Primary IRA Beneficiary Dies Prior to Taking Action
I’m am trying to understand how an IRA would pass in the following scenario, and if the rules that govern are based on law or set by each IRA custodian per account agreement.
Husband named Wife primary beneficiary of his IRA and his children contingent beneficiaries. Husband dies in November 2008. Wife dies in June 2009 before Wife does anything with Husband’s IRA (so no inherited IRA FBO Wife established, no transfer to own IRA done). Would the children then be beneficiaires per the contingent designation by the Husband, or would the Wife be deemed to of owned the IRA (even though no action taken to accept it) and thus assets pass in some other manner?
Thanks very much.
Permalink Submitted by mk foss on Mon, 2009-11-02 03:16
Since the spouse was alive when the IRA owner passed away, the contingent beneficiaries are no longer considered.
Distributions to a beneficiary depend upon that person’s age in the year after the owner passes away. For example if the spouse was 70 in 2009 (the year after the owner’s death) – the factor from the Single Life Table is 17.0 – that would allow benefits to be stretched out over 17 years. Since no distributions are required for 2009 – the period would become 16 years starting in 2010.
Next you need to know where the payments go for 16 years – for that you consult the IRA custodian’s agreement. Often it requires that the payments be made to the estate of the beneficiary. If that’s the case, the IRA will need to be probated (in most states) and the executor can ask that the IRA be assigned to the estate beneficiaries when the administration is concluded. The agreeement could specify that the IRA go to children but that isn’t very likely.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-11-02 03:16
At the moment the husband died, the wife owned the IRA, whether reregistered or not. Most custodians refer to their custodial account agreement/disclosure statement to determine who or what the “default beneficiary” is when no beneficiary is named on their IRA. Most will have spouse, followed by children. Some may have the estate, somewhere mixed in. I would call them.
pmk
Permalink Submitted by Alan Spross on Mon, 2009-11-02 04:18
This one could go in a number of directions. IF the estate is the default beneficiary because the wife did not name a successor beneficiary, then the probate process would look to the wife’s will to determine will beneficiaries. If her will named just the husband and no contingent beneficiaries, then the state intestate provisions would determine where the funds go. They could still likely end up with the children in this case.
And if the children received the IRA funds according to the above, the RMD picture would depend on whether the husband passed before or after his RBD. Wife is still treated as the designated beneficiary since she passed prior to 9/30 without disclaiming.
But the disposition of the funds takes precedence now before you worry too much about RMD technicalities.
Permalink Submitted by Andrea Cohen on Mon, 2009-11-02 04:45
Thank you all for your responses — very helpful. Appreciate your sharing your expertise.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-11-02 05:35
alan:
I don’t understand your point:
[quote]And if the children received the IRA funds according to the above, the RMD picture would depend on whether the husband passed before or after his RBD.[/quote]
If the children somehow got the IRA through the wife, who owned the IRA, why would his pre or post-RBD death matter for their (children’s) RMD schedule? Are you talking about a final RMD?
Thanks.
pmk
Permalink Submitted by Bruce Steiner on Mon, 2009-11-02 22:54
W’s executors could have disclaimed the IRA on her behalf after her death within 9 months after H’s death. In that case, it would have gone to the children as the contingent beneficiaries. In some states, this would require court approval.
If W’s executors had disclaimed the IRA on W’s behalf, it would have been subject to estate tax in H’s estate instead of in W’s estate. This might be beneficial or detrimental from an estate tax standpoint.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Wed, 2009-11-04 03:45
>>>>>>>>>>>>>
I don’t understand your point:
And if the children received the IRA funds according to the above, the RMD picture would depend on whether the husband passed before or after his RBD.
If the children somehow got the IRA through the wife, who owned the IRA, why would his pre or post-RBD death matter for their (children’s) RMD schedule? Are you talking about a final RMD?
Thanks.
>>>>>>>>>>>>>>>>>>>>>>>
Because the following Q&A from IRS Reg 1.401a(9)(3) only applies if the original IRA owner passed prior to their RBD:
>>>>>>>>>>>>>>>>>>>>>>>
Q–5. If the employee’s surviving spouse is the employee’s sole designated beneficiary and such spouse dies after the employee, but before distributions have begun to the surviving spouse under section 401(a)(9)(B)(iii) and (iv), how is the employee’s interest to be distributed?
A–5. Pursuant to section 401(a)(9)(B)(iv)(II), if the surviving spouse is the employee’s sole designated beneficiary and dies after the employee, but before distributions to such spouse have begun under section 401(a)(9)(B)(iii) and (iv), the 5-year rule in section 401(a)(9)(B)(ii) and the life expectancy rule in section 401(a)(9)(B)(iii) are to be applied as if the surviving spouse were the employee. In applying this rule, the date of death of the surviving spouse shall be substituted for the date of death of the employee. However, in such case, the rules in section 401(a)(9)(B)(iv) are not available to the surviving spouse of the deceased employee’s surviving spouse.
>>>>>>>>>>>>>>>>>>>>>
If the surviving spouse is therefore treated as the employee because they did not disclaim, and if the survivor failed to name their own successor beneficiary resulting in the estate of the survivor being the beneficiary, the 5 year rule would apply if the surviving spouse also passed prior to their RBD. I did not make my earlier post clear that both of the spouses had to pass before distributions were required to begin.
The above does not apply if the original IRA owner passed after their RBD. In that case, the sole surviving spouse would be treated as the designated beneficiary rather than the owner, and the estate would be the successor beneficiary. The estate beneficiaries could then be assigned the IRA after probate and take RMDs over the remaining life expectancy of the surviving spouse.
Rather a complex situation to be sure.
Permalink Submitted by Bruce Steiner on Wed, 2009-11-04 13:59
If W disclaimed, or in this case where W died within 9 months of H’s death if W’s executors disclaimed on W’s behalf, it would be as if W did not survive H. As a result of the disclaimer, H’s IRA would have been payable to the children as the contingent beneficiaries. The IRA would have been subject to estate tax in H’s estate, and the children could have stretched it out over their life expectancies.
W’s executors should have considered this immediately upon W’s death, before the time for disclaiming (9 months after H’s death) expired in August 2009.
In case there are any other significant issues, both H’s executors (or H’s successor executors if W was the original executor of H’s estate) and W’s executors may wish to consult with tax/estates counsel.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by fairira on Sat, 2009-11-07 01:53
On 11/2/09 B. Steiner commented that the wife’s executor(s) could have disclaimed the IRA on her behalf after her death if done within 9 months after the husband”s death but that in some states, this would require court approval.
Presumably court approval would be needed in California for just the appointment of the wife’s executor. Would further court approval be needed in California for the disclaimer?