IRA Disclaim
Mom died July 11, 2011. She left her property to her husband who now wants to disclaim. Under the will, all remaining assets are to go to a Trust with three children as beneficiaries.
Dad also wants to disclaim interest in an IRA valued at 300k without contingent beneficiary named. If the IRA goes into the Trust, does the Trust pay tax upon receipt? What if Dad AND the Trust both disclaim? Do the children of the decedent (also the beneficiaries under the trust) receive the IRA assets and can they stretch the IRA out for over five years? Any negative results?
Permalink Submitted by Bruce Steiner on Mon, 2011-12-05 23:10
Check to see if, upon the husband’s disclaimer, the IRA goes to the children as default beneficiaries under the IRA agreement.
If not, then if the husband disclaims, the IRA will go to the wife’s estate in the absence of a beneficiary. If the wife had reached her required beginning date (generally the April 1 after age 70 1/2), the estate can stretch it out over the wife’s life expectancy as of her death (if she had not died). If not, then the estate will have to take the entire IRA by December 31, 2016 (which allows for 7 taxable years if the estate uses a fiscal year). The estate can distribute the amounts it receives to the trust, or can distribute the IRA itself to the trust (though this may require some effort in dealing with the custodian, and won’t increase the stretchout period). If the stretch is limited to 2016, it’s probably easier to just keep the estate open until then.
I’m assuming that the trust divides into separate trusts for the children, since if it were to go to the children outright there wouldn’t have been any purpose to creating the trust in the first place. If so, the trust can distribute to the separate trusts for the children the amounts it receives from the estate, or it can distribute the IRA itself (though this, too, may require some effort in dealing with the custodian, and won’t increase the stretchout period). If the Will or trust agreement so permits, each child’s trust can likewise distribute to that child some or all of the amounts it receives from the master trust, or can distribute the IRA itself (though this, too may require some effort in dealing with the custodian, and won’t increase the stretchout period).
While there is no guarantee that portability will be extended or made permanent, and portability is not indexed for inflation, nor does it apply for GST tax, the husband might want to consider disclaiming the other assets, but accepting the IRA and rolling it over, possibly converting to a Roth IRA, and naming the children (or trusts for their benefit if he thinks it’s practical to have trusts for $100,000 each) as beneficiaries. The income tax benefit of this may outweigh the potential estate tax benefit of disclaiming the IRA.
Permalink Submitted by Alan Spross on Mon, 2011-12-05 23:32
If the estate is the default beneficiary as is most likely, even if the trust is qualified it is not a NAMED beneficiary so the stretching options are severely restricted to the owner’s life expectancy at best and only if death was on or after the RBD. The intended purpose of this trust is unknown.
There is plenty of time to get expert opinion on the best options here since the disclaimer deadline is still 4 months away. Dad can still take the RMD for 2011 if Mom passed after the RBD and did not complete the 2011 RMD and this will NOT nullify a disclaimer if a disclaimer is viable. Unless this trust serves a useful purpose that trumps the loss of the stretch, it might be best for Dad not to disclaim and either name the children directly on his IRA or a trust drafted for the best possible outcome including stretching potential. If the children need funds sooner, he might take additional distributions and gift them some money, perhaps less than the annual gift exclusion.
If estate taxes are an issue, I wouldn’t expect any resolution from Congress prior to the disclaimer deadline.
Permalink Submitted by Grant Sircharles on Tue, 2011-12-06 20:25
Mom was 73 when she passed away. Sorry I failed to mention it before.
Would there be any reason to have Dad disclaim and then have the trust disclaim to get the money in the hands of the beneficiaries or would it be best simply to stretch the IRA out over the course of mom’s life expectancy?
Permalink Submitted by Grant Sircharles on Tue, 2011-12-06 20:28
Moreover, how does a trust disclaim interest in an IRA? Is this the trustee’s duty? The Beneficiaries’?
Permalink Submitted by Bruce Steiner on Tue, 2011-12-06 20:34
Whether a trustee can disclaim (and if so, whether it requires court approval) depends on state law. But the result should be the same if the beneficiaries disclaim.
Without knowing the details, it’s hard to compare the income tax benefit of Dad taking the IRA, rolling it over, possibly converting to a Roth, and naming new beneficiares, against the potential estate tax benefits of Dad disclaiming. The lawyer handling the estate administration will know the details, and can better advise Dad.