A favorite client recently retained me after his mother’s death to help him settle her revocable living trust (RLT). His father died shortly before. My client was the trustee and sole heir under the trust. She named him in her durable general power of attorney. The Mother’s will transferred all assets to the trust. The trust distributes its assets to the son. This should have been a piece of cake. Not this time!
The bad news. His aged mother could not manage her affairs. She inherited a large IRA and failed to name a successor beneficiary. Using his Mother’s DPOA, my client asked the custodian of the IRA to name him as successor beneficiary but they refused because they saw a conflict of interest. Things got really expensive and could result in a heavy tax burden!
Bad news: With no beneficiary named after his mother died, her “estate” became the beneficiary. We had to open the estate in Probate Court. The whole purpose of the RLT was to avoid Probate.
Danger. Because an estate has no lifetime over which it could make required minimum distributions (RMD’s), in some cases, the IRS will distribute the entire IRA immediately, with resulting heavy taxes.
The good news. Fortunately, as a tax attorney, Wis was able to find a loophole that would allow the IRA to “stretch” the RMD’s over the mother’s life. However, there is still the expense of keeping the estate open for the distribution period and the cost and complexity of estate taxes. Wis intends to negotiate a transfer of the IRA directly to his client.
My advice: Never allow a retirement account to end up without a successor beneficiary. Retain a tax attorney to advise you regarding your plan beneficiaries. While many lawyers can draft wills or trusts, few of them can handle complex income tax issues like this.
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