Life and Death Planning for Retirement Benefits

Chapter 3: Marital Matters

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under § 2039 , whether or not paid in the form of true annuities, and thus are subject to this rule. Reg. § 20.2039-1(b) . The automatic QTIP treatment for “annuities” is a nice backup when retirement benefits are left outright to the spouse ( ¶ 3.3.11 ). It can also be helpful when retirement benefits are paid in the form of a true annuity and payments could continue after the surviving spouse’s death. If the first spouse’s estate is not large enough to be subject to estate taxes, so the estate “does not need” the automatic QTIP election to eliminate estate tax, see Rev. Proc. 2001-38, 2001- 1 CB 1335, which makes certain “unnecessary” QTIP elections automatically void. If the automatic QTIP election applicable to an annuity in the first estate is voided, the value of the annuity remaining at the surviving spouse’s subsequent death would not be includible in his estate under § 2044 ; see PLR 2003-18039. (The asset may still be included in the surviving spouse’s estate under some other Code provision.) Death benefits payable directly to the spouse outright in a lump sum should qualify for the marital deduction, if the spouse is a U.S. citizen and entitled to withdraw all the benefits. See, e.g. , PLR 8843033. Where the spouse is named as sole beneficiary, with the unrestricted right to withdraw all the benefits, no part of the participant’s interest in the plan passes to someone other than the spouse or her estate, so the spouse has not received a “terminable interest” ( ¶ 3.3.01 ). There is one possible quibble with this conclusion. If the participant or plan document has also named a successor beneficiary ( ¶ 1.5.12 (C), (D)), to receive the remaining benefits if the spouse survives the participant but dies before having withdrawn all the benefits, some might argue that the spouse has a nondeductible terminable interest under § 2056(b)(1) . The author does not believe that this scenario creates a nondeductible interest. The spouse’s interest meets the description of a deductible interest in § 2056(b)(5) , which provides that an interest is not a nondeductible terminable interest if the spouse is entitled to all the income for life and has the right (exercisable by her alone and in all events) to appoint the principal to herself with no person having the power to appoint it to someone other than her. Compare Reg. § 20.2056(b)-5(g)(2) . But in any case, at worst, the spouse’s outright interest as beneficiary would qualify for the “automatic QTIP election” under § 2056(b)(7)(C) (see ¶ 3.3.10 ). To eliminate the concern, the beneficiary form could recite that the spouse has the right to withdraw all income and principal of the benefits, tracking the wording of § 2056(b)(5) and Reg. § 20.2056(b)-5(f)(8) , when (1) the participant is naming his spouse outright as beneficiary and (2) the participant or plan document names a successor beneficiary (other than the spouse’s estate) who will be entitled to receive the benefits that the spouse does not withdraw during her lifetime. 3.4 REA ’84 and Spousal Consent This ¶ 3.4 describes the federal rights granted to spouses of retirement plan participants by the “ Retirement Equity Act of 1984 ” (“ REA ”), and discusses the estate planning implications of these rights. The applicable law is in IRC § 401(a)(11) and § 417 , and the virtually identical ERISA § 205 (29 U.S.C. § 1055); and Regs. § 1.401(a)-20 and § 1.417(e)-1 . The purpose of this ¶ 3.4 is to provide a brief overview of REA’s requirements and exemptions, for estate planners. For complete explanation of REA, see Chapter 10 of The Pension Marital deduction for benefits left outright to spouse