Incarcerated Beneficiary - Help!

[Guest cdevald]

I have a situation in which an employee has passed on. Her beneficiaries were her three daughters, one of which is in prison. I sent out termination paperwork to them. However, I received a note from the sister in prison stating that she would like the check to be made out and sent to one of her sisters. As I understand it, she is waiving her rights as a beneficiary and putting her trust in her sister to send the monies to her. My question is if the small note is sufficient to waive her rights? Is a more legal document required?

[Guest Dook]

I myself would not get involved. I would still make the distribution check payable to the daughter in prison for her share. If she wishes to make the check payable to her sister for the keeping of the money so be it. The plan however, has an obligation to pay to the designated beneficiaries.

This person may have some obligations that she is trying to avoid (legal fees, restitution, etc.) you don't want the plan to be accused of facilitating the avoidance of her obligations.

I wouldn't pay anyone but her as the designated beneficiary.

[KJohnson]

I agree. You need to follow your Plan document and the beneficiary designation form.

I know that some individually designed plans have put in provisions allowing "disclaimer" of benefits in certain limited instances. However, without a "qualified disclaimer" the distribution would be income to the designated beneficiary and must be reported as such. I know that the IRS has specific rules on when a beneficiary can disclaim a benefit and not have it treated as income. I don't have the cite off the top of my head.

[Guest PeterGulia]

A disclaimer (also called a renunciation in some states) is a written instrument in which a beneficiary states that s/he does not want to receive a benefit. To be legally effective and, if desired, to achieve tax planning purposes, the disclaimer document must carefully state certain requirements (see below).

A retirement plan will not permit a participant to disclaim his/her benefit because a retirement plan provides that a participant cannot forfeit or transfer any right s/he has under the contract. However, a retirement plan may (but is not required to) permit a disclaimer made by a beneficiary. See General Counsel Memorandum 39858 (September 9, 1991); IRS Letter Rulings 92-26-058, 90-37-048, 89-22-036. As always, read the plan document.

If a beneficiary makes a legally valid disclaimer, the benefit will be distributed (or distributable) as though the beneficiary had died before the participant's death.

To be effective for federal tax purposes, a disclaimer must meet all of the following requirements:

· The disclaimer must be made before the beneficiary accepts or uses any benefit.

· The benefit must pass without any direction by the disclaimant.

· The disclaimer must be in writing and must be signed by the disclaimant.

· The writing must state an irrevocable and unqualified refusal to accept the benefit.

· The writing must be delivered to the plan administrator.

· The writing must be so delivered no later than nine months after the date of the participant's death or the date the beneficiary attains age 21 (whichever is later).

· The disclaimer must meet all requirements of applicable state law.

IRC § 2518; General Counsel Memorandum 39858 (September 9, 1991)

State law will provide additional requirements. For example, in some states a disclaimer must state the disclaimant's belief that s/he has no creditor that could be disadvantaged by the disclaimer. In some situations, especially when the beneficiary is a minor child or an incapacitated person, a disclaimer may require court approval. See, e.g., New York Estates, Powers & Trusts Law § 2-1.11©; Pennsylvania Probate, Estates and Fiduciaries Code § 6202. Even when court approval is not required, state law may require that a disclaimer is not legally valid unless filed in the appropriate probate court. See generally Uniform Probate Code § 2-801.

In addition to state law and tax law requirements, the retirement plan may impose further requirements. Again, always read the plan document.

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[Bruce Steiner]

You can disclaim nonprobate assets such as retirement benefits. The PLRs cited are just a few of many PLRs in which people disclaimed retirement benefits, and since this is not a novel issue there are a vast number of cases in which retirement benefits are disclaimed without a ruling.

But this wouldn't be a disclaimer, because she wants her share to go to one of her sisters. In order for it to be a good disclaimer, she can't direct how the disclaimed property passes -- the disclaimed property has to pass as if she predeceased the decedent, in this case presumably either to her issue or to *both* of her sisters.

Depending on her circumstances (she may have creditor problems), she may want to disclaim. The attorney handling the decedent's estate (or her own attorney) ought to tell her how the benefits would go if she were to disclaim, and prepare the appropriate disclaimer if she chooses to disclaim.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL