Beneficiary IRA
A client of mine recently died at age 57, and he has no spouse and two children. His employer’s retirement plan has about $226,000 of all pretax money that the kids would like to rollover into beneficiary IRA accounts. But, on his beneficiary form he listed his beneficiary’s as “My two beloved children stated in my Last Will & Testament.” His will is valid and does name his two children by name. The hometown attorney that my client used is telling the children, who are ages 24 and 21 and both single, that this money has to be paid into the estate and these dollars will ultimately be taxed for federal and state income tax as well as be subject to probate costs and attorney fees.
Is this correct?
Is there anyway to do beneficiary IRA’s?
Will the money be subject to probate?
Thanks.
Peter Hill
Permalink Submitted by Bruce Steiner on Thu, 2007-10-11 03:36
Other than the stretchout, the income tax consequences are the same. The IRA benefits will be subject to income tax (with an income tax deduction for the Federal estate tax). The attorneys’ fees should be about the same either way, since the work to probate a Will is about the same regardless of the amount of the probate assets. In some states there is a probate fee based upon the size of the assets, but that’s usually a relatively small amount. But the stretchout can be very substantial. If the children are the beneficiaries, they can stretch the IRA out over their life expectancies, which at ages 24 and 21 are a very long time.
If he only had two children, they (or their lawyer, perhaps someone other than the one their father used) might want to argue that they are the children are the beneficiaries. Have they (or their lawyer) contacted the IRA custodian to see if it will recognize them as the beneficiaries? They (or their lawyer) could offer to give the custodian a copy of the Will or an affidavit saying that they are the only two children of the IRA owner. For $226,000 it’s worth some effort.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Thu, 2007-10-11 04:53
The problem with the beneficiary designation in the IRA are the words “stated in my last will and testament”. If he had just stopped after “my two beloved children”, they would have been considered designated beneficiaries because they are identifiable. However, by incorporating reference to the will, he has made the transfer subject to probate of the will, and worse yet the actual beneficiary becomes a non individual, the estate. That results in the 5 year rule applying and loss of the stretch.
If after the estate closes, the IRA is assigned to the two children in beneficiary IRA format, the damage remains in place as does the remaining time left of the 5 year rule for complete distribution.
I believe the point Bruce makes here is that an argument might be made that the will simply confirmed the identity of the two children and was therefore an extraneous reference in the IRA beneficiary listing. If the IRA custodian buys it, all the benefits of individual designated beneficiaries are restored, and therefore it might be worth the effort and expense.
Permalink Submitted by Bruce Steiner on Thu, 2007-10-11 12:56
You have to probate the Will anyway, to deal with all of the other assets. But probating a Will is generally not a particularly difficult task. It generally consists of filling out a few forms and filing them with the Will, a death certificate, and a modest filing fee.
Just because the beneficiary designation says that the names of the children are in the Will doesn’t make the estate the beneficiary.
Since the IRA owner only had two children, there shouldn’t be any difficulty ascertaining which two children are the beneficiaries.
For $226,000 the children shouldn’t give up so easily.