Effect If Primary Beneficiary Is Spouse “Per Stripes”?
A Vanguard IRA owner has designated his wife as the sole primary beneficiary of his IRA and their 3 sons as the secondary beneficiaries. He is concerned about the remote possibility that if he dies first, his wife’s paperwork to assume his IRA may not reach Vanguard before her subsequent death if it is soon after his death. In this situation Vanguard would set up an inherited IRA in the name of his wife’s estate. This would be so even though the IRA owner and his wife have filed a notarized “Letter of Instruction for the Record” with Vanguard to declare their intent that this IRA not go into either of their estates but that it be inherited as IRA’s by their 3 sons.
Vanguard’s creation of an estate-inherited IRA would then involve undesired probate and the inability of their sons to use their life expectancies for RMD purposes.
Q. 1: IF Vanguard would permit the IRA owner to modify his current IRA beneficiary designation by adding “per stirpes” to his wife’s name as sole primary beneficiary, what would the effect(s) be in the above situation of her untimely death?
Q. 2: Would this modification effectively designate their sons as the primary beneficiaries of her subsequently-acquired IRA so that Vanguard would be required to set up individual inherited beneficiary IRA’s for the sons?
Q. 3: Or would Vanguard have full choice as to what to do with the IRA despite the “per stirpes” designation?
Q. 4: Is there any other way to avoid the owner’s IRA becoming an estate asset other than the use of a trust, which would prevent the wife assuming the IRA if she survives long enough to do so?
Thank you for your responses.
Permalink Submitted by Alan Spross on Mon, 2010-06-28 22:22
Vanguard has always shown particular concern regarding distributions to beneficiaries over the years. This concern includes discouraging or refusing survivorship periods in beneficiary designations a few years back, and more recently discouraging “per stirpes” or “per capita” provisions in the beneficiary clause. These concerns are an attempt to reduce litigation or settlement disputes in which Vanguard incurs extra costs or liability in determining their actions.
Note that their IRA agreement also includes a hold harmless clause in favor of Vanguard. There is also a “simultaneous death” clause that conforms to the particular laws of the state of the IRA owner’s domicile. You may want to check into the appropriate state status with respect to the “Uniform Simultaneous Death Act”. In some states there is a 120 hour survival period during which the owner and beneficiary are each presumed to have pre deceased the other. Contingent beneficiaries would then inherit the funds directly.
If the primary beneficiary survives longer than the applicable period above or longer than any survivorship period specified (eg 90 days) in the beneficiary clause accepted by Vanguard, they would require an estate to be established to receive the IRA account even if there was no other need to establish an estate as would be the case if all assets passed by operation of law. Regarding your questions:
1) If Vanguard accepted the “per stirpes” designation, they would still set up the estate requirement if there was any possibility that the primary beneficiary survived the owner and any survivorship period or simultaneous death statute. Effectively, that would void the “per stirpes” clause which only applies if the primary beneficiary clearly pre deceased the owner.
2) No. See last sentence above.
3) The IRA agreement would govern subject to state simultaneous death laws. That said, does the owner definitely have all the amendments made to the agreement? The agreement I have from Vanguard is dated 04/20/03.
4) The survivorship period would do it, but note that such a survivorship period (if Vanguard would accept it) limits access to the funds for the length of that period.
Common disasters are actually much more rare than is assumed, although they do happen. Another frequent pitfall is the survivor assuming that contingent beneficiaries remain valid after the owner’s death and failing to promptly name their own beneficiaries (or successor beneficiaries if ownership is not assumed).
Bruce Steiner may have more or better suggestions on this topic………..
Permalink Submitted by Anonymous (not verified) on Mon, 2010-06-28 22:35
If the household assets are more than 500K, the account owner can bypass all these problems by sending in a “customized” beneficiary desgination. Vanguard will review the proposed language and will work with the client to avoid the concerns addressed above.
pko
Permalink Submitted by Bruce Steiner on Tue, 2010-06-29 21:11
Alan: thanks for the kind words.
Vanguard has gotten better over the years, though they’re not perfect. Their concern is the same as ours — they don’t want an ambiguous beneficiary designation where an IRA owner dies and it is not clear who is entitled to the IRA.
If the spouse is the beneficiary and survives the IRA owner but dies before rolling it over, I am not aware of any authority that would permit her executors to roll it over on her behalf.
But if the spouse is the beneficiary and survives the IRA owner but dies before rolling it over, the spouse’s executors can disclaim the IRA on her behalf. In some states, a disclaimer by an executor requires court approval. If the spouse’s executors disclaim, it will be as if the spouse did not survive, so that the IRA will go to the original IRA owner’s contingent beneficiaries, such as the children or trusts for the benefit of the children.
If the spouse survives the IRA owner but dies before rolling it over, and the spouse’s executors do not disclaim the IRA, then it becomes an asset of the spouse’s estate. The spouse’s executors can transfer it to the beneficiaries of the spouse’s estate, but the stretchout will be limited to the spouse’s life expectancy.
Probating a Will is generally a routine administrative task, and is generally not particularly difficult, burdensome or expensive.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL