Disclaiming to minor children

Submitted by Thomas Dranger on Thu, 2019-11-28 13:58

Happy Thanksgiving!

Dad has died younger than age 70.5 and with no beneficiary on file. The 401k plan document has a specific section addressing if there is no beneficiary it will be a. Spouse, b. Children per stirpes, c. Parents, d. Estate. Mom wants to disclaim and we want to further disclaim to our minor children.

Out first challenge is the 401k sponsor and provider are claiming disclaimers can’t be used since there was no beneficiary, we disagree because of the plan document default. Should mom and subsequently children be able to disclaim?

Can mom wholly disclaim and we partially disclaim to the kids?

We also understand that an inherited IRA cannot be converted to Roth IRA. But, we have read an IRS private ruling that at distribution from 401k it should be directed to an IRA, which could be a Roth IRA in effect creating a conversion. This would be a one-time opportunity only at distribution from the 401k to the IRA. Is this allowed?

More importantly, if we disclaim to minors can the rmd, and possibly larger withdrawals, be used as they grow up to pay expenses directly related to their needs such as shelter, healthcare, education, clothing or does it have to be saved to a non-ira investment account and preserved until age of majority? What other restrictions are placed on how money may be used?

Other information that may be helpful. We are all IN residents. We have determined that due to kiddie tax rules and tax bracket (married joint v estate) and difference in rmd due to life expectancy, it is a better tax scenario for us to disclaim and have the money taxed at kids rate. Our concern is the amount of money the kids will have immediate access to at age 21 without restrictions. So we want to be sure we clearly understand the options above.

Thanks!



Submitted by Bruce Steiner on Thu, 2019-11-28 17:35

  • A beneficiary who takes as a default beneficiary under the plan is treated the same as a named beneficiary.  So you should be able to do what you propose.
  • Mom should consider whether she (and her family) might be better off taking the benefits, rolling them over into her own IRA, naming new beneficiaries, and possibly doing Roth conversions over a number of years.  That would also allow Mom to leave her IRA to her children or grandchildren in trust rather than outright.  That would keep the assets out of her children or grandchildren’s estates for estate tax purposes, and would better protect the assets against her children’s or grandchildren’s creditors and spouses, and Medicaid.  It would also enable her to select an age higher than 21 when each grandchild would gain control over his/her trust.
  • If you go the disclaimer route and the beneficiaries transfer the benefits to Roth IRAs in one-time conversions, consider whether that bunches the income on the conversion into a higher bracket in a single year.  
  • If you go the disclaimer route and there are minor grandchildren, see if you can find an IRA custodian who will set up the inherited IRAs with a custodian (other than the grandchild’s parent) as custodian for the grandchild under the Uniform Transfers to Minors Act.  A UTMA custodian has discretion to use the money for the minor’s benefit.  If you can’t set up the inherited IRAs that way, you may need to have guardians appointed for the minor grandchildren.  Depending on state law, guardianships can be cumbersome.
  • Mom should consult with competent counsel who should be able to advise and assist on this.
  • Bruce Steiner

Submitted by Alan - IRA critic on Thu, 2019-11-28 17:56

  • Since the plan administrator does not seem to be aware of basic disclaimer rules,  because there are multiple disclaimers contemplated as affected by IN statutes, and since the children’s shares would probably have to be distributed into an UTMA account and used under IN law, you should probably retain an IN estate attorney to draft the disclaimers, determine the restrictions on spending under UTMA, and deal with this plan administrator. 
  • GIven the complexity and legal costs, is the plan balance large enough to justify this?
  • I think your point is that while minor children’s investment income from RMDs is subject to the kiddie tax, the RMD will be small enough to offset this cost.
  • Once the disclaimers have been filed and accepted, and when the plan has established separate accounting for each beneficiary, the plan is required to offer a direct rollover to an inherited IRA OR inherited ROTH IRA after distributing the 2020 RMD to each such beneficiary.
  • The deadlines must be met – 9 months from DOD for the disclaimers, and the end of the year following the year of death for individual plan beneficiaries to use the separate account rules for RMD determination and to avoid any mandatory 5 year rule the plan may have.
  • To avoid the minor’s age 21 large distribution exposure, a trust is the usual solution but it is probably too late for that.
  • One benefit of disclaiming you did not mention, is that without a disclaimer should you or the children inherit directly from Mother after legislation similar to the Secure Act has passed, a 5 or 10 year rule would likely apply.

Submitted by Bruce Steiner on Thu, 2019-11-28 18:12

  • That’s a good point.  The disclaimer route avoids the risk that the SECURE Act will pass and preclude the stretch.  On the other hand, if Mom takes the benefits, rolls them over, and does Roth conversions, she could live another 20 or so years.  If the SECURE Act doesn’t pass, and the children are otherwise provided for, she could leave her IRA in trust for her grandchildren (or perhaps even her great-grandchildren).
  • Obvioulsy a lawyer should prepare the disclaimers.  They have to satisfy both Federal tax law and state law.  But preparing disclaimers should be a routine matter for any law firm with a trusts and estates practice.
  • Bruce Steiner

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