In recent PLRs 201628004 through 201628006, the IRS considered the effect of a state court action that modified the named beneficiary after the death of the IRA owner. In the rulings, the decedent had originally named three trusts as beneficiaries of his IRAs. The trusts qualified as designated beneficiaries under the IRC Section 401(a)(9) Regulations. When his IRAs were moved to a new custodian, however, the beneficiary was changed to his estate. It was represented that, although the decedent signed the new beneficiary designation form, he merely intended to move the IRAs from one custodian to the other and that he did not intend to change beneficiaries as part of this transaction. He simply signed the forms that were completed by his financial advisor.
After the decedent’s death, the trustees of the trusts petitioned the court to modify the beneficiary designation to carry out the original estate plan. The Court subsequently ordered that the beneficiaries of the IRAs were the trusts, consistent with the decedent’s prior beneficiary designation. The order was retroactively effective as if such designation were made on the date the decedent signed the beneficiary designation form. The taxpayer requested a ruling from the IRS that the life expectancy of the oldest trust beneficiary could be used to determine required minimum distributions (rather than 5 years, as is the case with an estate).
The IRS stated that although the Court order changed the beneficiary of the IRAs under state law, the order did not create a “designated beneficiary” for purposes of IRC Section 401(a)(9). The IRS noted that courts have held that the retroactive reformation of an instrument is not effective to change the tax consequences of a completed transaction. Because the decedent’s estate was named as the beneficiary of the IRAs at the time of his death and an estate cannot qualify as a “designated beneficiary”, the IRS ruled that the IRAs did not have a designated beneficiary. This ruling is consistent with at least one private letter ruling, PLR 200742026.
This places a premium on doing the beneficiary designation right – – while the client is still living!
ABOUT THE AUTHOR
Michelle L. Ward, J.D., LL.M, CSEP is a Partner with Keebler & Associates, LLP whose emphasis is in estate planning with primary focus on retirement distribution planning. She also analyzes trusts for designated beneficiary status, benefits, and viability of inherited IRA analysis, as well as prepares private letter ruling requests and specimen retirement planning documents. Michelle has received more than 30 favorable private letter rulings and is a Certified Specialist in Estate Planning.
Michelle received her bachelor’s degree from the University of Wisconsin-Madison and her law degree from the University of Wisconsin-Madison Law School and received her LLM in estate planning from Western New England College of Law. Her professional affiliations include the State Bar of Wisconsin and the Green Bay Estate Planning Forum.
Michelle is also co-author of Panel Publishing’s Roth IRA Answer Book (2008 through 2014 editions) and Quick Reference to IRAs (2008 through 2013 Editions) and AICPA’s The Small Business Jobs Act of 2010: Tools, Tips, and Tactics. Michelle has also authored articles appearing in Trusts & Estates, Investments and Wealth Monitor, and Journal of Retirement Planning. Michelle is a member of the editorial advisory board of Penton Media’s Trusts and Estates magazine.
Prior to joining Keebler & Associates, LLP Michelle was in private law practice in Green Bay and was also a Senior Consultant with Baker Tilly Virchow Krause, LLP.
OTHER ARTICLES IN THIS ISSUE
- PRACTICE-BUILDING: The Top 20 Seminar Marketing Mistakes People Make (Part 2 of 2) by Philip J. Kavesh, J.D., LL.M. (Taxation), CFP®, ChFC, California State Bar Certified Specialist in Estate Planning, Trust & Probate Law
- ADVANCED PLANNING: The Private Decanting: A Do-Over Trust with your Privacy Intact by Steven J. Oshins, J.D., AEP (Distinguished)
- COURT CASES: Sometimes It Sucks To Be Right – IRS Wins, Business Founders and Their Families Lose by Carl L. Sheeler, PhD, ASA
- SUPPORT & ADMINISTRATIVE STAFF: The Success of Your Business Starts with a Happy Work Environment by Kristina Schneider, Executive Assistant