deaths of both owner and spousal beneficiary

Submitted by robert axelrod on Sat, 2017-05-13 14:36

My parents are both terminally ill. They have a number of IRAs and 1 403b, each owned by one with the other as beneficiary and the adult children listed as secondary/contingent beneficiaries.

It is very likely that both parents will pass away in a very short period of time, ie, days of each other. The surviving parent will not address any retirement accounts before he or she also dies.

From the IRA FAQ, it appears this could create problems for the non-spousal beneficiaries, who may be compelled to take withdrawals from the accounts on the basis of the surviving parent’s life expectancy, since the IRAs will never have been retitled.

Do you have any advice for us?

What recommendations would you make re: the 403b? Is it any different than the IRAs as far as these issues are concerned?



Submitted by Ben Meyer on Sat, 2017-05-13 17:17

  • At this point it would be beneficial if both of them would change their designated beneficiaries so that the adult children are named as primary beneficiaries.  If they are currently competent to do this you can bring them the papers to sign, assuming that they are agreeable to this, and you can send or bring the papers back to the custodians and administrators.  If you hold their durable power of attorney you may be able to change the beneficiaries if the power of attorney grants that power.  In any case, the most proper thing to do would be to name the same persons as primary beneficiaries as are now named as contingent beneficiaries.  But act quickly, since the new beneficiary designations need to be received and confirmed by the custodians and administrators during the lifetimes of the account holders.  Using a durable power of attorney can also be expected to take considerably longer, since the plans will need to perform a review of the DPOA document.
  • The advantage of changing the beneficiaries will be seen when the second of them passes.  At the time, two sets of accounts will be distributed to the adult children.  On the accounts belonging to the second to pass, the stretch will be reckoned on the ages of each of the adult children, which is fine.  However, the accounts of the first to pass will have been given to the other parent, and will transition to the adult children using the remaining lifetime of the second parent to pass.  This will result in a much shorter distribution period.  Changing the primary beneficiaries to the adult children will give each of them a distribution period corresponding to their own life expectancies. 
  • For the 403(b) accounts, the plan documents should be consulted.  Many 403(b) plans do not permit the stretch for non-spouse beneficiaries, or for successor beneficiaries.  These plans require a full lump sum distribution.  If such is the case with your parent’s 403(b) plans, and depending on the value of the accounts, you might consider having the 403(b) accounts transferred to rollover IRAs.  Again, that would be with the permission of each of your parents, or by using a suitable durable power of attorney.  It may be possible to do this at the same institution, which will save time.
  • There is also a possibility that their state has adopted the Simultaneous Death Act, and it might apply to IRA/403(b) accounts.  This act, if in effect, requires an heir to survive the death of the principal by at least 120 hours in order to inherit.  Whether it is in effect, or whether it applies to retirement plans would be determined by state law.  It may also be that such a provision is included in the plan documents.  This would be a backup measure in any case.

Submitted by Alan - IRA critic on Sat, 2017-05-13 17:59

If  up front beneficiary changes cannot be made before the first death, as a back up plan in many states the  surviving parent or POA thereof  is able to file a disclaimer on behalf of that parent. The plans of the first parent to pass will then go directly to the contingent beneficiaries. Or if the second parent passes very shortly after the first, the executor of the second parent can sometimes file a post death disclaimer subject to state law.

Submitted by robert axelrod on Sat, 2017-05-13 18:54

Alan, thank you so much. This is so overwhelming right now and I can’t believe it’s come down to this nonsense after decades of estate planning. To spend the last few days of my parents’ lives trying to run around changing IRA documents is horrifying. I do have POA but as you say that will take additional time we may not have. My dad is lucid and can participate in changing docs, my mother less so but certainly with moments of. They live in Michigan which, by my non-attorney eye, appears to have a 120 hour survivorship requirement. I guess the thinking is that gives the surviving spouse adequate time to retitle the assets but in reality that is not going to happen.Also – I recall some or all workplace accounts in some or all states require the spouse be the primary beneficiary. the 403b involved is very small so I don’t care about that. However, does a similar rule apply to IRAs? Or can my dad eliminate my mom from his IRA beneficiary list; and vice versa my mother him – without restriction?Alan, I appreciate your advice and I am so stressed out right now. I am trying to nail this down by Monday morning at which time we can fax or overnight forms.

Submitted by Alan - IRA critic on Sat, 2017-05-13 23:31

In a common law state like Michigan, the IRA can be left to anyone the IRA owner names as beneficiary. The spouse is not the automatic beneficiary without a signed waiver as is the case for qualified plans.

Submitted by Bruce Steiner on Sun, 2017-05-14 20:51

  • The purpose of the 120-hour default rule (which is merely a default rule — you can override it in the Will or beneficiary designation) is to avoid unintended results when two people die at about the same time.
  • Dealing with this in the context of retirement benefits was difficult when the estate tax exclusion amount was much lower, and there was no portability.  You often wanted the marital deduction in the richer spouse’s estate.  However, if the surviving spouse dies before completing the rollover, his/her executors can’t complete the rollover on his/her behalf.
  • The surviving spouse’s executors can disclaim on behalf of the surviving spouse’s behalf.  That works if there are contingent beneficiaries, and if the contingent beneficiaries are satisfactory to the surviving spouse’s executors and to the beneficiaries of the surviving spouse’s estate.  Note that the disclaimer has to be done within 9 months of the IRA owner’s death.  Also, in some states, an executor needs court approval to disclaim.  That could create a problem if the surviving spouse’s death is too close to the end of the 9-month deadline.
  • In this case, you should be OK if the children or grandchildren (or, preferably, trusts for the benefit of the children or grandchildren) are the contingent beneficiaries.  Alternatively, if you don’t need the marital deduction, and if one GST exemption is sufficient (since there is no portability for the GST exemption), you could make the children or grandchildren (or, preferably, trusts for their benefit) the primary beneficiaries.
  • See my article on trusts as beneficiaries of retirement benefits 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 .
  • Notwithstanding the decades of estate planning, they shouldn’t give up just before the finish line.

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