April 1, 2016
A part of estate planning that is sometimes overlooked is the naming of beneficiaries for retirement accounts. What may seem like a trivial exercise can have damaging impact if neglected. Be sure to name beneficiaries of your retirement accounts. And be sure to name contingent beneficiaries in case your primary beneficiary dies before you.
In Private Letter Ruling 201612001 (released March 18, 2016), the IRS was asked to provide an opinion on the following situation: Husband died owning an IRA account. His spouse survived him. The primary named beneficiary (not the spouse) died before Husband. There was no contingent beneficiary named. As a result the Husband’s estate became the beneficiary of the retirement account. The Surviving Spouse then requested the IRS’s opinion on whether she could treat the IRA account as her own, thus potentially delaying the payment of income taxes on the account. In this case, the IRS stated that because the Surviving Spouse was both the executor and the sole heir of the estate, she could treat the IRA account as her own.
You might be asking then what is the problem? The IRS said the Surviving Spouse can treat the account as her own and delay the payment of income taxes. Let’s assume for a moment that it was Husband’s intent for his Surviving Spouse to receive that account if his primary beneficiary died before him. The problem is that it is expensive to obtain a Private Letter Ruling from the IRS. There are IRS filing fees as well as attorney’s fees that will be incurred. This is not a good use for estate funds, when it could have easily been avoided.
It also takes time to get the ruling. In this case, the request was made about 11 months before the decision was rendered. Perhaps it also took a few months to prepare the request, and another few months on top of that to even realize that a Private Letter Ruling would be necessary. Lastly, an IRS Private Letter Ruling is not a precedent for any other taxpayer. Another taxpayer could not rely on this decision if they are in the same situation.
Consider though if it was not Husband’s intent for his Surviving Spouse to receive the IRA, then his intent was frustrated by not having named a contingent beneficiary. When you undertake estate planning, it is important to make sure there are no potential issues with your beneficiary designation forms, so get your attorney’s input when naming your beneficiaries. We have the experience to know what can possibly go wrong.