Death of IRA beneficiary shortly after death of owner

Submitted by Henry Stalzer on Tue, 2015-12-29 20:00

Husband and wife with no children either together or separately.
Husband has IRA with wife 100% primary beneficiary and two nieces as contingents (50% each). Assume husband dies first. The plan is that the wife will take the husband’s IRA as her own and name his two nieces as primary beneficiaries (50% each). There is full faith on the husband’s part that the wife will make the change according to plan. Is there any way to assure that the nieces get the IRAs if the wife should die shortly after the husband and before she has the opportunity to make the change. This could occur, with no fault on the part of the wife, due to a common accident in which the wife survives the husband by a short time or if she should die before she receives the necessary documentation to make the change. Granted the situation is unlikely but it is important to assure that the IRA ultimately goes to the husband’s nieces.



Submitted by Alan - IRA critic on Tue, 2015-12-29 22:04

Leaving the IRA to a QTIP trust would accomplish this, and also protect against the surviving spouse living a considerable time and either spending the IRA money or having a change of heart regarding the beneficiary.However, any trust arrangement as the husband’s beneficiary instead of leaving the IRA to the wife outright comes with certain trade offs for the wife. For example, the trust will have to file a 1041 every year, the wife will not be able to convert to a Roth IRA, and RMDs will be calculated using Table I rather than the Uniform Table.  See http://www.nytimes.com/2012/10/17/business/qtip-trust-guides-bequests-beyond-the-grave.html?_r=0

Submitted by Bruce Steiner on Tue, 2015-12-29 22:59

  • Alan is correct that there’s a tradeoff. 

 

  • Leaving the IRA to a QTIP trust (or, now that the Federal estate tax exclusion amount is $5,430,000 (indexed)), a credit shelter trust if they don’t need the marital deduction) permits him to control where the balance goes after her death, but  limits the stretch to her life expectancy and gives up the potential Roth conversion.

 

  • If the wife dies shortly after the husband, her executors could disclaim the IRA, so that it would go to the nieces.  Of course, the wife’s executors probably wouldn’t disclaim the IRA unless the nieces were also the beneficiaries of her estate.

 

  • Another possibility is to provide that the wfie only gets the IRA if she survives the husband by 6 months.  That way, if she survives him for less than 6 months, the IRA goes to the nieces.  That gives up the marital deduction, but the marital deduction is less important now that the Federal estate tax exclusion amount is $5,430,000 (indexed) and portability is permanent.  However, it also gives up the potential Roth conversion, it puts the IRA in limbo for 6 months, and he would have to find a financial institution willing to accept that contingency in a beneficiary designation.  This is a new concept in IRA planning, since for many years the Federal estate tax exclusion amount was much lower, and there was no portability.

 

  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL

Submitted by Ben Meyer on Sun, 2016-01-03 18:04

Possibly a Trusteed IRA can be utilized to provide the six month delay.  Then the IRA can be paid to a QTIP trust if the surviving spouse is still living, or transferred to the nieces.  Assuming that the surviving spouse survives the six month period, the QTIP trust should keep the marital deduction.  But the RMD period seems to be determined by the shortest life of the surviving spouse and the remainder beneficiaries, and requires the Single Life Table.  Rev. Rul. 2006-26 seems to be relevant here.  State estate tax considerations may require some variations, such as a partial credit shelter trust, especially in New Jersey.  

The value would need to be high enough to justify the cost of filing a form 1041 each year, and also the legal work.

Bruce, perhaps it would be worthwhile for you to work out the details if you believe that there is a significant public need for this approach.

Submitted by Bruce Steiner on Sun, 2016-01-03 21:06

  • You don’t want a trusteed IRA.  They’re expensive and inflexible.  See my article on this subject in the September 2009 issue of Trusts & Estates:  http://kkwc.com/wp-content/uploads/2015/04/uf_trusteed_IRA.pdf#toolbar=1&navpanes=0&nameddest=self&page=1&view=FitH,0&zoom=80,0,0.

 

  • Leaving the IRA to a QTIP or credit shelter trust limits the stretch, so an IRA owner would only do that where there’s an important reason for doing so in a given case.  

 

  • Thanks for the thought.  I’ll see if I can write something on this.  

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