The benefit of designating a successor or contingent beneficiary if the primary beneficiary of the IRA is deceased is that the distribution can be stretched over the life expectancy of the designated beneficiary, and the distribution avoids probate. These benefits may be lost if no contingent beneficiary is designated. The courts and the IRS may be of little or no help to assist the beneficiary in his effort to obtain the benefit of a lengthier distributive scheme, as exemplified by a recent Private Letter Ruling.
In this specific situation, Husband died in 2004, after the date he was required to start taking minimum distributions from his IRA. Husband’s wife had predeceased him. His daughter was his sole heir. Prior to his death, Husband named his wife as the primary beneficiary of his IRA and his daughter as the secondary beneficiary. Later, because he changed custodians of his IRA, Husband completed a new beneficiary designation form in which he designated his wife as the primary beneficiary, but he neglected to name his daughter as the contingent beneficiary of the IRA so she could stretch out distributions from the IRA based upon her own life expectancy.
After his wife died, the custodian sent Husband a new beneficiary designation form so he could name a new primary beneficiary, presumably his daughter. Unfortunately, Husband did not complete and return the beneficiary designation form. Upon Husband’s death, then, his estate was the beneficiary of his IRA. As a result, the IRS ruled the required minimum distributions from his IRA had to be made over the life expectancy of the Husband remaining at the time of his death, to be sure a much shorter period of time than his daughter’s life expectancy, thereby resulting in an acceleration of income taxes.
The attorneys for Husband’s estate sought and obtained an order from a local court that Husband never intended to eliminate his daughter as contingent beneficiary of the IRA, and that his daughter should be treated as if Husband had named her as the beneficiary of his IRA prior to his death. Based on this court order, the attorneys sought a Private Letter Ruling from the IRS that Husband’s daughter would be treated as the designated beneficiary of Husband’s IRA so that the required minimum distributions could be calculated based upon the daughter’s life expectancy.
The IRS refused to recognize this post-mortem reformation of the IRA designation form. The IRS, contrary to two previous rulings with similar facts, determined it was not bound by a state trial court’s determination of a property interest. The IRS opined that the income tax statute and regulations clearly describe the procedures to be followed so that a beneficiary can achieve a post-required beginning date payout period longer than the IRA owner’s remaining life expectancy. The burden is on the owner of the IRA to follow the proper procedures, and if he or she fails to do so, he or she should not look to the IRS to correct the error.
IRA beneficiary forms should be reviewed frequently and contingent IRA beneficiaries should always be named. Please do not hesitate to call us if you have any questions regarding IRA beneficiary designations.