IRA death proceeds payable to estate vs contingent benes
A study group associate of mine has faced two situations that thus far no other advisors that I have discussed this with are aware of (if true).
Her client & his wife both had large IRA’s; each IRA named the other as primary bene & the three adult children equally as contingent bends. The husband died of a heart attack, and one week later the wife died en route to the funeral of a stroke. The IRA custodians are stating that because the husband’s estate hadn’t yet been settled, since the primary bene (the wife) is deceased that the IRA proceeds do not go to the contingent benes but instead to the estate. This obviously creates all sorts of unpleasant & undesired tax consequences. The custodian of the wife’s IRA is making the same claim since she hadn’t yet changed her primary bene designation at the time of her death.
Amazingly, several weeks later she had another client (a retired physician) who was driving home late one night with his wife, fell asleep behind the wheel, and crashed head on into an oncoming car. He & his wife were killed as was the driver of the oncoming car. A child in the oncoming car was permanently brain damaged. The IRA custodians are making the same argument, that since the estate had yet to be settled when the wife (the primary bene) was killed then the IRA proceeds will be paid to the estate, not to the contingent benes (two adult children). Without getting into a discussion re the ethical obligation of the estate to the surviving victim, this obviously exposes the IRA proceeds to legal claims.
Does this sound correct to you-because the estate of the first decedent had yet to be settled that IRA proceeds are paid to the estate & not to the contingent bene? If yes, what can we advisors do to avoid this rare but obviously possible error from occurring?
Permalink Submitted by Bruce Steiner on Sun, 2012-11-11 20:20
In the first case, since W survived H, the IRA is payable to W. Since W has died, it’s now payable to W’s estate. W’s executors may be able to disclaim on her behalf, in which case the benefits will go to the children as the contingent beneficiaries. Depending on state law, W’s executors may need court approval to disclaim. Of course, W’s executors won’t disclaim unless the children are also the beneficiaries of W’s estate, or the beneficaries of W’s estate consent to their disclaiming.
In the second case, since there’s no way to tell whether H or W died first, unless the beneficiary designation provides otherwise, H’s assets pass as if H died first, and W’s assets pass as if W died first. In other words, H’s IRA would go to the children, as the contingent beneficiaries. In many states, IRAs payable to a beneficiary are not subject to creditors.
Whether H’s estate has been settled is irrelevant. The IRA is payable to the named beneficiaries.
Where are the lawyers in these cases? This is pretty basic. The families may wish to consult with competent tax/estates counsel.