Who decides life expectancy?

Submitted by Amar Patel on Thu, 2016-06-02 03:03

I’ve been researching about stretch RMD benefits of a Roth IRA, but I still have what may seem like a dumb question. And that is, regarding a trust as beneficiary, who decides what beneficiary life expectancy to apply? I know the IRS publishes tables, but they aren’t involved in the probate of wills and trust administration, right? Is it the IRA custodian? They will need trust documentation, and will presumably see the primary beneficiary is, for example, a 2 year old and the contingent is a 62 year old. Are they then legally compelled to stretch only over the 62 year old’s life expectancy? Can they be instructed by the trustees to use the 2 year old’s life expectancy, which would have been the real goal all along?



Submitted by Bruce Steiner on Thu, 2016-06-02 14:51

  • That was the situation in PLR 200228025.  Since the likelihood that the 62-year-old will survive the 2-year-old is extremely small, I suggest having the 62-year-old disclaim his interest.
  • See my article on this subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.elderlawanswers.com/Documents/Trusts%20as%20Beneficiaries%20of%20Retirement%20Benefits.pdf.

Submitted by Amar Patel on Thu, 2016-06-02 16:18

Is “disclaiming interest” the same as simply not listing the 62-year-old as a trust beneficiary to begin with?  And what if the trust only names the child as primary with no other beneficiaries listed?  Does that eventually ruin the stretch, when executors work through the documentation to see that the “estate” or some other (older) heir of mine (if not my child), even though not explicitly named, gets the assets?  This is the underlying “why” of who actually makes the determination of how long the stretches can last (the executor, the court, the IRA custodian, etc.).Thanks for all the great help so far!  And do note that I’ve had your (Bruce) article bookmarked as a frequent reference (though I’m still no expert in understanding it fully, but am making progress I hope).

Submitted by Ben Meyer on Fri, 2016-06-03 17:01

How would the 2-year-old make a beneficiary designation if he comes into succession of the IRA as a beneficiary?  If the custodian or guardian of the 2-year-old is the 62-year-old  adult, can the custodian/guardian place his own name as beneficiary on the inherited IRA of the 2-year-old without jeopardizing his earlier disclaimer? 

Submitted by Bruce Steiner on Fri, 2016-06-03 21:11

  • No matter how many levels of beneficiaries you provide, there’s always a chance you’ll run out of beneficiaries.  In PLR 201320021, there was only one beneficiary, and the IRS said it didn’t matter.  See my article on this subject in the November 2013 issue of Trusts & Estates:  http://kkwc.com/wp-content/uploads/2015/04/uf_IRS_Rules_No_Problem_If_IRA_Trust_Runs_Out_of_Ben.pdf.  Some lawyers disagree with this.

 

  • What do you mean by the custodian placing his own name as beneficiary (in his capacity as custodian)?  The IRA owner would name a custodian for the minor under the Uniform Transfers to Minors Act on the beneficiary designation form.  To avoid any doubt, I prefer to have someone other than the disclaimant be the custodian.

Submitted by Amar Patel on Sat, 2016-06-04 05:37

Oh wow!  I think that PLR is at least an indication of an answer that I had been looking for!  Is this related to the “mere successors” term I’ve read about?  Over dinner, my wife and I were chatting and struggling to determine who else to consider as beneficiary apart from our soon-to-arrive son.  We could not arrive at an answer that didn’t name someone considerably older than the boy.  But this situation seems to indicate something similar to what ours could be.  I understand PLRs are not binding guidance for the general public, and in a quick search I found where another attorney thinks the IRS erred and not to try it (like Bruce said).  But I, perhaps erroneously, am inclined to think that the IRS knows how its PLRs are being used in the public and would not have set a predecent it didn’t want.

Submitted by Ben Meyer on Sun, 2016-06-05 14:21

  • Thanks, Bruce, for your reply.  To briefly recap the underlying facts, we are assuming that one parent died, leaving an IRA with the other parent as primary beneficiary and the minor child as contingent beneficiary.  The surviving parent issues a qualified disclaimer, causing the IRA to go to the minor child.  Would the surviving parent be able to become the property guardian or UTMA custodian for the minor child’s IRA?
  • Then, how would a beneficiary would be elected for the IRA of the minor child?  Is the UTMA custodian or a property guardian able to make a beneficiary election for the child’s IRA?  If so, would the custodian or guardian be able, using his/her authority as custodian or guardian, to designate himself/herself, as the surviving parent?
  • Designation of a beneficiary may well be unnecessary.  In case of the unlikely event of the death of the minor child, the default beneficiary under the IRA plan would most likely be the estate, with the result that the surviving parent would inherit the IRA under intestacy law. 

Submitted by Bruce Steiner on Sun, 2016-06-05 16:19

  • It would be helpful to provide the specific facts.  Has the IRA owner already died?  
  • As a planning matter, we would name either a trust for the child (if the amount is sufficient to warrant administering a trust) or a specific person as custodian (or more than one, in order) for the child if the child is a minor and the amount isn’t sufficient to warrant administering a trust.
  • If there’s no custodian under the Uniform Transfers to Minors named, check state law as to whether the financial institution may select a custodian under the UTMA.  Most states permit this but only if the amount involved is below a fairly low value.  Otherwise you’ll need a guardian.  Depending on state law, guardianships can be very cumbersome, and courts may not understand IRAs being payable over a long period of time.  Alternatively, if the financial institution will cooperate, you could do nothing until the child turns 18 and then the minor could catch up on the missed required distributions, ask the IRS to waive the penalty on the grounds of having been a minor, and at worst if that’s not successful the penalty probably wouldn’t be very much since the required distributions at ages 2 to 17 aren’t very much.
  • If the child takes by reason of a disclaimer, we would have the custodian be someone other than the disclaiming parent.

 

  • If the amount involved is enough to warrant a disclaimer, it’s probably enough to warrant creating a trust.
  • I’m not aware of any authority that would permit a custodian for a minor to name a beneficiary.
  • With a $5,450,000 estate tax exclusion amount and portability, most likely the spouse would take the IRA rather than disclaiming it.
  • While a trust for the child raises the issue of what happens if the child dies without leaving any issue (descendants), it avoids all of the other complexities.  

Submitted by Amar Patel on Mon, 2016-06-06 00:11

Hi Bruce.  The supposition of my death is hypothetical, for now.  My wife and I are both living, and we have a son due in about 4 weeks (our first child).  We’re not rich by my definition but we’re probably above average and have a high savings/investment rate.  Our retirement assets – totaled across both of us – are probably the biggest assets.  And we’re thinking of adding sizable life insurance policies later this year, though nothing substantial is in place yet.  In the event of my demise, I intend to leave everything to my wife first, where she treats everything as “her own” (instead of paying-out on my IRAs).  In case we’re both gone together but our soon-to-be-born son survives us, then it all is to go to him.  We are simply unable to come-up with names of individuals that would be younger than a newborn to name as contingent beneficiaries of his trust, so as to not ruin the stretch RMDs for my son.  That PLR you mentioned, though not binding on the IRS for my situation, does give me hope of an option, until if/when our son greets his younger sibling.

Submitted by Bruce Steiner on Mon, 2016-06-06 01:16

Most likely if neither of you is living you would leave your IRAs to your children, equally, in separate trusts for their benefit.  If a child dies, he/she would have the power to appoint the balance of his/her trust to or in trust for anyone he/she wants, except anyone older than [your oldest child] [the oldest of your children and their spouses as of your death] [the oldest of your children and your wife’s and your nieces and nephews], or anyone other than an individual or another trust subject to the same restrictions.  If the child doesn’t exercise his/her power of appointment, the balance would go to his/her issue, in separate trusts for their benefit, or if none then to your other issue (in trust for their benefit), [or if none then to or in trust for your wife’s and your nieces and nephews and their issue].

Submitted by Amar Patel on Mon, 2016-06-06 02:34

Thank you very much Bruce.  Your detailed responses are very helpful.  To test my understanding, what you wrote seems to indicate 1) that naming a contingent beneficiary for the trust for my son at this time is not required and 2) that not naming a contingent beneficiary for the trust for my son limits the RMD considerations to his life expectancy only (or, that the IRS has ruled in favor of a family in a similar situation).  Correct?  And does the power of appointment instructions belong in the will, or does the estate planning attorney that will be hired to help draft the testamentary trust paperwork (if ever needed) cover that with the executors/trustees later?

Submitted by Bruce Steiner on Mon, 2016-06-06 16:11

If you want to provide your child with a testamentary power of appointment over a trust for his benefit, you would so provide in your Will.  He would then exercise it in his Will.  You’ll probably want to make some provision for what happens if none of your issue survive you, or if the last survivor of your issue doesn’t exercise his/her power of appointment.

Submitted by Amar Patel on Tue, 2016-06-07 00:39

Thanks again, Bruce. Some brief Googling of the “power of appointment” term resulted in some articles I’ll save for reference. Seemingly, this concept allows for some flexibility and tax planning. But I’m not sure how the term differs from just regular beneficiary designations and a will? And choosing between special powers and general powers of appointment seems very tricky. And I’m even less clear if that ruins stretch RMD potential for my son (though the article you referenced earlier seems to indicate it does not). In the end, if my wife and I do not survive, and our son does not live long enough to empty the trusts left to him, then my wife and I are not sure who else to include without ruining the RMDs. The way the state of Indiana handles intestacy would probably suffice but I’m not clear if that ruins the RMDs for the boy either (your linked article seems to imply it would not for the boy but not sure about the next of kin that gets it thereafter).

Submitted by Bruce Steiner on Thu, 2016-06-09 19:17

A power of appointment essentially lets someone modify a Will or trust agreement.  For example, suppose I leave my estate in a trust for the benefit of my spouse and children.  I could mandate that at my spouse’s death, the balance goes to or in further trust for my children, equally (with the issue of a deceased child taking the deceased child’s share).  Or I could give my spouse the power to provide for my children and their issue equally or unequally, outright or in trust under whatever terms she specifies.  Or I could give her the power to leave the balance of the trust to anyone she wants (other than herself or her estate or creditors).  That’s a special power of appointment.  It gives her the power to do what she thinks best at the time, taking into account circumstances arising after my death that I couldn’t foresee.  Or I could give her the power to (in addition) appoint the balance to herself or her estate or creditors.  That’s a general power of appointment.  This should be a routine matter for any competent trusts and estates lawyer.

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