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Who is the beneficiary of a post-death recharacterization?


Guest reg_h2b

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Guest reg_h2b

Who would be the beneficiary in the following scenario?

Taxpayer A converts his traditional IRA ("TIRA") to a Roth IRA ("RIRA") in 1998. For the TIRA the primary beneficiary was his spouse but for the RIRA the beneficary was a qualified trust [such that the beneficaries of the trust are the designated beneficiaries for 401(a)(9) purposes].

Taxpayer A dies in 1999.

In preparing Taxpayer A's estate the executor finds out that A's 1998 MAGI needs to be adjusted such that it will exceed the 100K limit. The executor recharaterizes the RIRA back to the TIRA by the 12/31/1999 deadline.

Who is the effective beneficary for this IRA?

i)On the one hand, Taxpayer A's last intention before he died with regard to the beneficiary was expressed on his RIRA. Which would leave it to the trust.

ii)On the other hand, 1.408A-5 Q&A-3 says the effect of the recharacterization, in this case, the RIRA "is treated as having been originally contributed to the Second IRA [herein the TIRA] on the same date ... that it was made to the the First IRA [herein the RIRA]". This implies to me that the beneficiary should then be the ben. of the TIRA, the spouse.

Seems to me result (i) makes the most sense. For example, the executor should not have the power to change the beneficiary designation of the decedent. Note in this case

1.408A-5 Q&A-6© gives the power to the executor to make a post-death recharacterization. It does not say it has to be a mandatory recharacterization. If result (ii) was correct the executor could change the intentions of the decedent. What if the executor was the beneficiary of the TIRA? You see where I'm going...

In addition, 1.408A-5 Q&A-1(a) says that if both the RIRA and the TIRA were within the same trustee instead of a transfer back to the original TIRA, the RIRA can be "redesignated" as a new TIRA; which in this case a redesignation would keep the RIRA's beneficary, the trust. One would think that the effective beneficary would not rest on the way the trustee chooses to processes the recharacterization.

Does anyone have a citation that would apply, other than the previously quoted 408A-5 regs in this scenario? I think that result (i) should be right; but I have no legal basis for it.

One could go on and complicate things by asking about a fractional recharacterization and about whose lifetime would be considered for MRD purposes in the recharacterized IRA but I think I'll stop here for now...

reg_h2b

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