A plan participant sometimes wants to provide a survivor annuity for a non-spouse beneficiary who is a child or other close relative of the participant, or a significant other who is not a spouse.Caution: If the participant has a spouse, a survivor annuity for a non-spouse beneficiary can be provided only if the spouse consents.

Recommendation: If a participant's plan allows a survivor annuity for a non-spouse beneficiary, the participant should consider providing such an annuity if the participant is so seriously ill that his life expectancy is substantially less than it would be under life expectancy tables, and the participant does not have a spouse.

Even if the participant has a spouse, he should consider a survivor annuity for a non-spouse beneficiary (instead of the spouse) if the spouse is also seriously ill. Doing this would make it likely that someone (e.g., a child) would benefit from the pension that the participant earned through years of hard work, even if the participant and the participant's spouse would not live long enough to get much benefit from it.

Even if a plan permits a plan participant to have a non-spouse beneficiary, there are limits on the amount that can be paid to that beneficiary under a survivor annuity. If a plan participant elects to provide a joint and survivor annuity for the participant and a beneficiary other than the participant's spouse, the periodic annuity payment payable to the beneficiary if she survives the participant must not, at any time on and after the employee's required beginning date, be more than the applicable percentage of the annuity payment to the participant.

The applicable percentage is based on the adjusted employee/beneficiary age difference, which is determined by:

* Calculating the excess of the age of the employee over the age of the beneficiary (based on their ages on their birthdays in the calendar year in which the annuity starts to be paid); and,

* If the employee is younger than age 70, by reducing the age difference determined by the number of years that the employee is younger than age 70 on the employee's birthday in the calendar year that contains the annuity starting date.

Example 1: Your client, who plans to retire in 2007, when she will become 68, wants to provide a survivor annuity for her disabled brother, who will become 54 that year. Her adjusted employee/beneficiary age difference is 12, i.e., the actual age difference between her and her brother of 14 (68 less 54) less two (the difference between 70 and 68).

Example 2: The same facts apply as in Example 1, except that your client will be 70 in 2007. Her adjusted employee/beneficiary age difference will be 16, i.e., the same as the actual age difference (70 less 54).

If the adjusted age difference is 10 years or less, the applicable percentage is 100 percent. Thus, the survivor's annuity for the non-spouse beneficiary can equal 100 percent of the annuity payable during the joint lives of the participant and the beneficiary. The applicable percentage is reduced for each year that the adjusted employee/age difference is more than 10 years (see chart, this page).

Example 3: Your client, a widower, plans to retire in May of 2006, the month in which he will become 70. He will get a pension at that time and his employer's plan allows him to provide a survivor annuity for a non-spouse beneficiary.

Your client is suffering from a disease for which there is no cure, and which will get progressively worse. His doctor has told him that he is unlikely to live more than five years after his retirement. He would like to provide a survivor annuity for his daughter, who will become 38 in 2006.

Since his daughter is 32 years younger than your client, her survivor annuity may be no more than 59 percent of the annuity payable to your client.

Example 4: The same facts apply as in Example 3, except that your client will be 62 in May of 2006. Accordingly, the adjusted age difference between your client and his daughter is only 16, i.e., the actual age difference of 24 (62 less 38) less eight (the difference between 70 and 62). Your client will be able to provide his daughter (if his plan permits) with a survivor annuity equal to 82 percent of the annuity payable to your client during his life.

Observation: Even if a plan permits a participant to have a non-spouse beneficiary, it may limit the percentage of the participant's benefit even more than the Treasury regulations do. For example, a plan may provide that the joint and survivor annuity for a non-spouse beneficiary may have a survivor annuity that is only 50 percent of the annuity payable to the participant.

Caution: The higher the percentage that a non-spouse beneficiary will receive of a plan participant's annuity, the lower your plan participant's own annuity will be.

Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.

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