Senate Finance Committee Chairman Max Baucus Tuesday said he will release a modified mark-up of The Highway Investment, Job Creation and Economic Growth Act of 2012 ahead of the Committee's consideration of the bill.
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Under the proposal, the five-year rule is the general rule for all distributions after death for plans and IRAs (regardless of whether the owner dies before or after the required beginning date), unless the beneficiary is an eligible beneficiary as defined in the proposal. This would apply to deaths occurring after 2012.
Eligible beneficiaries include any beneficiary who, as of the date of death, is the surviving spouse of the employee or IRA owner, is disabled, is a chronically ill individual, is an individual who is not more than 10 years younger than the employee or IRA owner, or is a child who has not reached the age of majority.
For these beneficiaries, the exception to the five-year rule (for death before the required beginning date) applies whether or not the IRA owner or employee dies before or after the required beginning date. In addition, the five-year rule would apply after the death of the beneficiary.
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The key issues here will be loss of deferral and bracket creep. The two most likely strategies to deal with this would be Roth conversions to pay tax at the owner's level prior to death or to leave an IRA payable to a charitable remainder trust.
We will be keeping a close eye on this proposal and will keep you updated.