Steve Leimberg's Employee Benefits and Retirement Planning Email Newsletter - Archive Message #160

Date:

12-Feb-03 08:40 PM

From:

Steve Leimberg's Employee Benefits and Retirement Planning Newsletter

Subject:

PLR 200244023 Ė Using Annuity to Preserve Stretchout for Retirement Benefits

 

PLR 200244023 illustrates the use of an annuity to preserve the stretch-out for retirement benefits.

LISI Commentator Bruce Steiner shows us how!

FACTS:

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.

COMMENTS:

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.

THE PROBLEM:

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 distributions?

In this case, the author understands that the IRS would not rule on this specific issue.

THE SOLUTION:

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 lifetime.

  • He 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 existence.

 

  • He could have terminated the plan during his lifetime and rolled his benefits over into an IRA.

 

  • He 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.

 

  • He 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 available.

POST-MORTEM OPPORTUNITIES:

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.

PLANNING TIP:

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 an annuity.

HOPE THIS HELPS YOU HELP OTHERS!

Bruce Steiner

Edited by Barry Picker, Technical Editor

CITE AS: Steve Leimbergís Employee Benefit and Retirement Planning Newsletter # 160 Copyright LISI 2003 Search Archives or join LISI at http://www.leimbergservices.com

P.S.

"Barry Picker's Guide to Retirement Distribution Planning" has been revised to reflect the changes in the April, 2002 final regulations. You can purchase a copy by calling 1 800 809 0015 or ordering online at Barry's excellent and most useful web site, www.BPickerCPA.com.

 

 



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