Primary-Secondary Beneficiaries; Last-minute changes
I am 77 and my wife is 67 years old. I have $800,000 in a Roth and she has $100,000. I expect that she will survive me. My Roth is set up with my wife as primary and my two sons as secondary beneficiaries. All persons involved know what they are doing, have financial sense and understand the advantages of the stretch.
I would like to keep the account as is and have my wife decide how things are setup when she inherits the account. One scenario could involve rolling 400K to her account and passing 200K in a Roth to each of the two sons. Another could be to roll the entire 800K to her Roth. What I’m trying to achieve is flexibility. Everything is held at Fidelity Investments.
Does this seem to be a practical strategy and is there anything that is problematic with respect to the law or custodian services?
Permalink Submitted by Alan Spross on Tue, 2011-05-17 02:33
The surviving spouse will have the option to do a full or partial disclaimer of the Roth IRA or other assets, but the disclaimer has to be executed within 9 months of your death. If she disclaimed half, then half of the 50% disclaimed would go to each son named as equal contingent beneficiaries. They could create separate inherited Roth IRA accounts and would have to take RMDs no later than the end of the year following the year of your death. Their RMDs or other distributions would be tax free assuming that your Roth will reach the 5 year mark long before they would ever reach the earnings in the Roth.
But the RMD requirement still exists, whereas the share your spouse retains will not have RMDs so there would potentially be a larger stretch if she inherited 100%. The best option depends on the entire financial situation including all other assets, the living expenses and needs of all parties etc, so it is not possible to recommend that she disclaim or not disclaim. But she WILL have this flexibility and there is nothing you need to do with Fidelity or otherwise now. She or someone else just needs to know that if she is to disclaim she will probably need legal assistance to draft the disclaimer and she also needs to know that if she cannot take distributions from the account before disclaiming. If any distributions are taken, the disclaimer will not qualify and will not meet the requirements of Sec 2518 of the tax code.
In summary, this is certainly a strategy that should be considered and planned for, and your wife needs to know about not taking any distributions until the disclaimer is completed if disclaiming is the best approach.
Permalink Submitted by Bruce Steiner on Tue, 2011-05-17 03:03
Taking distributions won’t necessarily destroy the ability to disclaim. See Revenue Ruling 2005-36: http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysque…
Of course, she should consult with tax/estates counsel before taking any distributions.
Permalink Submitted by Alan Spross on Tue, 2011-05-17 03:28
Correct for a TIRA with decedent RMD to be satisfied, but this was a Roth IRA with no decedent RMD requirement.