Trusts and Estates > Retirement > When the Stretch Snaps: Computing Damages

Sep 1, 2008 12:00 PM

When the Stretch Snaps: Computing Damages

By Michael J. Jones & Natalie B. Choate

When a retirement plan participant dies, the Internal Revenue Code's minimum distribution rules generally require that the plan benefits be distributed in annual installments over the life expectancy of the participant's designated beneficiary.1 Most advisors know that this post-death “life expectancy of the beneficiary” or so-called “stretch” payout of retirement benefits can be a valuable tax deferral option for the beneficiary, especially when that beneficiary is young.2

Unfortunately, the stretch payout option can easily be lost. If the participant names the wrong sort of beneficiary (such as his estate), the stretch payout will not be available.3 If the account is distributed in full upon the participant's death, the distribution is immediately taxable; a non-spouse beneficiary cannot fix the situation by “rolling” the distribution back into the same or any other retirement plan.4

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