RETIREMENT PLANS ALERT: The IRS Issues Final Regulations on the Minimum Distribution Rules

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RETIREMENT PLANS ALERT: The IRS Issues Final Regulations on the Minimum Distribution Rules

by Randolph B. Godshall, Esq.*

The IRS has now issued its final regulations on the minimum distribution rules applicable to qualified retirement plans and IRAs. The final regulations provide some important and generally taxpayer-friendly changes, clarifications and additions to the 2001 proposed regulations (which in turn had created a vastly simpler and better system than was provided under the old 1987 proposed regulations). This article will discuss the major changes made by the 2002 final regulations, with a focus on the rules applicable to IRAs.

The highlights of the 2002 final regulations are as follows:

I. EFFECTIVE DATE AND CHOICE OF APPLICABLE RULES

The 2002 final regulations are officially effective on January 1, 2003. To calculate minimum distributions for 2002, taxpayers can use either the 2002 final regulations, the 2001 proposed regulations, or even the 1987 proposed regulations. In most cases, using the 2002 final regulations will produce the lowest required minimum distribution.

II. NEW LIFE EXPECTANCY TABLES

Consistent with the mandate of EGTRRA, the IRS has updated the life expectancy tables to reflect current mortality data. These updated tables reflect longer single and joint life expectancies. Thus, a higher divisor is now reflected in the Uniform Lifetime Table (which is generally used for calculating the IRA owner’s lifetime distributions), the Joint and Last Survivor Table (which is used for calculating the IRA owner’s lifetime distributions if his/her spouse is the named beneficiary and is more than 10 years younger), and in the Single Life Table (which is used for calculating the designated beneficiary’s post-mortem distributions). The higher divisors reflected in the new tables will produce a lower required minimum distribution.

III. CHANGES IN CERTAIN DEADLINES

Under the 2001 proposed regulations, four different events were tied to December 31 of the year following the IRA owner’s death: (1) the determination of the identity of the designated beneficiaries for MDR purposes (which in turn allowed for post-mortem clean-ups or changes via cash-outs of charities or disclaimers); (2) the date by which separate shares or subaccounts of the IRA must be created to allow multiple designated beneficiaries to use their separate life expectancies to calculate their respective required minimum distributions; (3) the date by which post-mortem required minimum distributions must commence to avoid the 50% penalty tax; and (4) the deadline for the trustee to satisfy the information requirements to qualify a trust named as IRA beneficiary as a so-called DB-trust (which allows the individual trust beneficiaries to be treated as the designated beneficiaries for MDR purposes). Tying all four of these events to the same date created a great deal of "pressure" on that date, and under the 2002 final regulations these events are now for the most part "unlinked" as described below.

A. Date for Determination of Designated Beneficiaries

First, the date for determining the actual identity of the designated beneficiaries for MDR purposes is changed to September 30 of the year following the IRA owner’s death. (In another helpful clarification, the IRS has expressly provided that a named beneficiary who dies (without disclaiming) between the IRA owner’s death and the September 30 determination date will still be treated as the designated beneficiary for MDR purposes; this will allow the deceased beneficiary’s successors-in-interest to use the deceased beneficiary’s table life expectancy in the year after the IRA owner’s death to calculate their required minimum distributions. This author calls this the "DB-deemed-alive rule.")

B. Date for Providing Information to Qualify Trust as a DB Trust

Second, the deadline for the trustee to satisfy the information requirements has been moved to October 31 of the year after the IRA owner’s death. (Indeed, to help out trustees who may have missed the old deadline, the IRS has provided a transition rule that allows all trustees, regardless of the IRA owner’s date of death, to satisfy the information requirements by October 31, 2003.)

C. Retention of Existing Deadlines for Creating Separate Accounts and Commencing Post-Mortem Distributions

The last two events — creating the separate accounts and commencing post-mortem distributions — retain their old deadline under the 2001 proposed regulations, namely December 31 of the year after the IRA owner’s death.

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IV. WHEN SEPARATE ACCOUNT RULE APPLIES

Regarding the separate account rule, however, the 2002 final regulations also provide another important clarification. Under the 2001 proposed regulations, it was clear that separate accounts could be created for multiple designated beneficiaries (and separate life expectancies therefore used for MDR purposes) in the case of a pre-RBD death, but it was not clear whether this could be done in the case of a post-RBD death (which, if not, meant that all the designated beneficiaries had to use the oldest designated beneficiary’s life expectancy as their MDR divisor, even if they had created separate accounts). The 2002 final regulations clear up this confusion and clearly provide that the separate account (and separate life expectancy) rule applies both to pre-RBD deaths and to post-RBD deaths (but in either case it is still essential that the separate accounts be created no later than December 31 of the year after the IRA owner’s death).

V. USE OF DISCLAIMERS

Under the 2002 final regulations, a disclaimer can still be used to convert a contingent beneficiary into a designated beneficiary for MDR purposes. However, the 2002 final regulations provide that only a disclaimer that satisfies Code section 2518 will be recognized for MDR purposes. (Note that the new September 30 determination date for identifying the designated beneficiaries will allow the nine-month deadline for qualified disclaimers to be met in all cases.)

VI. NO DB-TRUST-TYPE TREATMENT FOR PROBATE ESTATES

The 2001 proposed regulations strongly suggested that, where the IRA owner’s estate was named as the IRA beneficiary, the beneficiaries of the probate estate could not become the designated beneficiaries for MDR purposes even if the IRA was distributed to them intact out of the probate estate by the then December 31 determination date. Any doubt on this issue has been removed by the 2002 final regulations, which expressly provide that the recipients of an IRA through the IRA owner’s probate estate cannot be designated beneficiaries for MDR purposes (which means that the 5-year rule will apply for pre-RBD deaths and the IRA owner’s remaining single (non-recalculated) life expectancy will apply for post-RBD deaths).

VII. DETERMINATION OF IRA OWNER’S MARITAL STATUS

Under the 2001 proposed regulations, it appeared that the IRA owner and spouse’s joint life expectancies could be used for MDR purposes only if the spouse was the named beneficiary for the entire distribution year. (Recall that this only mattered if the spouse was more than 10 years younger than the IRA owner, so that their real joint life expectancies, rather than the Uniform Table, provided their MDR divisor.) To ease the calculation of lifetime distributions, the 2002 final regulations clarify that the IRA owner’s marital status will be determined for MDR purposes as of January 1 of each year, and any changes in marital status or changes in beneficiaries due to the spouse’s death will not be recognized until the next year.

VIII. CHART OF NEW RMD RULES

The final new minimum distribution rules for post-morten distributions from IRAs under the 2002 final regulations are reflected in the diagram that follows.

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Notes:

*. Sheppard, Mullin, Richter & Hampton LLP, Costa Mesa, California

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Flow chart: New Minimum Distribution Rules for Post-Death Required Minimum Distributions
This flowchart diagram reflects the new minimum distribution rules for post-mortem distributions from IRAs under the 2002 final regulations.
Image description added by Fastcase.

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