Did You Get Advice When Completing Your Beneficiary Designation? Should You?
Many people designate beneficiaries for their IRAs, 401(k)s, and life insurance without any advice even though these designations can pass tremendous amounts of wealth. This lack of advice could cost money after someone dies and the beneficiary has to “fix” the problem. Private Letter Ruling (“PLR”) 201423043 illustrates this issue.
In this PLR Alan named his trust as a beneficiary of his Roth IRAs. Alan may have had a trust drafted by his attorney and thought EVERYTHING should be titled in the name of the trust even though a beneficiary designation is different than the titling of an asset. Alan’s trust provided that the assets were to be split between a Marital and Family Trust. Alan’s wife, Barbara, sole trustee of Alan’s trust, allocated the Roth IRAs to the Marital Trust.
The custodian (the company that maintained the Roth IRA) maintained the inherited Roth IRAs for the Marital Trust. Under the Marital Trust Barbara received all income and principal for her support, comfort, and welfare or for any other purpose for her best interest. As inherited Roth IRAs, while Roth distributions are not taxable, Barbara had to take minimum required distributions from of the Roth IRAs.
Barbara decided she would rather rollover these inherited Roth IRAs into her own Roth IRA (a benefit reserved only to spouses) but because these Roth IRAs were payable to the Marital Trust she requested a PLR to determine whether she could roll over the Roth IRAs into her own Roth IRA. If the Roth IRAs could be rolled over into her own Roth IRA she would NOT be required to take minimum required distributions and she could name younger beneficiaries to her own Roth IRA and use their life expectancies to pay out the Roth IRA at her death. Thus, she could capture the tax free growth and defer payments over a longer life expectancy.
The Internal Revenue Service allowed her to rollover these Roth IRAs EVEN though the beneficiary was the trust because Barbara was the sole trustee and she had the sole authority to pay the Roth IRA to herself.
While this PLR is not unusual as the IRS has consistently approved these types of rollovers (the spouse has control over the trust of which the spouse is the beneficiary), a PLR is ONLY applicable to the one requesting the PLR. Generally a custodian is going to require the beneficiary obtain a similar PLR so as to protect the custodian if they make such a rollover. A PLR request can cost $10,000, and, together with attorney fees, the total cost could run $20,000!!!
ADVICE: Carefully review your beneficiary designations. Generally (however there are a lot of exceptions), if you are married your spouse should be the initial beneficiary with the contingent beneficiaries being adult children. However IF a trust is a beneficiary you should obtain legal advice to determine whether the trust provisions will allow for the maximum deferral and whether a trust as a beneficiary is correct. In the above PLR, simply naming Barbara as the beneficiary of Alan’s Roth IRAs could have saved the cost of this PLR.
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