Vol. 74, No. 9, September 2001

Page 1: IRA and Retirement Plan Distributions

Estate Planning Implications

These changes will significantly affect estate planning for retirement accounts. Some of the possible ramifications of the new Proposed Regulations include:

1) There is no need to decide whether to recalculate life expectancies.

2) If a spouse who is named as the primary beneficiary of a retirement account dies first, the account owner simply can change the designated beneficiary, and the new beneficiary's life expectancy will determine the rate of minimum distributions after the account owner's death, even if the change occurs after the account owner's required beginning date.

3) As a result of #2 above, second-to-die life insurance will be a much more feasible way to pay estate taxes on retirement accounts.

4) If the designated beneficiary makes a qualified disclaimer (that is, rejection of ownership) of account benefits, and as a result the benefits pass to a person with a longer life expectancy, then the longer life expectancy can be used when determining the rate of distributions after the account owner's death. As a result, it will be important to draft beneficiary designations that include younger persons (such as grandchildren) as alternate beneficiaries.

What Account Owners Should Do

1) If an account owner is over age 70-1/2 and therefore is receiving minimum distributions, then:

• He or she should not take his or her minimum required distribution for 2001 until he or she is certain the new table is being applied. This will, in most cases, ensure the distribution is no larger than required.
• Remember, the account owner can always withdraw more than the required amount. In most cases, of course, the account owner will have to pay income tax on such a withdrawal.
• Account owners should review their current beneficiary designations to ensure they are taking advantage of the new proposed rules. The simpler, more lenient rules have created opportunities to ensure that the tax-deferred funds continue to be tax-deferred for as long as possible after death.

Andrew J. Willms, University of Miami 1984 cum laude, LL.M.-Estate Planning 1985, is the founding shareholder of Willms Anderson S.C., Thiensville. His practice emphasizes estate and retirement planning, probate, and corporate law. He is a frequent author and speaker on estate planning and related topics. Jason R. Handal, Marquette 1995, is a shareholder with the firm, limiting his practice to estate and retirement planning, probate and trust administration, and corporate and tax law. He also is a frequent speaker on estate planning topics.

2) Because the required distribution will be lower, this could reduce certain individuals' 2001 adjusted gross income to less than $100,000, thereby making him or her eligible to convert a traditional IRA to a Roth IRA, if he or she is otherwise interested in doing so.

3) In the case of an inherited IRA or retirement account from a person who died during 2000 or before, consider delaying the 2001 distribution until the impact of the new rules has been clarified.

Conclusion

While questions remain and further guidance is expected, the new Proposed Regulations will simplify distribution planning from retirement accounts as well as increase an account owner's ability to defer the income tax liability attributable to such accounts. Further, the Regulations, in most cases, will allow beneficiaries to withdraw the funds more slowly after the account owner's death. As a result, all account owners should review their beneficiary designations to ensure they are taking advantage of the newly proposed rules.

To view the entire text of the Proposed Regulations (and subsequent IRS clarifications), visit the "estate planning in depth" section of www.estatecounselors.com.