KEYWORD:

IRAs: NEW RULES FOR DISTRIBUTIONS

Last year, this publication reported new rules that were issued on January 11, 2001, concerning distributions from IRAs and certain qualified retirement plans. Those rules, which were in the form of proposed IRS Regulations, represented a significant simplification of how to identify a designated beneficiary ("DB") and how to calculate the minimum required distributions ("MRDs") that account owners must withdraw once they reach their required beginning date ("RBD"). On April 17 of this year, the IRS issued final Regulations which further simplify and clarify the rules. Before we examine some of the new rules, let's review some of the basic concepts.

Account owners must begin taking MRDs from their IRAs by their RBD, which is generally April 1 following the year in which they attain age 70 ½. An account owner may withdraw funds from the account before his RBD (but after attaining age 59 ½), and may withdraw more than the MRDs. The RBD simply marks the date at which the account owner must begin taking MRDs.

Only a Designated Beneficiary ("DB"), who must be an individual, may use his life expectancy to calculate MRDs from the account of a deceased owner. However, certain qualified trusts may be eligible to use a rule that allows the life expectancy of the oldest beneficiary of the trust to be considered for determining MRDs. The actual named beneficiary does not have the meaning as a DB. For example, an account owner's estate may be the actual beneficiary of the account but is not a DB for the determination of MRDs.

The concept of MRDs is important because funds distributed from an IRA are fully taxable to the recipient. Financial advisors generally recommend that only the MRDs be withdrawn so the retirement account assets can continue to accumulate on a tax deferred basis as long as possible. The Final Regulations revised the table that most account owners will use to determine their MRDs. The new table reflects updated mortality rates which allows account owners to withdraw their MRDs over a longer period. DBs will use a different table to determine their MRDs.

The 2001 Regulations provided that the DB of an account owner may be determined as late as December 31 of the year after the account owner's death. The designation date has been moved up to September 30 of the year following the year of the account owner's death. Determination of the DB does not mean that a new beneficiary may be named by the executor, beneficiary, or others after the account owner's death. Rather, disclaimers or distributions occurring after the account owner's death may be utilized prior to the designation date to eliminate certain beneficiaries who would not qualify as DBs. This increases the flexibility of the executor or custodian to avoid unintended or disadvantageous results.

The requirements for when a trust may be "looked through" to the beneficiaries of the trust remain complex with some modifications. For example, certain documentation must be provided to the IRA custodian which must be done by October 31 of the year following death.

The final Regulations are effective on January 1, 2003, but may be used for determining 2002 MRDs.

Conclusion. While the IRS has greatly simplified the difficult rules concerning IRA distributions to account owners and beneficiaries, planning with IRAs is still complex. The decisions regarding MRDs and beneficiary designations will have a significant impact upon both the account owner during his lifetime as well as upon the beneficiaries. While these regulations have greatly improved the estate planning options available to IRA owners, careful review and discussions with your estate planning professional are still the best way to maximize the advantage of these new regulations.

[Robert T. Gardner is an attorney at Lange, Simpson, Robinson & Somerville LLP who practices primarily in the area of estate planning and administration. This article first appeared in the June 2002 issue of Senior Living.]