Change the primary beneficiary to the spouse and make the child the contingent. If the spouse doesn't need the IRA assets after the account owner dies, she can disclaim the account, and the child will get to take withdrawals over his or her life expectancy. The first post-death withdrawal is made by December 31 of the year following the account owner's death. (That's why you can implement this strategy for 2000 deaths. Those beneficiaries must take a 2001 distribution, and the new regs may be used for 2001 distributions.) The beneficiary's initial withdrawal is calculated using his or her life expectancy (based on his or her age) in the year following Dad's death. That initial life expectancy is reduced by 1.0 each subsequent year.
For post-RBD clients with multiple children, make the spouse the primary beneficiary and the kids co-contingents, clearly indicating on the beneficiary-designation form each child's share. After the wife disclaims, split the IRA into separate accounts-each maintained in the decedent's name yet identified as a beneficiary account, e.g., "John Gregory IRA (deceased April 18, 2001). For the Benefit of Max Gregory, Beneficiary"-to let the progeny stretch withdrawals over their individual lives. The account must be split by December 31 of the year after death; otherwise, the oldest beneficiary's life dictates the post-death distributions, as under prior regulations.
From The Crypt
Deaths before 2000 that led to a primary beneficiary disclaiming may also offer planning opportunities, Keebler says. If the original beneficiary was older than the contingent who ultimately inherited the account, the IRA is currently being drained according to the life expectancy of the person who disclaimed (as per the old regs). "But prospectively, we would use the life expectancy of the person receiving under the disclaimer," Keebler reasons.
"So why can't we go back on prior deaths, and if there were disclaimers, use the life expectancy of the younger person?" To find out if you can, make that argument in a request for a private letter ruling from the IRS, Keebler suggests. "That's what you would do."
One aspect of the new regs that could cause confusion for consumers and advisors alike is a new tax-reporting requirement. IRA custodians will have to provide MRD information to (besides the feds) account holders and beneficiaries who are subject to minimum-distribution requirements. The motive behind reporting is simplification-for the IRS. It lets the agency monitor withdrawals to make sure taxpayers take at least the minimum. When they don't, a 50% penalty is assessed.
Although each custodian must furnish minimum-withdrawal information, consumers are permitted to withdraw the aggregate minimum from as few, or as many, of their IRAs as they like, with some caveats. "Only amounts in IRAs that an individual holds as the IRA owner may be aggregated," the regulations read. "Amounts in IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent."
Help Wanted
With all the implications of the new rules, advisors may have a hard time deciding whom to help first. Certainly, the ability to change beneficiaries at any age warrants immediate review of ailing clients' designations. Fairfax, Va., advisor Ric Edelman believes seniors who are nearing or beyond 701/2 are the best clients with whom to start, since those who don't need IRA assets to live on can benefit now from lower MRDs. With reduced taxable income, itemized deductions may no longer be subject to phaseout, for example, or perhaps converting to a Roth IRA is suddenly possible.
A population worth seeing soon is your 591/2-year-olds with long-term tax plans. With reduced MRDs, taxable income down the road probably will come in lower than what you projected under the old regs, says Tucson, Ariz., advisor Patricia Raskob, who begins forecasting clients' post-RBD tax brackets when they hit the penalty-free withdrawal age of