EMPLOYEE BENEFIT PLANS

May 2000

IRA BENEFICIARIES RECEIVE FAVORABLE PAYMENT SCHEDULE

By Kenneth L. Powell, CPA, David Berdon & Co. LLP

The tax law requires an IRA account holder to start taking minimum annual distributions no later than the April 1 following the year the individual attains age 70 wQ . It usually is beneficial for the account holder and family to take the distributions over as long a period as possible.

In a private letter ruling (PLR 199936052), the IRS clarified how the distribution rules apply to a contingent beneficiary that is entitled to benefits after the IRA beneficiary dies. Prior to this PLR, some IRA sponsors believed that the remaining IRA balance had to be distributed in a lump sum after the beneficiary's death. Fortunately, this is not how the IRS sees it.

An individual had established, by rollover, an IRA inherited from her spouse. The individual timely designated her child as the primary beneficiary of the IRA. The individual elected to receive the required minimum distributions from the IRA over the joint life expectancy of herself and the child, subject to the required minimum distribution incidental benefit (MDIB). When the individual dies, the child could continue to take minimum distributions over his life expectancy. In addition, if the child were to name a contingent beneficiary to receive the benefits upon his death, the contingent beneficiary could continue to take the benefits over the child's distribution period (i.e., remaining life expectancy).

This can be illustrated as follows: An individual, 70, designates a child, 45, as her primary beneficiary and elects a joint life annuity. The individual takes the IRA distribution over 26.2 years because of the MDIB requirement. The individual dies at age 80, and her child can take the distributions over 27.7 years [life expectancy at time of election (at age 45, 37.7), less the elapsed 10 years, equaling 27.7]. The child names a contingent beneficiary. When the child dies, the contingent beneficiary in effect can continue to take distributions over the child's remaining life expectancy.

Revising a Single Life Expectancy Schedule

The IRS also favorably ruled that designated IRA beneficiaries could take distributions over the life expectancy of the oldest beneficiary following the death of the IRA account holder even though the IRA account holder had elected to take distributions based upon a single life expectancy under the recalculation method (PLR 199951053). Once again, many plan sponsors had thought that the beneficiaries would be required to have the IRA account balance distributed by the end of the year following the account holder's death.

The IRS's reasoning was that the account holder timely designated her sons as beneficiaries and could have taken the minimum distributions based upon the joint life expectancy of her and her oldest son. The fact that the account holder elected to accelerate her distributions does not affect the required minimum distribution based upon designating beneficiaries. Thus, after the account holder's death, the beneficiaries can take distributions over the remaining life expectancy of the oldest beneficiary.

Remember, private letter rulings can only be used as authority for the taxpayer requesting it; however, they do indicate what the IRS is thinking on a subject. *