Estate planning…large IRA

Submitted by Gregg Miller on Sun, 2019-05-26 12:18

Folks,

Newbie to this forum and find it extremely helpful already. Hoping for a response to this scenario, which I will try to simplify.

My dad recently passed with a roughly $5 million IRA as his primary asset. There are conflicting instructions in the will and beneficiary forms. The beneficiary forms states that my mom is to get 100% of the IRA with 4 kids acting as 25% contingent beneficiaries (were she not alive). The will states that the IRA is to be divided into 2 parts: 50% goes directly to my mother and 50% is directed to a pass through IRA trust that will distribute the larger of that portion of the IRA’s income or the RMD for the year to her, with the principal remaining intact. She does have access to the principal, if needed, but would not likely need it. In essence, the Trust was established to take advantage of the then $5 million exclusion in place at the time and to get at least $2.5 million out of my dad’s estate.

A few issues:

1) The discrepancy between the beneficiary form and the will: Is this going to be an issue in fulfilling the terms of the will if the beneficiary form dictates that 100% goes to my mother.

2) The IRA trust and all components of the will are very open ended in their language. There is a lot of verbiage describing flexibility to distribute funds in such a way as to take advantage of the various federal and state “exclusions” at time of death. The estate is not large enough to trigger federal estate taxes but is sufficiently large to trigger MA state taxes (over $1 million, so entirety of estate is taxes). Leaving $2.5 million of an IRA to an IRA trust will no doubt trigger the MA estate tax. It would seem better to me that the IRA or at least any amount over 1 million go directly to my mother to avoid the estate tax for the time being. Does that analysis sound correct?

3) 4 children are the ultimate beneficiaries of the IRA trust after my mother passes. It would seem that until this point, her RMDs will be based on her age, not those of any of the children. As a pass through trust, will she still be able to use the Uniform Life expectancy table or will she be forced to use the single life expectancy table (thus accelerating RMDs over her lifetime)?

4) Curious as to how one would have structured things differently given the onerous MA estate tax (and low exclusion), but generous Federal estate tax exclusion amounts. What should my mother be doing in preparation for the future to structure her estate when such a large component of it is the IRA? With the proposed elimination of the stretch IRA rules, does it make sense to structure something now (based on the open ended language of my father’s will) to take advantage of current stretch IRA rules before any changes go into effect?

I look forward to hearing from any and all of you with respect to these matters. This forum is a wealth of information and I thank you, in advance, for your time and expertise.

SR



Submitted by Alan - IRA critic on Sun, 2019-05-26 18:05

  • You will have to consult with a MA estate attorney (normally the one that drafted the trust) in order to determine if there if there are any options to address the MA estate taxes. Extraordinary steps if even possible to get 50% into the trust will likely be time consuming and expensive if even possible in MA. 
  • If mother disclaims 50% of the IRA, the disclaimed portion will be split among the children, but that still does not get any portion into the trust and MA estate taxes will likely apply. It will be safer to wait until any disclaimer is processed and beneficiary IRAs are established before determining  how the beneficiaries want to complete any year of death RMD that father did not complete. The uncompleted year of death RMD is a collective beneficiary requirement and need not be done pro rata.
  • Mom would then do a spousal rollover of her 50% to her own IRA and then take RMDs using the uniform table from her own IRA and name her beneficiaries. Roth conversions could be considered after her annual RMD had been withdrawn. 
  • If any portion could somehow be transferred to the trust, RMDs would be based on the non recalculated single life table and age of the oldest trust beneficiary, likely Mom. That would not change after her passing.
  • Note that if one of the retirement bills moving along in Congress pass as expected the children should not lose the stretch since it is most likely that the stretch will not be impaired for deaths occurring prior to enactment. However, if the children inherit as a result of mom’s passing later on, they could end up saddled with a distribution requirement of 5 years max resulting in loss of deferral and higher marginal tax rates. This factor must be considered and compared along with MA estate tax issues when analyzing how a disclaimer could get half the IRA to the children now, albeit at the expense of MA estate taxes.
  • The IRA custodian will not recognize the trust, only the beneficiary clause in the IRA at father’s death, but the contingents will be recognized with a qualified disclaimer or partial disclaimer. So it is not clear whether the inconsistency between the IRA and the will is costly, or could actually be beneficial.
  • With respect to being able to transfer any portion of the IRA to the trust, that would require a difficult and expensive reformation, if even possible in MA. Consult with a MA attorney to determine whether these non standard options exist and are worth pursuing given the simpler disclaimer approach. Remember, that upon Mom’s death estate taxes again will become an issue perhaps even federal estate taxes at that time.

Submitted by Bruce Steiner on Sun, 2019-05-26 20:08

  • The beneficiary designation trumps the Will as to the IRA.  The IRA is payable to your mother.  
  • For Federal estate tax purposes, your father’s executors can elect portability, in which case your mother will “inherit” your father’s unused estate tax exclusion amount.
  • There is no portabiliity for Massachusetts estate tax purposes.  If less than $1 million passes other than to your mother (or a marital trust for which your father’s executors claim a marital deduction for Massachusetts estate tax purposes), the unused portion of your father’s $1 million Massachusetts estate tax exclusion amount is lost.  In that case, your mother could disclaim the portion of the IRA needed to bring the other beneficiaries up to $1 million.  For example, if there weren’t any assets other than the IRA, she could disclaim $1 million of the IRA.  The $1 million disclaimed portion of the IRA would go to the children as the contingent beneficiaries.  She would get the remaining $4 million of the IRA.  
  • If the stretch is eliminated, your might might consider leaving her IRA to a charitable remainder trust for the children, with remainder to charity.  That will replicate the stretch.  However, it gives up considerable flexibility.
  • If your mother can afford to give up more than the portion of the IRA needed to bring the children up to $1 million, she could disclaim more of the IRA.  That would insure the benefit of the stretch (since the children could stretch their shares over their life expectancies under current law).  It would result in some Massachusetts estate tax, but that tax will be payable at her death unless she moves to another state or the tax is repealed or the exclusion amount is increased.  It will give up the opportunity to convert the additional disclaimed portion to a Roth.  It will also give up the opportunity to leave the additional disclaimed portion to the children in trust rather than outright.
  • It may be possible to get part of the IRA to the trust but it’s probably not worth the effort since the stretch on it would be limited to your mother’s life expectancy.
  • Your mother should roll the IRA (or the portion of it she doesn’t disclaim) into her own IRA and name new beneficiaries.  She should consider providing for her children in trust rather than outright to keep their inheritances out of their estates for estate tax purposes, and to protect their inheritances from their potential creditors and spouses, and Medicaid.  She should consider Roth conversions.
  • Your mother should work with different (more competent) counsel, who’s used to dealing with estates of this size, both in doing her own planning and in administering your father’s estate.
  • As to what your father should have done differently, he should have worked with competent counsel who would have known that the beneficiary designation trumped the Will.  He should have provided for his children in trust rather than outright for the reasons set forth above.
  • Bruce Steiner

Submitted by Gregg Miller on Mon, 2019-05-27 01:23

Grateful for these responses. Confirmed what I suspected. Can’t thank you enough for your keen and erudite insight. SR

Submitted by Gregg Miller on Tue, 2019-05-28 12:19

One quick follow-up question:If my mother disclaimed say $500,000 of my father’s IRA to be distributed to the 4 children as inherited IRAs, would that $500,000 be included in my dad’s estate or my mother’s (for purposes of federal and state estate tax purposes).Thanks again for the great information!SR

Submitted by Bruce Steiner on Wed, 2019-05-29 03:48

It would all be included in your father’s estate, but his estate would get a marital deduction for the portion your mother keeps.  The portion your mother keeps will then be included in her estate.  The portion your mother disclaims will be taxable in your father’s estate (in other words, it will count toward his Federal and state exclusion amounts).

Submitted by Alan - IRA critic on Tue, 2019-05-28 15:31

Dad’s estate.

Submitted by Gregg Miller on Wed, 2019-05-29 11:14

if my mom disclaimed a portion of the ira and it reverted back to my dad’s estate, is there a way for the children to disclaim the disclaimed portion of the ira so it ends up in their far lower income children’s hands (grandchildren of the deceased). thanks! SR

Submitted by Alan - IRA critic on Wed, 2019-05-29 18:22

If Mom and the children both disclaim, the IRA will pass through Dad’s estate according to his will. The 5 year rule will apply if he passsed prior to his RBD, and his remaining life expectancy will apply if he passed on or after his RBD. If the trust inherits in this manner it will not be a qualified trust since it was not named on the IRA beneficiary clause. A minor inheriting the IRA would expose the RMDs to the kiddie tax as well.

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