Designating a Beneficiary

[Guest pepe100]

Could someone please assist me with this question?

In the event where a participant nominates a beneficiary but the beneficiary is deemed not to have fallen within the definition of a designated beneficiary (for example a named estate or a corporation), what will be the consequnces of this?

[david rigby]

Careful examination of actual plan provisions will be needed for an exact answer. Probably, the result is that such designation will be invalid, as if it had never been made. Most plans will have a default definition of beneficiary in such case. If that default differs from your desire (assuming you are a plan participant), then you must make a valid designation in advance.

[Guest P A Weick]

I assume the class of designated beneficiaries you speak of are "Designated Beneficiaries" for purposes of the required minimum distribution regulations.

1. The designation of a nonDesignated Beneficiary would have no effect during the participant's lifetime in calculating required minimum distributions. The rules that made a difference as to whether or not your beneficiary was designated for determining required minimum distributions were amended a while back to get rid of that problem. This presupposes that the participant does not have a spouse who is more than 10 years younger than him/her and the spouse is not named as the beneficiary - if that is the case, then the required minimum distribution will be larger than if the spouse were the Designated Beneficiary.

2. After death, the appointment of a nonDesignated Beneficiary would shorten the period over which these beneficiaries could withdraw funds; 5 years if death occurs prior to required beginning date, unexpired life expectancy of the deceased (I know that sounds odd, but for this purpose dead men do have life expectancies) if death occurs after required beginning date. That may have significant tax impact if the ultimate beneficiaries are individuals, say the beneficiaries of the deceased's estate. If the corporation named is a charity, then there would be no tax impact as to the charity's share because it is tax exempt.

3. However, as Pax points out the plan terms may vary these rules through having limited classes of beneficiary allowed or through requiring nonspousal beneficiaries to take lump sum payouts, thus making it impossible to take life expectancy or intallments payments from the plan.

[mbozek]

I am not sure what you are saying. A participant doesn't nominate a beneficiary - he designates the bene. If the bene is not a natural person the distribution will have to paid in 5 years after the death of the owner. Unless the particpant has failed to get spousal consent there is nothing illegal in designating an estate or charity as a beneficiary of a distribution.