Increased Attention To Distribution Planning From Retirement Plans

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Las Vegas

Planners are putting increased attention on distribution planning for their clients retirement plan assets, according to Rebecca S. Hanna, vice president advanced marketing for GE Financial Assurance Companies, speaking at a breakout session during this years LIMRA Advanced Sales Forum here.

“Demographics show this is becoming an growing issue as baby boomers come closer to retirement age,” she said. Furthermore, with the enormous amount of assets sitting in qualified plans, advisors must begin considering how those assets will be distributed.

“Right now it is estimated that there is in excess of $10 trillion in qualified plans–thats a lot of money and a tremendous opportunity for the industry,” she said.

To illustrate the importance of understanding the fundamentals of distribution planning, Hanna gave a basic example: Assume an IRA owner has an account value of $1 million and intends to postpone distributions from the account until he is age 70 1/2–at which time he will take minimum distributions. He has named his daughter and grandson as beneficiaries of his IRA.

Under this scenario, he will receive distributions until death, and his daughter and grandson will then receive distributions based on the life expectancy of his daughter. Assuming an 8% annual return, the total amount distributed is just over $9 million dollars.

An alternative here is to split the IRA into two equal parts, Hanna explained. Now, his daughter will receive income from her IRA while the grandson will receive income from his IRA. Using the same 8% assumed rate of return, the total amount distributed now exceeds $27 million.

While Hanna admits that 8% may be an aggressive rate of return to illustrate, “by splitting the IRA into two IRAs, were allowed to use both life expectancies rather than just one.” The result is increased deferral and increased total distributions, she said.

But IRA owners are not the only prospects when it comes to distribution planning. “How many of you have had agents come to you with questions from clients who have inherited IRAs?” The beneficiaries of qualified account balances need to know what their options are, Hanna explained.

And while recent regulations simplified retirement plan distribution planning, Hanna said that agents working in this market still need to be very careful when advising clients of their options.

One area that agents who are new to this market need to familiarize themselves with concerns the required beginning date for qualified retirement plan distributions. Many planners assume the required beginning date is equal to the owner/participants age of 70 1/2. Rather than focusing on that age, however, planners need to take a good look at the definition of the required beginning date, Hanna said. This may be an area of confusion for both planners and clients, she added.

The required beginning date is defined as April 1 of the year following the calendar year the owner/participant turns 70 1/2, Hanna continued. But if a surviving spouse inherits an IRA and is the sole designated beneficiary, then he or she may delay distributions until the end of the calendar year in which the owner would have attained age 70 1/2.

Another option for spouses inheriting IRAs is to roll the IRA into the spouses own IRA. In this instance, she said, the rules for determining the required beginning date of distributions “apply as if the spouse was the owner of the IRA all along.”

To better illustrate this, Hanna used an example: Assume John is the IRA owner and dies at age 65. His wife, Mary, is the sole designated beneficiary at age 71. If Mary rolls Johns IRA into her own, her required beginning date is based on her age–as if she owned the IRA all along.

But, if Mary continues as beneficiary of Johns IRA without rolling it into her own, she may delay distributions until the required beginning date based on Johns age.

Both these options only are available to Mary because she is Johns spouse, Hanna explained.

Another scenario that will alter the required beginning date in this example involves the use of an annuity as a method of providing distributions from the IRA. “For distributions from an IRA funded with a qualified annuity, the required beginning date is set when distributions begin,” she said.

While Hanna explained a great deal about the required beginning date, she said there are many other areas that need to be understood by advisors when planning their clients retirement distributions.

Another area that may create some confusion among both clients and planners has to do with the designated beneficiary definition.

“The designated beneficiary must be a live person,” she explained. The designated beneficiary must be named as of the date of death, but in calculating the minimum required distribution from a retirement account, the designated beneficiary is not determined until Sept. 30 of the year after death.

To illustrate how this can impact future planning, Hanna gave this example: A woman names her daughter and a trust as equal beneficiaries of her IRA. When she dies, the designated beneficiaries are determined the following Sept. 30. Since a trust is named as a designated beneficiary and the trust is not a living person, on Sept. 30, there will be considered to be no designated beneficiaries of the account. According to the rule, all designated beneficiaries must be real people. If any beneficiary is not a real person, the result is there are no designated beneficiaries. “This is a major pitfall,” she said.

To remedy this problem, Hanna suggested making sure that the entire interest due to nonperson beneficiaries be paid prior to Sept. 30. “Get nonhumans out of the picture before 12:01 a.m. of Sept. 30 after the owner dies,” she said.

“Then youve cleaned up the mistake,” she said.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 25, 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.