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Beating the Beneficiary Blues

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By April K. Caudill

A lifetime payout was permitted to each of three IRA beneficiaries, according to a recent private letter ruling, even though the decedent had not divided the IRA into separate accounts before her death. This is one of the earliest rulings to take into account provisions of the final 2002 minimum distribution regulations.

The taxpayer, who we will call Andy, was one of three beneficiaries of his mothers IRA when she died in late 1999. The other two were siblings of Andys, and the IRA was left to them in equal shares. Andys mother had not yet reached her required beginning date when she died.

When an IRA owner dies before his or her required beginning date, final regulations state that distributions from the account must be made either within a five-year period following death or under a life expectancy rule. The life expectancy rule provides for distributions over the life or life expectancy of the designated beneficiary, determined in the year following the owners death and reduced by one for each year that elapses thereafter.

The final regulations issued in 2002 also provide that for minimum distribution purposes, a beneficiary determination is made as of Sept. 30 of the year after the death of the IRA owner. Prior to this date, various planning steps may be taken with the account proceeds, such as execution of disclaimers, payout of a charitable interest or the creation of separate accounts.

According to the private ruling, the IRA was divided into three separate accounts in 2000, during the year after the mothers death. The ruling approved the payout of each separate account over the life expectancy of the beneficiary to whom it was payable.

This ruling was unusual in that it spans a time period during which three different sets of regulations affected required minimum distributions. One set of provisions was in effect when the decedent died. These were replaced by new proposed rules in 2001 and final regulations in 2002. The ruling referred to all three sets of regulations.

Beneficiaries of accounts governed by the final regulations will no longer have to take payouts over the shorter life expectancies of older beneficiaries, provided a few simple planning steps are followed. The final regulations make the kind of planning flexibility exhibited by this ruling a matter of routine. (The number of this Letter Ruling is 200307095.)

April K. Caudill, J.D., CLU, ChFC, is managing editor of Tax Facts and ASRS, National Underwriter Company publications.

Reproduced from National Underwriter Edition, April 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.