Coordinating Retirement Plan Beneficiary Designations with Estate Planning - Ohio
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Ohio Fall Meeting 2000
October 7-8, 2000
Coordinating Retirement Plan
Beneficiary Designations
with Estate Planning
Joan L. Bozek, J.D.
Senior Vice President
Senior Fiduciary Consultant
Merrill Lynch Trust Company, FSB
Wealth Management ServicesJoan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
TEN THINGS YOU MUST KNOW
TO BE AN EDUCATED PLANNER:
1. Know with whom youre dealing:
IRAs:
a. Where are you in the institution? There are different
approaches to handling retirement beneficiary designations
within the same institutions! Factors that determine how
willing an institution is to work with you, include:
High net worth department (private bank/trust
company) or retail?
Level of assets in IRA?
National institution/brokerage or local bank?
Fees client pays for IRA/asset management?
b. Watch your middle! You will probably encounter
institutions most willing to work with your client on
customized beneficiary designations at two extremes:
Smaller institutions interested in accommodating
significant clients are often willing to accept
customized beneficiary designations on an attorneys
recommendation.
Larger institutions with the in-house understanding,
specialized IRA administration or planning groups
may understand, and can be flexible in, accepting
customized beneficiary designations.
Many mid-sized institutions have some fire power,
but often not the level needed to comprehend and
administer these documents and will balk at anything
outside their procedures.
2Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
c. You get what you pay for!
Basic Brokerages and discount houses are often
unwilling to provide the staff and support to
administer complex beneficiary designations (or
assume the risk for doing so).
This position is justified based on fee provided.
Qualified Retirement Plans:
a. The simpler the better! Qualified Plan sponsors, trustees
and their administrators consider the implementation of
sophisticated beneficiary designations an expense and a
significant risk.
Defined benefit plans of larger employers will provide
annuity payments under various options because the
amount and timing of distributions are relatively fixed,
and thus, the administrative costs fairly manageable
Defined Contributions plans (401(k), profit sharing,
money purchase, ESOPs, Comparability Plans, etc.)
are less likely to accept customized beneficiary
designations.
This position is justified based on administrative
difficulties; costs and limitations on benefits.
b. Why dont you just leave? factor: Once an employee
has retired (or after an employee has died), companies
really dont want to deal with the retired employee (or the
beneficiaries) to set up payment strategies that favor the
beneficiaries tax planning.
c. If the qualified plan permits single sum distributions,
why would you want to leave assets in the plan anyway?
If your client resides in a state(s) which offers IRA creditor
protection, OR if your client is not concerned about
creditor protection, an IRA rollover is typically in the
clients best estate planning interests.
3Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
2. Climb Higher, Jump Further!
a. If you encounter resistance, ask that the institutions legal
counsel consider your documents. In many institutions,
you will be told by business line personnel that a
customized beneficiary designation cannot be accepted.
In many cases, you will also be told that you cannot speak
with the legal reviewer of your documents.
Be persistent, and keep asking to speak to the next
level supervisor until you can reach no higher. We
humans tend to respond to only what they are
comfortable with. You may be helping to educate
personnel, but it may be worth it for your client!
b. On the other hand, most institutional documents clearly
state that a beneficiary must be designated on a form
acceptable to the institution!
If an institution wont accept a beneficiary
designation, do not assume it will stand, should your
client die without an acceptable beneficiary
designation on file with the institution. Again, the
requirement of an acceptable beneficiary designation
is part of the IRA/retirement plan contract.
If an institution is unresponsive, and if the assets are
in an IRA, discuss with your client the possibility of
finding a more enlightened sponsor.
3. What does the document say?
a. What the IRS giveth, the documents can taketh away!
Section 401(a)(9) and the IRS regulations (still) proposed
thereunder, illuminate both the minimum and the most
liberal options for distributions consistent with the law.
As long as a plan or an IRA complies with the required
minimum distribution options, it need not offer the most
liberal options otherwise available under the proposed
regs.
4Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
Today, qualified plans, in addition to offering
required annuity options, more regularly offer single
sum distributions to participants. When? as soon
as practicable after retirement or death.
For spouses, this option can facilitate rollovers,
but makes disclaimer issues more compelling.
For non-spouse beneficiaries, this method of
distribution creates an income tax nightmare.
Regardless that the regulations permit a stretch
distribution over the life of a beneficiary (death
pre-RBD) or over the remaining period selected
at RBD (for death post-RBD), the plan will
govern.
IRA documents may also impose similar limitations!
Before institutions figured out the distribution rules,
IRA documents commonly required that the IRA be
paid our within five (5) years of the IRA owners
death.
Would that language prevent a beneficiary who
otherwise wants to receive distributions over her
life expectancy (owner died pre-RBD) from doing
so? An IRA is, after all, a contractual agreement,
and the beneficiary is a third party beneficiary.
Thankfully, in many cases, institutions are being
flexible but not all!
4. Whos steering the ship - Trustee or Custodian?
a. IRA custodians (and plan administrators) may not have
the power to be flexible!
Custodians do not have the fiduciary powers
necessary to implement many beneficiary
designations, particularly those naming trusts.
Custodians often dont have principal and
income accounting options.
5Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
Custodians may not have an understanding of
QTIP rules that may still be applicable under old
Rev. Rul. 89-89 QTIP trusts.
b. Some IRA custodians (and plan administrators) do not
have the knowledge base to understand estate planning.
Plan administrators particularly are unqualified to
make decisions on implementation of estate planning
beneficiary designations.
c. IRA Trustees may have more capacity to implement estate
planning options:
Trust powers of a Trustee IRA sponsor enable
principal and income accounting.
Often possess expertise to help in administering more
complex beneficiary designations, such as fractional
splits.
Trusteed IRAs are a newer product, and documents
may have been updated to permit most liberal
distribution periods.
May include internal trust provisions (trust provisions
incorporated into the body of the IRA, thus
eliminating the need for a separate IRA and a separate
trust instrument.)
May provide more complex beneficiary designation
prototypes to prompt estate planning based elections.
Likely to be more able to review and accept
customized beneficiary designations.
5. Beneficiary Designations and the K.I.S.S.* of Death!
* K.I.S.S. = Keep It Simple, Stupid!
6Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
a. Institutional Beneficiary Designations tend to suffer from
simplicity.
Prototypes prompt only primary and contingent
beneficiaries. Numerous contingencies covered in
an estate plan arent addressed in most beneficiary
designations.
If two (2) siblings are named as primary
beneficiaries of Moms IRA, and one sibling dies
before Mom, who takes the deceased siblings
share?
How does one name a spouse and a trust as co-
primary beneficiaries?
If Dad is named as primary beneficiary and the
option of a disclaimer into a credit shelter trust
is desired, should the credit shelter trust simply
be named as contingent beneficiary? What
happens if the credit shelter trust is amended?
Revoked? What happens if Dad dies first?
b. The Fault with Defaults:
Document defaults may determine the beneficiary of
retirement assets in the event of unexpected
circumstances. But, they may produce unintended
results:
Most defaults will determine who receives assets
if one of several primary beneficiaries should
predecease the retirement account owner. In most
cases, the deceased primary beneficiarys share
will be divided among surviving primary
beneficiaries.
Result: A clients desire that his estate be
divided in a stirpital manner may be defeated
by a per capita default in a retirement plan
document.
7Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
What if there is no beneficiary designation, or it is
lost?
Traditional default is the retirement account
owners estate, although many institutions are
modifying this default
6. Customized Beneficiary Designations - Your best
alternative.
a. Draft the beneficiary designation as you would draft the
will or trust.
The only way to be certain that distribution of
retirement assets coordinates with the estate plan is
with a customized beneficiary designation document.
Customized documents eliminate unintended
results from defaults.
Most IRAs document will permit its dispositive
provisions (defaults) to be amended.
b. If disclaimer planning is possible, build in a disclaimer
beneficiary and contingent beneficiaries.
Multiple layers of contingent beneficiaries can be
included.
c. Clearly identify formula clauses and, if possible, provide
an example!
Many institutions will not honor formula clauses
because their implementation requires knowledge of
other assets in the clients estate, or direction from
an executor/personal representative or trustee.
Limiting (eliminating?) an institutions duty to obtain
this information, or placing the burden of
implementing the formula split squarely on the
executor/personal representative who possesses the
knowledge of the estate (and relieving the institution
of liability for their actions) can go a long way towards
acceptance by an institution.
8Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
d. For IRAs, identify each beneficiarys method of
distribution. (Here is another difference between IRAs
and qualified plans, as in most qualified plans, the method
of distribution can be only what is set forth in the plan.)
IRA Owners can dictate how IRA assets may be
distributed as long as they comply with minimum
distribution laws and proposed regulations. A
customized beneficiary designation can be used to
identify different methods of distribution for different
beneficiaries (individuals versus trusts; spouse versus
children.) If a beneficiary is a trust, carefully determine
the method of distribution to achieve desired tax
benefits as well as title holding interests.
e. Use customary beneficiary designations to document
RMD elections: Usually a recommended course of
action. But see Item 10, below, for possible changes in
the future of RMD elections.
7. To Vest or Not to Vest: The right of beneficiaries to name
successors.
a. Institutional documents do not typically address the power
of beneficiaries to name successor beneficiaries.
In response to recent inquiries and on the heels of
PLR 199936052, many institutions have determined
that their documents do permit beneficiaries to name
successors beneficiaries for amounts remaining in an
IRA at the first beneficiarys death.
How is this done? Have you seen a Successor
Beneficiary Designation Form?
b. How does this result integrate with a clients estate plan
that provides for (1) continuing trusts for lineal
descendants; or (2) a clear bias against diversion of assets
to non-blood line individuals?
Should the client eliminate the right of a beneficiary
to name successors?
9Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
What about GST tax?
If you do build in a springing general power of
appointment in a beneficiary to help mitigate the GST
tax, what is the source of funds to pay estate tax in
the beneficiarys estate?
c. Who receives retirement assets if a beneficiary entitled to
name a successor beneficiary fails to do so?
Deceased beneficiarys estate?
Deceased IRA Owners estate?
Be careful! Qualified plan provisions particularly, but
also IRA documents, will govern!
8. Oh No! Not a Trust!
a. Even when an IRA Trustee offers trust provisions within
its IRA (or a separate trust prototype), your client will
likely be better served with a separate attorney drafted
document.
Institutional defaults may not track the clients needs.
Or, they may not even be contemplated under the
institutions document.
Institutional documents may not contain the
dispositve provisions desired by a client, including,
among others, the power to invade principal for
support, a limited power of appointment, and the
myriad of variable you discuss with a client in
tailoring the clients estate plan.
b. Carefully draft tax and administration expense payment
clauses. Institutional trusts will not coordinate your
clients testamentary tax payment clause with IRA
language.
Determine source of payment of estate tax.
Plan for income tax on minimum distributions that
may remain in trust as trust accounting principal.
10Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
If QTIP trust, determine source for payment of estate
tax arising from inclusion of QTIPd IRA assets in
spouses estate.
c. Follow the proposed regulations when seeking to create
a trust beneficiary that is a qualifying trust.
Qualifying Trust can be a beneficiary, with the eldest
trust beneficiary as designated beneficiary. General
rules for trust to qualify as beneficiary (Prop. Reg 1-
401(a)(9)-1 Q & A D5-6) to use eldest individual
trust beneficiary as designated beneficiary:
trust must be valid under state law.
trust may be revocable (as a result of IRS revision
to proposed regulations under 401(a)(9), issued
December 1997) under Wills and revocable trusts
that become irrevocable on death of owner.
all beneficiaries must be individuals and be
identifiable. Requires identification of beneficiary
with shortest life expectancy.
NOTE: IRS is beginning to look more
closely at who beneficiaries COULD be in
determining designated beneficiary for
purposes of life expectancy calculations. In
PLR 9809059, the sole current beneficiary
of a trust was not treated as the designated
beneficiary because at the beneficiarys death,
older siblings could potentially receive trust
benefits. As a result, the eldest sibling was
treated as the designated beneficiary. See also
199912041.
copy of trust must be provided to plan trustee or
IRA custodian, or, following December 1997
revisions, a statement identifying trust terms and
beneficiaries may be provided instead.
What if institution wont accept the trust or
retain the statement? Send it anyway: return
receipt requested.
11Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
If an institution requires a trust, send it.
Disclosing trust provisions is simpler than
having an institution reject the beneficiary
designation as is its right under most IRA
and qualified plan documents.
d. What is institutional knowledge of Rev. Rul. 2000-2?
Generally, awareness is pretty high, but interpretative
knowledge is still evolving.
In Rev. Rul. 2000-2, an IRA funded a QTIP trust,
under which the spouse was given the power to
compel the QTIP trustee to have annual IRA income
distributed to spouse. However, the QTIP trustee
was not required to withdraw all of the IRA income
except at the spouses request. The IRS ruled that
this option meet the spouses entitlement to all income
of a QTIP trust as required under Reg. 20.2056(b)-
5(f)(8). There was nothing in the IRA or the QTIP
trust that prevented the spouse from exercising this
power. Note too, that an RMD would be distributed
from the IRA to the QTIP trust, regardless of
distributions of income.
What is the impact of Rev. Rul. 2000-2? In early
distribution years after IRA owners death, when
IRA income may be greater than RMDs, the
QTIP Trustee must obtain from the IRA only
the RMD, unless spouse requests otherwise. If
spouse does not request distribution of all IRA
income, it remains inside the IRA, continuing
to grow on a tax deferred basis.
Although Rev. Rul. 2000-2 stated it obsoleted
Rev. Rul. 89-89 that is not entirely true in practice.
A valid, QTIPd IRA may still provide for the
IRA payment options described in Rev. Rul. 89-
89. In fact most IRA beneficiary designations
naming QTIP trusts and the QTIP trusts
themselves were drafted under 89-89, and will
require payments from the IRA consistent with
89-89. (In 89-89, the IRS ruled that an IRA
beneficiary designation must require, and QTIP
trustee must be compelled to direct, that the
12Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
greater of (a) all of the income earned by the IRA,
and (b) the minimum required distribution for
the year be paid to the QTIP trust. In essence,
all IRA and QTIP Trust accounting income must
be distributed to spouse under 89-89.) So dont
be trapped! Simply having 2000-2 does not
eliminate the need to distribute all IRA income
to the QTIP trust, if otherwise required under
the beneficiary designation and the QTIP trust.
e. QDOTs: The PLRs have recognized beneficiary
designations making an IRA payable to a QDOT for a
non-citizen spouse. Make sure the institutions document
does not preclude a QDOT as a beneficiary! Consider
including ability for QDOT trustee to invade IRA and
distribute to non-citizen spouse for hardship of the
spouse. Be very explicit if the beneficiary designation
should shift to the spouse outright, if the spouse becomes
a citizen!
9. Tracking RMD elections and other surprises.
a. Determine whether the custodian/trustee tracks RMD
elections and monitors periodic distributions to assure
RMD is met each year. (This is typically not an issue
with qualified plans that must assure RMDs are
distributed to individuals who have attained RBD in order
to maintain the plans qualified status.)
If not the institution, then who?
If you know that the institution does not track RMDs
and have assisted the client with planning, what is
your responsibility? Liability?
How does your liability compare with the clients
accountants responsibility? The accountants
Liability?
b. The transferred IRA: Coordinating the new IRAs
beneficiary designation with an existing estate plan.
13Joan L. Bozek, J.D.
Coordinating Retirement Plan Beneficiary Designations with Estate Planning Notes
How often do you review a clients estate plan?
Beneficiary Designations?
If you know a client has changed jobs, retired or
moved to a new state (Florida, for example) do you
suggest a review of a clients beneficiary designations?
Do you review clients beneficiary designations upon
divorce, remarriage or birth of a child?
10. Know what is happening in Washington.
Retirement Security and Savings Act: For plan years
beginning after December 31, 2000:
a. RMD rules would be simplified.
Upon the death of an owner of retirement assets, all
distributions could be made under the present law
applicable to post death RMDs for death prior to
RBD, regardless of the owners age at date of death.
In essence, the present at least as rapidly rule
for post death distributions applicable to
retirement asset owners who die after RBD would
be eliminated.
This would permit individual, non-spouse
beneficiaries to receive distributions over the
beneficiarys life expectancy even if the retirement
account owner had elected single life recalculate.
b. The excise tax applicable to the undistributed amount of
an annual RMD would be reduced from 50% to 10%.
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