ShareThisBy ALAN S. NOVICK
Tuesday, October 31, 2006
Over 30 years ago, the dean of the Harvard Law School told an audience of lawyers and estate planning professional that if a delegation from Mars came to the United States to study retirement planning, they would report back to their leaders that the goal of the Internal Revenue Code was to make it too complicated for anyone to attempt to put money aside for retirement.
Since then the rules for retirement planning, pensions plans, profit sharing plans and Individual Retirement Accounts, (IRA's) have been attacked, changed, and made more complicated, and also simpler by various statutory amendments.
IRA reforms were supposed to make it easy and uncomplicated for a working person to put aside money for retirement, while also providing some tax incentives to do so. The last round of amendments has actually done away with many of the complications, and even added some tax saving possibilities that are possible to achieve without stumbling on complicated formulas relating to amount of contribution and withdrawals from an IRA account.
Just two of the legal code sections relating to these less complicated provisions take up about 40 pages of single space typing, and that is without counting the regulations the Treasury Department routinely issues to help us understand what the code actually means. Yes, there is a bit of cynicism in that last sentence, but we can still distill some of the general principles that now apply, and which can be effective in shaping the retirement plans and estate plans of many taxpayers.
One of the most common problems facing IRA participants and their spouses is what to do when the IRA participant dies. In most cases, if the surviving spouse is the named "designated beneficiary" of the husband's IRA, the quick and easy answer is "roll it over into your own IRA."
The dead employee's IRA is rolled over by the survivor withdrawing his IRA balance and putting it in her own IRA. After the rollover, the minimum required distribution rules will be applied to the surviving spouse. If the surviving spouse has not reached the required beginning distribution date, no distributions need be made (and therefore become taxable income) until that date occurs. Then distributions will be based upon the life expectancy of the spouse and the spouse's beneficiary.
Note to survivors: Do not forget to name a beneficiary. Do not leave the name of your dead husband/wife on file as your beneficiary. "DB" means designated beneficiary, not dead beneficiary.
If the dead spouse has started receiving distributions, and if the survivor is much younger and needs to use the IRA account for current living expenses, then it should not roll it over into the spouse's own IRA. That's because the spouse will then have to wait until age 59 1/2 to begin withdrawals. Instead, the surviving spouse can continue to take out distributions which the deceased spouse had started in the same pattern as in effect at the time of death.
Just what is "rolled over"? Any part of the deceased spouse's IRA of which the surviving spouse is the named beneficiary may be rolled over except:
_ The minimum required distribution for the year of death, if any.
_ A trust may not be rolled over unless the trust is the special kind of trust which qualifies as a "designated beneficiary" AND the surviving spouse had the power to either revoke the trust during her life or to withdraw all of the trust property during life.
Note that generally a designated beneficiary must be one named person, not a group, a corporation, an estate or a trust. A trust can be named as a beneficiary, but only with special language and following specific procedures.
IRA beneficiary designations and distributions are still not as simple as they were meant to be. Ask questions _ hopefully of people who know the answers.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304(at)aol.com.)
