Traditional IRA Beneficiary Disclaimer | Ed Slott and Company, LLC

Traditional IRA Beneficiary Disclaimer

Upon the death of the IRA owner, the primary beneficiary (spouse) wishes to partially disclaim the IRA. They will meet all the requirements of Section 2518. Based on that:

LOI
1) Is there model language for a LOI (some custodians have a form while others just ask for a LOI)? The custodian we work with requires a LOI but gives little guidance.
2) While the model language may satisfy the IRC, it may not meet all the requirements of state law, so how does a primary beneficiary address state law?
3) Would you recommend a primary beneficiary hiring an attorney to draft the LOI?

Account Management
1) It is cleaner to create multiple IRAs now so the primary beneficiary can disclaim an entire IRA account instead of partially disclaiming one IRA account? I've seen disclaimer forms where they allow beneficiaries to partially disclaim and IRA on a percentage basis. So it seems like it doesn't matter.

RMD
1) The RMD in the year of death will be based on the Joint Life Table, does disclaiming change the RMD life expectancy factor in the year of death on the balance disclaimed, given that the primary beneficiary will no longer be the spouse? The Joint Life Table requires the primary beneficiary be the spouse.

Thanks to anyone who has any experience handling disclaimers. It's very uncommon.

  1. Given that there is a 9 month clock disclaimers, if the wording comes into question and the amount disclaimed is significant, best to retain an estate attorney to handle the entire disclaimer process including the intended outcome, and technical issues such as what beneficiary actions might disqualify the disclaimer. 
  2. The partitioning of the IRA pre death also falls under the above. It may or may not be necessary.
  3. Year of death RMD - if the joint life table (Table II) applies pre death, it also applies for the year of death if owner passes on or after the RBD. A post death disclaimer will not affect this.

Thanks Alan. I really appreciate your reply. But I do still have a question regarding the year of death RMD. Below is my research on this but since I’ve never encountered this in real life, I have no clue as to whether it even matters. How would the IRS even know? Am I overthinking this?Treasury Regulation 1.401(a)(9)-5 is entitled “Required Minimum Distributions for Defined Contribution Plans.” Regulation 1.401(a)(9)-5 uses a question and answer (“Q” and “A”) format. Question Q-4 asks: “For required minimum distributions during an [IRA owner’s] lifetime, what is the applicable distribution period?" The answer (A-4) is set forth in two paragraphs.Paragraph A-4(a) states a “general rule” that “except as provided in paragraph (b) to this A-4, for all years, up to and including the distribution calendar year in which the [IRA owner] dies, the annual distribution period must be derived from the Uniform Lifetime Table.”The paragraph A-4(b) “exception” provides its own “general rule.” It states that if the “sole designated beneficiary” of the IRA is the IRA owner’s spouse, then “for purposes of determining required minimum distributions during the [IRA owner’s] lifetime, the [Joint Life Table] may be applied.However, paragraph A-4(b) then goes on to state the following caveat:               “The spouse is the sole designated beneficiary for purposes              of determining the applicable distribution period for a distribution              calendar year during the [IRA owner’s] lifetime only if the spouse              is the sole beneficiary of the [IRA owner’s] entire interest at all               times during the distribution calendar year.”In my opinion, the above reference to “the sole beneficiary of the [IRA owner’s] entire interest at all times during the distribution calendar year” is dispositive. Once a disclaimer has been made, the disclaimant ceases to be “the sole beneficiary of the [IRA owner’s] entire interest” for whatever remains of that “distribution calendar year.” And that also means for purposes of the year of death RMD the Uniform Lifetime Table must be used instead of the Joint Life Table [in this case]. Treasury Regulation 1.401(a)(9)-4 provides additional support for the conclusion that disclaimers deprive the disclaimant of the requisite “designated beneficiary” status. It is entitled “Determination of the Designated Beneficiary.” Its Q-4 asks: “When is the designated beneficiary determined?” The answer states that to be a “designated beneficiary,” a person must not only hold that position when the IRA owner dies, but must continue to maintain it until September 30th of the year following the year of the owner’s death; and that: “Accordingly, if a person disclaims entitlement…pursuant to adisclaimer that satisfies Section 2518 by that September 30,thereby allowing other beneficiaries to receive the benefit inlieu of that person, the disclaiming person is not taken intoaccount in determining the [IRA owner’s] designated beneficiary.” It can be argued that both the question (Q-4) and answer (A-4) to Regulation 1.401(a)(9)-5 are expressly addressed only to the period “during the [IRA owner’s] lifetime.” But this interpretation is belied not only by the Q-4 and A-4 references to the full “distribution calendar year,” but also by the fact that Q-5 and A-5 (which immediately follow) specifically refer to determining the RMD after the owner’s death and define this to mean “the distribution calendar year after the distribution calendar year containing the [owner’s] death.” The clear implication of this juxtaposition is that Q-4 and A-4 do embrace the entire year-of-death calendar year.Likewise, it can be claimed that Regulation 1.401(a)(9)-4 has no bearing and only applies to the determination of beneficiaries’ RMDs beginning in the year after the owner has died; but even if this is so, the IRS’ view of the disqualifying impact of a disclaimer is made clear by that Regulation.  

  • What's an LOI and what does it have to do with a disclaimer.
  • The filing and service requirements for disclaimers vary from state to state.
  • Bruce Steiner

  • When IRS Regs are published, the authors intend to address various situations not clear from the tax code. When the Regs also fail to clarify certain situations, IRS Pubs sometimes cut through the complexity. This is one of those situations where the following quote from Pub 590 B is clear. Note that if the IRA owner had not passed, there would be no disclaimer.
  • "Table II (Joint Life and Last Survivor Expectancy). Use Table II if you are the IRA owner and your spouse is both your sole designated beneficiary and more than 10 years younger than you. Note. Use this table in the year of the owner's death if the owner died after the required beginning date and this is the table that would have been used had he or she not died."

I appreciate your wilingness to help and clairfy. Much appreciated.

 

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