In an unanticipated move, the Department of Treasury has issued a substantial revision to the Proposed Treasury Regulations ("Proposed Regs.") that govern Minimum Required Distribution ("MRD") from IRAs and qualified retirement plans. The changes affect distributions both after age 70 ½ and after the owner's death. These alterations substantially change the MRD rules that have been in place since 1987! The new Proposed Regs. considerably simplify the distribution rules and are retroactive to January 1, 2001.
Determination Of Designated Beneficiary
Probably the most significant change made by the new Proposed Regs. relates to determining a designated beneficiary. Under the old rules, a designated beneficiary had to be determined by the participant's Required Beginning Date ("RBD"). The RBD is April 1st of the year following the year in which the participant reaches age 70 ½. All future distributions were based upon calculations that took into consideration the beneficiary designated at this time, regardless of whether the participant subsequently changed his or her beneficiary.
Under the new Proposed Regs., a beneficiary can be determined as late as December 31st of the year following the year of the participant's death. This dramatic change allows the participant to change his or her beneficiary at any time without it resulting in an increase in his or her MRD.
In addition, any beneficiaries "eliminated" (such as through a disclaimer or a cash-out) between the date of death and the end of the year following the participant's date of death will be disregarded for determining the MRD of the remaining beneficiary(ies). As such, a distribution within the first year after the participant's date of death to a charity, or a distribution to the spouse (which he or she could roll over), would not prevent the remaining beneficiary(ies) from taking his, her or their MRDs based upon the appropriate party's age.
Further simplifying matters, this new rule means that there are no longer different distribution rules for beneficiaries where the participant dies before or after the participant's RBD.
Calculation Of MRD
Under the old rules, when determining a participant's MRD, the participant was faced with the choice of recalculating his or her life expectancy, his or her spouse's life expectancy, or both. Under the new Proposed Regs., however, this is not a factor. Instead, a uniform lifetime distribution period based upon the Minimum Distribution Incidental Benefit ("MDIB") divisor table is used for almost all participants, regardless of whom the participant names as his or her beneficiary. The one exception to this much-simplified rule is where the participant names a spouse more than 10 years younger than the participant as sole beneficiary of the participant's IRA or retirement plan. Under these circumstances, lifetime distributions are based upon a joint and last survivor life expectancy.
Distributions To Beneficiary After Participant's Death
The new Proposed Regs. also attempt to simplify distributions to beneficiaries after a participant's death. Specifically, they provide the following, depending upon who is determined to be the designated beneficiary as of December 31st of the year following the year of death:
- Non-Spouse: Remaining life expectancy of designated beneficiary as of year following participant's death
- Spouse: Spouse's single life expectancy during spouse's life. Year after spouse's death, spouse's life expectancy in year reduced by one year each subsequent year.
- No designated beneficiary: Participant's life expectancy in year of death, reduced by one year each subsequent year -or- 5 year rule (new Proposed Regs. are unclear on this point.)
Trusts As Designated Beneficiaries
Take note that the new Proposed Regs. do not affect the existing requirements to have a trust classified as a qualified designated beneficiary, except that there will be no need to provide the plan administrator with a copy of the plan document prior to age 70 ½. Rather, consistent with the time for determining a designated beneficiary, the documentation must be provided to the plan administrator/custodian by December 31st of the year following the year of the participant's death. This means that proper planning continues to be needed where a trust is the beneficiary of an IRA or retirement plan.
Big Brother Is Watching
The old rules did not have a mechanism for tracking whether participants were taking their MRDs. However, this is addressed by the new Proposed Regs. They amend existing Proposed Reg. 1.408-8 to require sponsors and custodians to report to the IRS and the participant the amount of the MRD taken each year. This will alert the IRS to those participants not taking their MRDs, thereby allowing them to assess against the participant or beneficiary the hefty 50% penalty associated with withdrawing less than the minimum. This also means that virtually every Custodial Document in existence will have to be amended to reflect the reporting requirement.
The new Proposed Regs. simplify much of the rules that so often wreaked havoc on retirement planners. They provide unique planning opportunities that shouldn't be overlooked. But some of the technicalities associated with dealing with these assets remain, especially when a trust is involved. To get a copy of the new Proposed Regs. and to discuss how to integrate your client's retirement assets with their estate plan in light of the many changes brought about by the new Proposed Regs., contact our office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.