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Widowed spouse does not want to be the beneficiary


BG5150

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Husband and wife own a company with a retirement plan.  Neither ever named an alternate beneficiary.

Wife dies. 

Husband does not want to be the beneficiary, but he wants the benefit given straight to the children.

Is there any way to do this?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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42 minutes ago, Bill Presson said:

He can disclaim it, but he's not in control of who gets it. If there is no secondary beneficiary, then her estate determines the recipient.

 

39 minutes ago, Mr Bagwell said:

Plan doc probably has the term "disclaim" in it.  FIS document does.

I looked in the BPD and I didn't see anything.  But it's late on a Friday afternoon.  I sent Datair an e-mail.  I hope they can help.

On Monday.

Have a great weekend everyone!

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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If a plan’s governing document has no provision for recognizing a disclaimer but also none to preclude a disclaimer, a fiduciary might (if the plan grants discretion) interpret the plan as allowing a disclaimer.

A fiduciary might restrict a disclaimer to one that not only is valid under a relevant State’s law but also meets the conditions of Internal Revenue Code of 1986 § 2518 for a qualified disclaimer.

26 C.F.R. § 25.2518-1 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-1

26 C.F.R. § 25.2518-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-2

If a plan’s administrator accepts a disclaimer, the plan’s benefit is distributable as if the disclaimant had died before the participant’s death or before the creation of the benefit disclaimed.

If the participant’s beneficiary designation names no one beyond the disclaimant, that means looking to the plan’s default provision.

As Bill Presson suggests, a plan might make the participant/decedent’s children or her estate (or its residue’s takers) the default beneficiary.

Before making a disclaimer, a would-be disclaimant might prefer to know exactly what beneficial rights would result.

As always, Read The Fabulous Document.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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17 hours ago, Peter Gulia said:

A fiduciary might restrict a disclaimer to one that not only is valid under a relevant State’s law but also meets the conditions of Internal Revenue Code of 1986 § 2518 for a qualified disclaimer

Can you go into more detail?  This isnt my area of expertise, but I have looked at disclaimers as a tax issue first, and benefits issue second.  Without a qualified disclaimer, the disclaiming party retains the tax liability per the code, right? From a plan perspective, it doesn't make much sense for tax liability and benefit to go to different people.

 

 

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RatherBeGolfing, you’ve got the right idea.  A plan’s administrator and payer want some comfort that a disclaimer not only changes the beneficial rights under the plan but also sufficiently changes rights (and does so in a way tax law recognizes) so the disclaimant no longer has anything that would be a subject of Form 1099-R tax-information reporting.  That’s why many plans and administrators require a disclaimer that not only is valid under a relevant State’s law but also gets tax-law treatment as a qualified disclaimer.

Internal Revenue Code § 2518 is about using a qualified disclaimer to get rid of property interests that otherwise might be counted regarding Federal estate and gift taxes.

Yet, many practitioners assume that a property interest validly disclaimed to get § 2518(a) treatment also is no longer the disclaimant’s property in considering whether a property right results (or could result) in income for a Federal income tax purpose.

The Treasury department might have impliedly assumed that concept in making the § 401(a)(9) rules.  One determines designated beneficiaries “as of September 30 of the calendar year following the calendar year of the [participant’s] death”, and for that purpose may recognize a qualified disclaimer made within nine months after the date of the disclaimant became entitled to the property interest the disclaimer renounces.  (The rule’s drafters, including Marjorie Hoffman, considered that some people die on December 31 of a year.)  26 C.F.R. § 1.401(a)(9)-4/Q&A-4 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(a)(9)-4

Many requirements for a valid disclaimer overlap, with similar requirements in a State’s law and in Internal Revenue Code § 2518(b).  But it’s possible that a disclaimer valid under a State’s law is not a qualified disclaimer that gets a plan’s administrator or payer enough comfort for one or more Federal tax-law purposes.

Conversely, it’s possible a disclaimer meets IRC § 2518 conditions, but is invalid under a relevant State’s law.  An ERISA-governed plan’s fiduciary might interpret the plan to allow such a disclaimer if, despite not conforming to a particular State’s law, the disclaimer conforms to common concepts for a disclaimer.  But many administrators, considering that ERISA’s title I lacks rules for a disclaimer (and a plan’s provisions might not specify enough), prefer a disclaimer that would be valid under a relevant State’s law.  (Further, the limited facts of BG5150’s query leave open a possibility that the plan is not ERISA-governed.)

Applying both property-law and tax-law sets of requirements for a disclaimer helps protect a retirement plan’s administration and tax-reporting.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Agree with all the comments above that a disclaimer will likely solve the perceived problem. The rules for qualified disclaimers are pretty clear under Section 2518 of the Code and its regulations. Note that one of the requirements is that the disclaimer must generally be made within 9 months of the date of death, or later if the person disclaiming is under age 21. While Section 2518 is an estate and gift tax section, the IRS follows it for income tax as well, and there is guidance to that effect. The plan could always be amended, post-death, to provide for a disclaimer if it does not already contain the provision.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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From the folks who sponsor our doc:

[quote]

As long as the original beneficiary has not taken control of the account they may be able to disclaim the account. If they disclaim they are treated as if they predeceased the participant. The account would then go to the next named beneficiaries. In the XXXXXX PPA document the order of beneficiaries is (1) spouse then (2) children and then (3) other heirs/estate at plan administrator discretion. Slightly different in PostPPA.

 In order to be a qualified disclaimer:

- Must be made within 9 months of the participant's death

- Must be done in writing and be irrevocable

- Beneficiary cannot have taken control of the account. This generally means they have not taken any distributions (except RMDs), changes investment options, or the like. If they have taken a distribution they can disclaim the remainder of the account but not the amount distributed.

 Once the account has been disclaimed the former beneficiary cannot have any control of who gets the assets - it has to follow the beneficiary form (if applicable) or the default under the plan documents.

[/quote]

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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BG5150, I would add that of course the disclaimer is the responsibility of the person who is doing the disclaimer and his/her counsel. A lot of widows and widowers don't, of course, usually have counsel, but a business owner who is dealing with the estate of his or her spouse likely does, so if it were me I would make sure that that counsel drafts the appropriate document(s) and takes responsibility for requirements' being met and advising on what the outcome of the disclaimer will be.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Whether a disclaimer must be acknowledged before a notary or other officer, must be recorded in a county’s or parish’s recorder-of-deeds office, must be filed in a court, or must meet other notice, authenticity, or procedure requirements are among the points for which Luke Bailey suggests the disclaimant get the advice, and perhaps other services, of the disclaimant’s lawyer.

Whether a plan’s administrator prefers to impose some authenticity protection beyond what is required under a relevant State’s law (and the plan’s governing document) is a fiduciary decision.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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In this case, the owner, plan sponsor, plan administrator, fiduciary and trustee are all the same person.

Turns out, we have a form that our firm used in the past.  It seems to touch on all the requirements to be a qualified disclaimer noted above.  I do not know if the form was ever looked at by a lawyer, though.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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