Tag Archive for: beneficiary

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Small Estate Affidavits and Retirement Plan Assets

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“One of my clients who sponsors a 401(k) plan asked me about a “small estate affidavit;” what is it and can it be used with retirement account assets?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry related to retirement account beneficiaries.

Highlights of the Discussion

A small estate affidavit is a creature of state law. A small estate affidavit is a sworn written statement that authorizes someone to claim a decedent’s assets outside of the formal probate process when the estate is below a set value. Each state that authorizes the use of such documents sets forth the process and procedure for their use in state statute. For example, the governing Minnesota state statute for collection of personal property by affidavit is §524.3-1201 when the value of the estate does not exceed $75,000.

A small estate affidavit may come into play when a person dies “intestate,” that is, without a will (or named beneficiaries in the case of retirement plan assets.) Usually, the estate of a person who has died intestate goes through probate court to determine who will inherit the decedent’s assets. Use of a small estate affidavit can bypass the probate process.

When it comes to retirement plan assets, ERISA 3(8) allows participants to designate beneficiaries directly. The governing plan documents will outline the steps and forms necessary to properly assign beneficiaries of the plan. Federal law requires the spouse of a plan participant to be the beneficiary by default, unless he or she formally waives his or her right to the assets. If a participant fails to properly designate a beneficiary, or if no beneficiary so designated survives the participant, most plan documents specify the beneficiary shall be the surviving spouse, or if there is no surviving spouse, the deceased participant’s estate.

Whether a plan sponsor or plan administrator should honor a small estate affidavit is an important legal question. A “best practices approach” for plan sponsors could include the following steps.

  1. Review what the governing plan document says about the distribution of assets when no beneficiary is named, particularly with respect to the use of small estate affidavits.
  2. If the plan document is silent on small estate affidavits, determine if there are distribution administration policies in place that address the use of small estate affidavits.
  3. Absent plan document and distribution policy guidance, or if the guidance is unclear, seek the advice of an attorney and document the recommended course of action.
  4. Consider formally addressing the use of small estate affidavits within the plan’s distribution policies and/or plan document.

Conclusion

Plan administrators may encounter small estate affidavits when a deceased plan participant’s estate is small as determined by state law. Honoring a small estate affidavit is an important legal question for plan sponsors. The most prudent course of action would be to proceed with caution with the guidance of legal counsel.

 

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Retirement Plan Benefits and Prenuptial Agreements Do Not Mix

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“My client asked me what effect, if any, a prenuptial agreement would have on 401(k) plan assets?

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in California is representative of a common question related to spouses as retirement plan beneficiaries.

Highlights of Discussion

Generally, a prenuptial or antenuptial agreement  is an agreement made between a couple before they legally marry by which they forfeit future rights to each other’s property in the event of a divorce or death. The short answer is that a prenuptial agreement has no impact on a spouse’s claim to 401(k) plan assets because it does not satisfy the applicable spousal consent requirements of Internal Revenue Code Section (IRC §) 417(a)(2) and Treasury Regulation Section (Treas. Reg.) 1.401(a)-20, Q&A 28.

In most cases, spousal consent is required before a plan can pay out benefits in a form other than a Qualified Joint and Survivor Annuity. The Retirement Equity Act of 1984 (REA) added the mandate to obtain spousal consent before a plan participant could take a distribution so that the nonemployee spouse would have some control over the form of benefit the participant chose, and would, at the very least, be aware that retirement benefits existed. There are exceptions to the spousal consent rule when

  1. The payable benefit is ≤ $5,000;
  2. There is no spouse or the spouse cannot be located;
  3. The spouse has been legal abandoned or the couple is legally separated;
  4. The spouse is incompetent; or
  5. The plan must satisfy requirement minimum distribution rules.

Even if a 401(k) plan is drafted as a “REA Safe Harbor Plan” (meaning it meets the criteria to be exempt from the QJSA requirements)[1], the spouse must generally consent in writing to the naming of anyone other than the spouse as primary beneficiary.

For its reasoning on antenuptial agreements, the IRS relied on several court cases, which found that the antenuptial agreements were not valid because, in part, they were signed by the participant’s fiancée (not spouse), and the agreements did not comply with REA since they did not specify the nonspouse beneficiary who would receive the benefit [See Hurwitz v. Sher, 982 F.2d 778 (2d Cir. 1992), cert. denied, 508 U.S. 912 (1993) and Nellis v. Boeing Co., No. 911011, 15 E.B.C. 1651 (D.Kan. 5/8/1992)].

Conclusion

Based on numerous court cases and Treasury Regulations, the IRS has made it clear that a prenuptial agreement has no impact on a spouse’s claim to 401(k) plan assets.

 

[1] Treas. Reg. 1.401(a)-20, Q&A 3

 

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“How did beneficiary distribution options change under the SECURE Act?”

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ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to beneficiary distribution options.

Highlights of the Discussion

The Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions that Congress added to the Further Consolidated Appropriations Act, 2020, affected the distribution options for retirement plan beneficiaries in 2020 and beyond. The changes are summarized in the charts below.

Beneficiary Changes under the SECURE Act

Applies to distributions with respect to individuals who die after December 31, 2019

Refer to the terms of the plan or IRA agreement for specify options.
Type of Beneficiary Definition Distribution Options
Eligible Designated Beneficiary (EDB)
  • Spouse
  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the employee (or IRA owner), or
  • Children of the employee (or IRA owner) who have not reached the age of majority
 Terms of the plan or IRA agreement will specify, but  generally:

Death before required beginning date (RBD)

•     Five-year rule

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse beneficiary only)

•     Rollover

  • Spouse EDB may roll over his or her share from an IRA or qualified plan into his/her own IRA or eligible plan
  • Non-spouse EDB may roll over his or her share of an employer plan to a beneficiary IRA

Death on or after RBD

•     Single life expectancy payments

•     Lump sum

•     IRA transfer to own IRA “treat as own” (spouse EDB only)

•     Rollover (see above)
Noneligible Designated Beneficiary (Non-EDB) Nonspouse beneficiaries who do not qualify as an EDB as listed above (e.g., child who has reached the age of majority) Terms of the plan or IRA agreement will specify, but generally:

•     Timing of death does not matter (i.e., no before or after RBD differentiation)

•     10-year rule—account depleted within 10 years of death

•     Lump sum

•     Rollover−nonEDB may roll over his or her share of an employer plan to a beneficiary IRA, but payout remains subject to 10-year rule

 
Estate or nonqualified trust as beneficiary Nonperson beneficiaries Death before RBD

•   Lump sum

•   Five-year rule

Death on or after RBD

•   Lump sum

•   Single life expectancy payments

 
Qualified trust as beneficiary with underlying EBD A qualified trust is one that meets the following requirements of Treas. Reg. 1.401(a)(9)-4, Q&A 5(b).

1.   The trust is valid under state law,

2.   The trust is irrevocable (either during the IRA owner or plan participant’s

life or becomes so at his or her death),

3.   The trust has identifiable beneficiaries, and

4.   The trustee of the trust provides the IRA or plan administrator with a copy of the trust instrument (or qualifying trust documentation) by October 31 of the year following the year of the IRA owner or plan participant’s death.

EDB—See above

 Death before RBD

·    Lump sum

·    Five-year rule

·    Single life expectancy payments

Death on or after RBD

·     Lump sum

·     Single life expectancy payments

·      Rollovers-

  • Spouse EDB rollover only allowed with private letter ruling
  • Nonspouse EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary
Qualified trust as beneficiary with underlying Non-EDB Qualified trust—See above

Non-EDB—See above

 Timing of death does not matter (i.e., no before or after RBD differentiation

•   10-year rule

•   Lump sum

•   Rollover−Non-EDB may roll over his or her share of an employer plan to a beneficiary IRA with the trust named as beneficiary, but payout remains subject to 10-year rule
© Copyright 2024 Retirement Learning Center, all rights reserved
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What is a stretch IRA?

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“What is a stretch IRA?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Arkansas is representative of a common inquiry related to beneficiary payout timelines.

Highlights of the Discussion

Contrary to popular belief, a stretch IRA is not a unique type of IRA. It is simply a type of distribution strategy that allows beneficiaries, and beneficiaries of beneficiaries, to base IRA payouts on the longest life expectancy permitted under the circumstances. Any regular IRA, simplified employee pension (SEP) IRA, saving incentive match plan for employees (SIMPLE) IRA or Roth IRA can be a stretch IRA. The stretching feature is achieved by applying standard distribution rules that allow beneficiaries to prolong payouts over an applicable life expectancy.

According to Treasury regulations, following the death of an IRA owner or plan participant, typically, the beneficiary has the option to take life expectancy payments. Moreover, if the beneficiary has not exhausted the payments upon his or her death, a subsequent beneficiary may continue the payments over the course of the remaining schedule. Note that some IRA beneficiary forms allow a beneficiary to name a beneficiary, whiles others do not. Most qualified retirement plan beneficiary forms do not permit a beneficiary to name a beneficiary.

EXAMPLE

Herb, age 75, has an IRA valued at $2 million. His wife, Judith, who is 20 years his junior, is his beneficiary. The couple has a special-needs child, Richard, who is 30 years old. Herb has been taking RMDs based on the joint life expectancy of Judith and himself (because she is more than 10 years younger than he). As a result of failing health, Herb passes away. Rather than treat the IRA as her own, which would subject her to the early distribution penalty tax for any amounts taken before she reaches age 59 1/2, Judith begins life expectancy payments as a beneficiary. Because the IRA forms permitted it, Judith named Richard as the beneficiary of her inherited IRA. At age 58, Judith dies. Richard may continue distributions from the IRA over Judith’s remaining life expectancy, nonrecalculated.

The ability to do a stretch IRA may come to an end if HR 1994 Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) is enacted into law. Section 401 of the bill would modify the required minimum distribution rules with respect to defined contribution plans and IRAs upon the death of the account owner. Under the legislation, depletion of the account would be required by the end of the 10th calendar year following the year of the employee or IRA owner’s death. A few exceptions would apply.

Conclusion

A stretch IRA is not a specific type of IRA but, rather, is a distribution strategy that allows beneficiaries, and beneficiaries of beneficiaries, to continue IRA payouts on the longest life expectancy permitted pursuant to the given circumstances. A stretch IRA is only permitted if the underlying beneficiary forms can accommodate a beneficiary naming a beneficiary. Legislative changes have been proposed that would, if enacted, eliminate stretch IRAs.

© Copyright 2024 Retirement Learning Center, all rights reserved