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800 lb. Gorilla. IRA’s or other retirement plan benefits, such as 401K’s, are often the 800 lb. gorilla in an
estate plan analysis. This was especially true in the boom of the 90's, but recent stock market gains may
mean that we will see more situations where the largest asset, or at least the largest liquid asset, consists of
retirement plan accounts. Many times these are divided among IRA’s and 401K plans, or sometimes some
special deferred compensation accounts. They all share the same tax characteristic - income tax is payable
when the funds are withdrawn. They also share the same estate tax characteristic - retirement accounts are
includable in the decedent’s gross estate. Because of the complex rules regarding the income tax liability, in
particular, it is easy for confusion to reign when it comes to deciding on IRA beneficiaries.
Words of Caution. Designating beneficiaries of substantial IRA’s should not be taken lightly. We are using the
term "IRA" as a shorthand for all retirement plans, but you all know that the rules are not the same for all such
plans. ERISA governs many retirement accounts, but not IRA’s. ERISA is the federal law applicable to defined
contribution plans, 401K plans, etc. and its provisions override state law, which is particularly important with
regard to the rights of a spouse. A plan participant marries, and the spouse may become the primary
beneficiary regardless of the prior beneficiary designation form. In most cases, the beneficiary cannot be
changed without the spouse’s consent. Spousal rules do not apply to IRA’s, however. Other differences may
derive from the provisions of the plan itself. Some retirement and 401K plans require mandatory distribution
within five years after death. Other plans may permit roll-overs or a stretch in the case of a spouse. Too often
advice comes from a financial advisor, CPA or attorney, concerning beneficiary designations without
reviewing the terms of the particular plan involved. This might bring nasty surprises after the death of the
participant.
Check the Fine Print. Beneficiary designation forms of the plan sponsor often contain fine print which is easy
to overlook. For example, a participant names her three children as primary beneficiary. If one child
predeceases, the whole plan will probably go to two surviving children, possibly disinheriting the
grandchildren, offspring of the deceased child. This is normally contrary to most people’s wishes.
Coordinate with Estate Plan. Very often clients are tempted to let the tax-tail wag the dog. By that I mean not
coordinating the IRA beneficiary designation with an overall estate plan. It is true that naming a spouse as
primary beneficiary offers the most income tax flexibility, but it might not be consistent with the overall estate
plan objectives, which may include deferral of distributions, provisions for grandchildren, or providing for
charity.
Caught in the Stretch. The ability to delay IRA distributions is called the stretch by some advisors. A Stretch
IRA is a beneficiary designation designed to permit the beneficiary to delay distributions as long as possible,
probably for his or her life expectancy, in the event of the participant’s death. Sometimes this possibility of tax
deferral overrides other decisions about what a client wants to do with his or her money at death. A client who
wants a surviving spouse to be supported during his lifetime, but wants remaining property to go to her
children at the spouse’s death may nonetheless name the spouse as the IRA beneficiary and thereby subvert
the overall goal. Maximum deferral is not always consistent with having the assets go to specific individuals
or wanting to control the time when individuals have access to the property.
Conclusion. Choosing the IRA beneficiary, primary and secondary, is becoming a key part of estate planning
and should receive even more attention as baby boomers’ accounts grow. The estate tax exemption
increases, more attention is directed to income tax planning and integration of the retirement plan benefits
with the overall estate plan. This is not a simple subject. Natalie Choate has made a career out of annual
additions to her treatise "Life and Death Planning for Retirement Benefits". The next two editions of this
monthly newsletter will be directed toward a summary discussion of naming a trust as beneficiary and, in
particular, the possible applications of a Charitable Remainder Trust as a beneficiary. If retirement accounts
are a significant part of your clients’ estates and if these clients can benefit from years of human experience,
please contact or refer them to Jim Modrall, at 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| November 2003 IRA’s - WHO IS THE BENEFICIARY? by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |