Distribution of Plan Assets After the Participants Death-New articles, ABA newsletters and Community Events

Distribution of Plan Assets After the Participants Death

On Ps death, Plan assets are distributed to Ps beneficiaries in accordance with rules that change, depending upon the beneficiaries identities and the date of Ps death. First if the beneficiary is Ps spouse, the spouse can always roll over the Plan assets into a new IRA, giving the spouse the ability to use his or her own life expectancy and name a new DB, achieving even greater deferral. This ability to roll over Plan assets is limited to Ps spouse, and only if the beneficiary is the spouse individually, not a trust for his or her benefit. Although the spouse has other options, rolling over Plan assets will almost always be the best choice. Second, if the beneficiary is not Ps spouse and if P dies before the RBD, there are two options. If the beneficiary is a DB, then the beneficiary can withdraw Plan assets over his or her life expectancy. If the beneficiary is not a DB, then the beneficiary must withdraw all Plan assets (and pay income taxes on the withdrawal) within 5 years of Ps death. Note that the 5-year rule also applies if the DB fails to make his or her first required distribution by December 31 of the year after the year in which P dies. Third, if the beneficiary is not Ps spouse and if P dies after the RBD, the beneficiary must withdraw Plan assets "at least as rapidly" as P did. As you might expect given these horribly complicated rules, "at least as rapidly" does not actually mean at least as rapidly, but rather using the same method, as P did. This can have adverse consequences for Ps beneficiaries. For example, assume that P never filled out a beneficiary designation, or named her estate as her beneficiary, on the RBD. Assume further that she never elected otherwise, so the IRS deemed her to be making minimum distributions using the recalculation method. Finally, assume that her will directs that Ps two daughters are entitled to all the property of her estate. Under this example, P has no DB, so only Ps life expectancy can be used. On Ps death, her withdrawal method must be used by her estate and subsequently by her daughters. Because Ps recalculated life expectancy after her death is zero, all of the Plan assets must be withdrawn by December 31 of the year after the year in which P died, and income tax at ordinary rates must be paid on the entire amount. All future deferral is lost. By contrast, had P named her daughters individually (or qualifying trusts for their benefit), the daughters could have withdrawn Plan assets over the oldest daughters life expectancy.