By Kristen M. Lynch, J.D., AEP, CISP, CTFA
with Robert S. Keebler, CPA, MST, AEP (Distinguished)
In the world of estate and retirement planning, I have been fortunate enough to have been cross-trained as both a trust officer and an attorney. As a trust officer, I was charged with being the divisional manager and administrator for all of the IRAs within a large regional bank’s trust department. In that role, I was responsible for ensuring that the bank’s IRA clients took their required minimum distributions (“RMD’s”), coordinated estate planning and post-mortem issues with the IRA client’s legal and tax counsel when requested, and dealt with a myriad of other issues that arise with IRAs with values averaging in excess of two million dollars. As I transitioned into the role of attorney and took on IRA/estate planning clients of my own, I explained to clients that I was still part of the same team sitting at the conference table, just wearing a different hat. Prior experience taught me, among other things, how important it is that clients having a good professional team in place, that can coordinate estate planning documents to coincide with beneficiary designations and the like. When there is a good team and good communication, things usually flow smoothly both before and after the death of the IRA owner. But what happens when there is no team or there is a weak link?
Thanks to the 2003 final required minimum distribution (“RMD”) regulations, there are new post-mortem planning opportunities, but along with opportunity comes responsibility and liability. The regulations endorse the concept that IRA beneficiaries can disclaim within the appropriate time frame and the next in line will step up into primary beneficiary status. They also endorse the idea that if there is a beneficiary that will not be considered a “designated” beneficiary, that beneficiary can be removed from consideration by distributing their share to them or separating their share prior to the relevant deadlines. But who is responsible for making sure that these actions are taken? IRAs are not probate assets, so unless the IRA is left to an estate, the Personal Representative or Executor does not have any authority over these types of account. Similarly, if the IRA is left to a trust then perhaps the trustee can assume this responsibility; but in most cases, IRAs are left to individuals who have limited knowledge regarding these types of assets. If the IRA owner had no professional team in place, or perhaps a team without good coordination, things can be overlooked very easily and there can be unintended consequences that the IRA owner could never envision.
To further complicate things, many professionals are still misinformed in regard to the post-death options available with IRAs. If most professionals don’t know or understand the rules, heaven help a lay person serving as personal representative or trustee that is charged with ensuring that these accounts are transitioned through the post-mortem process correctly. This can be a very treacherous area to navigate, since there are new cases being reported every day where fiduciaries are being surcharged for mishandling IRAs left in their care. In most of these cases, the surcharge is due to either taking a lump sum distribution of the IRA when there could have been significant deferral or providing the wrong advice as to available deferral periods. So what is a fiduciary or planning professional to do? And what if there is something else wrong, such as a missing beneficiary designation or a beneficiary that predeceased the IRA owner?
First and foremost, it is crucial that anyone dealing in this area know the rules and pitfalls. When an IRA owner dies and was already in RMD mode, the worst case scenario (where there are no “designated” beneficiaries, including when the IRA is left to an estate) is that the beneficiaries of the IRA will have the remaining life expectancy of the decedent over which to withdraw the IRA. However, a much worse “five-year rule” comes into play if the IRA owner was not over 70 ½ at the time of death. Other common issues that may arise involve trusts named as IRA beneficiaries with insufficient language regarding beneficiary distributions, insufficient QTIP trust language, unclear language where a trust is supposed to be divided, conflicting IRA beneficiaries when the IRA holds annuities that perhaps have their own beneficiaries named, missing beneficiary designation forms, conflicts between the beneficiary form and the IRA owner’s estate planning documents, insufficient information to determine which charity is intended (if a charity is named), incapacitated or incompetent beneficiaries. There’s an almost endless list of other traps for the uninformed client and advisor.
The best way to navigate through this potential minefield is to understand which laws apply and will govern any given situation. It’s not as simple as just knowing the RMD rules. IRAs are also governed by other federal laws, as well as by many state laws that can be applicable, such as intestacy laws, guardianship laws, bankruptcy and creditor protection laws, principal and income acts, trust modification and/or reformation statutes, elective share or community property statutes, slayer statutes, trust and probate codes, etc. Additionally, the IRA agreement and or qualified plan document is a contract and will be binding in regard to certain choices or options that can be limited by the IRA custodian/trustee or plan trustee, such as arbitration, governing law for contract disputes, default beneficiary provisions if none are named, per stirpes versus per capita distribution, investment choices, requirements to effect a change of beneficiary, etc. There’s a lot to be aware of, or at least recognize as potential issues, so you can call in the appropriate professional colleagues when the need arises.
As an attorney, I am often called upon in my practice to help resolve the types of issues described above in order to avoid litigation, or to act as an expert witness to assist and support in the litigation process. The best way to avoid litigation is to have a good professional team in place, be informed, know your client’s options, or consult with someone that does before beneficiary designation mistakes are made.
RELATED EDUCATION
Join us for a special 90-minute teleconference entitled, “When Good Beneficiaries Go Bad or Missing – – How to Identify, Avoid, and Fix Common IRA and QRP Beneficiary Designation Problems” with speakers Robert S. Keebler, CPA, MST, AEP and Kristen M. Lynch, J.D., AEP, CISP, CTFAon Thursday, July 11, 2013 at 9am Pacific (12pm Eastern). For more information and to register, click here.
ABOUT THE AUTHORS
Kristen M. Lynch is a partner of the Florida law firm of Fowler White Burnett P.A. in the Trusts and Estates department. She has worked within the Trust and Estates area for twenty four years, almost exclusively with high net worth IRA clients. Previously, Ms. Lynch worked for SunTrust Bank in the capacity of Divisional IRA Manager for the Private Client Services Group, and for Merrill Lynch Trust Company as a Senior Trust Officer. Ms. Lynch has been designated as a Certified Trust and Financial Advisor as well as a Certified IRA Services Professional by the Institute of Certified Bankers, and as an Accredited Estate Planner. She has been published numerous times in the Florida Bar Journal, the Journal of Retirement Planning, and Leimberg’s Estate Planning Newsletter, as well as Trust & Estates magazine. She is a member and the Immediate Past Chair of the IRA an Employee Benefits Committee of the Florida Bar. During her tenure as Chair, she was responsible for several key pieces of legislation affecting IRAs. She can be reached at (954)377-8190 or at klynch@fowler-white.com.
Robert S. Keebler is a partner with Keebler & Associates, LLP. He has received the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planning Counsels and has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States. Mr. Keebler is the past Editor-in-Chief of CCH’s magazine, Journal of Retirement Planning, and a member of CCH’s Financial and Estate Planning Advisory Board. Mr. Keebler frequently represents clients before the National Office of the Internal Revenue Service (IRS) in the private letter ruling process and has received over 150 favorable private letter rulings. Mr. Keebler is nationally recognized as an expert in family wealth transfer and preservation planning, charitable giving, retirement distribution planning and estate administration and works collaboratively with other professionals on academic reviews and papers, as well as client matters. He can be reached at (920)593-1701 or at robert.keebler@keeblerandassociates.com.