Under-Aged Beneficiary

[Guest msprice]

I have two separate issues:

- Designated beneficiary is under age 18, would the distribution be paid directly to him or to his legal guardian?

- Designated beneficiary is citizen of the UK, would the normal procedures to doing a non-spouse beneficiary remain the same?

Please advise!

Thanks!

[Peter Gulia]

Beneficiary is a minor

While nothing in ERISA or the Internal Revenue Code precludes a retirement plan from paying a distribution to a minor, many plan administrators prefer to pay a minor’s conservator, natural guardian, or UTMA custodian. Why? A payer wants to be sure that a payment is a satisfaction of the obligation to pay the benefit. Ordinarily, a beneficiary’s deposit or negotiation of a check that pays a retirement plan distribution is the beneficiary’s acceptance that the payment satisfied the claim under the plan.

A minor is a person still young enough that he or she can’t make a binding contract. At common law, the age of majority was 21. Now, all but three States’ laws end a person’s minor status at age 18. Before a child reaches age 18 (or the other age of competence to make contracts), his or her conservator may disaffirm an agreement or promise the minor made. After a child reaches age 18 (or the other “full age”), he or she may disaffirm an agreement or promise he or she made before he or she reached the age of competence to make contracts. A typical payer won’t take the risk that paying a distribution isn’t a satisfaction of the plan obligation. Thus, payers usually are unwilling to pay a plan’s benefit to a minor.

To facilitate payment in these circumstances, most plans permit payment to a minor’s conservator, guardian, or Uniform Transfers to Minors Act custodian. If a participant named a minor as a beneficiary (rather than naming as beneficiary a trustee or custodian), a typical payer is likely to honor a claim made by the child’s conservator or natural guardian. As always, a plan administrator should read carefully what the plan says, and, if the right administration isn’t obvious, get its lawyer’s advice.

Beneficiary is not a U.S. person

If a retirement plan distribution is payable to a foreign person (such as a nonresident alien), a withholding agent must withhold 30% for U.S. Federal income tax unless the withholding agent has proper documentation (such as a withholding certificate on Form 8233 or the correct form in the Form W-8 series) that it properly relies on to treat the payment as made to a beneficial owner who is a foreign person entitled to an exemption from, or a reduced rate of, withholding. Detailed rules govern the circumstances in which a withholding may or must not rely on the distributee’s or payee’s certificate. See 26 U.S.C. §§ 1441-1443; 26 C.F.R. §§ 1.1441-1 through 1.1441-9, 1.1443-1.

The United States has an income-tax treaty with the United Kingdom. A distributee who’s entitled to claim that treaty’s protection likely qualifies for an exemption or a reduced rate.

[Guest msprice]

Thank you so much for the thorough information!

Beneficiary is a minor

While nothing in ERISA or the Internal Revenue Code precludes a retirement plan from paying a distribution to a minor, many plan administrators prefer to pay a minor’s conservator, natural guardian, or UTMA custodian. Why? A payer wants to be sure that a payment is a satisfaction of the obligation to pay the benefit. Ordinarily, a beneficiary’s deposit or negotiation of a check that pays a retirement plan distribution is the beneficiary’s acceptance that the payment satisfied the claim under the plan.

A minor is a person still young enough that he or she can’t make a binding contract. At common law, the age of majority was 21. Now, all but three States’ laws end a person’s minor status at age 18. Before a child reaches age 18 (or the other age of competence to make contracts), his or her conservator may disaffirm an agreement or promise the minor made. After a child reaches age 18 (or the other “full age”), he or she may disaffirm an agreement or promise he or she made before he or she reached the age of competence to make contracts. A typical payer won’t take the risk that paying a distribution isn’t a satisfaction of the plan obligation. Thus, payers usually are unwilling to pay a plan’s benefit to a minor.

To facilitate payment in these circumstances, most plans permit payment to a minor’s conservator, guardian, or Uniform Transfers to Minors Act custodian. If a participant named a minor as a beneficiary (rather than naming as beneficiary a trustee or custodian), a typical payer is likely to honor a claim made by the child’s conservator or natural guardian. As always, a plan administrator should read carefully what the plan says, and, if the right administration isn’t obvious, get its lawyer’s advice.

Beneficiary is not a U.S. person

If a retirement plan distribution is payable to a foreign person (such as a nonresident alien), a withholding agent must withhold 30% for U.S. Federal income tax unless the withholding agent has proper documentation (such as a withholding certificate on Form 8233 or the correct form in the Form W-8 series) that it properly relies on to treat the payment as made to a beneficial owner who is a foreign person entitled to an exemption from, or a reduced rate of, withholding. Detailed rules govern the circumstances in which a withholding may or must not rely on the distributee’s or payee’s certificate. See 26 U.S.C. §§ 1441-1443; 26 C.F.R. §§ 1.1441-1 through 1.1441-9, 1.1443-1.

The United States has an income-tax treaty with the United Kingdom. A distributee who’s entitled to claim that treaty’s protection likely qualifies for an exemption or a reduced rate.