Estate Planning Tax Law Changes
RE: Retirement Benefits

The IRS has recently  issued new rules that make sweeping changes in how "Minimum Required Distributions" are calculated. These changes potentially affect everyone who is now taking required distributions from an IRA or other retirement plan. That includes most individuals over age 70½, as well as individuals who have inherited an IRA or retirement plan from someone else.  Surprisingly, the changes are almost all good: the necessary calculations have become simpler and the new methods produce smaller required distributions for most people.  As with any major tax change, it will take a while before the IRS has sorted out all the questions. Let's start with what we know now.  Effect on IRA owners now over 70 ½.  If you are age 70½ or older, and you own an IRA, then (as you know) you are required to take a distribution from that IRA every year. You probably know how to calculate your 2001 required distribution, using the old rules. You are entitled to switch to the new rules for this year, 2001, if the new rules give you a more favorable result (i.e. a smaller required distribution).   Under the new rules, (almost) everyone uses a new "Uniform Table" to calculate his or her required distributions. The uniform table is reproduced at the end of this memo (along with an explanation of how to use it).  With the new system, it no longer matters (for purposes of calculating your lifetime distributions) who is named as your beneficiary, with one exception: if your sole beneficiary is your spouse; and your spouse is more than ten years younger than you; then you calculate your distributions using the "joint and survivor life expectancy" of you and your spouse. (The necessary table is in IRS Publication 590). This will produce an even smaller required distribution than the Uniform Table.  The rule changes described above do not affect Roth IRAs, because there are no required distributions during life from a Roth IRA. 

Other kinds of retirement plans

The above explains how the new rules apply to required distributions from IRAs. The answers aren't quite so simple for distributions from other types of retirement plans. For example, the IRS did not say when 403(b) plan retirees will be able to use the new rules. 401(k) plans, pension plans, Keogh plans and other "qualified retirement plans" may switch to the new rules in 2001 - but the choice is up to the plan, not the individual receiving benefits from the plan. At this point, we don't know whether such plans will allow their retirees to switch to the new system in 2001, or will make them wait until 2002.  If the IRS sticks to its announced timetable, everyone will have to switch to the new rules in 2002 (for all types of retirement plans).

Effect on beneficiaries now holding inherited IRAs

 There are also changes in how beneficiaries who have inherited IRAs and other retirement plans are to calculate their required distributions from those inherited plans. If you inherited an IRA or other retirement plan from a deceased individual, and there is still some money in that inherited IRA or plan (in other words, the IRA or plan was not entirely cashed out prior to 2001), you need to determine whether the new rules will allow you to achieve longer income tax deferral. Some beneficiaries now receiving distributions from inherited IRAs are entitled to dramatically longer income tax deferral under the new rules than the old. Other beneficiaries will have no change.

 It is particularly important to take action on this before the end of 2001 if (1) you are holding an IRA that you inherited from someone who died (regardless of how long ago the original owner died) or (2) you are holding, as beneficiary, any type of retirement plan (IRA or other) that you inherited from someone who died in 2000.

Improved estate planning choices for older individuals

 The new rules expand estate planning opportunities for individuals who are approaching or already past age 70½. Here are two examples:

The old rules made it difficult for a person age 70½ or older to leave retirement benefits to charity. Basically, the old rules penalized individuals who chose to leave benefits to charity after age 70½, by forcing them to take larger distributions from the plan than would have been required if an individual had been named as beneficiary instead of a charity. The new rules remove this disincentive to leave retirement benefits to charity. Under the new rules, leaving retirement benefits to charity does not cause accelerated distributions during life.

Recommendation: If you have considered leaving all or part of your retirement plan to charity, but chose not to do so because of the increased income taxes that would have resulted under the old rules, you may want to review the situation again now.

The new rules also make it easier for older clients to take advantage of the "stretch IRA" concept. The tax rules for many years have permitted the long-term tax-deferred pay-out of retirement benefits to younger generation beneficiaries (such as grandchildren) after the death of the original IRA owner. However, the old rules made it difficult for individuals over age 70½ to achieve that result. Under the old rules, unless you named a younger generation individual as your beneficiary when you turned age 70½ (and at all times thereafter), your heirs could never take advantage of the "stretch" IRA. 

The new rules remove this obstacle. Under the new rules, whoever you designate as your beneficiary can enjoy a deferred pay-out of the IRA over his or her life expectancy, regardless of when you named him or her as your beneficiary. It no longer matters whether you named some other beneficiary back when you turned age 70½.

 Recommendation: If you have considered changing the beneficiary on your retirement plan, but were discouraged from doing so because you were past age 70½ so it was "too late" to implement changes, you may want to review the situation again now.

What to do now

 So, here are the steps we recommend at this time:

·         If you are currently taking required distributions from your IRA or other retirement plan, we would recommend not taking your required distribution for 2001 until you have checked out whether the new rules are available to you and provide you a more favorable result. 

·         If you are taking distributions as a beneficiary from a retirement plan or IRA you inherited from a deceased individual, we recommend not taking your 2001 distribution until you can determine whether the new rules will apply to your 2001 distribution and if so, how. 

·         If you are past age 70½, and have been constrained in your choice of a beneficiary for your retirement plan because of the restrictions imposed by the old rules, contact us to review your estate plan including your beneficiary choice. 

·         Finally, if you are younger than age 70 ½, and you are not taking distributions from any inherited retirement plan, the new rules, for now, have no effect on you; so pass this notice along to an older friend or relative! 

 The "Uniform Table"

 Under the new Proposed Regulations, the above Uniform Table may be used by ALL IRA owners who have reached age 70 ½ to determine their annual required minimum distributions for 2001 and later years. For each "Distribution Year" (i.e., a year for which a distribution is required), determine:

(A) the account balance as of the preceding calendar year end;

(B) the participant's age on his or her birthday in the Distribution Year; and

(C) the "applicable divisor" for that age from the above table.

"A" divided by "C" equals the minimum required distribution for the Distribution Year. (In the age 71½ Distribution Year, first reduce the "A" number by the amount of any required distribution for the age 70 ½ year that had not been taken out by the end of that year.)

This table does not apply to beneficiaries of a deceased IRA owner; or if the sole beneficiary of the IRA is the participant's spouse who is more than 10 years younger than the participant. This table may not be used for year 2000 distributions taken in 2000 or 2001.

 The new rules are a great benefit to retirees and their families.  If you need help figuring out your IRA or pension under the new rules, please contact your Estate Planning Attorney (Cook Schuhmann & Groseclose, Inc.: Jo Kuchle, Bob Groseclose, Skip Cook or Craig Partyka).  Stay tuned for our next alert regarding the sweeping tax law changes recently made by Congress!

CS&G thanks attorney Natalie Choate for providing us the use of her letter.