Window available for change in beneficiary designation.

• Author: Flynn, Maura P.

Often, individuals who are already receiving payments from their retirement plans and individual retirement accounts (IRAs) may wish to change their designated beneficiaries. Although this is permissible, it could negatively affect the calculation of the individual's required minimum distributions (RMDs). The impact depends on the life expectancy of the new designated beneficiary.

Example: Individual X, now age 72, has an IRA on which he designated his spouse as the beneficiary. X begins taking annual distributions at age 70 1/2, based on his and his wife's joint life expectancy. After two years of payouts, X decides to restructure his estate plan, and change his designated beneficiary.

If the participant changes the designated beneficiary to substitute his child (who has a longer life expectancy than his spouse) after the required beginning date (April 1 of the year after age 70 1/2 is attained), Prop. Regs. Sec. 1.401 (a) (9)-1, Q&A E-5, requires him to continue using the life expectancy of the old designated beneficiary for purposes of determining the distribution period, even though that person is no longer a plan beneficiary. As a result, there is no ability to reduce payouts by designating a younger beneficiary once payments have begun. If the participant change the designated beneficiary to someone with a shorter life expectancy, the same regulation requires the participant to begin calculating RMDs using the new beneficiary's life expectancy. This would accelerate the RMD, which usually is not a desired result. Finally, the participant names a nonindividual as the designated beneficiary, he will be treated as not having designated a beneficiary for purposes of calculating the RMD.

There is an exception to this rule in the proposed regulations, highlighted in Letter Ruling 9704029. Under Prop. Regs. Sec. 1.401 (a) (9)-1, Q&A D-5, the beneficiary of a trust is treated as the participant's designated plan beneficiary for purposes of determining the distribution period under Sec. 401 (a) (9) (A) (ii), if all of the following requirements are met: 1. The trust is a valid trust under state law, or would be but for the fact there is no corpus. 2. The trust is irrevocable. 3. The beneficiaries of the trust, who are beneficiaries with respect to the trust's interests in the employee's benefit, are identifiable from the trust instrument. 4. A copy of the trust instrument is provided to the plan.

In Letter Ruling 9704029, a taxpayer receiving...