Simultaneous Death Laws and IRA Beneficiaries

[Guest David Hammond SRS]

Hi Everyone,

Need some input on this one.

I am aware of a case where a husband and wife were each named as reciprocal primary beneficiary on each other's IRA with their adult children as contingent benficiaires on each. The IRA's are

Trusteed by a bank headquartered in Delaware with the domcile residence of the decedent couple in Florida.

Husband and wife were killed in an auto crash in Florida and experienced a Simultaneous Death. This was stated on the Death Certificate issued by the Coroner in Florida. Their Estates are being probabted in Florida.

The Delaware based Bank will not pay to the contingent beneficcaires and insists on paying only to the Estates of each of the Deceased claiming that Simultaneous Death Law in Delaware prohibits payment of these proceeds to anyone other than the Estates under this circumstance.

Other IRA's and insurance policies held elsewhere were successfully paid to the contingent beneficiaries.

My understanding is that most states

provide that as a result of simultaneous death the decedent survives his or her beneficiary. In that case the proceeds would be payable to the contingent beneficiary(ies)of the assets.

Why is this situation a problem?

1. The Attorney in Florida handling the estate is avoiding the research in this matter. Not interested in challenging.

2. These IRA assets if paid to the decedent's estates and not the contingent beneficiaires will be the only income generating estate assets neccessitating filing of an Estate Income Tax Return and taxation at potentilly higher rates than the contingents as individuals.

3. Access to state by state law in this matter has been difficult to locate.

Looking for your thoughts.

[BPickerCPA]

It seems that the biggest issue is the loss of the stretch out of the IRA withdrawals if the IRA is payable to the estate. This could be a VALUABLE thing if the IRA is big enough.

Based upon my experience with banks, the custodian could just be taking the easy way out. I would either insist that the estate attorney get off his *ss and do some research, or get an attorney to check into this for you.

One possibility that will help for your estate income situation although it may not give you an extended payout, is for the executor of each estate to disclaim the other's IRA. Look into doing that if all else fails. Under no circumstances should you let the bank issue a check at this point. There is no reason for that.

[Bruce Steiner]

Why wouldn't Florida law govern? The people were Florida residents.

You are correct as to the default rule -- in case of a simultaneous death, the beneficiary is treated as not surviving. While I haven't looked at this in all 50 states, it's hard to imagine any state having a different default rule.

The real issue in these cases is usually to get the marital deduction in the richer spouse's estate. That's why the Will of the richer spouse often overrides the default rule, and provides that in case of a simultaneous death, his/her spouse is deemed to survive him/her. The common problem with IRA benefits is that the clause in the Will overriding the default rule may not apply to nonprobate property such as IRA benefits. Also, in the case of IRA benefits, if they are payable to a spouse who dies before rolling them over, the IRS takes the position (in at least one PLR, which I cite in my article in the October 1997 issue of Estate Planning on spousal rollovers where the spouse is not the named beneficiary) that the spouse's executors can't do a rollover on his/her behalf.

But in your case, you're not trying to override the default rule. So I don't see what the problem is. If the primary beneficiary doesn't survive, the contingent beneficiaries take.

Why are they using a lawyer who refuses to do research and to advocate the client's interests? What does he/she think he/she is getting paid for?

Barry Picker is correct that the real issue here is the stretchout. If the children (or the grandchildren, if they are next in line and the children disclaim) can stretch the benefits out over their life expectancies, the income tax deferral can be extremely valuable.

But I don't think a decedent's executors can disclaim the decedent's IRA benefits, since the decedent had control over them while he/she was living.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[BPickerCPA]

Bruce,

Two points-

1. I think you misunderstood the disclaimer suggestion (or I mistated it). The estate of the BENE should disclaim the INHERITED IRA, so that it will go to the next bene on the form. I agree you cannot disclaim your own IRA. Here, in a simultaneous death, the bene never took any benefits from the other spouse's IRA.

2. It is my understanding from the IRS (and I agree with their position) that if a designated bene DISCLAIMS, the next bene will NOT get their own life expectancy for stretch out, unless their own life is less than the disclaimant (sort of a heads they win, tails you lose). So if the IRA gets to the kids via a disclaimer by the spouse, the stretch out is limited to the spouses life expectancy. Similarly, if the kids are the designated bene (which is what SHOULD be, imo) and they disclaim, the grandchildren would be limited to the kids life.

[Guest mcdonnell]

David, With regards to the Estate Income Tax and the distributions, if the husband and wife were under age 70 1/2 then the distributions could be spread out with the 5 year rule. Also, it might be possible for the executor to assign the distributions to the beneficiaries of the estate. However, the Bank might not agree with this, so a letter ruling could be needed to convince them.

[Bruce Steiner]

Barry has a good suggestion. Even though neither spouse's estate should have any interest in the other's IRA (since neither one survived the other), if each spouse's executor disclaimed his/her decedent's (nonexistent) interest in the other's IRA, the bank would no longer be able to claim that each IRA is payable to the other spouse's estate.

Since the spouses really didn't have any interests in each other's IRAs, assuming they had not yet reached age 70 1/2, the children ought to be able to use their own life expectancies.

Barry: do the rulings using the disclaimant's life expectancy cover cases where the IRA owners had not yet reached age 70 1/2, or only where the IRA owners were beyond 70 1/2?

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[BPickerCPA]

Bruce,

If the account holder died after the RBD, then the disclaimer should not make any difference. If the payments are based on term certain, it won't matter who dies when (real or imagined, via disclaimer). If the payments are recalced, then you'll lose all deferral when both are dead.

They were not rulings, but rather based upon private conversations with IRS people (not my conversations) that were related to me. The argument simply is that the disclaimer rules, sec 2518, are gift tax rules and relate only to gift and estate taxes, and have no effect on income taxation. In other words, 2518 and 401(a)(9) don't mix.

[Guest PeterGulia]

Returning to Mr. Hammond's first question (whether the IRA custodian is correct in its understanding of the IRA instrument together with applicable law), the children may wish to consider whether the executor, the estate, and the contingent beneficiaries may have differing interests, and whether separate lawyering may be appropriate for that or other reasons.

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[Bruce Steiner]

I agree with Barry that the disclaimer shouldn't make any difference if the IRA owner was beyond his/her RBD. But I don't see why it wouldn't work if the IRA owner had not yet reached his/her RBD.

As to separate counsel, the attorney for the estate *is* the attorney for the executor.

While the attorney for the executor generally assists beneficiaries in dealing with issues relating to the decedent's nonprobate assets, in this case since he/she is unable or unwilling to deal with this issue, the beneficiaries will have to deal with it or get counsel to help them deal with it.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL