Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

More on Dealing With IRAs In An Estate
(11/25/01)

Last week I addressed some of the concerns you might have if you were appointed personal representative or trustee of a decedent's estate that contained an IRA or qualified plan. I'd like to continue that discussion, again focusing on some common questions I've been asked since the law was changed in January of this year.

Last Week you told me what to look for if my Mother was named
as the beneficiary of my Father's plan. She wasn't. What now?

If your father has a Qualified Plan (not an IRA) and did not name your mother as the beneficiary, you have a big problem. The only way your father could name anyone other than your mother as the beneficiary of his Qualified Plan is if she consented to it in writing. If she didn't, she is the beneficiary.

Does it Make any Difference that this is my Stepmother
and She and Dad had a Prenuptial Agreement?

If your father had a Qualified Plan, the prenuptial agreement becomes immaterial. It is of no legal effect since Qualified Plans are controlled by a federal statute, commonly referred to as "ERISA." If your father had an IRA which he set up for himself, ERISA doesn't apply and he could name anyone he wanted as his beneficiary. The first question you need to answer is what kind of retirement plan was it-an IRA or a qualified retirement plan.

My Father had two IRAs and he named us kids as Beneficiaries
of one and my Stepmother as beneficiary of the other. Is there anything
I need to know when we have multiple Beneficiaries like this?

Clearly you and your siblings will qualify as Designated Beneficiaries. The question is whether your father properly set up his beneficiary designation form to establish separate shares for each of you or if he just lumped you all together for distribution purposes.

If your father established separate shares for each of you on a timely basis, each of your life expectancies will determine when and how much you must take as required minimum distributions from your individual shares. If he didn't, all of your distributions will be determined by the child with the shortest life expectancy.

Earlier, you said a Trust might qualify as a Designated Beneficiary. What Did You Mean?

There are a number of requirements which must be met in order for a trust to qualify as a Designated Beneficiary. The most important is that notice must have been given to the plan administrator, IRA custodian or IRA Trustee in a timely fashion. Depending on which set of rules was in effect at the time of your father's death, this notice may have been required before he died or you may still have time to provide it. If you aren't sure what was or wasn't done, consult with an estate planning attorney who can properly advise you on these requirements.

If the trust in question is a Qualified Terminable Interest Property ("QTIP") Trust, even more complex rules apply.

Depending upon whether the Trust uses a fractional or pecuniary formula to allocate the proceeds from the IRA, the estate may have to recognize income earlier than would otherwise be required. You shouldn't have to recognize "Income In Respect Of Decedent" (or IRD) if you use a fractional formula, but a pecuniary formula may be a different matter. A thorough analysis is beyond the scope of this article, so please confer with an estate planning professional if you have questions.

Last week you said there were different distribution options
for IRAs and Qualified Plans. How do I know which to select?

First, look at the terms of the plan or IRA. These will control. Read the plan or its summary in detail so you know what the plan administrator will allow you to do.

One problem with IRAs and Qualified Plans is that owners seldom put much thought into the beneficiary designations. Normally the husband or wife names his or her spouse first and then the children equally. End of discussion. Since your father is deceased, you are locked into whatever decision he made. For those who still haven't made a decision, though, I cannot stress strongly enough the benefit of a custom beneficiary designation form or Retirement Asset Will.

What are the benefits of a custom beneficiary designation form?

Let me give you an example. When your father named your mother as sole beneficiary, she was probably in excellent health. Since then, her health has deteriorated significantly. If your father had a properly designed beneficiary designation form, he would have provided an option for disclaimer. That way, your mother could disclaim all or part of her interest in the IRA and allow it to pass to the children or other designated beneficiary pursuant to the beneficiary designation form. If one child had greater financial needs than another, your father could have provided for that contingency, as well. At a minimum, he should have provided for allocation of the IRA proceeds to separate shares so each beneficiary's distribution would be based on that child's life expectancy.

That about sums it up for this week. I apologize for hitting you three weeks in a row with such heavy material. IRAs and Qualified Plans are tricky creations of the law and slippery creatures to get your hands on. If you find yourself serving in the role of Personal Representative or Trustee and the estate contains an IRA or Qualified Plan, remember that the rules are complicated and seek competent legal advice before you embark into that strange and unknown world known as "Tax Law".

To return to the Strategic Planning Articles click here.