Disclaimer of plan benefits or IRA by spouse if a decedent is not a prohibited assignment or alienation.

Retirement plan assets are often a significant portion of an individual's estate. The opportunity for postmortem planning with these assets has been expanded with the release of GCM 39858. The IRS Office of the Chief Counsel concluded that a qualified disclaimer of plan benefits by the participant's surviving spouse was not a prohibited assignment or alienation under Sec. 401 a)(1 3), nor was it an assignment of income. Similarly, a spouse's qualified disclaimer of an interest in an individual retirement account (IRA) was not an assignment of income and not contrary to Sec. 408(a)(4) and (b)(1). As a result, the plan benefits and IRA funds otherwise payable to the spouse became payable to a successor or contingent beneficiary. The Chief Counsel's Office also concluded that the actual recipient of the benefits was taxable under the income in respect of a decedent (IRD) provisions of Sec. 691(a) and was entitled to an IRD deduction under Sec. 691(c).

Disclaimer of plan benefits

Situation 1: Employee E, a participant in a qualified retirement plan, died before separating from service and receiving benefits under the plan. E's husband, H, had not waived the joint and survivor annuity option under Sec. 417; therefore, H became entitled to a preretirement survivor annuity on E's death. Instead of receiving plan benefits, H executed a qualified disclaimer that met the requirements of state law and Sec. 2518(b). Sec. 2518(b) provides that a person making a qualified disclaimer of a property interest is deemed never to have received an interest in the property. As a result of the disclaimer, plan benefits otherwise payable to H became payable to a successor beneficiary.

Sec. 401(a)(13) provides that a trust is not a qualified trust unless it provides that benefits under the plan cannot be assigned or alienated. Regs. Sec. 1.401(a)-13(c) defines assignment and alienation as any direct or indirect arrangement under which a participant or beneficiary who would otherwise be entitled to plan benefits transfers right or interest in those benefits to a third party. However, because qualified disclaimer of plan benefits operated retroactively back to the participant's date of death, H was deemed to have never accepted or received plan benefits. Because H was never entitled to the plan benefits, it was not possible for him to assign or alienate the benefits.

Disclamer of IRAS 

Situation 2: Husband H established an individual retirement account and an individual retirement annuity (IRAS). H died, leaving the interests in both IRAS to his wife, W. Instead of receiving the benefits, W executed a qualified disclaimer that met the requirements of state law and Sec. 2518(b). As a result, the benefits otherwise payable to W became payable to a successor beneficiary.

Sec. 408(a)(4) provides that an individual's interest in an IRA must be nonforfeitable. Sec. 408(b)(1) provides that a contract for an IRA must not be transferable by the owner. The logic that applies to a disclaimer of retirement plan benefits also applies to IRAS. Regs. Sec. 1.408-4(a)(1) provides that the payee or distributee of an IRA is generally taxable only on amounts actually received or distributed. Because W disclaimed the IRAs, she never became the beneficiary of the IRAs. Therefore, the distribution to the third party did not violate either Sec. 408(a) or (b)(1).