Revocable trusts can be named as qualified plan beneficiaries.

• Author: Lipschultz, Brent S.

Employees often complete their employer retirement plan designated beneficiary forms without fully considering the income tax and estate tax implications of their choices. Because most employees today have a substantial percentage of their personal assets in qualified retirement vehicles (such as pensions, Sec. 401(k) plans and individual retirement accounts), an informed designation that integrates estate planning objectives is essential.

Not only do beneficiary designations provide direction as to who will receive the benefits on an employee's death, they also affect how rapidly the plan assets must be distributed during the employee's lifetime and after death. If the assets are not needed to preserve cash flow while the employee is alive, the goal should be to keep the assets inside the retirement account as long as possible, thus deferring income taxation and taking full advantage of the tax shelter aspects of a qualified plan. Because the Taxpayer Relief Act of 1997 repealed the excess accumulation and excess distribution taxes, there is no further need to worry about having too much accumulated in a plan.

At the same time, an employee should consider integrating qualified retirement plans into an overall estate plan. Taking advantage of the $625,000 (in 1998) applicable exclusion and/or preserving the unlimited marital deduction (in an effort to continue maximizing deferral opportunities) are important estate planning steps. Today, many individuals set up revocable living trusts to avoid probate and conservatorship proceedings, and to facilitate estate planning.

Until 1997, however, IRS regulations provided that, unless the trust became irrevocable at the employee's required beginning date, the employee was deemed to have no designated beneficiary. Generally, the required beginning date is April 1 of the year following the calendar year in which the participant reaches age 70 1/2, unless the participant is still working and is not a 5% owner.

If the trust is irrevocable on the date the employee reaches the required beginning date, the employee can take the distributions over his joint life expectancy and the life expectancy of the oldest trust designated beneficiary (subject to the minimum distribution incidental benefit (MDIB) rule), permitting a greater tax-deferred accumulation inside the plan. The MDIB rule deems the designated beneficiary (other than the participant's spouse) to be no more than 10 years younger than the employee...