Vol. 75, No. 10, October
Final Rules on IRA and Retirement Plan Distributions
On April 17, 2002, the IRS released final regulations that change the
minimum distribution rules pertaining to individual retirement accounts
and qualified retirement plans. The final regulations retain and clarify
last year's proposed regulations that made sweeping changes.
Andrew J. Willms & Jason R. Handal
On April 17 the IRS released final regulations under Internal Revenue
Code (I.R.C.) section 401(a)(9). Proposed regulations, which were the
topic of a September 2001 article in the Wisconsin
Lawyer,1 were issued in January 2001.
This article focuses on the final regulations.
The final regulations retain and clarify last year's sweeping changes
to the minimum distribution rules pertaining to individual retirement
accounts and qualified retirement plans ("retirement accounts"). Prior
to 2001, the rules governing retirement account distributions were
governed largely by proposed regulations that created almost as many
questions as they answered.
Since January 2001 the IRS has solicited comments from attorneys and
other tax professionals regarding the 2001 proposed regulations. The
final regulations clarify and modify various aspects of the 2001
proposed regulations, in response to comments submitted to the IRS.
The final regulations are effective Jan. 1, 2003. However, for
determining 2002 required minimum distributions, taxpayers may rely on
the final regulations, the 2001 proposed regulations, or the
1987 proposed regulations.
Updated Uniform Table
The 2001 proposed regulations contained a simple, uniform table to be
used by almost all taxpayers when determining the minimum amount that
must be withdrawn annually from their retirement accounts during life.
The final regulations contain an updated life expectancy table for use
in determining required minimum distributions. For example, the
distribution period for a person age 70 ½ was increased from 26.2
to 27.4. This will mean smaller required minimum distributions from
retirement accounts. The updated mortality tables can be used to
determine life expectancy to calculate the amount of substantially equal
period payments under I.R.C. section 72(t)(2)(A)(iv).
Determination of Designated Beneficiary
The 2001 proposed regulations provided that determining the rate of
distributions could be delayed until Dec. 31 of the year following the
account owner's death. The final regulations change the determination
date from Dec. 31 of the year following death to Sept. 30 of that
The final regulations also clarify that if a designated beneficiary
dies after the account owner dies but before Sept. 30 of the year
following the account owner's death, the designated beneficiary (and not
the successor beneficiary) will continue to be the beneficiary for
required minimum distribution purposes. The final regulations provide
that if the account owner is married on Jan. 1 of a given year, he or
she will be regarded as having been married for the entire year for
required minimum distribution purposes.
Because the final regulations allow for delaying the determination of
the designated beneficiary for required minimum distribution purposes
until Sept. 30 of the year following the account owner's death, a
disclaimer can be used to change the designated beneficiary to a person
with a longer life expectancy than the primary beneficiary. I.R.C.
section 2518 requires that a disclaimer be made within nine months of
the decedent's death in order for the disclaimer to be "qualified."
However, the determination date for required minimum distribution
purposes falls after the nine-month disclaimer period expires. The final
regulations clarify that a disclaimer must be "qualified" to change the
designated beneficiary for minimum distribution purposes.
The IRS refused to adopt in the final regulations requests from
commentators that if an estate is 1) named as the beneficiary of a
retirement account, or 2) would become a beneficiary by operation of
law, then the estate's beneficiary could replace the estate as the
This refusal highlights the need for retirement account owners to
review their retirement account beneficiary designations. Failure to
carefully consider and designate a beneficiary could lead to the
benefits being paid to the owner's estate, with undesirable distribution
and income tax consequences.
Trusts as Beneficiaries
The final regulations provide that documentation of a trust as
beneficiary must be provided to the plan administrator, IRA custodian,
and so on, no later than Oct. 31 of the year following the account
Election to Tax Revocable Trust as Part of Estate
The final regulations clarify that a revocable trust's election to be
treated as part of an estate under I.R.C. section 645 will not cause the
trust to fail to be a qualified beneficiary for purposes of I.R.C.
section 401(a)(9), provided the trust continues to be a trust under
state law. This is an important clarification that should help avoid
conflicts between the trust's income tax planning and the trust
beneficiary's ability to receive distributions from the trust over his
or her life expectancy.
The issue of separate accounts arises in the context of an account
owner who has designated multiple beneficiaries. If maximum income tax
deferral is desired, then the ability to divide the account after death
and allow each beneficiary to use his or her respective life expectancy
when determining the amount of the required minimum distribution is
Under the 2001 proposed regulations, it was not entirely clear that
this result could be achieved. The final regulations clarify that
separate accounts with different beneficiaries can be established both
before and after the required beginning date. The separate accounts will
be recognized for required minimum distribution purposes after the
account owner's death. If the separate account beneficiary's life
expectancy is the only factor to be used for determining that person's
required minimum distributions, then the separate account must be
established no later than Dec. 31 of the year following the account
The final regulations fail to clarify when separate accounts can be
established if a trust with multiple beneficiaries is the beneficiary of
a retirement account. At a minimum, the beneficiary designation must
specify that the account is to be divided into separate accounts. Given
the uncertainty, it is preferable to divide the IRA into separate IRAs,
each with its own individual beneficiary, prior to the account owner's
death when it is practical to do so.
Surviving Spouse's Elections
The final regulations indicate that a surviving spouse may elect to
treat an inherited IRA as his or her own at any time after the account
owner's death, and that the required minimum distribution for the year
of death is determined as though the deceased spouse lived the entire
year. Further, the surviving spouse (provided he or she is the account
beneficiary) must receive the year-of-death required minimum
distribution to the extent such amount was not distributed during the
The final regulations also provide that a surviving spouse can roll
over distributions received from the deceased spouse's IRA, provided
such distributions do not constitute required minimum distributions to
Guidance for Qualified Plan Administrators and IRA Custodians
The IRS has not yet published procedures for amending qualified plans
to reflect the final regulations, though it intends to do so. As for IRA
custodians, Rev. Proc. 2002-10 (2002-4 I.R.B. 401) provides guidance on
when IRA documents must be updated for the final regulations. You can
find 2002-4 I.R.B. 401 at www.irs.ustreas.gov/bus_info/bullet.html.
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. He also is a
frequent speaker on estate planning topics.
While the final regulations address many important issues, some
significant questions still remain, including:
1. Will a direction in a revocable living trust to pay estate taxes
on the grantor/account owner's estate still prevent the trust from being
a qualified beneficiary? The answer should be no, as long as the taxes
are paid before the Sept. 30 determination date.
2. Must a trust that is designated as a beneficiary be a "conduit
trust" in order to avoid counting contingent remainder beneficiaries
when applying the "look through" rules of Treas. Reg.
§1.401(a)(9)-4?2 Many commentators
believe that use of this type of trust is required to avoid having to
consider contingent remainder beneficiaries' ages, regardless of how
remote the beneficial interest.3 However,
Treas. Reg. §1.401(a)(9)-4, A-1 indicates that members of a class
of beneficiaries that is capable of expansion or contraction will be
treated as identifiable if the class member with the shortest life
expectancy can be identified.
3. Can a "dynasty trust" be a qualified beneficiary of a qualified
plan or IRA? We believe the answer to be yes, though other commentators
4. Can the beneficiary of an inherited retirement account designate
the beneficiary(s) following his or her death? The answer should be yes;
however, the terms of the plan document or IRA adoption agreement must
allow for this and thus must be consulted.
The final regulations improve in many ways upon last year's proposed
regulations. Taxpayers and their advisers can operate with greater
certainty concerning the simplified distribution rules and can plan more
effectively to increase an account owner's ability to defer the income
tax liability attributable to qualified plan and IRA accounts. The final
regulations also remind of the importance of reviewing beneficiary
designations and trust documents to ensure that full advantage is taken
of the new rules.
To view the entire text of the final regulations online, visit the
"estate planning in depth" section of www.estatecounselors.com.
1 Andrew J. Willms
& Jason R. Handal, Simplified Rules on IRA and Retirement Plan
Distributions, 74 Wis. Law. 10 (September 2001).
2 A "conduit
trust" is a trust in which the trustee does not have the power to hold
or retain retirement plan distributions inside the trust. Rather, any
amount distributed from the retirement account must be immediately
distributed to a single trust beneficiary. Although a trust is not a
person, and therefore has no actual life expectancy, the "look through"
rules allow a qualified trust to use the life expectancy of the oldest
trust beneficiary when determining the amount of required minimum
Priv. Ltr. Rul. 200228025 (July 12, 2002).