Multi-Generational IRA Considerations

Submitted by Dick Platt on Wed, 2007-10-24 13:09

A financial planner recently questioned the way my wife and I had designated beneficiaries for our IRAs. Each of us has designated the other as primary beneficiary and our 2 children as equal secondary beneficiaries for our IRAs.

The financial planner said this did not meet the “Multi-Generational” requirements of recent IRS rulings and would result in a large portion of our IRAs being immediately taxable if my wife and I were to die in an accident and it could not be determined who died first.

Is this true? If so, what wording should be used to correct the problem?

I am thoroughly confused. Any clarification will be greatly appreciated.

Dick



Submitted by Erick Frey on Wed, 2007-10-24 13:51

Dick,
It is likely that your planner is correct however you may wish to investigate. IRA’s in many states fall under “The Uniform Simulatneous Death Act” (1991/1993). These are usually state specific and designate which spouse is classified to have died first in a common tragedy and is therefore passing the assets to the other spouse and then to the contingent beneficiaries.

You can check to see what your state has said about the situation or depending on the IRA if they have stated anything specific under a “simultaneous death” provision.

Additionally, it [i]may[/i] be possible for you to handle this through a will. You may wish to talk to an attorney to have each of your Wills address a clearly specific situation of who will inherit your IRA assets should it be unclear who dies first and only in that situation.

Submitted by BRENT WAINSCOTT on Wed, 2007-10-24 20:33

Dick…it is not a problem. Almost every will I have seen designates that if it cannot be determined who dies first ..then the husband is deemed to have died first. The way you have set it up is perfectly OK. Brent

Submitted by Denise Appleby on Thu, 2007-10-25 02:27

Don’t forget that the Will does not govern the IRA. The beneficiary designation form does.
A customized beneficiary designation form may provide the desired solution, by including contingency language. That is, assuming the custodian will accept customized forms.

If the children are the contingent beneficiaries of both IRAs, then the stretch should apply to at least the IRA of the spouse determined to have died second.

Dick, would you mind saying which firm is the custodian of your IRA? Maybe we can take a look at the beneficiary provisions and take it from there.

Submitted by Wendy Lanier on Fri, 2007-10-26 21:28

A Multi-generational distribution is different than a stretch distribution. The multi-generational distribution will use each generation of beneficiaries’ separate life expectancy verses the first beneficiary’s life expectancy. You can check out companies like Allianz and Old Mutual – the sales team can explain this and the multi-generational beneficiary designation form must be used.

Submitted by Alan Spross on Sat, 2007-10-27 00:50

The only difference evident to me is use of such names as multi generational or perpetual that makes the product sound like it actually provides a longer stretchout period. It does not, and these branded names are just basic IRAs or IRA Annuities that carry the same old RMD requirements per Sec 401(a)9 of the tax code.

Most of the benefits of stretching an IRA over the longest possible number of years rely on discretionery factors including:
1) Accumulating a large balance
2) Taking no more than the RMDs required or passing shortly after RMDs begin
3) Naming a spouse as sole beneficiary, even better if the spouse is much younger. For example, if more than 10 years younger the RMDs are reduced, and the younger spouse can assume the IRA, delaying RMDs for many more years.
4) When the surviving spouse passes, the first non spouse beneficiary is very young, possibly a minor such as a grandchild. A 13 year old taking no more than the non recalculated life expectancy RMD could make the distributions last 70 years.

All of the above is discretionery and requires considerable outside wealth to never take more than the RMD over a century long period. Since IRAs are only 3 decades old, this has obviously never been done. The main point is that once an IRA is inherited by a NON SPOUSE, that non spouse’s life expectancy can NEVER be changed to that of a younger successor beneficiary, no matter how many successor beneficiaries die and leave the IRA to other named successor beneficairies.

An annuitized IRA annuity may substitute lifetime or joint lifetime payout periods for life EXPECTANCY.

Submitted by Wendy Lanier on Sat, 2007-10-27 12:20

Again, Multi-Generational is not Stretch. If the custodian of the IRA allows a multi-generational distribution, then each beneficiary (spouse, kids, grandkids, …) will be able to stretch over their own life expectancy. They have to be named on the Multi-Generational Designation beneficiary form. If you haven’t heard of this or don’t know, then I encourage you strongly to become familiar with this type of distribution as it is different from the traditional stretch. It has to be set up properly by the advisor using the right paperwork should the custodian allow this type of distribution.

Submitted by Al Fry on Sat, 2007-10-27 17:08

Wendy, Alan is correct. It is just semantics. If I name my children as benes of my IRA, they can do a stretch (if they wish to). If I name my grandkids the benes, thay also can do a stretch (if they wish to), which could be dubbed a multi-generational transfer. In the latter case, I may need to concern myself with Generation-skipping Transfer Taxes (and GSTT witholding).

Submitted by Denise Appleby on Sat, 2007-10-27 19:11

[quote=”wendy@savannahseniorsolut“]A Multi-generational distribution is different than a stretch distribution. The multi-generational distribution will use each generation of beneficiaries’ separate life expectancy verses the first beneficiary’s life expectancy. You can check out companies like Allianz and Old Mutual – the sales team can explain this and the multi-generational beneficiary designation form must be used.[/quote]

Each generation of beneficiary using their own life expectancy is not permissible under the tax code. Such a strategy would create [url=http://www.retirementdictionary.com/Excess-accumulation-penalty2.htm%5Dexcess accumulation penalties[/url], if the successor beneficiaries are younger than the first generation beneficiary.

If someone is telling that that is permissible, they may be confused about the provisions under the tax code.

I agree with Alan and Al,

The stretch, allows the distributions to be stretched over the life expectancy that applies to the first generation beneficiary. If this first generation beneficiary dies before his/her life expectancy expires, then his/her beneficiary[which would be a second-generation or successor beneficiary] is allowed to continue the distributions over what remained of his/her[the first generation beneficiary’s] life expectancy, thereby stretching the distributions over multiple generations…. Hence the term multi-generational…

In sum, the IRA can be passed on to ( and stretched by ) multiple generations, providing the stretch period does not exceed the life expectancy to which the first generation ( original) beneficiary is subjected.
See example at http://www.retirementdictionary.com/Stretch-IRA.htm

Submitted by Alan Spross on Sat, 2007-10-27 19:31

At risk of piling on here, attached is a NY Times article regarding inappropriate sales tactics to seniors. Mentioned prominently in the article are the companies previously named in this thread:
http://www.nytimes.com/2007/07/08/business/08advisor.html?_r=2&oref=slog…

Submitted by Wendy Lanier on Sun, 2007-10-28 20:40

Denise,

Please help me clarify. Have you ever used the Inherited IRA Analysis Software for illustration? You plug in the owner, spouse, and any beneficiaries named with their dates of birth, an amount and a growth percentage. I am looking at an example of a owner born in ’46, the spouse in ’47, son in ’73, son in 75, and grandson in 07. An initial balance of $400K with a 6% interest rate is used in this example. I assigned one son with 50%, the other son with 40% and the grandson with 10%. On each page of the report, it shows the hypothetical growth and income and begins paying out to each beneficiary when the spouse (first beneficiary) dies (after taking income out to her life expectancy which is shown as age 83 per the IRS Uniform Life Table III for this example) – it takes it out for each of their separate life expectancies – out to age 85 for each of them. It pays out to 2058, 2060 and 2092 for the grandson. This example shows a total payout of $3,351,045 with RMD income to the owner, spouse and beneficiaries. I have always known about the regular stretch and was introduced to this different “multi-generational” concept recently. It shows that the values are derived from IRS Publication 590. I believe that I am reading the report correctly or am I totally wrong in understanding this? Please advise.

Regarding the bad practices in working with the elderly, that is a terrible thing when they are taken advantage of – I am sure that we are all aware of these practices – there are bad people in every profession and that is why we belong to this group to keep ourselves abreast of IRA rules and regulations. In defense of Allianz, they are a 1.7 trillion dollar company and less than 1/2 of 1% of their contract holders were involved in the lawsuit which has been settled. What large corporation isn’t involved in a lawsuit?

I appreciate all of the comments and would like to make sure that I have the right understanding and information regarding stretch and “multi-generational” distribution.

Submitted by Alan Spross on Mon, 2007-10-29 00:17

Wendy,
I did a quick check on your figures, and they appear correct. However, the RMD treatment illustrated here IS the regular stretch, nothing more.

As indicated earlier, this illustration is subject to the ability and discipline to take only the RMD and no more in any single year from now to 2092. If the entire IRA was left to the oldest son, the total distributions would be around $700,000 less.

In any event, various companies tend to give this basic treatment their own names and the false impression that their particular contract allows greater stretching than the IRS method. As Denise indicated, there is no exception that allows a greater stretch than the IRS approved method outlined in their 2002 Regulations. The same $3.3 million dollar total distriubution figure would be available from any approved IRA custodian in the US given the same assumtions in your example.

Even if a family were able to replicate this disciplined withdrawal strategy, the danger is that selection of a company product such as the annuities offered by many insurance companies will carry expenses that reduce the available return. For even a 1% reduction in return, the long term affect is staggering.

Submitted by Al Fry on Mon, 2007-10-29 00:56

One other point. Some annuity carriers claim they can limit a bene’s withdrawal to RMDs. While this may be possible with fixed annuities, it is not enforceable with variable annuities.

Submitted by Wendy Lanier on Mon, 2007-10-29 02:12

Alan,

Thanks for the clarification. I found out where some of my confusion is – once I went back and read through some notes and reviewed the explanation of how this worked out with the different life expectancies is if the beneficiary disclaims all or some of the IRA – then their portion would be based on their life expectancy – is this correct?

Submitted by Alan Spross on Mon, 2007-10-29 04:42

In your example there is no indication that disclaimers were involved. The last spouse to pass had named 3 designated beneficiaries, and separate accounts were created for each prior to the end of the year following death. That enables each beneficiary to apply their own individual life expectancy including the grandchild for his 10%.

However, disclaimers can also be incorporated into various beneficiary strategies. One simple illustration is a surviving spouse disclaiming all or part of the IRA to a contingent beneficiary, who must have been listed on the IRA agreement by the original owner. The contingent beneficiary is then considered to be the designated beneficiary and can use their own life expectancy. Obviously, the younger the beneficiary, the smaller the RMD and longer the stretch.

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