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Reports from Heckerling 2017 - Retirement Accounts in First and Second Marriages: The Fun Begins

Jan 17, 2017

Continuing with our reports from the 2017 Heckerling Institute on Estate Planning

Christopher Hoyt (University of Missouri—Kansas City) presented the session “Retirement Accounts in First and Second Marriages: The Fun Begins.”  Mr. Hoyt opened up by summarizing the current rules and regulations as they relate to retirement accounts, outlining similarities and differences between 401(k)s and IRAs, as well as the related income tax implications. Upon conclusion of the refresher, the discussion moved to the interesting topic involving treatment of inherited IRAs and 401(k)s, the importance of these assets in an estate plan, while considering the possibility of a second marriage and a blended family. Mr. Hoyt emphasized the importance of keeping the desired beneficiaries current, as the decedent’s intent will not be considered over the governing jurisdiction.   Private Letter Ruling (PLR) 2016-23001 addressed the distribution of retirement assets in a community property state and some of the lessons that are to be learned. In this example, an IRA was held by an individual domiciled in a community property state, who had named his son the primary beneficiary. Upon death of the IRA owner, the court ruled that the surviving spouse was entitled to a percentage distribution of the IRA, regardless of the fact that she was not a named beneficiary. The surviving spouse requested the right to rollover the distribution into an IRA, designating her as the primary beneficiary and alleviating the immediate income tax burden. The IRS denied this request and the distribution was considered a taxable distribution -- not to the surviving spouse, but to the son. The two primary lessons learned:

  • Update beneficiary designations, considering state treatment if community property is involved. If the employed individual had named both the spouse and the son, each, as 50% beneficiaries, the need for a disclaimer and a PLR could have been avoided.
  • Request that the beneficiary execute a qualified disclaimer. Had the son executed a qualified disclaimer of the assets, assuming there was not a contingent beneficiary, the IRA would have passed to the spouse and she would have qualified to rollover the assets into an inherited IRA.

Estate planning, with regard to IRAs, has been successful with the use of a Stretch IRA. The designation of a Stretch IRA allows the IRA to be passed on from generation to generation, assuming certain requirements are met and required annual distributions are made. Distributions are over the life of the beneficiary and, in certain cases of multiple beneficiaries, required minimum distributions may be less than that of the decedent.

Complexity is increased when second marriages and blended families are to be considered. Naming a trust as the beneficiary of an IRA can mitigate the concern an employed individual may have when considering the future well-being of their own children in the event the surviving spouse remarries. Regardless, if the trust is set up as a conduit for the required minimum distributions, or as an accumulation trust, the employed individual will be able to determine the beneficiaries without having to consider the possibility of a second marriage and/or a blended family.

For more content stemming from the 2017 Heckerling Institute on Estate Planning, please click here.

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Stephanie Hines

Stephanie Hines, Partner in EisnerAmper Private Client Services Group, provides expertise in planning and compliance for ultra-high and high net worth individuals in the areas of personal and fiduciary income taxation, succession and estate taxes.

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