The biggest consideration in estate planning for qualified plans and individual retirement accounts (IRAs) is determining the “right” beneficiary.
Different rules apply between qualified retirement plans and IRAs that impact an account holder’s right to name a beneficiary other than a spouse.
Under the Retirement Equity Act of 1984 (REA), a participant in a qualified retirement plan must obtain the written consent of the spouse in order to name a beneficiary other than the spouse. This subject frequently is the subject of prenuptial agreements, and we address it in this chapter. The REA restrictions are inapplicable to IRAs because IRAs are not covered by the applicable parts of Employee Retirement Income Security Act (ERISA) and are not included in Internal Revenue Code Section 401(a)(11).
IRC Section 401(a)(9) — and, specifically, the rules concerning when the required minimum distributions must be paid out — apply to qualified retirement plans and IRAs, although the rules are inapplicable to Roth IRAs during the lifetimes of the account holder and the account holder’s spouse (if the spouse survives the account holder and is able to rollover the account).
The first consideration concerns when the account holder dies vis-à-vis that person’s “required beginning date.” The required beginning date is April 1 of the year following the year that the account holder attains the age of 70½ — unless the person is employed at that time and is less than a 5% owner, in which case it is the year in which the employee retires. There are only two possibilities for the account holder from the standpoint of distribution consideration: death before reaching the required beginning date, and death after reaching the required beginning date.
The second consideration is whether the now deceased account holder or participant has named a “designated beneficiary of the benefits.
It is very important to understand that not all named beneficiaries will qualify as “designated beneficiaries” under these rules, which directly affects when the beneficiaries must be forced out of the plan or IRA.
Again, there are only two available possibilities: either the decedent named a designated beneficiary, or there is no designated beneficiary, either because the decedent failed to name one or where the named beneficiary does not qualify as a designated beneficiary under the rules.
The third consideration is the identity of the designated beneficiary. The two options are, first, the surviving spouse, and, second, everyone else. As a general rule, in order to qualify as a designated beneficiary, one must be an individual, i.e., estates, entities such as corporations and a charity will not qualify as a designated beneficiary. The regulations make it clear that one cannot go beyond the beneficiary designation or the plan or IRA document, i.e., someone who obtains the benefits due to the laws of descent and distribution is not a designated beneficiary.
Death Before the Required Beginning Date
If the decedent dies before reaching the required beginning date, no minimum required minimum distribution need be made for the year following death of the account holder or participant if the designated beneficiary is the surviving spouse.