ESTATE PLANNING - NEW RULES FOR IRA WITHDRAWALS:

Summer 2001

New rules have been adopted as to the calculation of mandatory withdrawals from an Individual Retirement Account (IRA). The general rules are still in effect that funds deposited in an IRA are tax deferred until withdrawals are made and that such withdrawals must begin by April 1 of the year following the IRA owner's attainment of age 70 1/2. The changes that have been implemented allow the owner greater flexibility and control over the rate of withdrawal from the IRA, resulting in greater tax deferral.

The primary change is that the beneficiary upon whose life expectancy the amount of annual distributions will be based need no longer be designated as of the date on which distributions must begin (April 1 of the year following the owner's attainment of age 70 1/2). Under the old rules, the amount of each year's distribution would be based on the joint life expectancies of the owner and the beneficiary named as of the required beginning date, and, after the owner's death, would be based on that beneficiary's life expectancy. Even if the owner had later named a younger beneficiary, that beneficiary's longer life expectancy would not affect the distribution calculation. Under the new rules, the owner need not choose a beneficiary at age 70 1/2.

The amounts of minimum withdrawals that must be made each year while the owner is still alive are based on a single schedule of life expectancies that will apply to nearly everyone. The new schedule, known as the "Uniform Table," is based on the joint life expectancies of the owner and a designated beneficiary who is 10 years younger than the owner. An exception to the use of the table applies if the owner's spouse is the sole designated beneficiary. In that case, if the spouse is more than 10 years younger than the owner, the minimum amount that must be withdrawn is based on the joint life expectancies of the owner and the spouse. Thus, this exception is to the owner's advantage because it applies only if the required distribution will be less than that called for by the table.

After the IRA owner dies, the minimum withdrawals are based on the life expectancy of the oldest named beneficiary as of December 31 of the year following the owner's death. This means that an IRA owner can replace a beneficiary with a younger one and the amount of withdrawals that must be made after the owner's death will be based on the younger beneficiary's life expectancy.

Even though the pressure will now be off in the sense that there is no age 70 1/2 deadline for designating a beneficiary, the IRA owner still needs to make that decision, or possibly alter a prior decision, and any such step should be made only after consultation with a qualified advisor.

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