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IRA & Pension Planning
Planning Opportunities Following the Death of a Participant
Failure of a decedent to name a designated
beneficiary prior to his or her RBD or prior to his or her death may be curable
through post death action by the executor and/or beneficiaries of the estate.
Prior law required the participant to make an irrevocable election as to the
beneficiary(s) of his or her IRA or Plan, either prior to the participant's RBD
or before death, whichever came first. If the participant made no election,
e.g., had no designated beneficiary, then the IRA under the terms of the IRA
instrument would be payable to the decedent's estate. Under the new proposed
regulations, the IRS gives us an extended period of one year following the date of
death of the decedent.
The transfer to the children
does not trigger any income tax because it is an assignment of the right to
receive Income in Respect of a Decedent (IRD) to the person(s) who is entitled
to receive the IRD under the decedent's Will or Trust. Separate accounts can be
created for children and each can then defer the income taxes over their
respective life expectancies.
Example: Assume that following the death of the participant, the executor/trustee
(without taking any distributions of the IRA) transfers the IRA account
equally to the two children of the decedent who are the residuary
beneficiaries of the decedent’s estate. This is accomplished before
the end of the year following the date of death. The estate of the
decedent is not in receipt of the IRA, but the children have now become
the "designated beneficiaries."
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A surviving spouse or child of the decedent
can now disclaim the IRA and a younger contingent beneficiary can disclaim the new designated
beneficiary. (To "disclaim" is to renounce a bequest or gift.)
Example: A parent gives one of her children, Sarah, $5,000.
She writes in the gifting letter that if Sarah doesn't want the gift
(i.e., Sarah disclaims it) then the gift goes to Sarah's children.
Within 9 months of the gift (assuming Sarah doesn't spend any of the money),
Sarah can disclaim the gift and the $5,000 goes to Sarah's children.
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It appears that the executor
can now establish separate accounts if there are multiple individual and/or
individual and non-qualifying non-individual beneficiaries after the death of the
participant. If separate accounts are established by the end of the year following
the date of death, then each separate account is considered independently
for purposes of determining required distributions to the beneficiary of that account.
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