By Attorney Paul T. Czepiga, JD, CPA

The IRS has finally done something to make our jobs easier. The new IRA regulations, enacted January 11, 2001, greatly simplify the prior complexities of the IRA rules. The new rules have resulted in a number of changes. Those that are substantial or that will have an impact on most IRA participants are summarized below:

1. An IRA participant can now take advantage of longer distribution periods after the required beginning date. A new "Uniform Table" now disregards the age of the beneficiary and instead factors in a joint life expectancy based on the age of the participant and a hypothetical beneficiary ten years younger than the participant. This will benefit IRA participants with spouses close to them in age.
   
   
2. For post-mortem distributions, some co-beneficiaries and contingent beneficiaries can now take advantage of a younger beneficiary's longer lifetime distributions through the use of disclaimers or by electing to receive their distributions outright at the participant's death.
   
   
3. Post-mortem distributions are calculated based on the life expectancy of who the beneficiary is when the IRA participant dies, rather than who the beneficiary was on the earlier of the IRA participant's date of death or the IRA participant's required beginning date.
   
   
4. Recalculating life expectancy is now automatic, and the disadvantages previously associated with recalculating (i.e., a premature death) have disappeared. If there is no designated beneficiary, the life expectancy no longer reverts to zero; instead, the distributions continue over the life expectancy of the beneficiary as determined by the beneficiary's age at the time of the participant's death.

Lifetime Distributions After the Required Beginning Date

Your clients now have fewer, yet more attractive choices for determining a distribution method after they turn 70. The numerous choices for calculating required minimum distributions have been replaced by a Uniform Table, which is designed to calculate lifetime distributions after the required beginning date. Now there are just two methods of determining the life expectancy factor. Most individuals will calculate their life expectancy by using the new Uniform Table. The Table factors in the joint life expectancy of the participant and a hypothetical beneficiary ten years younger than the participant, based on the participant's age in the year distributions are made. A participant can use this joint life expectancy distribution method, regardless of whether or not the participant has named a beneficiary.

Under the Uniform table, a participant no longer suffers a shorter distribution period by failing to name a beneficiary (forcing a single life expectancy calculation) or because the joint life calculation is based on a spouse who is close to the participant's age. For those IRA participants with a same age or near same age spouse, this will be a major benefit because they may use the Uniform Table that factors in a ten-year age difference. This new rule is probably the most substantive of all the IRA changes considering that most people marry someone who is close to their own age.

The second method of calculating life expectancy relates to those participants who are married to spouses more than ten years younger than themselves. In this scenario, the distribution period is the longer of the calculation of the life expectancy in accordance with the Uniform Table or the joint life expectancy of the participant and his spouse during the distribution year. It is the best of both worlds. In addition, a participant may choose either election each year; the election in year one, therefore, is not binding for the entire period of distribution. The ability to re-determine an election is a factor for situations when the participant divorces or if the participant's spouse dies.

Negative Features of Recalculation Disappear

Electing a recalculation method used to have a negative consequence: if the participant died after the required beginning date the participant's life expectancy reverted to zero. The revised regulations have abolished this drawback. Joint recalculation is now mandatory and, if the participant dies after the required beginning date, distributions continue over the life expectancy of the beneficiary, based on the beneficiary's age in the year of the participant's death. If the participant does not have a designated beneficiary, (i.e., a charity), distributions continue over the remaining life expectancy of the participant as determined in accordance with the Unified Table.

Post-Mortem Distributions Changing Your Beneficiary

When a participant dies, the distribution period is calculated based on the life expectancy of the individual beneficiary, as determined by the beneficiary's age in the year of the participant's death. This abolishes the old rule that calculated the distribution based on who was the beneficiary as of the participant's date of death or the required beginning date, whichever occurred first. You no longer need to worry that naming a younger beneficiary after the required beginning date will result in negative consequences, and you will not need to go back in time to research who the beneficiary was when the participant turned age 70.

Surviving Spouses

Although most IRA participants' surviving spouses (who are beneficiaries) will choose to roll over the participant's IRA into one of their own retirement accounts, should the surviving spouse elect not to roll over, the spouse can now take advantage of a longer distribution period. The new rules allow the surviving spouse to recalculate annually; thus, the surviving spouse cannot outlive the IRA. Any remaining benefits are paid out over the contingent beneficiary's fixed term life expectancy.

Non-Spouse Beneficiaries

For non-spouse individual beneficiaries, the distribution period is that beneficiary's fixed term life expectancy, based on his age in the year in which the participant died. For multiple non-spouse individual beneficiaries, the distributions are calculated based on the fixed term life expectancy of the oldest beneficiary.

For multiple, non-spouse beneficiaries, calculating the distribution based on the life expectancy of the oldest beneficiary can be averted. The proposed regulations enable, in situations where there are primary and contingent beneficiaries, those beneficiaries to take advantage of calculating the life expectancy of a younger contingent beneficiary after the participant dies. Although beneficiary cannot be changed after the participant's date of death, for distribution purposes the beneficiary is not determined until December 31st of the year following the year in which the participant died. In the interim, primary beneficiaries may now disclaim their interests, allowing a younger, contingent beneficiary to take advantage of longer lifetime distributions. In circumstances where the participant has named several co-beneficiaries, the older co-beneficiaries may simply elect to receive their distributions outright at the time of death of the participant. If they do, then on December 31st of the following year, the only remaining beneficiaries are the younger co-beneficiaries, who may use their longer life expectancy for distribution and calculation purposes.

For additional information on the new IRA rules, or for questions regarding estate planning, elder law planning, or tax planning, please feel free to contact me.