Magazine article The CPA Journal

Pension Distributions to Estates as Beneficiaries

Magazine article The CPA Journal

Pension Distributions to Estates as Beneficiaries

Article excerpt

Pensions have become one of the most significant assets that Americans own. Beneficiary forms rather than wills will be directing an increasingly larger proportion of decedents' distributions. It is imperative for estate planners to focus clearly on pension designations to ensure that they are coordinated with the rest of the estate plan.

To divide assets equitable among heirs, the most feasible way to coordinate pension assets with the rest of the estate plan is to simply designate the client's estate as the postmortem beneficiary. Unfortunately, such planning has potentially adverse consequences. Some individuals have been accumulating large pension assets and, at the same time, other sub stantial assets with which to retire. Many of these people would typically prefer to keep money in their pension to ensure tax-deferred growth for the longest possible period and perhaps to pass their pension assets on to subsequent generations.

In analyzing pension distribution planning, two important considerations are 1) whether the participant has reached the required beginning date (i.e., April 1 of the calendar year following the calendar year that he or she became 7() for application of IRC Sec. 401(a)(9) minimum distributions and, 2) if this required beginning date has been reached, whether the distributions are subject to term certain or age recalculation rules. (Note that if a spouse is the designated beneficiary, distributions can be based upon recalculation for either or both of lives. Otherwise, only the participant's life may be recalculated.)

If a pension participant dies before the required beginning date, distributions must be made based on the five-year rule under IRC Sec. 401(a)(9)(B)(ii) or the exception to the five-year rule under IRC Sec. 401(a)(9)(B)(iii). However, if the estate is the postmortem beneficiary, the exception to the five-year rule is not available.

The five-year rule as set forth in Treasury Prop. Reg. 1.401(a)(91, Q & A C-2, mandates that the participant's entire plan balance must be distributed as of December 31 of the calendar year that contains the fifth anniversary of the date of the employee's death. The exception to the five-year rule requires that the plan balance be distributed over the life of the nonspouse designated beneficiary or within the life expectancy of the nonspouse designated beneficiary.

The default rule (i.e., should the fiveyear rules not have been chosen) for a surviving spouse as the designated beneficiary is the exception to the five-year rule. While the exception to the five-year rule generally requires distributions to commence by December 31 of the calendar year immediately following the calendar year in which the employee dies, a surviving spouse [as 1.401(a)(91, Q & A C3 ) indicates], may wait until December 31 of the calendar year in which the participant would have attained age 70 1/2 to commence distributions. For a nonspouse designated beneficiary, the default rule (should the exception to the five-year rule have been chosen) is the five-year rule. The default rules are reviewed in Q & A C4 of the same regulation section.

Simply stated, the exception to the fiveyear rule is not available to an estate as a designated beneficiary because it does not have a life expectancy.

Upon reaching the required beginning date, minimum distributions must be made under the recalculation or term certain method. …

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