PLR 200244023 illustrates the use of an annuity to
preserve the stretch-out for retirement benefits.
LISI Commentator Bruce Steiner shows us how!
The decedent, a self-employed physician, died in 2002 before reaching
age 70 Ĺ.
He left his Keogh plan benefits to a trust.
The trust was divided into two sub-trusts. One trust was for the benefit
of his wife (perhaps a QTIP trust). The second was for his son and his
sonís issue (perhaps for the credit shelter amount).
The decedentís wife died shortly thereafter.
MINIMUM DISTRIBUTION REGULATIONS:
Under the minimum distribution regulations, where retirement benefits
are payable to a trust, they can generally be stretched out over the life
expectancy of the oldest beneficiary of the trust, provided certain
requirements are met.
A qualified plan has to have an employer (or a sole proprietor) as the
plan sponsor. But what happens when a sole proprietor dies? Can his estate
continue the plan to permit the beneficiary to stretch out the
In this case, the author understands that the IRS would not rule on this
To avoid having to distribute all of the benefits at once, the trustees
of the plan purchased an annuity and distributed the annuity to the trust.
The annuity provided for payments over the life expectancy of the
physicianís wife, who was the oldest beneficiary of the trust.
Since the annuity was not transferable by the beneficiary, the value of
the annuity was not immediately taxable. Instead, the annuity payments will
be taxable as they are received. This will preserve the income tax deferral
as if the plan had remained in existence and distributed the benefits over
the wifeís lifetime or life expectancy.
It is not unusual for a plan to purchase an annuity to a participant.
However, it is not as common for a plan to purchase an annuity for the
beneficiary of a deceased participant. But as this situation illustrates,
it can work - and work well - in the proper circumstances.
OTHER PLANNING OPPORTUNITIES DURING PARTICIPANTíS LIFETIME:
The physician may have had some other planning opportunities during his
could have formed a professional corporation. After his death, it
might have been possible to continue the corporation as a regular
business corporation. In that way, the plan could have remained in
could have terminated the plan during his lifetime and rolled his
benefits over into an IRA.
could have named his wife as the beneficiary of some or all of his
benefits. She could then have rolled them over into her own IRA.
could have divided his benefits between his wife (or
the trust for her benefit) and his son (or the trust for his benefit)
in the beneficiary designation, rather than in the trust instrument.
This might have enabled the sonís share to be paid out over the sonís
life expectancy rather than the wifeís life expectancy.
However, after the physician died, these choices were no longer
With enough disclaimers, it might have been possible to get some or all
of the benefits to the physicianís wife. She could then have rolled the benefits
over into her own IRA. However, that would have been difficult in this
case, since the wife died soon after her husband.
Alternatively, if the wife had disclaimed some the benefits, it might
have been possible to stretch them out over the sonís life expectancy.
When a plan is terminated, beneficiaries of deceased participants should
be able to preserve the stretch-out by taking their benefits in the form of
HOPE THIS HELPS YOU HELP OTHERS!
Edited by Barry Picker, Technical Editor
Steve Leimbergís Employee Benefit and Retirement
Planning Newsletter # 160 Copyright LISI 2003 Search Archives or join LISI
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