On April 26, 2002, the IRS issued minimum distribution regulations finalizing the 2001 version of the proposed regulations (discussed in the March 2001 issue of our UPDATE) which significantly simplified the manner in which IRA and other retirement plan participants and their beneficiaries calculate their minimum required annual distributions. The final regulations clarify and modify the proposed regulations in several important respects:
1. If the plan has any beneficiaries who are not "designated beneficiaries" under the regulations, then all plan benefits must be distributed within five years of the death of the plan participant (or at the same rate as the deceased account owner, if he or she had already reached 701/2). The proposed regulations provided that the deadline for identifying the beneficiaries was December 31 of the year following the year of death. That date has been moved up to September 30 of the year following the date of death.
2. The proposed regulations implied that plan benefits payable to an estate might be allocated to individuals or other "designated beneficiaries" by an executor before the end of the year following death, thereby avoiding the five-year distribution period. The final regulations make it clear that this post-mortem planning opportunity is not available. Thus, if your estate is the beneficiary of your IRA or retirement plan, you should contact us as soon as possible so that the beneficiary designation can be changed to comply with the regulations.
3. It is, however, possible to eliminate certain "non-individual" beneficiaries prior to September 30 of the year following the participant's death and still avoid the five-year rule. For example, if benefits are left 50% to a charity and 50% to an individual, and the charity's 50% is paid in full prior to September 30 of the year following death, then the individual will be the sole beneficiary so that distributions can then be made over that "designated beneficiary's" life expectancy.
4. Separate accounts for beneficiaries must also be established by September 30 of the year following death in order to allow for separate designated beneficiaries (rather than using the oldest beneficiary's life expectancy). For example, if plan beneficiaries are two children (age 20 and 35), and the plan is separated into an account for the 20-year old and an account for the 35-year old prior to September 30 of the year following death, then the 20-year old can utilize his or her life expectancy for distributions and the 35-year old may utilize his or her life expectancy for distribution of his or her account share. If the account is not separated in a timely fashion, then all distributions must be made utilizing the life expectancy of the 35-year old child.
5. The final regulations also establish new mortality tables with longer life expectancies. This enables participants and their beneficiaries to take distributions over a longer period of time.
