POST-DEATH PLANNING

Whether your spouse died before or after his required beginning date, the beneficiary of his retirement accounts is not officially determined until December 31 of the year following his death. This delay allows for significant post mortem distribution planning. In other wards, there is time to “clean up” a messy beneficiary designation.

For example, if your late spouse named multiple beneficiaries under his retirement account or named his trust as beneficiary, the age of the oldest named beneficiary (or trust beneficiary) must be used for purposes of calculating RMDs.

If one of the multiple beneficiaries is a charity, all beneficiaries must take their distribution in the year of death!

With proper post mortem planning, however, the share of an older beneficiary or a charity can be distributed before December 31 following death (i.e., the “clean up” deadline). In so doing, only the life expectancy of the oldest remaining beneficiaries is counted, lowering RMDs for the remaining beneificiaries.

Also, an older beneficiary (such as you) can “disclaim” (essentially give) his or her interest to younger beneficiaries (your children) during the clean-up period, eliminating the older beneficiary from the calculation.

Finally, separate accounts may be created for each beneficiary by the end of the year after death. With separate accounts, each beneficiary’s RMD is calculated separately based on the age of each such beneficiary.

If a trust is named as beneficiary, a copy of the trust (or a certification of trust that complies with IRS Regulations) must be supplied to the Plan Administrator (IRA Custodian) prior to December 31 of the year following death.

TEN YEAR AVERAGING

If your spouse was age 50 by January 1, 1986 you should calculate “10-year averaging” on a lump sum distribution or your spouse’s entire account. Although somewhat radical, this approach can sometimes produce surprising results. Note that 10 year averaging is available only for employer-sponsored retirement plans and not for IRA, SEP, or 403(b) distributions.

CONCLUSION AND COURSE OF ACTION

Your late spouse’s retirement accounts are likely an integral part of your financial security. You should control all aspects of such accounts including investment matters and the timing of distributions. The fact that the accumulations in these accounts are fully taxable for income tax purposes (and estate tax for that matter) dictates that you plan to defer distributions as long into the future as legally possible.

Unless you are substantially younger than 59 ½, you should roll your deceased spouse’s accounts into your own IRA. You should name your revocable trust as beneficiary of all retirement accounts, or create separate accounts for your beneficiaries. Spreading RMDs over children’s lifetimes not only provides maximum income tax deferral, but also provides financial safety for your children and perhaps your grandchildren.