Using Codicil to create Life Estate and distribute remainder interest to beneficiaries via an annuity if the beneficiaries agree to life distribution from IRA.

[Guest godmom]

All legal minds please give me a feedback on this.

A Codicil reads as follows:

I'm conveying the real property at 11 Main St., NY, by will, to create a Life Estate for my husband John Doe and create a Remainder Interest held in trust for my brothers and sisters. John Doe as a life tenant shall occupy and use the residence. He will administer, maintain and be responsible for expenses and taxation of the real property.

Upon the death of life tenant John Doe, I direct the trustee to sell the real property at 11 Main St. NY. The net proceeds of the sale are to be used to purchase a 20 year Immediate Annuity for each of my brothers and sister that agree to and receive lifetime distribution from my IRA which they are beneficiaries. If any of my brothers or sisters, that are beneficiaries of my IRA, do not agree to nor receive a lifetime distribution from my IRA, that person will only receive one dollar from the sale of the real property.

Questions?

Is a Life Estate created with the wording?

Can the trustee sell the Remainder Interest and distribute it via Immediate Annuities?

Are the beneficiaries of the IRA given an incentive to select a life distribution instead of lump sum?

Comments please specially fron New York

[mbozek]

you really need to have this matter reviewed by an attorney since you are asking for a legal opinion.

[Bruce Steiner]

Your ideas are quite good for someone who's not a lawyer. We've seen lawyers who haven't done as well. But instead of your trying to come up with the solutions, you should focus on your objectives and concerns, and let your lawyer advise you as to how best to accomplish your objectives.

You must have some concern about your siblings if you are considering providing for them in the form of a 20-year annuity. and you want to make sure they don't cash in the IRA at once. But if you leave your IRA to them, you can't stop them from cashing it in (at least after your husband's death once they get the annuity). A better way to provide for them is in trust rather than outright, so the trustees will have some control.

A 20-year annuity is extremely inflexible, and not very tax efficient. Again, it would be better to select the appropriate trustees, and give the trustees some discretion.

If you leave the IRA to or in trust for your siblings, the stretchout is limited by their life expectancy. Is there some other way to get a longer stretchout?

A life estate is also not very flexible. Suppose at some point your husband wants to move? Suppose he wants to refinance the mortgage (if there is one), or take out a home equity loan. Again, a trust is much more flexible.

Finally, we rarely do codicils. To do a codicil, you have to make sure it meshes with the Will. After your death, everyone will both the Will and the codicil, whoever's interest was reduced by the codicil may be unhappy. If you do a whole new Will, no one would know what the changes were unless for some reason the prior Will came to light. Finally, a codicil is often done as a temporary stopgap, but once the codicil is done, redoing the Will may seem less urgent. So don't do a codicil; do a new Will. With the aid of word processing, it probably won't cost much more.