Trust Reformations under the Required Minimum Distribution Rules

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By Steven B. Gorin, Esq.
Thompson Coburn LLP, St. Louis, MO

When are reformations respected to determine the life expectancy used under the required minimum distribution rules of §401(a)(9)?

Regs. §1.401(a)(9)-4, Q&A-4, provides that an employee's designated beneficiary will be determined based on the beneficiaries designated as of the date of death who remain beneficiaries as of September 30 of the calendar year following the calendar year of the date of death.

PLRs 200616039, 200616040 and 200616041 approved reformations of beneficiary designations. In those cases, the decedent had transferred his IRA from one provider to another. The decedent asked the IRA provider to make sure that the beneficiary designation on the new IRA was the same as the old. However, the new IRA beneficiary designation failed to include the contingent beneficiary named on the original IRA. The IRS allowed the beneficiary designation to be reformed to include the contingent beneficiary to facilitate disclaimer planning.

PLR 200742026 did not allow a reformation to be respected. The decedent had changed beneficiary designations for an IRA a few times, and the last change did not include a contingent beneficiary. The primary beneficiary predeceased the decedent, and the eventual beneficiaries had not been named. Thus, no beneficiaries were designated as of the date of death.

PLR 201021038 involved a trust with a lot of provisions that were not worked out before death. This seemed more like a prospective modification than like a reformation fixing a mistake.  The policy should be that one takes a pool of existing beneficiaries and eliminate some through a reformation, allowing one to whittle down the beneficiaries to whoever is left on the September 30 beneficiary designation date. What seemed to disturb the IRS was that the trust as originally drafted did not qualify as a designated beneficiary at all, although it did include beneficiaries who would qualify in their own right. Perhaps, if the trust itself had qualified as a designated beneficiary before any modification was contemplated and the modification served merely to eliminate older beneficiaries, the IRS might have approved the ruling.

One should not attempt to over-engineer a trust's provisions when beneficiary designations under the required minimum distributions are needed. Be sure that the trust qualifies as written, then use post-mortem planning as a tool to obtain a more satisfactory result, not to fix a defective trust.

For more information, in BNA's Tax Management Portfolios, see Wojnaroski, 821 T.M., Federal Tax Issues of Employee Plan and Commercial Annuities, and Bosley and Hutzelman, 370 T.M., Qualified Plans — Taxation of Distributions, and in Tax Practice Series, see ¶5520, Plan Qualification Requirements.