Retirement Plan Distributions: Representing the Surviving Spouse
| Publication year | 1986 |
| Pages | 1803 |
| Citation | Vol. 15 No. 10 Pg. 1803 |
1986, October, Pg. 1803. Retirement Plan Distributions: Representing the Surviving Spouse
Attorneys who represent a surviving spouse should be familiar with the rules governing distributions from the decedent's IRAs and qualified plans. "Qualified plans" comprise all pension, profit-sharing and stock bonus plans described in Internal Revenue Code ("Code") § 401(a), including self-employed plans, still commonly referred to as "Keogh" plans. "IRAs" are individual retirement accounts described in Code § 408(a). IRAs may be established by the decedent(fn1) or employer pursuant to a simplified employee pension.
This article provides an overview and highlights certain rights granted to the spouse by recent legislation and rulings. These rights are most important where the spouse's interests conflict with those of the decedent's other beneficiaries.
If the decedent ("D") dies before making his IRA contribution for any year, his executor may not contribute on his behalf.(fn2) However, D's non-working spouse ("S") may contribute up to $2,000 to a spousal IRA for the year of D's death, based upon D's compensation for that year,(fn3) if a joint return will be filed for D and S and if S will not reach the age of seventy and one-half years by the end of the year of D's death.(fn4) If death occurs on or before April 15, it appears that S may also contribute (by that date) for the previous year, if D had not done so before his death.
D's IRA documents should include either a specific beneficiary designation executed by D, or a backup beneficiary provision to take effect in its absence. If S is the beneficiary, she is entitled to the IRA funds, and has essentially two distribution options. The first option may satisfy a shorter range need for cash; the second may provide more effective tax deferral for a younger spouse.
Under the first option, S elects to take the funds as D's spouse-beneficiary. She may take current distributions as needed. She will be taxed at ordinary rates on amounts withdrawn. However, she will avoid the 10 percent penalty otherwise imposed on distributions prior to the age of fifty-nine and one-half years, regardless of her age or D's age at his death.(fn5) She may withdraw funds rapidly or defer commencement of distribution until the later of one year after D's death or the date D would have reached the age of seventy and one-half years.(fn6) If distributions had begun prior to D's death, payments must continue to S at least as rapidly as provided for in the distribution method in effect at the time of D's death.(fn7)
Using the second option, S may elect to treat the IRA (or the remaining portion if distribution had begun) as her own, or roll the funds into her own IRA.(fn8) Distributions do not have to commence until April 1 of the year following the year S (not D) reaches the age of seventy and one-half years.(fn9) However, the 10 percent penalty will be imposed on funds withdrawn before S reaches the age of fifty-nine and one-half years, unless she is disabled.(fn10)
Under the second option, S has the right to name her own beneficiary for any funds remaining on deposit at her death. Under the first option, depending upon the governing documents, the remaining funds may pass to the secondary beneficiary named by D, not to S's beneficiary.
If S has not been named as beneficiary, she is not directly entitled to D's IRA.
However, she may assert an indirect claim through augmented estate proceedings. Although the augmented estate excludes any "pension" payable to a non-spouse beneficiary,(fn11) an IRA probably is not a pension for this purpose.(fn12)
The Retirement Equity Act of 1984 ("REA")(fn13) grants to S direct and automatic rights to D's qualified plan...
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