Tax Impact on IRA Distribution

[Guest WendyE79]

This is a case I hae to do for my Tax class. I could really use some help. Here's the scenario. Mary Jane Sevens father, Earl Stevens, passed away last year. He was 85 years old. During the last years of his life, Mary Jane a hired an attendant, Martha Simms, who cared for Earl on a daily basis. They became good friends. Three months before his death, Earl changed the beneficiary on his IRA account, naming Martha as the sole beneficiary. The account balance was about $75,000. Most of the rest of his estate was spread equally among Mary Jane and her brothers and sisters. Mary Jane was upset that her father would change the beneficiary and, through her attorney, was able to get Martha to equally split the IRA account, without going to court and was able to avoid attorney fees. How was Mary Jane able to reach a settlement without going to court and also avoiding costly attorney fees?

[Belgarath]

A disclaimer of a portion of the benefit? Just a guess...

[Appleby]

I’m with Belgarath…one way I can see this working (splitting the assets while still in the IRA) is through a proper disclaimer.

However, the disclaimer would work only if the following requirements were met:

There were no contingent beneficiaries, otherwise , the disclaimed amount would go to the contingent---of course, the contingent could also disclaim the assets.

The default provisions of the IRA plan document provide that if there is no designated beneficiary, the beneficiary by default would be the children (in most cases, the default would be the spouse and if there is no spouse, then next in line would be the children- if there is a spouse, the spouse would need to properly disclaim the assets so that it is passed to the children as beneficiary)

Assuming the default provision mentioned in # two above applies, and there is no spouse or the spouse properly disclaims the assets, the children would then become the beneficiary. For the amount to go to just Mary Jane, the other children must disclaim their portion.

The other way it could work is if Earl has a customized beneficiary designation, in which he provided that should the primary beneficiary properly disclaim any portion of the assets, that amount would go to Mary Jane as beneficiary.

[Bird]

When you get the answer, please let us know how the client was able to go through an attorney and still avoid attorney fees.

[mbozek]

Martha could also make a gift of a portion of the IRA to Mary Jane. The difference between a gift and disclaimer is that a disclaimer is not considereed to be a gift subject to the federal gift tax because the donor is deemed to predecease the donee. If the transfer is considered to be a gift then Martha will use up part of her $1,000,000 lifetime allowance of property which can be transferred free of the gift tax after reduction for the $11,000 annual exclusion. Also Martha doesnt need a lawyer to make a gift- She only needs to file a 709 form if the value of the transfer exceeds $11,000.

[Demosthenes]

Take the simplest route, Mary Jane got Martha to split the IRA by threatening Martha, a home health care aide making 30k a year with a costly and protracted lawsuit.

I know, I know, none of my professors would have bought that one either. Except for the one that did personal injury law, I think that was his business model.

[Belgarath]

Interesting. Now, assuming for the moment that there is no contingent beneficiary as Appleby stipulated, then am I correct that a disclaimer is better than a gift, at least from Martha's viewpoint? Because without the disclaimer, Martha pays income tax on the whole 75,000, plus uses up a portion of her lifetime allowance - whereas the disclaimer gets the money directly to Mary Jane with no adverse consequences to Martha? Have I got that right, or is there other fun stuff to be considered?