Rules of Per Stirpes & Inherting IRA
Joann died (7/2011) — She has an IRA R/O account at Fidelity. The beneficiary designation names her 9 children specifically by name AND PER STIRPES. 4 of the 9 children want to “disclaim” their share of the IRA and have it pass to thier children (Joann’s grandchildren). Fidelity is stating that if 1 (or more) disclaim, that the disclaimants share will pass to the remaining primary beneficiaries and NOT to the Grandchildren, claiming It states this in Fidelity’s Custodial Agreement. My client (one of the beneificiaries) happens to be a CPA and is disputing this answer. Does anyone have experience with this situation and/or fidelity specifically?
Permalink Submitted by Peter Lingane on Wed, 2011-12-14 21:08
What does the custodial agreement say?
Permalink Submitted by Betty Albitz on Wed, 2011-12-14 21:32
….”per stirpes” shall be construed as follows: if any primary or contingent Beneficiary, as applicable, does not survive the Depositor (or following the death of the Depositor, the Beneficiary), but leaves surviving descedents, any share otherwise payable to such Beneficiary shall instead be payable to such Beneficiary’s surviving descedents by right of representation. In all cases, the custodian shall be authorized to rely on any representation of facts made by the Depositor, the executor or adminstrator or the estate of the Depositor, any Beneificary, the executor adminstaror of the estate of any Beneficiary or any other person deemed appropriate by the Custodian in determining the identity of the unnamed Beneficiaries. …..(it then identifies “Minor” “QTIPS AND QDOTs” “Judicial Detmination” and “No Duty”)….
…No Duty. The Custodian shall not have any duty to question the directions of the Depostior (the Authorized Agent, or following the the death of the Depostior, the Beneificairy)as to the amount(s) of the distributions form the custodial Account in accordance, or to advise him or her regarding the compliance of such distributions with repect to section 401(a)(9), Section 408(a)(6), Seciton 2056(b)(7) or Section 2056A of the Code and related regulation.
Permalink Submitted by Peter Lingane on Wed, 2011-12-14 21:39
I suggest that you look a few inches earlier in the agreement. My non lawyerly interpretation is that per stirpes only matters if there was a specific allocation to each beneficiary. If the nine children were named as a group, the IRA is devided eqully among the surviving members of the group and the grandchildren are not considered.
7. Designation of Beneficiary. … [u]If the Depositor designates more than one primary or contingent Beneficiary but does not specify the percentages to which such Beneficiary(ies) is entitled, payment will be made to the surviving Beneficiary(ies), as applicable, in equal shares.[/u] (emphasis added) Unless otherwise designated by the Depositor in a form and manner acceptable to the Custodian, if a primary or contingent Beneficiary designated by the Depositor predeceases the Depositor, the Shares and Other Funding Vehicles for which that deceased Beneficiary is entitled will be divided equally among the surviving primary and contingent Beneficiary(ies), as applicable. If the Beneficiary is not a U.S. citizen or other U.S. person (including a resident alien individual) at the time of the Depositor’s death, the distribution options and tax treatment available to such Beneficiary may be more restrictive. Unless otherwise designated by the Depositor in a form and manner acceptable to the Custodian, if there are no primary Beneficiaries living at the time of the Depositor’s death, payment of the Depositor’s Account upon his or her death will be made to the surviving contingent Beneficiaries designated by the Depositor. If a Beneficiary does not predecease the Depositor but dies before receiving his or her entire interest in the Custodial Account, his or her remaining interest in the Custodial Account shall be paid to a Beneficiary or Beneficiaries designated by such Beneficiary(ies) as his or her successor Beneficiary in a form and manner acceptable to, and filed with, the Custodian; provided, however, that such designation must be received and accepted by the Custodian in accordance with this section. If no proper designation has been made by such Beneficiary in accordance with this section, distributions will be made to such Beneficiary’s estate. Notwithstanding any provision of this Agreement to the contrary, for purposes of distributions calculated and requested pursuant to Article IV, the designated beneficiary within the meaning of Section 401(a)(9)(E) of the Code shall be the individual designated as such by the Depositor. Notwithstanding any provision of this Agreement to the contrary, unless otherwise designated by the Depositor (or following the death of the Depositor, by a Beneficiary) in a form and manner acceptable to the Custodian, when used in this Agreement or in any designation of Beneficiary received and accepted by the Custodian, the term “per stirpes” shall be construed as follows: if any primary or contingent Beneficiary, as applicable, does not survive the Depositor (or following the death of the Depositor, the Beneficiary), but leaves surviving descendants, any share otherwise payable to such beneficiary shall instead be paid to such beneficiary’s surviving descendants by right of representation. …
Permalink Submitted by Betty Albitz on Wed, 2011-12-14 21:48
OK ….so because percentages were not specifically stated, but rather “equally per stirpes” was the wording used, the disclaiming beneficiaries portion of the account would cause the custodian to apply the funds to the remaining primary beneficiaries vs. the disclaiming beneficiaries heirs?
Permalink Submitted by Peter Lingane on Wed, 2011-12-14 21:58
Talk to an attorney!
Permalink Submitted by Betty Albitz on Wed, 2011-12-14 22:19
I think I will have the client talk with an attorney. Most recent word from Fidelity is that each custodial agreement is different — when you sign it you accept it.
Permalink Submitted by Bruce Steiner on Wed, 2011-12-14 22:48
“Equally” and “per stirpes” are inconsistent.
I can leave my IRA to a class of persons “per capita.” In that case, each member of the class gets an equal share. For example, if I leave my IRA to my nieces and nephews per capita, each one who survives me gets an equal share. If one precedeased or disclaims, my IRA goes to the remaining nieces and nephews.
I can leave my IRA to a class of persons, and provide that if one predeceases or disclaims, his/her share goes to his/her issue “per stirpes.” That means that if one predeceases or disclaims, his/her share goes to his/her children, and if one of them predeceases or disclaims, his/her subshare goes to his/her children, and so on.
There’s a third method, called “by representation,” which is a hybrid of the first two. For example, if I leave my IRA to my issue by representation, and I have 3 children, A, B and C, and A survives, B predeceases leaving 2 children, and C predeceases leaving 3 children, A gets 1/3, and B’s and C’s 2/3 are aggregated and divided equally among the 5 grandchildren of B and C. While that’s sometimes done where 2 children predecease, it’s generally not done for disclaimers, since in the above example, B might not disclaim if it meant that some of “his” share would go to C’s children rather than to B’s children.
You can leave your IRA however you choose. But you should specify how you want it to go, to avoid any ambiguity.
What is the exact language of the beneficiary designation in this case?
Permalink Submitted by Alan Spross on Thu, 2011-12-15 00:47
I have a copy of the Fidelity IRA Custodial Agreement, and it contains the verbiage already posted here.
It appears to me that the “per stirpes” designation clearly applies to each of the 9 beneficiaries without ambiguity, and if a qualified disclaimer equals “predecease” or “does not survive the depositor” as is expected, then I do not understand Fidelity’s conclusion. “Per stirpes” should supercede the equal shares unless the agreement clearly states otherwise.
One area of concern appears to be Fidelity’s authority not to accept a disclaimer at all, since P 7 indicates that within 9 months time any change must be in a form acceptable to Fidelity. But it seems preposterous that Fidelity would not accept a proper disclaimer, perhaps not unless they are not sure that their agreement is clear as to what the effect of a disclaimer would be.
Fidelity’s legal Dept certainly knows their agreement better than anyone, as well as any challenges made to it. I think the discussion should be elevated up the ladder at Fidelity, since their conclusion does not seem to match the circumstances described.
I think there was a period that Vanguard did not want to accept a per stirpes designation, perhaps because it opens up the field to unlimited unnamed beneficiaries. But if a custodian accepts it, it would seem that they would have to deal with the prospect of disclaimers as well.
Permalink Submitted by Peter Lingane on Thu, 2011-12-15 03:26
I have been impressed by the quality of Fidelity’s legal department. In my experience, they read beneficiary designations and demand reasonable changes. Other firms accept the same designations without comment.