Advanced Underwriting Consultants

Ask the Experts – March 6

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  My deceased former client named her living trust the beneficiary of an IRA.  There are two primary non-spouse successor beneficiaries of the living trust.  Can the trustee of the trust arrange for the IRA account to be split into two parts—one for each beneficiary—and can each beneficiary stretch her own part based on her life expectancy?

Answer: No.

The general rule is that if an inherited IRA with multiple beneficiaries is divided into separate accounts, each beneficiary can stretch RMDs based on his or her own life expectancy.

Additionally, the beneficiaries of a trust (which itself is the named beneficiary of the IRA) may be treated as the designated beneficiaries—and qualify for stretch treatment—if four requirements are met:

1. The trust is valid under state law,

2. The trust is irrevocable or becomes irrevocable upon the death of the grantor,

3. The beneficiaries of the trust are readily identifiable from the trust itself, and

4. A list of beneficiaries or a copy of the trust is provided to the IRA by October 31 of the year following the date of the grantor’s death.

These types of trusts are referred to as look-through trusts.  The oldest beneficiary of a look-through trust is considered to be the designated beneficiary for stretch purposes.

It would appear that the combination of these two rules (separating an IRA and the look-through trust rule) would allow each beneficiary to stretch based on his or her own life. However, the IRS held in Regulation Section 1.401(a)(9)-4, Q&A-5(c), that if the IRA beneficiary is a trust, the IRA cannot be separated and stretched based on the lives of each individual trust beneficiary.

With proper planning, this problem could be avoided. For example, if the beneficiaries are widely separated in age, it may make sense to plan on the front end to divide the IRA into multiple accounts, and direct each of the accounts into separate look-through trusts for each one of the beneficiaries. This way, the IRA owner maximizes the control and tax aspects of the IRA planning.

However, in today’s question, there is only one living trust with two beneficiaries, and so separating the IRA into multiple accounts would not allow each of the beneficiaries to stretch based on each of their respective lives.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.  

Ask the Experts – February 21

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: If an IRA owner dies after she divorces her ex-husband, and she failed to remove him as the designated beneficiary, would he still be entitled to the IRA proceeds?

Answer: It depends on the facts and the state’s laws, so it’s best to contact a local attorney.

Some states automatically invalidate an ex-spouse’s designation as beneficiary following a divorce, but this is not always the case. For example, consider the recent case in New Hampshire, UBS Financial Services v. Brescia, 2014 WL 580142 (2/12/14).

In UBS Financial, an IRA owner and her husband divorced. They signed a divorce decree which released all claims of one party to the property of the other; however, the ex-wife left her husband as the named beneficiary to her IRAs.

The ex-wife died six years later without amending the designated beneficiary. At her death, both her estate and her ex-husband asserted a right to the IRA proceeds. The district court of New Hampshire held that the ex-spouse, as designated beneficiary, was entitled to the IRA.

The court reasoned that the divorce decree must unambiguously show an intent to remove a beneficiary in order to change the original designation. The ex-wife’s estate argued that by signing the property release agreement upon their divorce, the ex-husband was removed as beneficiary. The court disagreed, reasoning that the property release agreement did not affect the beneficiary status because the beneficiary status was not a vested property right.

The estate also argued that the property release showed an intent to remove her ex-husband as beneficiary to the IRA. The court was not convinced, holding that under state law, the owner must make an effort to change the beneficiary designation.

The ruling may seem unfair, but the court noted that the purpose of this rule is to avoid speculating about what the parties may have intended. Furthermore, the ex-wife could have avoided this result by simply changing the designated beneficiary.

In some states, ex-spouses are automatically removed as beneficiaries. But regardless of the state in which an individual resides, she should always make sure her designated beneficiary lines up with her intentions. This is much safer and easier than relying on state-specific rules.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Ask the Experts – January 20

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: A client’s husband passed away naming an irrevocable trust as the beneficiary to his IRA. His surviving spouse is the sole beneficiary of the trust. Can she roll over her deceased husband’s IRA into her own IRA?

Answer: Possibly, but it will depend on how the trust is set up.

A surviving spouse who directly acquires a decedent’s IRA will be able to roll over the decedent’s IRA into the surviving spouse’s own account—even if the spouse is not the sole beneficiary of the IRA.

If the IRA beneficiary is a trust or estate, the answer becomes less definitive since the IRS has not yet addressed this specific issue outside of numerous Private Letter Rulings (PLRs). While PLRs cannot be relied upon for precedence, they can provide insight on how the IRS might view the issue in the future.

In PLR 201125047, the IRS stated the general rule that if the proceeds of a decedent’s IRA are paid to a trustee who then pays the proceeds to the surviving spouse as beneficiary of the trust, the surviving spouse will be treated as having received the proceeds from the trust—not the IRA itself. Therefore, under the general rule, the surviving spouse could not rollover the proceeds.

However, the IRS noted an exception. If the surviving spouse has the sole authority and discretion under the trust language to pay the IRA proceeds to herself, she may roll over such proceeds from the trust into her own IRA. But if someone other than the surviving spouse—e.g., a trustee—decides who receives the IRA funds, according to PLR 201125047, the surviving spouse would not be able to roll over the funds as they are distributed.

What happens if the trust document itself dictates that all or a certain ascertainable portion of the IRA goes to the surviving spouse? Does she have the “sole authority and discretion” under the trust language to distribute the proceeds to herself? If she has the complete right of withdrawal of the assets, then she should be allowed rollover treatment. PLR 201225020.  However, if there are substantial limitations on when the proceeds may be distributed, she might not meet the threshold of authority.

Another problem a surviving spouse might encounter is that the IRA custodian might not allow a direct trustee-to-trustee transfer to the surviving spouse’s own IRA. Under such situations, she would only be able to do a 60-day rollover.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – May 14

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client has named his son as the 100% beneficiary of his IRA.  The client wants to annuitize the IRA for the joint life expectancies of himself and his son.  Will the annuitization satisfy the RMD requirement for the taxpayer?

Answer: No.

An annuitization of an IRA for the joint lives of the participant and his spouse beneficiary will generally satisfy RMD requirements.  An annuitization for the lives of the participant and his nonspouse beneficiary usually will NOT satisfy RMD requirements.

Question 2 in Regulation 1.401(a)(9)-6 cover this: http://law.justia.com/cfr/title26/26-5.0.1.1.1.0.2.51/.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.