Spousal Estate Planning Considerations for Qualified Plan Distributions
| Publication year | 1992 |
| Pages | 725 |
| Citation | Vol. 21 No. 4 Pg. 725 |
1992, April, Pg. 725. Spousal Estate Planning Considerations For Qualified Plan Distributions
Since the Tax Reform Act of 1986 complicated the qualified plan distribution rules, reams of paper and thousands of hours of time have been devoted to analyzing and explaining the alternatives available in planning for such distributions. This article is not intended to compete with those works of art. Instead, it discusses certain special considerations advisors of married clients should take into account in recommending courses of action in estate planning and distribution planning matters. The three main sections focus, respectively, on general qualified plan distributions, estate tax rules and planning options.
Generally, a participant in a qualified plan ("plan") must begin receiving distributions by April 1 of the year following the calendar year in which the participant attains age 70$1/2, even if he or she still is employed on that date.(fn1) (Exceptions to this rule are available if a TEFRA § 242(b) election was made and still is in effect.(fn2)) The date that minimum required distributions must commence is called the participant's "required beginning date."(fn3) Because many plan participants desire to defer distribution of their plan interests as long as possible, postponement of distributions, to the extent possible, becomes an important goal.
The minimum amount that must be distributed each year is the amount of the participant's plan interest as of the last plan valuation date in the preceding year, divided by the participant's life expectancy (or the joint life expectancies of the participant and his or her designated beneficiary).(fn4) If the participant's designated beneficiary is not the participant's spouse, a second calculation must be made to ensure that the minimum distribution incidental benefit ("MDIB") rules are met.(fn5) The MDIB calculation ensures that the participant does not decrease the annual amount that must be distributed during the life of the participant by naming a designated beneficiary much younger than the participant so that the joint life expectancy of the participant and his designated beneficiary is lengthened. The larger of the minimum amount determined under Internal Revenue Code ("Code") § 401(a)(9) or the MDIB amount is the minimum amount that must be distributed each year.(fn6)
If the designated beneficiary is younger than the participant, minimum required distributions will be calculated over the joint lives of the participant and the designated beneficiary (within the MDIB rules). This will result in smaller required distributions than if the participant's life expectancy alone is used. Specific rules apply if multiple designated beneficiaries are named.(fn7) A trust may be a designated beneficiary (for purposes of calculating the minimum required distributions) only if the trust satisfies certain requirements, which are discussed below.(fn8)
If a participant dies after his or her required beginning date, the plan distributions must continue to be made at least as rapidly as the distribution method in effect on the day before the participant's death (without regard to the MDIB requirements).(fn9)
If the participant dies before his or her required beginning date, the participant's entire plan interest must be distributed by the first December 31 after the fifth anniversary of the participant's death.(fn10) Alternatively, distributions may be made over the life of the participant's designated beneficiary if the distributions commence by December 31 of the calendar year following the calendar year of the participant's death.(fn11) In addition, if the designated beneficiary is the participant's spouse, distributions may be
If the plan allows the surviving spouse to take a lump sum distribution, the surviving spouse may roll over the lump sum distribution to his or her own individual retirement account ("IRA").(fn13) Once this is done, the surviving spouse may postpone distributions from the IRA until his or her required beginning date. The IRA distributions then can be made over the life expectancy of the spouse (or the joint life expectancies of the spouse and the spouse's designated beneficiary, such as a child).(fn14)
For purposes of the minimum required distribution rules, life expectancies are determined using the expected return multiples in Tables V and VI of the Code § 72 regulations.(fn15) The general rule in determining life expectancies is to use the attained ages of the participant and the designated beneficiary in the calendar year in which the participant attains age 70$1/2.(fn16) However, if the plan permits or requires it, the participant's life expectancy may be recalculated annually by redetermining the participant's life expectancy based on his or her most recently attained age each year.(fn17) The life expectancy of the participant's spouse also may be recalculated annually if the distribution period is over the joint lives of the participant and spouse.(fn18)
If the participant's life expectancy (or the joint life expectancies of the participant and spouse) is being recalculated each year, on the death of either, the life expectancy for the decedent becomes zero for purposes of determining the minimum required distribution amount for the year following the year of that person's death.(fn19) This recalculation may increase the annual distribution amount because subsequent distributions will be based on the life expectancy of the survivor.
Distributions to a married participant from a money purchase pension plan and trust (and from a defined benefit plan, a target benefit pension plan and profit-sharing plans that so provide) must be made in the form of a qualified joint and survivor annuity ("QJSA"). The participant's spouse must be the survivor annuitant unless (1) the participant waives the annuity form of distribution and (2) the participant's spouse consents to the waiver in writing in accordance with specific notice, consent and timing requirements.(fn20) A QJSA is an annuity for the life of the participant, with at least a 50 percent survivor annuity provided for the life of the participant's surviving spouse.(fn21) The QJSA may be waived only during the ninety-day period preceding the "annuity starting date" (generally, the date of commencement of distribution of the participant's plan interest).(fn22)
"The ability to reduce or postpone plan distributions by naming the spouse as beneficiary allows deferral of payment of income tax."
If the participant dies before distribution of his or her interest in a pension plan has commenced, the surviving spouse will be paid a qualified preretirement survivor annuity ("QPSA").(fn23) The QPSA may be waived by the participant prior to his or her death if the participant's spouse consents to the waiver.(fn24) The waiver of the QPSA (and the spouse's consent to that waiver) may be made only during specific election periods and only in compliance with certain notice requirements.(fn25)
The last of the various estate tax exclusions for qualified plan distributions that had been available was repealed in 1984.(fn26) Thus, like any other asset (such as a non-qualified annuity), the value of plan assets or the right to receive annuity payments is includible in the decedent's gross estate for federal estate tax purposes.(fn27) Such assets will be subject to estate tax except to the extent they are protected from estate tax by (1) the participant's unified credit or (2) the marital deduction for assets passing to a surviving spouse.
A survivor annuity payable to a surviving spouse qualifies for the marital deduction if the spouse is the only recipient of payments during his or her life and if a QTIP election is made with respect to the annuity.(fn28) If a surviving spouse has the right to a lump sum distribution and actually takes it, the amount of the lump sum distribution qualifies for the marital deduction.(fn29) In any other situation, the rights of the surviving spouse must meet the requirements of the Code's marital deduction provisions.(fn30) If the interest provided to the surviving spouse does not qualify for the marital deduction, it will be part of the participant's taxable estate and subject to estate tax to the extent the taxable estate exceeds $600,000.
A 15 percent excess retirement accumulations excise tax is imposed on the excess (if any) of: (1) the deceased participant's interest in all qualified plans, tax sheltered annuities, and IRAs over (2) the present value of a single life annuity with annual benefits equal to the annual threshold amount (in effect for the year of death) and based on the participant's life expectancy on the day before death.(fn31) For example, consider the hypothetical life annuity of an individual who dies at age 70, who has no grandfather election in effect under Code § 4980A and at whose death the IRS-published interest rate is 8 percent. The present value of that annuity would be $1,082,850.
The excess retirement accumulations tax is reported on Schedule S of Form 706. A rollover by the surviving...
To continue reading
Request your trial