custom-crafted IRA agreement

[Peter Gulia]

I’m wondering if other BenefitsLink readers have found a “product” solution to a spouse’s-rights situation that I guess happens often enough that someone might want to get a fee out of it.

A small-business owner is the only remaining participant in a money-purchase retirement plan. Because she is retired from the business, her yearly income is less than $100,000. (Her spouse has no income.) She would like to terminate the money-purchase plan, take a single-sum distribution of her entire plan account, and direct a rollover into a Roth IRA.

Her spouse understands his survivor-annuity and spouse’s-consent rights. The participant said that she would name her spouse as the primary beneficiary of the IRA. But the spouse understands that mainstream IRA documents allow an IRA owner to change a beneficiary designation. In his view, an IRA beneficiary designation (even 100%) that can be changed without his consent is not as much protection as a QPSA (even 50%) provision that remains in effect unless he consents. So far, the spouse is unwilling to sign a consent.

The participant would prefer to “Roth-ize” the retirement accumulation now because she believes that income tax rates after 2009 will be meaningfully higher than current rates, and she happens to have money to pay the “conversion” taxes now (without affecting her lifestyle spending). Maintaining the employment-based plan means losing the opportunity to “Roth-ize” the accumulation.

The participant believes that her spouse would sign the necessary consent if an IRA agreement has provisions legally enforceable by the non-owner spouse that make the IRA trustee responsible for not allowing any beneficiary change.

Does anyone know of a trust company that would make such an IRA agreement?

[J Simmons]

Hi, Peter,

I do not know of such an IRA custodian.

I post only to pose questions to be considered. Would it be an impermissible alienation of the power to pick, choose and change the death beneficiary for the IRA owner to contract away that right? Is the ability to change the death beneficiary a necessary incident of ownership of the IRA under 408? Since any change of beneficiary, in the context of such a contract, would contractually require both to sign, would that make the IRA owned by two rather than one?

Does the state in question have a legal mechanism for dividing the marital/community property despite the marriage continuing? Could there perhaps be a severance of the benefits now, pursuant to a QDRO and then each take half into an Roth IRA separate from the other?

[Peter Gulia]

John, thanks for thinking about this.

I don’t think that an IRA trust creator’s creation of a trust that omits to provide a right to name an after-death beneficiary would make that trust somehow forfeitable or not for the IRA participant’s exclusive benefit during her life.

I had thought about using a QDRO, but it’s not an easy fit. First, in the particular situation I would advise on, the only thing that’s arguably marital property under State law is the spouse’s right not to consent to a qualified election against a QJSA or QPSA. None of the account balance is marital property: that’s because all labor was performed and all contributions were made before the marriage, and since the marriage there have been investment losses rather than gains. Second, the separate-property State’s law provides equitable distribution only incident to a divorce or annulment, not during a marriage that neither party seeks to change. Third, even if one could persuade a court to partition the spouse’s right not to consent to a qualified election and exchange his 100% share of that marital property for a distribution from the retirement plan, the spouse (who is not my client) would want some comfort that this distribution is a QDRO distribution and so eligible for rollover. I doubt that the spouse’s lawyer would render that tax advice. Waiting to conclude the court proceeding until after an IRS letter ruling is obtained could defeat the timing that the participant seeks.

So has anyone read or heard about a trust company that would accept responsibility for not allowing a beneficiary designation after creation of the IRA?

[Peter Gulia]

If it helps any in finding a trust company that would accept responsibility for not allowing a beneficiary designation after creation of the IRA, it would not need to customize the IRA documents because the person who wants to persuade her husband to allow the rollover would pay for me or another lawyer to write the needed provisions.

[jpod]

Just out of curiousity, will the spouse be protected during the IRA holder's life? In other words, what is to prevent her from transferring or rolling over all of the $ to another IRA and then naming the pool boy as the sole beneficiary? Alternatively, what would prevent the IRA holder from withdrawing all the $, with or without adverse tax consequences, and then spending it or giving it away?

[Peter Gulia]

This is where the custom drafting comes in.

The IRA would be an irrevocable trust agreement. (The agreement would provide the trustee a power to amend the agreement as necessary to maintain IRA tax treatment.)

The agreement would preclude anyone from removing the trustee.

The agreement would omit any provision to permit a rollover or transfer.

Instead of providing a choice of distribution forms, the agreement would specify only one lifetime distribution provision. It would allow payments not significantly greater than what might have resulted under the relevant QJSA. The distribution might restrain payments to no more than minimum-distribution amounts.

The agreement would specify all post-death distributions. The agreement would omit any provision for naming a beneficiary.

The agreement would state that the participant’s spouse is an intended third-person beneficiary of these provisions, and would recite that the IRA creator made these provisions to induce the spouse’s consent to the qualified election under the previous retirement plan. This language might persuade the spouse that he has rights to enforce the agreement and make the trustee responsible for the spouse’s loss caused by the trustee’s breach.

[jpod]

Ok. One last thought. I think this spousal unit needs to talk to a marriage counselor first, ERISA lawyer second.

[Appleby]

A Roth Annuity would be more likley to include an irrevocable beneficiary designation ---maybe check with an annuity provider?...unless she prefers a more diversifed form of investment portfolio

[K2retire]

Ok. One last thought. I think this spousal unit needs to talk to a marriage counselor first, ERISA lawyer second.

My thoughts exactly!