© by Tax & Business Professionals

February 2001 Update

On January 17, 2001, the IRS published in 66 Federal Register 3928 (January 17, 2001) a new set of proposed rules, Prop. Regs. § 1.401(a)(9)-1 et seq., relating to IRA distributions that substantially simplify and modify a number of the rules discussed in the article "Income Tax and Estate Planning for Large IRAs." In particular, the proposed new rules significantly alter, among other components:

• the rules for computing the minimum required distributions from the IRA
• the rules relating to the designation of beneficiaries
• the rules governing the consequences of beneficiary designation on the minimum distribution requirements.

With respect to the subjects covered in "Income Tax and Estate Planning for Large IRAs," the new rules make several important changes. Chief among these are the following:

• All distribution requirements are keyed to a uniform life expectancy table rather than to the individual life expectancies of the IRA owner or beneficiary. In most cases, the uniform table will reduce the minimum distribution requirement for most owners and beneficiaries.
• No longer will it be necessary to designate a beneficiary before the required beginning date (usually age 70½). Now, the beneficiary can be determined as late as the end of the year following the IRA owner's death.
• No longer will it be necessary to deal with the question of recalculating life expectancies each year. More post-death distributions can now be spread over a number of years in more situations than was permissible under the prior proposed rules.

The net effect of these changes is not only to simplify the process of complying with the IRA rules but also to allow greater flexibility in planning and using IRAs.

From a planning perspective, one of the most significant effects of the new proposed rules is the change in the time at which the designated beneficiary is determined. As "Income Tax and Estate Planning for Large IRAs" explained, under the prior rules, if the beneficiary was not designated by the date at which distributions are required to begin (soon after age 70½), the options for IRA distributions were greatly reduced. Similarly, it was not possible to change the beneficiary after that date.

Under the newly proposed rules, however, the designated beneficiary is determined as of the end of the year following the death of the IRA owner. Therefore, beneficiary designations can be changed up to the date of death, because the designation of the beneficiary no longer affects the computation of the minimum required distribution. Moreover, certain post-death events, such as disclaimers, will now be taken into account in determining who is the designated beneficiary.

In a nutshell, the new distribution rules, subject to a number of exceptions and qualifications, are as follows:

1. Distributions must begin as of the required beginning date (same as under the old rules), but the minimum distribution is determined based on the IRA owner's life expectancy under a uniform table.
2. If the IRA owner dies before beginning distributions (i.e., the required beginning date), there are two basic alternatives:
   • If there is a designated beneficiary, over the life expectancy of the beneficiary;
   • If there is no designated beneficiary, over a five-year period.
3. If the IRA owner dies after beginning distributions (i.e., the required beginning date), there are two basic alternatives:
   • If there is a designated beneficiary, over the life expectancy of the beneficiary;
   • If there is no designated beneficiary, over the remaining life expectancy of the IRA owner immediately before his or her death.

Thus, even where the IRA owner dies without a designated beneficiary, in many instances the value of the IRA can be distributed over a period of years (determined by the IRA owner's life expectancy immediately prior to death), rather than all in the year after death, as the old rules required.

The new rules would also bear upon a number of other planning issues. They clarify certain questions about designating trusts as beneficiaries, although they retain the same basic approach as the earlier rules. Similarly, while keeping some of the provisions of the old rules on the rights of a surviving spouse to treat the IRA as his or her own, the new rules do make several important clarifications and modifications. Under the new rules, it now appears that if a trust is a beneficiary, even if the surviving spouse is the sole beneficiary, this may prevent the spouse from making this election.

The new rules also mark several important procedural changes in the rules. Now, for the first time, IRA trustees and custodians will be required to report to the IRS the amount of the minimum distribution requirement.

Officially, the IRS says the new proposed regulations will be effective beginning January 1, 2002. IRA owners and beneficiaries, however, may elect to apply the new rules in year 2001 for purposes of computing required distributions or they may continue to apply the old rules.

Published jointly by The Tax & Business Professionals, Inc. and the law firm of Newland & Associates as a service to their clients.

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