With IRAs, It Ain't Over Til Its Over and Then It Still Ain't Over
In January of 2001, the United States Treasury issued proposed regulations on the Minimum Distribution requirements for IRAs. These proposed regulations substantially simplified what had been a compendium of complex and confusing rules that had many practitioners and IRA owners confused. In April 2002, the regulations, with some further changes, were made final. All breathed a sigh of relief and went to work crafting beneficiary designations that met the new regulation requirements. Part of the rules deal with what are known as "separate shares." Under the rules regarding separate shares, if you have three children that will take your IRA by way of a trust, it was believed that if you were sufficiently clear in delineating the shares and the trust shares were assigned to the beneficiary by the end of the year following the year of death, then each share beneficiary's life expectancy will determine the period over which the payments must be made and hence the fractions of the IRA payable in each year, i.e. a 40 year old son would take his share out over 43.6 years and a 60 year old sister would take her share out over 25.2 years. The IRS, in PLR 200234074, subscribed to this view and in so doing announced its policy. Now, in 3 PLRs recently issued it has recanted that policy and announced that its new rule is that all "shares" will have the distribution period of the shortest life expectancy. Then, the son must take out his share in the same number of years as his aunt.
These rulings require all of us to rethink our beneficiary designations if they involve trusts and there are substantial age differences among the persons who will "inherit" the IRA. It is still the case that the preferred beneficiary designations are directly to the individuals that are to "inherit" the IRA but if it must pass through a trust to get to the beneficiaries it would be a good idea to consider the problem referred to above. Complex beneficiary designation forms may resolve some of the problems but IRA custodians are not always very happy to see them and in fact, sometimes refuse to honor them.