Retirement plan distribution final regs.

The final regulations (TD 8987) for retirement plan required minimum distributions (RMDs) build on the 2001 proposed regulations by updating the life-expectancy tables to reflect increased longevity, permitting smaller RMDs for increased tax deferral. The distribution period for IRA owners assumes the beneficiary is 10 years younger than the owner. If the sole beneficiary is a spouse more than 10 years younger, the distribution period is based on a joint life expectancy. The regulations contain planning opportunities and should be considered for all affected clients, including beneficiaries who inherited since 1997.

If no designated beneficiary exists, the RMDs will depend on whether the date of death (DOD) is before or after the required beginning date (RBD) for distributions. If an IRA owner dies on or after the RBD, the owner's single-life expectancy must be used. If he or she dies before that date, the entire account must be distributed by the end of the fifth year following the year of the owner's death.

Finally, if the designated beneficiary is older than the IRA owner and the IRA owner dies after the RBD, the beneficiary can use the IRA owner's life expectancy instead of his or her own.

Planning for Estate Administrators

The final regulations modify and clarify the proposed regulations.

Postmortem planning. With a few exceptions, the designated beneficiary is determined based on the beneficiaries on record as of the DOD, who remain beneficiaries as of the following September 30 (the proposed regulations' deadline was December 31 of the year following the year of death.) This rule offers postmortem planning opportunities for an account with non-qualifying beneficiaries. For example, if an IRA account's beneficiaries include a charitable beneficiary and an individual, the individual will be treated as sole beneficiary if the charity receives its share of the account by September 30 of the year following the year of death.

Multiple beneficiaries. An IRA account with multiple beneficiaries must be divided into separate accounts by December 31 of the year following the year of the owner's death, to avoid using the oldest beneficiary's life expectancy for all future distributions. If the beneficiaries split an account, they could each use their own life expectancy to calculate their required distributions. According to the final regulations, the account can be split as late as December 31 of the year following the year of death.

Trusts. Estates do not qualify as designated beneficiaries but, under certain conditions, trusts do. Thus, advisers should double-check every client's retirement account to ensure that it has both a beneficiary and a contingent beneficiary. A trust will qualify as a designated beneficiary, as long as trust documents are provided to the plan administrator or custodian by October 31 of the year following the year of death.

Planning for Current Beneficiaries

Beneficiaries who inherited IRAs years ago may be able to switch to the new rules. Designated beneficiaries are eligible regardless of when or how they inherited, but beneficiaries who inherited through an estate are not designated beneficiaries and, thus, are ineligible. Advisers should contact every IRA beneficiary to ascertain whether he or she qualifies to switch to the new rules.

Beneficiaries currently using the five-year rule who have not yet drained their accounts will see the most dramatic result from switching. If the account has already been emptied, no relief will be available; thus, these clients should be identified and contacted first.

To switch from the five-year rule, a beneficiary must take all of the distributions that would have been required had he or she been using the life-expectancy method, by the earlier of the original five-year term or Dec. 31, 2003. The distributions will be subject to tax, but not to an untimely distribution penalty.

Beneficiaries using their own or someone else's life expectancy may also switch, but should only do so on a case-by-case basis; the results are not as dramatic as a switch from the five-year rule, and may even be negative. The steps include redetermining who would have been the designated beneficiary under the new rules at the owner's death, and reconstructing the life expectancy for that person, to calculate future RMDs.

Relief can be obtained for older trusts taking distributions as required under the old rules, by filing the trust documents with a plan's custodian by Oct. 31, 2003. If this requirement is met, the IRA distribution schedule could be changed to the new rules, in which the oldest trust beneficiary's life expectancy is used to calculate distributions.

Conclusion

Advisers have plenty of planning opportunities in the final regulations. They should (1) remind all clients with retirement plans to update their beneficiary forms and (2) identify and contact all beneficiaries currently taking distributions to determine if they can benefit from the new rules.

FROM SUSAN DAY, CPA, GRAY, GRAY & GRAY LLP, BOSTON, MA