Decline to be Beneficiary?

[PMC]

Plan states death benefit payable to - the designated beneficiary, and if none, to the spouse, if no spouse to the participant's estate.

Unmarried participant dies. His brother is his named beneficiary. The deceased participant does have minor children. The beneficiary brother wants to know, can he now decline to be the beneficiary entitled to receive the death benefit and instead have the death benefit paid to the children? Or is the brother "stuck" with being the beneficiary and if he wants to provide the death benefit to the children he needs to explore other "gifting" type avenues?

[QDROphile]

Good plans have terms that allow a beneficiary to disclaim the benefit.

[Guest mjb]

Under the plan if bene disclaims payment will be made to brother's estate, not the children. Need to see who inherits from estate. Could be brother who might be able to disclaim in favor of children. You need to consult an attorney.

[Kirk Maldonado]

mjb:

Aren't there rules in the IRC about disclaiming benefits, and don't they apply to waivers of benefts under qualified plans? I'm not disagreeing with your recommendation that the person needs an attorney, I'm just interested in more information for my own benefit.

[Guest mjb]

IRS has permitted disclaimers in Q plans; See PLRs 9016026, 8838075. However, disclaimer is permitted only if plan allows a disclaimer by the beneficiary. Nickel v. Estate of Estes, 122 F3d 294 (5th Cir. 1997). General rule is that interest must be disclaimed within 9 months after date of death of participant and that disclaimant cannot direct who the benefit will be paid to.

[Kirk Maldonado]

MJB:

Thanks for the citations.

I don't recommend anybody reading the Nickel case unless they enjoy doing some extremely complicated mental gymnastics. The court analyzed the wording of the plan in excruciating detail. The moral of the case is that the disclaimer language in the plan document needs to be drafted with extreme precision, or it may not achieve the desired result.

QDROphile:

You must get a higher quality of plans to review than I do. Given all of the due diligence that I've done on M&A transactions over the past 25 years, I estimate that I've reviewed at least 1,000 plans, and I've never seen one yet that had disclaimer language.

But that could be due to the fact that I tend to work on larger, corporate plans rather than plans for professional corporations where the plan is used as a tax shelter technique. The drafters of those plans are often quite sensitive to estate planning considerations; whereas I am blissfully ignorant of those issues.

Do you think that, in the absence of enabling language in the plan document, allowing a disclaimer would disqualify the plan (using the IRS analysis that actions not authorized by the plan document would disqualify the plan), or would that be something that you think could be handled by action of the plan's administrative committee? For what it is worth, my belief is that it is beter to be safe than sorry, so I'm going to add such language to my plans.

[Belgarath]

This question is more as an individual looking in from the other end.

Is there any principle of law that can force an individual to be a beneficiary of any kind of benefit if he doesn't want it? That just doesn't seem reasonable somehow. Not just for plan money. Is it different if you are a beneficiary under a will? If someone dies intestate?

It just doesn't seem "fair" - yes, I know life isn't fair - to be forced to accept something as a beneficiary if you don't want to - plan language notwithstanding. I mean, if the deceased was my brother who murdered my wife or something equally whacko, and I just plan didn't want to receive or be involved with his darned estate or money, isn't there any way out?

But I'm no attorney, so I'm interested in the opinions of those who are. The concept of the law forcing someone who doesn't want the money to accept it seems strange to me, although there may well be good reasons for it when it gets to some funky tax manipulations.

[QDROphile]

I get a higher quality of plans because we draft them, and we have very little by the way of professional corporation plans.

I can't answer your question off hand. I would start from the proposition that the plan had to follow its terms. However, I have been getting an education from out estate planning group about state law on disclaimers, and related tax coordination, so I would not act only on my knee jerk ERISA reaction. Fortunately, I have not had to deal with as many issues because our plan documents help avoid them. Since the documents do a lot subtle heavy lifting, sometimes I forget all the reasons and authority behind our standard terms.

That is why I am notorious for claiming that other documents suck. They often do.

[WDIK]

That is why I am notorious for claiming that other documents suck. They often do.

How is that slogan working as part of your marketing campaign?

[QDROphile]

I don't use this forum for marketing.

I am two-faced, like everyone else. I have a totally diferent image under a different name.

[Guest mjb]

Most states permit a beneficiary or heir who inherits under a will or intestacy to renounce a bequest in accordance with state law which may contain different requirements from the disclaimer provisions of IRC 2518. The purpose of the disclaimers is to avoid incurring a gift tax by the inheritor who disclaims the assets or retirement benefits because the beneficiary disclaiming the benefit is regarded as predeceasing the owner of the property. Under 2518 the disclaimer must occur no later than 9 months after the right to the benefits arises or 9 months after the recipient attains age 21. Renunciation is also permitted for persons who inherit nonprobate assets such as IRAs and life insurance. Howver a disclaimer in a retirement plan can occur only if the plan permits disclaimers.

Assets may also be transferred by an assignment from the beneficiary to another person under Reg. 1.401(a)-13(e) but the beneficiary will be taxed on the receipt of the benefits under the assignment of interest rule.

FYI: The purpose of disclaiming assets is to keep property out of the estate of persons who do not need the funds so as to avoid estate tax and income tax by transferring the assets at least two generation removef from the deceased. For example father dies leaving his 200k IRA to his son the hedge fund trader in the 35% bracket. Son disclaims and the property is transferred to the grand daughter as contingent beneficiary who is in the 15% bracket. The 200k is never included in sons estate and is not taxed as a gift to his daughter.

[Kirk Maldonado]

mjb:

You just brought up another very good point, which is that the disclaimer apparently must satisfy both the rules in the IRC to be effective for federal tax purposes, but must also satisfy the state law rules to be effective for purposes of the income tax laws of the state in which the taxpayer resides (assuming that state imposes an income tax).

This message thread has been very illuminating for me.

[WhatsESUP]

Any new insight regarding a qualified disclaimer of benefits for the designated beneficiary?

The beneficiary submitted a disclaimer but the plan document does not have any language regarding disclaimers.

Does the plan document need state specifically that disclaimers are allowed?

[QDROphile]

Subject to a reading and understanding of all the plan terms, it would be reasonable to interpret the plan to allow a disclaimer.  I venture that few plan administrators are both capable and familiar enough with plan terms to make a solid determination.  I also doubt that it is a high risk proposition.