.1 Can a Beneficiary Designate a Beneficiary? Yes, at death, despite the literal wording of Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(f).

May a beneficiary designate a beneficiary? The proposed regulations provide:

“(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.”[88]

Does this proposed regulation preclude a beneficiary from designating where any remaining undistributed benefits will go at the beneficiary’s death? MH confirmed at the 2000 Seminar that a beneficiary may designated a death beneficiary without affecting the MRD rules. Note that a different rule may apply in the trust context where the designation is by power of appointment.

[1] Rev. Rul. 2000-2, 2000-3 IRB.

[2] Treas. Reg. §20.2056-7(d)(2).

[3] Treas. Reg. §20.2056(b)-5(f)(8).

[4] Rev. Rul. 2000-2, 2000-3 IRB.

[5] See Ice, “Beneficiary Designations For Qualified Plans and IRAs,” ACTEC Notes, Summer 1995, Vol. 21, No.1, p.53 at 61-62.

[6] Rev. Rul. 2000-2, 2000-3 IRB.

[7] We have all wondered whether a testamentary trust may qualify as a designated beneficiary under the look-through rules? The fact that the re-proposed regulations were not explicit on this point is unfortunate, since a testamentary trust is not really a trust under state law until the decedent’s death. However, the IRS has unofficially several times indicated that the beneficiaries of a testamentary trust that is otherwise qualified will qualify as designated beneficiaries under the re-proposed regulations.

Is there any significance in the fact that the trust in 2000-2 was a testamentary trust? If the testator had been past his RBD on date of death, then the ruling would have been authority on this point. But since the testator was 55 when he died, the fact that the trust named as beneficiary was a testamentary trust is not as significant as it would have been if the RBD had been the applicable date. At date of death, here the applicable date, the trust would likely be a valid trust under state law, even though receipt of a conventional corpus might be delayed.

[8] Rev. Rul. 2000-2, 2000-3 IRB.

[9] Rev. Rul. 2000-2, 2000-3 IRB.

[10] Rev. Rul. 89-89, 1989-2 C.B. 231.

[11] At the May 2000 ALI-ABA Seminar, George Masnik made it clear that the 89-89 technique still works. And is worth noting that the Ruling states, immediately before the formal holding: “The result would be the same if the terms of the testamentary trust require the trustee to withdraw from the IRA annually an amount equal to all the income earned on the IRA assets and pay that amount to the surviving spouse.”

[12] See Natalie Choate.

[13] Rev. Rul. 89-89, 1989-2 C.B. 231.

[14] See Ice, “Annotated Form Designation of Beneficiary and Election of Form of Benefits Under IRC §401(a)(9).

[15] “First, we note that although final regulations command our respect (Commissioner v. Portland Cement Co. of Utah), 450 U.S. 156, 169 (1981), proposed regulations carry no more weight than a position advanced on brief by respondent. Freesen v. Commissioner, 84 T.C. 920, 939 (1985), revd. on other grounds 798 F.2d 195 (7th Cir. 1986), quoting F. W. Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-1266 (1970). Cf. Mearkle v. Commissioner, 87 T.C. 527, 531 (1986). See also Tamarisk Country Club v. Commissioner, 84 T.C. 756, 761 (1985); Scott v. Commissioner, 84 T.C. 683 (1985); and Miller v. Commissioner, 70 T.C. 448, [pg. 898] 460 (1978).^fn We therefore decide this case by considering the evidence under the standards of the statute, not those of the proposed regulation.” Laglia V. Commissioner, 88 TC 894 (1987).

[16] Grantor Retained Income Trust.

[17] IRC §2519(a).

[18] Rev. Rul. 2000-2, 2000-3 IRB.

[19]IRC §§ 402(c)(9), 403(b)(8)(B) and 408(d)(3)(C). Treas. Reg. 1.408-2(b)(7)(ii). Prop. Treas. Reg. 1.408-8, Q&A A-5 (Proposed 7/27/87).

[20] Prop. Treas. Reg. §1.408-8, Q&A A-5 (Proposed 7/27/87).

[21]I.e., the distribution method applicable for distributions on and after the RBD.

[22]IRC §401(a)(9)(B)(i)(II).

[23]IRC §4974(d). Prop. Treas. Regs. §54.4974-2, Q&A A-8.

[24]Treas. Reg. §1.402(c)-2 Q&A 7(a).

[25] Treas. Reg. §1.408A-4 Q&A 6.

[26] Does the parenthetical language suggest that the MRD should be deducted first? Doesn’t this regulation antedate §401(a)(9) in its present form?

[27]Treas. Reg. §1.408-8, Q&A A-5(b), first sentence.

[28]Prop. Treas. Reg. §1.408-8, Q&A A-5 (Proposed 7/27/87).

[29]IRC §401(a)(9)(B)(iii)(II).

[30]IRC §401(a)(9)(B)(iv)(I). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(b). (Proposed 7/27/87).

[31] Note that, under the IRA informal position, if death is after the RBD, then, in the year of death, there would be no MRD due on behalf of the deceased IRA owner if there were a deemed rollover as of December 31; and so a deemed rollover would be implied under those circumstances if the MRD for the decedent were not taken by the end of the year. Would there be a MRD for the spouse for the year of rollover? As indicated in this article, I do not think so; but consider that if there were, and it were made, how could one necessarily tell whether the MRD was on behalf of the spouse or the decedent?

[32]PLR 9418034 and PLR 9608042.

[33]PLR 9418034 and PLR 9608042.

[34] PLR 9534027.

[35] PLR 9311037.

[36] Well if not the husband’s agent, then the wife’s agent by virtue of the divorce decree. In either case, unless, the divorce decree was ineffective as a matter of state law to transfer legal ownership of the account —recall that the decree read the trial court ordered the taxpayer’s IRA “to be divided equally between the parties”—, then the husband was acting as the wife’s agent in effectuating the physical or ministerial conveyance of the assets.

[37] We recognize that private letter rulings have no precedential value but merely represent the Commissioner's position as to a specific set of facts. See sec. 6110(j)(3) (redesignated sec. 6110(k)(3) under the IRS Restructuring and Reform Act of 1998, Pub. L. 105-206, sec. 3509(b), 112 Stat. 743, 772); Lucky Stores, Inc. v. Commissioner, 153 F.3d 964, 966 n.5 [82 AFTR 2d 98-5815] (9th Cir. 1998), affg. 107 T.C. 1 (1996); Fowler v. Commissioner, 98 T.C. 503, 506 n.5 (1992); Estate of Jalkut v. Commissioner, 96 T.C. 675, 684 (1991); First Chicago Corp. v. Commissioner, 96 T.C. 421, 443 (1991), affd. 135 F.3d 457 [81 AFTR 2d 98-545] (7th Cir. 1998). We mention these rulings merely to set forth the Commissioner's administrative practice as to sec. 408(g). See Rowan Cos. v. United States, 452 U.S. 247, 261 n.17 [48 AFTR 2d 81-5115] (1981); First Chicago Corp. v. Commissioner, 96 T.C. 421, 443 (1991).

[38] We address a somewhat narrower issue, i.e., whether for Federal income tax purposes petitioner is the sole “distributee” and thus taxable on the distributions he received from his IRA's. We do not address, as did these State cases, whether sec. 408(g) preempts community property interests in IRA's altogether.

[39] Michael G. Bunney v. Commissioner, 114 T.C. No. 17 at 155 (2000).

[40] Michael G. Bunney v. Commissioner, 114 T.C. No. 17 at 155-156 (2000).

[41] Sec. 408(d)(6) provides: Transfer of account incident to divorce. – The transfer of an individual's interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.

[42] IRS Publication 590 describes two commonly used methods of transferring an interest in an IRA: (1) Changing the name on the IRA to that of the nonparticipant spouse or (2) directing the trustee of the IRA to transfer the IRA assets to the trustee of an IRA owned by the nonparticipant spouse.

[43] Sec. 408(d)(6) governs the transfer of an “individual's interest” in an IRA. It does not address distributions. In contrast, distributions from a qualified pension plan pursuant to a qualified domestic relations order may be reallocated to a spouse (designated as the “alternate payee” and considered a plan “beneficiary”). See sec. 402(e)(1)(A); 29 U.S.C. sec. 1056(d)(3)(J) (1993).

[44] We note that for returns filed on or after Dec. 2, 1998, respondent's view is that a return position “reasonably based on one or more of the authorities set forth in section 1.6662- 4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments)” will generally satisfy the reasonable basis standard. Sec. 1.6662-3(b)(3), Income Tax Regs., as amended by T.D. 8790, 1998-50 I.R.B. 4. Among the authorities set forth in sec. 1.6662-4(d)(3)(iii), Income Tax Regs., are private letter rulings issued after Oct. 31, 1976.

[45] Michael G. Bunney v. Commissioner, 114 T.C. No. 17 at 159 (2000).

[46] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-2(b), last sentence. (Proposed 7/27/87).

[47] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(2). (Proposed 7/27/87).

[48] Allard v Frech, 754 S.W.2d (Tex. 1988).

[49] PLR 199912040 and PLR 199925033.

[50] There is still the uncertainty of whether the children will be beneficiaries at all, since they will only have a beneficial interest in the benefits if the trust receives the allocation.

[51] The nicest thing about the disclaimer approach is that we can expect to be in a better position to know the answer to questions such as this one when we make the disclaimer (if we do). But we are still forced to decide now who the recipient of disclaimer will be in the future.

[52] Treas. Reg. §1.661(a)-2(f)(1) reads “(1) No gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of the distribution, unless the distribution is in satisfaction of a right to receive a distribution in a specific dollar amount or in specific property other than that distributed.”

IRC §691(a)(2) provides:

(2) Income in case of sale, etc. If a right, described in paragraph (1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of this paragraph, the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

[53] Of course, the right to receive the IRD is being actually distributed in satisfaction of the pecuniary obligation, but it is being distributed from an estate or trust, and not from the IRA or qualified plan.

[54] Cf. the very confusing PLRs 199918065 as modified by 200008048, where there was both a funding and a distribution.

[55] PLR 199903050.

[56] See Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(2) (Proposed 7/27/87).:

[57] See Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(c). (Proposed 7/27/87).

[58] It is perhaps worth noting here that IRC §2518 merely provides that for gift tax purposes a disclaimer will not be treated as a transfer. Therefore, arguably, §2518 does not affect other tax principles, assignment of income being the first to come to mind where income in respect of a decedent (IRD) is the subject of a disclaimer. Nevertheless, in practice, the federal (gift tax) disclaimer statute has been applied generally. Perhaps this is technically not justified, but this practice has at least kept the worms in the can up until now. In the example with which we are concerned, it is probably state law that we should look to in order to see if the disclaimer is to be given effect, and state law disclaimer statutes, as a rule, merely declare that a disclaimer is not a transfer, and the application of state law disclaimer statutes are generally not limited to transfer tax purposes.

[59] PLRs 9037048, 9442032, 9450040, and 9537005.

[60] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(1) (Proposed 7/27/87).

[61]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-5 and 6. (Proposed 7/27/87 and amended 12/30/97).

[62]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-5(b), second sentence. (Proposed 7/27/87).

[63]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-5(a). (Proposed 7/27/87).

[64]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-7A(a). (Proposed 7/27/87 and amended 12/30/97).

[65] E-5. Q. If an employee has more than one designated beneficiary or if a designated beneficiary is added or replaces another designated beneficiary after the date for determining the designated beneficiary, which designated beneficiary's life expectancy will be used to determine the distribution period?

A. (a) General rule.

(1) Except as otherwise provided in paragraph (f), if more than one individual is designated as a beneficiary with respect to an employee as of the applicable date for determining the designated beneficiary, the designated beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the distribution period. However, except as otherwise provided in D-5, D-6, and paragraph (e)(1) of this E-5, if a person other than an individual is designated as a beneficiary, the employee will be treated as not having any designated beneficiaries for purposes of section 401(a)(9) even if there are also individuals designated as beneficiaries. The date for determining the designated beneficiary (under D-3 or D-4, whichever is applicable) is the applicable date. The period described in section 401(a)(9)(A)(ii) (for distributions commencing before the employee's death) or section 401(a)(9)(B)(iii) (for distributions over a life expectancy commencing after the employee's death), whichever is applicable, is the distribution period.

(2) See H-2 for special rules which apply if an employee's benefit under a plan is divided into separate accounts (or segregated shares in the case of a defined benefit plan) and the beneficiaries with respect to a separate account differ from the beneficiaries of another separate account.

(b) Contingent beneficiary. Except as provided in paragraph (e)(1) [where a beneficiaries benefit is contingent on the death of a prior beneficiary who dies after the applicable date], if a beneficiary's entitlement to an employee's benefit is contingent on an event other than the employee's death (e.g., death of another beneficiary [who is not a prior beneficiary under (e)(1) who dies after the applicable date?]), such contingent beneficiary is considered to be a designated beneficiary for purposes of determining which designated beneficiary has the shortest life expectancy under paragraph (a).

(c) New beneficiary.

(1) Except as provided in paragraph (e)(2) (in the case of the death of a beneficiary), if, after the applicable date for determining the designated beneficiary, a new designated beneficiary with a life expectancy shorter than the life expectancy of the designated beneficiary whose life expectancy is being used to determined the distribution period is added or replaces a designated beneficiary, the new designated beneficiary is treated as the designated beneficiary for purposes of determining the distribution period. In such case, the new beneficiary's life expectancy will be used to calculate the distribution period in subsequent calendar years. In determining the beneficiary with the shorter life expectancy, the life expectancies will be calculated as of the applicable birthdays in the calendar year specified in and in the manner provided in E-1 through E-4. Consequently, the old distribution period must be replaced by a new distribution period. The new distribution period equals the period which would have been the remaining joint life and last survivor expectancy of the employee and the designated beneficiary if the new designated beneficiary had been designated as of the applicable date. If, instead, the new designated beneficiary has a life expectancy longer than the life expectancy of the designated beneficiary whose life expectancy is being used to determine the distribution period, the life expectancy of the old designated beneficiary will continue to be used for purposes of determining the distribution period even though such old designated beneficiary is no longer a beneficiary under the plan.

(2) If a new beneficiary who is not an individual is added or replaces a designated beneficiary after the applicable date, unless otherwise provided in D-5 and D-6, the employee will be treated as not having designated a beneficiary. Further, except as provided in paragraph (e)(2) in the case of the death of a designated beneficiary, if at any point in time after the applicable date there is no beneficiary designated with respect to the employee, the employee will also be treated as not having a designated beneficiary. In either case, the new distribution period described in subparagraph (1) will equal the period which would have been the employee's remaining life expectancy if no beneficiary had been designated as of the applicable date.

(3) Any adjustment described in this paragraph will only affect distributions for calendar years after the calendar year in which the new designated beneficiary is added or replaces the prior beneficiary, or there is no beneficiary designated with respect to the employee.

(d) Recalculation for spouse. For purposes of determining the distribution period in accordance with paragraph (a) or (c)(1), if any designated beneficiary involved is the employee's spouse and the life expectancy of the spouse is being recalculated, the life expectancy of the spouse as recalculated will be compared in each calendar year to the remaining life expectancy of the other applicable designated beneficiary or beneficiaries, not recalculated, and the shortest life expectancy will be used for determining the minimum distribution required for that calendar year.

(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 prior beneficiary] occurs prior to the applicable date for determining the designated beneficiary.

(2) If the designated beneficiary whose life expectancy is being used to calculate the distribution period dies on or after the applicable date, such beneficiary's remaining life expectancy will be used to determine the distribution period whether or not a beneficiary with a shorter life expectancy receives the benefits. However, in accordance with E-8, if the designated beneficiary is the employee's spouse, the spouse's life expectancy is being recalculated, and the spouse dies, the spouse does not have any remaining life expectancy; therefore, in the calendar year following the spouse's death, the spouse's life expectancy will be reduced to zero.

(3) This paragraph is illustrated by the following example:

Example. The designated beneficiary of an unmarried participant (X) as of X's required beginning date on April 1, 1988, is X's sister (A), but X has specified that, in the event of A's death, X's brother (B) will become the beneficiary. A's life expectancy as of A's birthday in calendar year 1987 is 25 years. B's life expectancy as of B's birthday in calendar year 1987 is 10 years. On X's required beginning date, A is the designated beneficiary because B's entitlement to benefits is contingent on A's death. A dies on May 1, 1988. A's remaining life expectancy will continue to be used to determine the distribution period with respect to X for purposes of determining the minimum distribution for the 1988 distribution calendar year and each succeeding distribution calendar year. This is true even though, upon A's death, B will become X's beneficiary and B's life expectancy as of B's birthday in calendar year 1987 is shorter than A's life expectancy as of A's birthday in that calendar year. However, if B's entitlement was not contingent on A's death but was contingent for another reason, B would be the designated beneficiary for purposes of determining the period described in section 401(a)(9)(A)(ii), even during the period in which his entitlement is contingent, because B's life expectancy, as of B's birthday in calendar year 1987, is shorter than A's life expectancy, as of A's birthday in that calendar year.

(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. However, such discretion will not be found to exist merely because the employee's surviving spouse may designate a beneficiary for distributions pursuant to section 401(a)(9)(B)(iv)(II).

[66] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-7. (Proposed 7/27/87). Emphasis added.

[67] “First, we note that although final regulations command our respect (Commissioner v. Portland Cement Co. of Utah), 450 U.S. 156, 169 (1981), proposed regulations carry no more weight than a position advanced on brief by respondent. Freesen v. Commissioner, 84 T.C. 920, 939 (1985), revd. on other grounds 798 F.2d 195 (7th Cir. 1986), quoting F. W. Woolworth Co. v. Commissioner, 54 T.C. 1233, 1265-1266 (1970). Cf. Mearkle v. Commissioner, 87 T.C. 527, 531 (1986). See also Tamarisk Country Club v. Commissioner, 84 T.C. 756, 761 (1985); Scott v. Commissioner, 84 T.C. 683 (1985); and Miller v. Commissioner, 70 T.C. 448, [pg. 898] 460 (1978).^fn We therefore decide this case by considering the evidence under the standards of the statute, not those of the proposed regulation.” Laglia V. Commissioner, 88 TC 894 (1987).

[68]IRC §401(a)(9)(B)(iii)(I).

[69] IRC §401(a)(9)(A)(ii).

[70] §401(a)(9)(B)(iv).

[71]IRC §401(a)(9)(B)(iv)(I). Prop. Treas. Reg. §1.401(a)(9)-1, Q&A C-3(b). (Proposed 7/27/87).

[72] Rev. Rul. 2000-2, 2000-3 IRB.

[73] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a)(1), the question. (Proposed 7/27/87).

[74]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a)(1), first sentence to the answer (the general rule). (Proposed 7/27/87).

[75]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(a)(1), second sentence to the answer (the exception). (Proposed 7/27/87).

[76] Contrast the phrase “another beneficiary” with “a prior beneficiary.” It appears that E-5(b) is describing a class of beneficiaries, none of whom is a prior beneficiary and one or more of whom dies, and the death of one member inures to the benefit of the remaining living members of the class. How common is that outside of a trust? How else can the entitlement of one beneficiary be contingent on the death of another without the dead beneficiary being a prior beneficiary? The only case I can think of is where one of the members of the class dies after the RBD but before the participant’s death.

[77]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(b). (Proposed 7/27/87).

[78]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(1). (Proposed 7/27/87).

[79]§401(a)(9) and the proposed regulations often tend to frame the usual case as an exception to the rule, rather than the other way around. The primary example is treating a designation of an individual as a beneficiary as an exception to the 5-year rule. This can be disconcerting at a first reading.

[80] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(e)(2). (Proposed 7/27/87).

[81] If you have another interpretation or example, I would be delighted to here it. My phone number is 817/877-2885.

[82] See Ice, “Estate Planning For Distributions From Qualified Plans and IRAs.”

[83]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A D-2. (Proposed 7/27/87). Emphasis added.

[84] Treas. Reg. §1.401(a)(9)-1, Q&A D-5(b). (Proposed 7/27/87).

[85] Prop. Treas. Reg. §1.401(a)(9)-1, Q&A H-7. (Proposed 7/27/87). Emphasis added.

[86] A state may or may not have a law shielding IRAs from creditor claims.

[87] Treas. Reg. §1.401(a)(9)-1, Q&A D-2(a). (Proposed 7/27/87).

[88]Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(f) first sentence. (Proposed 7/27/87).

ARTICLE 1 MARITAL DEDUCTION ISSUES Revenue Ruling 2000-2[1]

ARTICLE 2 Spousal rollovers

2.1 Is a Minimum Required Distribution (MRD) Due in the Year of a Participant’s Death, if Death is After the RBD? Yes.

2.3 Assuming That A Spouse Beneficiary Is Allowed To Rollover The Participant’s Final MRD, And The Spouse Does Nothing, And The MRD Is Not Made, Is The Spouse Deemed To Have Elected Rollover Treatment? Yes, if the premise is correct.

2.6 What is the Required Beginning Date For a Spouse Who is Over 70½ at the Time a Spousal Rollover is Made, If The MRD For The Participant Was Made In The Year Of The Rollover? December 31, of the year following the rollover.

2.7 What is the Required Beginning Date For a Spouse Who is Over 70½ at the Time a Spousal Rollover is Made If The MRD For The Participant Was Not Made In The Year Of The Rollove? December 31 of the year of death, according to MH.

ARTICLE 3 COMMUNITY PROPERTY ISSUES

3.1 Does IRC §408(g) Compel an IRA Owner to Ignore the State Law Ownership Interest of a Spouse or Former Spouse For Federal Income Tax Purposes? Yes(?).

3.2 If the Beneficiary is Not the Spouse, But the Spouse’s Heirs (or Estate!) Will Have an Interest in the IRA at the IRA Owner’s Death Under the Community Property Laws, Must the Heirs (or Estate!) be Treated as Beneficiaries? I have no idea, but it is possible.

3.3 Is a Nonprorata Partition of a Community Property IRA Following the Death of a Spouse Treated as a Taxable Sale or Exchange for Income Tax Purposes? No.

3.4 Can The Best of All Possible Worlds be Obtained By Disclaiming Into a Community Property Trust That Allows For Allocation Back to the Spouse or to a Bypass Trust, As Part of a Nonprorata Division of the Community Estate? Perhaps, but there are a number of as yet untested issues to consider.

ARTICLE 4 Income TAX Issues

4.1 If a Pecuniary Bequest is Funded With the Right to Receive Distributions From an IRA or Qualified Plan, Will Income Tax be Accelerated? No.

ARTICLE 5 The Separate Account Rule

5.1 If A Participant Dies Prior To The RBD, Naming Children A, B & C As Beneficiaries, Do We Have To Use The Life Expectancy Of The Oldest Child For Purposes Of The MRD Rules? No, assuming each child has a separate share for accounting purposes.

5.2 If A Participant Has an IRA With a Designated Beneficiary, and the Participant Transfers (Rollsover) a Part of that IRA After The RBD, and Names a Charity (for example) as Beneficiary of the Transferred IRA, Is the Original IRA Tainted? No.

ARTICLE 6 DISCLAIMERS

6.1 Can a Spouse Disclaim After a Deemed Rollover? Perhaps.

6.2 Can a Disclaimer Take Place After a MRD Has Been Made? Yes.

6.3 Is A Disclaimer Treated As If The Disclaimant Predeceased The Participant, Or As If The Participant Changed The Beneficiary Immediately Prior To Death? The latter.

6.4 If a Spouse Disclaims Prior To The RBD In Favor Of Child, Do Distributions To The Child Have To Be Made Over the Spouse’s Life Expectancy, Or Over a Child’s Life Expectancy? Probably the latter, but . . . .

ARTICLE 7 TRUSTS AS BENEFICIARIES

7.1 Do We Need Regulations To Authorize Us to Treat the Beneficiaries of a Trust as Designated Beneficiaries? Maybe not, prior to the RBD; probably so, after the RBD.

7.2 If a Spouse is Treated as a Beneficiary Under the Trust “Look-Through” Rule, Can MRDs From the Trust Be Postponed Until the Participant Would Have Been 70½, as Would Have Been the Case If No Trust Were Involved? Not if there are other beneficiaries of the trust.

7.3 Can The Beneficiaries of a Testamentary Trust Qualify As Designated Beneficiaries? Yes, probably, despite technical issues.

7.4 Who Is The Employee And Who Is The Plan Administrator Of An IRA, For Purposes Of The Notice And Delivery Requirements? Arguably the IRA owner is both, but the IRS thinks the employer is the trustee.

7.7 Can The Beneficiaries Of A Dynasty Trust Ever Be Treated As Designated Beneficiaries? No, according to informal statements by the IRS, but this conclusion cannot be drawn from the proposed regulations.

7.9 Can A Designated Trust Beneficiary Have A Testamentary Power Of Appointment? Apparently yes, if the beneficiary fails to survive his or her life expectancy; otherwise, the answer is no. Again, the proposed regulations give no clue that this is the rule.

7.10 Since We Don’t Know What The Rules Are Right Now, Much Less What They Will Be Under The Final Regulations, What Are We Supposed To Do In The Meantime? I have provided suggested language in a separate article, which can be viewed or down loaded from www.trustsandestates.net.

ARTICLE 8 Miscellaneous

8.1 Can a Beneficiary Designate a Beneficiary? Yes, at death, despite the literal wording of Prop. Treas. Reg. §1.401(a)(9)-1, Q&A E-5(f).

ARTICLE 1
MARITAL DEDUCTION ISSUES
Revenue Ruling 2000-2 [1]

ARTICLE 2
Spousal rollovers

ARTICLE 4
Income TAX Issues

ARTICLE 5
The Separate Account Rule

ARTICLE 6
DISCLAIMERS

ARTICLE 7
TRUSTS AS BENEFICIARIES

ARTICLE 8
Miscellaneous