United States: New Proposed Minimum Distribution Rules:

Proposed regulations recently issued by the Internal Revenue Service significantly change and simplify the so-called "minimum distribution rules", previously contained in 13-year old proposed regulations. The minimum distribution rules provide guidelines for determining the amount and timing of lifetime and post-death mandatory distributions from qualified retirement plans and accounts such as pension plans, 401(k) plans, 403(b) plans, profit-sharing plans, H.R.-10 plans and Keogh plans, and IRAs.

Retirement accounts have long provided a significant opportunity for income tax deferral. The new minimum distribution rules will, for many plan participants, reduce required annual distributions and increase the period of years for distributing account balances, thereby increasing the income tax deferral benefits these accounts provide. Beginning in 2002 (and, at the participant’s option, in 2001), the proposed regulations will impact significantly on distributions to any participant or post-death beneficiary currently receiving distributions from retirement accounts. Significantly, the proposed regulations substantially reduce the number of optional methods for drawing down a retirement account. Under these proposed regulations, generally:

1. 1. As under the prior regulations, distributions must begin by the participant’s "required beginning date", typically age 701 /2. Under the new proposed regulations, except as provided in paragraph 3 below, a participant determines the amount to be distributed from a retirement account for any particular year by dividing the balance in the account by the factor applicable to the participant’s age. This factor is set forth in a uniform table contained in the proposed regulations. The factors in the table are based on the joint life expectancy of the participant and an individual 10 years younger than the participant without reference, except as provided in paragraph 3 below, to the actual age of a participant’s designated beneficiary.

2. Following the participant’s death, the amount of each annual distribution depends on whether the participant had named a "designated beneficiary" (a term of art which refers to the recipient of the account balance following the participant’s death, but which typically is limited to one or more individuals or a qualifying trust). If there is a designated beneficiary, the annual distribution amount is determined based on the designated beneficiary’s age and life expectancy. If there is no designated beneficiary, and the participant dies on or after his or her required beginning date, the annual distribution is based on what would have been the deceased participant’s life expectancy. If there is no designated beneficiary, and the participant dies before his or her required beginning date, the entire retirement account balance must be distributed within 5 years of death.

3. If the participant’s spouse is the designated beneficiary and the spouse is more than 10 years younger than the participant, during the participant’s lifetime the annual distributions may be determined with reference to the joint life expectancy of the participant's lifetime the annual distributions may be determined with reference to the joint life expectancy of the participant and the spouse without reference to the uniform table in the regulations.

4. A post-death rollover to the IRA of a surviving spouse who is the designated beneficiary continues to be permitted.

5. Retirement accounts have always been a tax-efficient source for funding charitable gifts at death. The proposed regulations make it easier to use retirement plan dollars for this purpose.

The new proposed regulations will make it easier for participants to calculate the amount they must withdraw from a retirement account each year. They will also make it easier for the IRS to make sure the minimum distribution rules are being complied with.

Although the regulations are proposed, so are the ones they replace. Going forward, most plan participants will want to rely on the new regulations in making annual plan distributions. A plan participant who is currently receiving distributions should consult with a tax, benefits, estates or financial professional to see how these regulations will impact on plan distributions.

As a result of the issuance of the regulations, beneficiary designations for all retirement accounts participants should be reviewed with counsel and, if necessary, amended so that they achieve the participant’s post-death distribution goals in a tax-efficient manner. For many individuals, retirement accounts comprise a significant portion of the assets which will pass to family members or other beneficiaries at death. The issuance of the new proposed regulations provides a reason and opportunity to revisit existing financial and estate plans more globally.