Retirement Planning, part 4

We have been working through a discussion about retirement planning and ways that you can coordinate retirement plans with wealth transfer planning. It can be challenging because retirement accounts are driven by income tax laws designed to encourage Americans to accumulate wealth for retirement, not for transferring wealth upon death.

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

Yesterday we looked at determining the Minimum Required Distribution (“MRD”) for the beneficiary after the plan participant dies. But what if there are multiple beneficiaries?

Multiple Beneficiaries
If there are multiple beneficiaries, there is no Designated Beneficiary unless all of the beneficiaries are individuals. If all of the beneficiaries are individuals, the Designated Beneficiary is the oldest beneficiary and it is his or her life expectancy that sets all MRDs. There are, however, two “escape hatches:”

(1)  The ability to remove a beneficiary through disclaimer or distribution of that beneficiary’s share. This must be done by September 30 of the year following the year of death.

Example: If the beneficiary designation is to a trust that distributes a specified sum to a charity and splits the balance between Child 1 and Child 2, you can make the distribution to charity prior to the critical date. That would leave you with the two individuals, Child 1 and Child 2, and the older of the two would be the Designated Beneficiary.

Example:  If the beneficiary designation is to a trust that distributes one-third to the participant’s mother and one third each to Child 1 and Child 2, if the beneficiary’s mother disclaims her interest prior to the critical date, the beneficiaries would be Child 1 and Child 2 and the older of the two would be the Designated Beneficiary.

(2)  The separate accounts rule: If the participant’s benefits under a plan are divided into separate accounts with different beneficiaries, the post-death MRD rules apply separately to each account. This allows multiple beneficiaries to each use their own life expectancy in determining post-death MRDs. (The separate account rule is not applicable to multiple beneficiaries who take their interests through a trust that is named as a beneficiary of the plan.)

Planning Tip: In order to satisfy compliance for the separate accounts rule, there must be pro rata sharing in gains and losses, which is normally done by fractional or percentage division. A pecuniary gift would not meet the definition unless (under local law or beneficiary designation) the gift shares in post-death gains and losses pro rata with the other beneficiaries’ shares. However, you can eliminate the recipient of a pecuniary gift from being included in the Designated Beneficiary determination by distributing that gift before September 30 of the year following the year in which the participant died.

Planning Tip: Separate accounts must be established by December 31 of the year following the year of the participant’s death to use separate life expectancies. If established later, the separate accounts are still effective for all other purposes.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look. You can find out how to reach us at our website: You can also find us on Facebook at and Twitter @thefisherlawoffice.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

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