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On January 17, 2001, the IRS published new proposed regulations to simplify the minimum distribution rules
and regulations for IRA accounts. These proposed regulations, as published, will remove a lot of the
technicalities and restrictions that had been the subject of the first regulations proposed in July, 1987. The old
rules, after almost fourteen years, had been taken as gospel by plan sponsors, participants and professional
advisors, so, to many of us, the new proposed rules came as quite a surprise.
MINIMUM DISTRIBUTION RULES SIMPLIFIED. For most people, the new rules will be easier to understand,
extend the distribution period in almost all cases, and, correspondingly, reduce the required minimum
distributions for most people. Paraphrasing from the IRS notice, the new proposals would:
Provide a simple uniform table that all employees can use to determine the minimum distribution during your
lifetime, stretching the required distribution period in almost all cases (except where the spouse is more than
ten years younger).
Eliminate the requirement that the beneficiary be designated by the Required Beginning Date (RBD).
Eliminate the need to decide whether or not to recalculate life expectancy.
Permit the beneficiary to be determined as late as the end of the year following the year of an employee’s
death.
Permit a change of designated beneficiary after the RBD without increasing the required minimum
distribution.
Permit the calculation of post death minimum distributions to take into account an employee’s remaining life
expectancy at death ("thus allowing distributions in all cases to be spread over a number of years after
death.")
UNIFORM DISTRIBUTION PERIOD. The new table which is attached hereto, as published by the IRS,
assumes the beneficiary ten years younger for purposes of the calculation. Thus, all employees will have the
same divisor based on age (again, except where the sole beneficiary is a spouse more than ten years
younger, in which case the distribution period can be measured by the joint life of the employee and spouse.)
Most employees will have lower minimum distributions as a result of the changes.
For the years after an employee’s death, "the distribution period is generally the remaining life expectancy of
the designated beneficiary,... using the age of the beneficiary in the year following the year of the employee’s
death, reduced by one for each subsequent year."
DETERMINATION OF DESIGNATED BENEFICIARY. The new rules provide that, generally, "the designated
beneficiary is determined as of the end of the year following the year of the employee’s death" rather than the
RBD or date of death. There are still complexities to be concerned with, but, basically, a beneficiary can be
designated up to the date of death and changed by disclaimer or payout after death so that the determination
is generally simpler.
DEFAULT RULE FOR POST DEATH DISTRIBUTIONS. The old five year rule for distributions in the case of
death before RBD (for a non-spouse beneficiary) is changed to the life expectancy rule. Thus the same rule
will apply whether death occurs before RBD or after RBD, i.e. the beneficiary’s life expectancy will be the
measuring period, determined as of the end of the year following the year of the employee’s death. If there is
no designated beneficiary, the five year rule would apply. Thus it is still important to keep beneficiary
designations up to date.
ANNUITIES. The proposed regulations make some simplification in the annuity rules. However, these are
complicated enough to warrant a special discussion and are beyond the scope of this alert.
TRUST AS BENEFICIARY. The new regulations contain the 1997 update concerning Trusts. That is, the
underlying beneficiary of the Trust can be the designated beneficiary for purposes of determining minimum
distributions.
Under the new regulations, the Trust documentation would not have to be furnished to the sponsor until the
end of the year following the year of death. Therefore, the lifetime documentation requirements are
significantly reduced.
Special attention needs to be paid to QTIP Trusts, where remainderman must be taken into account under
certain circumstances.
SPOUSAL ROLLOVER. The new regulations still allow a spousal rollover. However, under the new
regulations, the spouse can rollover only if the required distribution for the year of death is taken. (A spousal
rollover is still not probable if a Trust is named as beneficiary, even if the spouse is the sole beneficiary.) We
should note that generally Trusts are named as beneficiaries for other purposes, such as qualifying for Credit
Shelter or QTIP provisions so this is not a substantive limitation. There are also clarifications concerning the
treatment of minimum distributions when the surviving spouse is age 70 ½ or older.
EFFECTIVE DATE. The new regulations are proposed to be effective beginning January 1, 2002. However,
taxpayers can rely on the new rules for 2001 distributions, or on the 1987 regulations. The IRS notes that if the
new rules are made more restrictive, taxpayers will be grandfathered in their reliance on the rules as
published. Public hearings are scheduled for June 1, 2001, so the final regulations will certainly be issued
after that date. Let’s hope we don’t have to wait another fourteen years.
CONCLUSION. The new IRS rules will make life considerably simpler for IRA participants, spouses, IRA
sponsors and estate planners. However, that doesn’t mean that this is a subject to be ignored. For many
taxpayers, their IRA is the largest part of their gross estate. The new rules give you, as professional advisors,
a good reason to contact your clients to review their beneficiary designations and update them to coincide
with their estate plans.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| February 2001 NEW IRA DISTRIBUTION RULES - A kinder, gentler IRS? by James R. Modrall III, J.D., C.P.A. |
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| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |