How retirement beneficiary designations fit an estate plan
Key takeaway
Coordinate retirement accounts with your estate plan through beneficiary designations under each account's rules, subject to spousal rights, because naming someone in a will alone does not make that person the account beneficiary.
Start your review with the beneficiary record for each account. Compare the intended recipients with the account's terms, your family circumstances and the instructions in your estate documents.
Start with the account's instructions
A beneficiary may be designated by a default election under the plan's terms or, if the plan permits, by an affirmative election. A blank form therefore does not always make the estate the beneficiary.
Beneficiary choices remain subject to statutory spousal rights and qualified domestic relations orders. ERISA plan fiduciaries must follow plan documents insofar as those documents are consistent with ERISA.
Ask the administrator for the current beneficiary record and the default provisions. Put those records beside your will and trust before deciding which instructions need attention.
Account for a spouse's employer plan rights
Employer plans subject to the survivor annuity rules must provide a vested participant's benefit as a qualified joint and survivor annuity. If the vested participant dies before annuity payments begin, a surviving spouse must receive a qualified preretirement survivor annuity.
These rules cover defined benefit plans, defined contribution plans subject to funding standards, and other defined contribution plans unless an exception applies. A waiver requires the spouse's written consent, witnessed by a plan representative or notary public.
For other defined contribution plans, the exception requires the full vested balance to be payable to the surviving spouse at death, or to another designated beneficiary with the spouse's consent. The participant must not elect a life annuity.
IRAs are outside these statutory employer plan survivor annuity rules. Ask the employer plan administrator which requirements apply before requesting a beneficiary change involving someone other than your spouse.
Distinguish a spouse beneficiary from an IRA owner
A surviving spouse may elect to treat an inherited IRA as their own only if they are its sole beneficiary and have an unlimited right to withdraw. Naming a trust fails this requirement even if the spouse is its sole beneficiary.
After a valid election, the spouse becomes the IRA owner and may make beneficiary elections permitted by its terms, subject to applicable statutory requirements. Do not assume children named by the first owner remain the ultimate recipients.
For a blended family, discuss the intended destination after the spouse's death as well as the immediate inheritance. Bring the account terms and current designations to that conversation.
Review old designations after divorce
In Kennedy, the employer plan administrator properly paid the former spouse still designated under the plan. The participant had not changed the designation through the plan's process, and the divorce waiver was not a qualified domestic relations order.
The Court did not decide whether the estate could recover those benefits from the former spouse after payment.
In Minnesota, for example, divorce revokes a revocable beneficiary designation favoring a former spouse unless the instrument, a court order, a property agreement or a retirement plan document provides otherwise. Other states differ, and ERISA rules may control employer plans.
Include old employer accounts in a divorce review. Ask for confirmation of any requested designation change rather than relying on the divorce papers alone.
Separate trust funding from beneficiary planning
IRA ownership cannot be moved to a living trust. Withdrawing IRA money to fund a trust is a distribution, taxable to the extent the IRA distribution rules require. Rollovers and direct transfers operate under separate rules.
A trust can instead be named as an IRA beneficiary. For retirement distribution purposes, looking through a trust to its beneficiaries requires all four conditions below.
- The trust is valid under state law, or would be valid except for having no assets.
- The trust is irrevocable or becomes irrevocable at the owner's death.
- Its beneficiaries are identifiable from the trust instrument.
- The applicable documentation requirements are satisfied.
For an IRA, the trust documentation need not be provided to the IRA trustee, custodian or issuer.
Use the trust beneficiary guide below for detailed qualification questions before choosing a trust designation.
Keep inherited IRA tax records with the plan
Traditional IRA distributions generally produce ordinary income, but nondeductible contributions can make part of a distribution nontaxable. When the deceased owner made nondeductible contributions, that basis remains with the inherited IRA.
Unless a surviving spouse treats the IRA as their own, inherited basis cannot be combined with basis in the beneficiary's own IRAs or IRAs inherited from other decedents.
A beneficiary taking distributions from both an inherited IRA and their own IRA, each with basis, must complete separate Forms 8606. Include nondeductible contribution records in the material gathered for the beneficiary review.
Two related terms
Conduit trust
A conduit trust is a qualifying see through trust whose terms require all retirement plan distributions received by the trustee to be paid directly to, or for the benefit of, specified trust beneficiaries.
Accumulation trust
An accumulation trust is a qualifying see through trust that is not a conduit trust.
A perspective on family ownership
"When they have children or grandchildren who are potentially citizens outside of the country or live outside of the country, the need to see things from a global perspective is of high importance and planning around who owns what and where those assets are held."
Common questions
Can a beneficiary other than a spouse take the money and roll it over?
No. A beneficiary other than the surviving spouse cannot roll over amounts received from an inherited IRA. An employer plan can instead make a direct trustee to trustee transfer to an inherited IRA, which remains subject to required minimum distribution rules.
Must beneficiaries finish the owner's unpaid required distribution?
Yes, if the owner died on or after the required beginning date. Any unpaid portion of that year's lifetime required minimum distribution must reach the beneficiary or beneficiaries during the year of death.
An owner who dies before the required beginning date has no lifetime required minimum distribution for that year.
Does inheriting a Roth IRA eliminate required distributions?
No. A Roth IRA has no required minimum distributions during its owner's life, but after death the rules apply as though the owner died before the required beginning date. A sole spouse beneficiary may delay distributions.
Sources
- Treasury Regulation §1.401(a)(9)-4: beneficiary designations, default elections and trust qualification.
- Internal Revenue Code §401(a)(11): employer plan survivor benefits and the defined contribution exception.
- Internal Revenue Code §417(a)(2): spousal consent and witnessing.
- ERISA §404: fiduciary duties concerning plan documents.
- ERISA §206(d): qualified domestic relations orders.
- Kennedy v. Plan Administrator for DuPont: payment under the employer plan designation and the limits of the holding.
- Minnesota Statutes §524.2-804: divorce and revocable beneficiary designations.
- Treasury Regulation §1.408-8: spouse ownership elections, IRA trust documentation and inherited Roth distribution rules.
- Internal Revenue Code §408: IRA ownership, distributions and inherited IRA rollover restrictions.
- Internal Revenue Code §402(c)(11): direct transfers for beneficiaries other than surviving spouses.
- Treasury Regulation §1.401(a)(9)-5: required distributions for the year of death.
- IRS Publication 590 B: traditional IRA distributions, inherited basis and separate Forms 8606.