Spousal Beneficiary
Good Morning
I am looking for guidance regarding the following scenario
FACTS:
Husband, age 65 died leaving a traditional IRA to his son (50%) and surving spouse, age 45 (50%)
Son immediately cashed out his half
Surving spouse requested she remain a beneficiary on her deceased husband’s account
Financial instution instead made the IRA her’s. Now the bank is telling the surviving spouse she was never allowed to remain a beneficiary (obviously incorrect)
Question:
Can the the account be reclassified as a beneficial IRA?
Thank you
Permalink Submitted by mk foss on Wed, 2012-06-13 16:56
The spouse beneficiary is not allowed to maintain the decedent’s IRA – she needs to roll it to an IRA or transform it to a beneficiary IRA.
Normally the rollover is best, but this survivor is very young so the beneficiary IRA would be best for her.
I don’t see how she could “roll” a rollover IRA back to a beneficiary IRA. In this case, the financial institution seems to have made an error because they did not do what was requested. The solution would be to go back to the institution and see if they will correct their error. It may require that you speak to the supervisor of everyone you contact at the instittuion. The beneficiary’s attorney may have to contact the institutions legal department if they won’t deal with this.
Permalink Submitted by Alan Spross on Wed, 2012-06-13 19:14
A closely related issue in this situation is the surviving spouse’s RMD requirements once she succeeds in restoring beneficiary status. Since the son’s interest was evidently paid off prior to 9/30 of the year following the year of death, the surviving spouse qualifies as a sole spousal beneficiary. That means that her RMDs as beneficiary must begin no later than 12/31 of the year her husband would have reached age 70.5. This would mean that she has roughly 5 years before she must start beneficiary RMDs using her life expectancy.
Her distribution requirements and options would then be:
1) First 5 years, no RMDs as beneficiary required, but any distributions she wishes to take will be penalty free.
2) After this period she must take RMDs using her re calculated life expectancy as sole spousal beneficiary. If she fails to take an RMD, she become the owner by default.
3) At anytime she can roll the balance over to her own IRA subject to RMDs as owner rather than beneficiary. But if she does this prior to reaching 59.5, the early distribution penalty applies.
Her best option would appear to be maintaining the account as inherited until reaching 59.5, taking RMDs as necessary for about 9 years. Then at 59.5 she would roll it over to her own IRA and RMDs could cease until she reaches 70.5.
It should not be difficult to get the institution to correct their error, and she should push for this ASAP. While the last resort could be a 72t plan (SEPP), these plans do not work well for long periods of time such as 14 years because they are too inflexible and she would probably end up busting the plan sooner or later and owe retroactive penalty and interest.
Permalink Submitted by ShipsnGiggles on Wed, 2012-06-13 20:38
Alan
As always I apprciate your prompt and detailed response.
One further question.
Couldn’t the surviving spouse remain as a beneficiary until the deceased would have reached 70.5; then rollover the account or make it her own? This would continue to delay the RMD until she reaches 70.5. Correct?
Thank you
Permalink Submitted by Alan Spross on Wed, 2012-06-13 22:16
Correct.
That was the 5 years I mentioned for which no RMDs would be required. But if she does the rollover after that 5 years, she would still only be 50. While she would not have RMDs, neither could she take penalty free distributions if she needed any of that IRA money for the next 9 years. Therefore, the rollover should wait until she is 59.5 unless she is sure that she will not need funds prior to 59.5.
While she would have RMDs for those 9 years as beneficiary, she may well need those RMDs for expenses.
What she could during those years is to maintain the account as inherited until she gets closer to 59.5. Once she gets closer, perhaps 3 years or so from 59.5 and is more sure of not needing the RMD funds, she could do the rollover and stop the RMDs. Actually, if she just misses an RMD she is deemed to become the owner that entire year.
Another factor to consider is her own successor beneficiary, who she should name ASAP. For example, if she has a child but passes prior to when beneficiary RMDs must begin, the child is treated as her primary beneficiary. But if she maintains the IRA in inherited form while taking beneficiary RMDs and passes, the child would be the successor beneficiary and would have to continue the mother’s RMD schedule instead of being able to use the child’s age.
Permalink Submitted by ShipsnGiggles on Thu, 2012-06-14 14:27
Alan
Again thank you.
Another question came to mind
Should the surviving spouse remain a beneficiary for more than 5 years RMD would begin, due to the deceased attaining age 70.5. Question? Which table does she use? Jt life? or Single Life? She was more than 10 years younger than her spouse; does the jt life table still apply since the spouse died prior to commencing RMDs?
Thank you