Revocable Trust as Beneficiary??
My husband and I each have an IRA.
When we set up our Revocable Trust and pourover will we were advised to make each other primary beneficiaries of our IRAs with the Trust as contingent beneficiary. The Trust would divide our assets equally between our two children (both adults now).
I think I heard Ed Slott say, on his PBS presentation, that in order for our children to take advantage of the stretch-IRA provision they would have to be specifically named as beneficiaries of the IRAs. In other words, as things stand, if we were to die together our children would not be able to stretch the inherited IRAs over their lifetimes. Is that correct?
This also has a bearing on how the beneficiary designation should be changed once one of us parents is gone. We agree that the survivor would combine the IRAs so that there is only one going forward.
Permalink Submitted by mk foss on Sun, 2010-09-19 22:58
The usual recommendation for beneficiaries is primary – spouse and contingent – children or trust. The trust is preferable to naming the children directly in many ways because it may protect the funds in case a child is divorced, has creditor problems or may be a spendthrift. Having the spouse as the primary beneficiary allows a rollover when the first spouse dies – at that point the previous contingent beneficiaries would be named primary beneficiaries on the combined accounts.
If both spouses were in an accident of some kind and passed away within hours of each other, one spouse would have a survivor (for a short time) and the trust would be the beneficiary of the other. The surviving spouse would not have sufficient time to name new beneficiaries but the executor of that spouse may be able to disclaim the IRAs so they would go to the contingent beneficiary of the first to die. If you were to die in a common disaster of some sort, your state law may provide a law that presumes which spouse has survived – but with disclaimers, the trust is likely to be the beneficiary. The life expectancy of the oldest child is used to “stretch-out” IRA distributions – which shouldn’t be a great hardship if the children are relatively close to each other in age.
With no disclaimers, the spouse who is presumed to be the survivor would inherit an IRA and fail to name beneficiaries. In that case, distributions would go as determined by the custodian’s agreement. The agreement is likely to name the beneficiaries estate if there is no surviving spouse – in that case the children’s lives would not be a factor even if they’re the only estate beneficiaries.
There could be some provisions in your state law that would change the answer given above. You should check with your estate planning attorney as to what would happen in your state if you died together with the trust as a contingent beneficiary. It is so much better than having no contingent beneficiary at all. I think you’re doing a good job in considering these things.
Permalink Submitted by fairira on Mon, 2010-09-20 01:34
Mary Kay Foss,
In a situation where a California couple have named their spouse as the primary beneficiary of their IRA’s and their children as the secondary beneficiaries, what would happen if the couple die within 120 hours of one another?
One Vanguard representative, citing the Uniform Simultaneous Death Act, advised that regardless of the order of their deaths and of California law, their IRA’s would all be inherited by their children with RMD’s based on the childrens’ individual life expectancies.
I am not sure whether California has adopted the Uniform Simultaneous Death Act or something similar. If not, can you say if that would alter what the Vanguard representative said?
Thank you.
Permalink Submitted by Alan Spross on Mon, 2010-09-20 02:51
I will defer to Mary Kay on this one since she is located in CA and deals extensively in estate planning issues and retirement plans.
She may have a different opinion than the following article, but here is a link to a detailed article, and it seems to conclude the the Uniform Death Act as modified by the CA Probate Code does NOT apply to retirement accounts, but does to assets passing in certain other situations. Also just checked my Vanguard IRA agreement, which I cannot confirm is current, but it has a Sim Death Act clause on p 22 which brings their agreement into conformity with the Act. However, IF the act does not apply to retirement accounts in CA, then we are back to identification of the exact time of death of each spouse.
http://apps.calbar.ca.gov/mcleselfstudy/mcle_home.aspx?testID=39
Permalink Submitted by fairira on Mon, 2010-09-20 17:20
Thank you, Alan. I read the article for which you kindly supplied a link and noted your impression that “it seems to conclude the Uniform Death Act as modified by the CA Probate Code does NOT apply to retirement accounts.”
You could well be correct, certainly so in the example you gave of a couple with uncommon heirs who then enter into litigation re who was the surviving retirement plan owner. My own impression is that the 120-hour provision would apply to the different situation I gave, in which case the IRA’s of both the husband and the wife would pass to their IRA’s secondary beneficiaries (their children) since both the husband and wife would be deemed the “survivor” under the 120-hour provision.
I say this because I think the retirement plans are “intestate assets” and the article also says “But intestate assets and assets passing under statutory wills do not so pass, as Probate Code §6403 requires survivorship for 120 hours, so those assets will still pass to the heirs of the first to die unless the survivor lived beyond that period.”
Finally, I suppose that if the couple could add a 30-day survivorship requirement to their IRA’s before their spousal primary beneficiary could inherit (or assume) the first deceased’s IRA, then the question of the 120-day provision would be moot.
Hopefully, Mary Kay will clarify all of this.
Permalink Submitted by Bruce Steiner on Mon, 2010-09-20 21:27
An additional consideration in some cases is that the spouse has to be considered to have survived in order to get the marital deduction.