Same Owner / Multiple IRA Advantages?

[Guest AJ Milano]

Husband owner, wife primary benficiary, 4 Children contingent beneficiaries. On a recommendation from his lawyer, the owner wants to set up 5 seperate IRA's, with each child named a beneficiary in a respective IRA. Does anyone know of the tax advantages on this? I do not see any. If the owner and then the wife die, the IRA would be split up for the 4 children anyway. Am I missing something?

[Bruce Steiner]

Assuming husband has reached his required beginning date, if he has separate IRAs for each child, then after his death, each child can use his/her own life expectancy.

If he has a single IRA payable to the four children, it is not clear whether each child can use his/her own life expectancy (after their father's death), or whether they must all use the oldest child's life expectancy. Most people think it is the latter, though I think one could make a good argument for the former.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Guest Fishchick]

This could also help with beneficiary succession. For example, many IRA custodians split the assets between the remaining primary beneficiaries if a beneficiary were to pass away prior to the assets being distributed. If separate IRA's are established, the IRA owner could name his/her child as Primary Beneficiary, and that child's children as Contingent beneficiaries. This ensures that the grandchildren inherit their parent's share if the parent dies. This can also be done through a "per stirpes" beneficiary designation, but many IRA custodians will not accept "per stirpes" designations from all clients.

[Bruce Steiner]

It's really puzzling that IRA custodians have trouble with "per stirpes." It would probably take a couple of pages to define it.

It's like the word "mortgage." It's a big, technical word. But everyone knows what it means, and it would probably take a couple of pages to define it.

The bigger issue is that lately some IRA custodians (notably Vanguard) seem to be having trouble with most any beneficiary designation intended to reduce taxes.

I don't think it should be any of the IRA custodian's business what the beneficiary designation says. The IRA custodian should simply stamp it to show the date it was received. If, after the IRA owner dies, there is a dispute as to who is entitled to the benefits, the IRA custodian should simply hold the money until the interested parties resolve their dispute (and so notify the IRA custodian in writing) or a court decides the question.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[BPickerCPA]

Bruce,

Perhaps you can also explain why IRA custodians, who insist up and down that they do not give tax advice, keep refusing to follow (valid, legal) requests from IRA holders and beneficiaries because "it's not permitted by the IRS".

Doesn't that constitute 'tax advice'?

[John G]

Before people jump off this bridge, consider some of the practical downsides of splitting up an IRA: (1) limitations on making some investments because each lump is smaller (less of a problem if using mutual funds), (2) more effort required to make changes (even toggling between e-accounts), (3) harder to keep the bulk of funds invested, likely to have cash residuals in multiple accounts, (4) more statements to review, (5) due to variable results (it would be hard to maintain identical investments) over time 1 account could dwarf the others (more effort to rebalance the accounts every couple of years?), and (6) more transactions more accounts surely means more errors to correct.

While the accountants above gave some good reasons to consider this option, I wanted to raise some cautionary flags.

[Bruce Steiner]

Barry:

It's very hard to say exactly what constitutes tax advice or legal advice.

Dealing with IRA custodians is often difficult. If anyone in this group works for a financial institution, you have a wonderful marketing opportunity if you can make it easy for people to deal with your institution with respect to IRAs.

The best advice to give an IRA owner or beneficiary who is not happy with a financial institution is to move the account to another financial institution. The new one will likely be cooperative in processing the transfer forms, and the old one will likely transfer the assets without giving you a hard time.

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Bruce Steiner, attorney

(212) 986-6000 (NY office)

(201) 862-1080 (NJ office)

also admitted in FL

[Guest Gregory]

Couple of comments from the brokerage side.

Multiple IRAs can be used for 72t planning.

I see too many people poorly planning 72t distributions because they forget to plan for that "extra" amount they may need in the future. A word to the wise, split 1 IRA into 2 IRAs and use one to handle the minimum 72t needed. Use the other as a cushion in the event the client needs that little extra. This could save bundles in penalties years down the road.

Brokerages have deep pockets and with all the grey matter in the IRA beneficiary arena, we're sitting targets. Here's what I suggest you offer the when drafting the beneficiary designation; put the onous on calculating the required amounts on somebody other than the brokerage firm. The IRS doesn't require the IRA custodian to calculate the required amunts, so why do attorneys mandate it in the designations they write?

[BPickerCPA]

I have never seen a beneficiary designation that mandated the custodian to compute the required minimum distribution. As far as I'm concerned, the custodian can have whatever release language they want, as long as they basically shut up and do what the IRA owner or (after death) beneficiary tells them to. My simple objection is being told that the custodian cannot comply with a request because the request violates tax law, when the request does NOT violate tax law.

Telling an account holder that a request violates tax law, constitutes providing tax advice. When that request in fact does NOT violate tax law, telling the account holder that it does constitutes malpractice. No amount of disclaimer language will get the custodian off the hook.