{"id":107327,"date":"2023-01-18t00:47:53","date_gmt":"2023-01-18t05:47:53","guid":{"rendered":"\/\/www.g005e.com\/?post_type=product&p=107327"},"modified":"2024-08-11t20:46:09","modified_gmt":"2024-08-12t00:46:09","slug":"sg23ret-seymour-goldberg-retirement-asset-traps-failures-and-errors","status":"publish","type":"product","link":"\/\/www.g005e.com\/shop\/sg23ret-seymour-goldberg-retirement-asset-traps-failures-and-errors\/","title":{"rendered":"retirement assets: traps, failures and errors"},"content":{"rendered":"

why many beneficiary forms are defective<\/strong><\/span><\/h3>\n

by seymour goldberg, cpa, mba, (taxation) jd<\/em><\/strong><\/p>\n

i first became aware of the fact that many ira beneficiary forms were incomplete or defective in 1990. it was at a time that a cpa asked me to review an ira beneficiary form of a major financial institution for his client. the form provided that each child would receive 50% of the client\u2019s ira account. i then looked to see what provisions were made in the ira beneficiary form if the child predeceased the ira owner to make sure that the child\u2019s issue would receive the predeceased child\u2019s share. i was shocked to discover that the ira beneficiary form provided that the surviving child would receive 100% of the ira proceeds and that the issue of the predeceased child would be cut out. flash forward, i have since corrected many canned ira beneficiary forms to date to avoid this problem.<\/p>\n

during the last ten years or so many ira institutions have upgraded their ira beneficiary forms so that the issue of a predeceased child, if any, will receive the share allocated to the predeceased child. that\u2019s the good news. the bad news is that there may be many ira beneficiary forms that were executed by the ira owner before the revised forms came out. that means that unless the ira owner is alert, he\/she may have the old forms on file with the ira institution.<\/p>\n

how could many ira owners make such a mistake?<\/strong> <\/em><\/p>\n

it\u2019s easy and here are some of the reasons:<\/strong><\/p>\n

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  1. \n
      \n
    1. taxpayers often think<\/strong> that the ira assets are disposed of by their will. that\u2019s not true for the most part since an ira is a non-probate asset and is not governed by a will. the beneficiary designation determines who is entitled to the ira proceeds upon the death of the ira owner, not the will. the exception is when there is no beneficiary designation on file with the ira institution or the ira owner for whatever reason selected his\/her estate as the beneficiary of his\/her in that case the ira proceeds will be governed by the will provisions unless the ira agreement provides for default beneficiaries.<\/li>\n
    2. it is possible that a number of ira institutions<\/strong> may need to upgrade their beneficiary forms to provide for the predeceased child situation previously<\/li>\n
    3. a number of ira institutions<\/strong> have sophisticated beneficiary forms that are excellent. the problem there is that they are so sophisticated that they are difficult for the average person to follow.<\/li>\n
    4. many taxpayers are intimidated<\/strong> by ira beneficiary forms and they tend not to read the fine print that is boilerplate. in essence the canned language in your ira beneficiary form acts as a will for your ira<\/li>\n
    5. failure to timely prepare<\/strong> and implement traditional ira and roth ira beneficiary forms with the ira institution(s) maintaining the ira account(s). this applies to ira owner(s) and the beneficiary of inherited ira account(s) (traditional and roth).\u00a0 the beneficiary of an inherited ira should prepare a beneficiary form for the inherited ira account as soon as possible after the death of the ira owner.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

      in my practice, we’ve found the following additional errors or issues:<\/strong><\/p>\n

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      1. \n
          \n
        1. an ira owner died<\/strong> and had approximately $500,000 in his ira. the designated beneficiary of his ira was child number 1 as his primary beneficiary and child number 2 as his secondary beneficiary.\u00a0 child number 1 received the $500,000 ira in a lump sum and child number 2 received nothing.\u00a0 it is interesting to note that the decedent intended to leave his assets to both children equally based upon his will provisions.<\/li>\n
        2. an ira owner listed only a few<\/strong> of his children as the primary beneficiaries of his ira but left out a number of children as primary beneficiaries of his ira. i asked him why he did that, and he told me that he thought that his will governed who would receive his ira assets.<\/li>\n
        3. another ira owner left out most of his children<\/strong> as beneficiaries of his ira. the ira form only had a few spaces on it for primary beneficiaries.\u00a0 he therefore cut out most of his children as beneficiaries of his ira.<\/li>\n
        4. another ira owner listed a child and his wife<\/strong> as primary beneficiaries and all his other children as contingent beneficiaries. he told me that the form did not have enough spaces and he didn\u2019t realize what he was doing.<\/li>\n
        5. another ira owner established a trust for the benefit of his grandchild<\/strong> as the beneficiary of his substantial ira and filed this beneficiary designation form with the financial institution. the original beneficiary of his (substantial) ira was his daughter who did not need the funds.\u00a0 this was in effect a generation-skipping transaction and part of his estate plan.\u00a0 two years later he found out that the beneficiary of his ira was still his daughter.\u00a0 i looked into it and found that the revised ira beneficiary form listing the trust as the beneficiary was still sitting in his financial advisor\u2019s desk.\u00a0 the financial advisor forgot to forward it to the ira retirement area of the financial institution.<\/li>\n
        6. another ira owner listed each of his two children<\/strong> as contingent beneficiaries on all of his ira accounts. each child as a contingent beneficiary had a 50% interest in his ira.\u00a0 the ira owner added the words \u201cper stirpes\u201d next to each child\u2019s name.\u00a0 the legal effect of the words \u201cper stirpes\u201d means that if a child predeceases the ira owner, then such child\u2019s share is then payable to the issue of that predeceased child.\u00a0 the ira owner misplaced three of his ira beneficiary forms and contacted the three institutions that maintained these ira accounts for confirmation as to the beneficiaries of his ira.\u00a0 all three institutions sent back letters confirming the primary and contingent beneficiaries of his ira accounts.\u00a0 however, none of the confirmation letters mentioned \u201cper stirpes.\u201d the ira owner insisted on receiving the actual copies of his ira beneficiary forms from each of these three institutions.\u00a0 believe it or not, the actual ira beneficiary forms did in fact have the words \u201cper stirpes\u201d next to each child\u2019s name.\u00a0 the confirmation letters were obviously incorrect.\u00a0 this case was a wake-up experience for us. no further comment.<\/li>\n
        7. another ira owner updated his ira beneficiary form<\/strong> with a financial institution and added the words \u201cper stirpes\u201d next to each child\u2019s name. the financial institution rejected the form because the financial institution\u2019s policy is to not permit the words \u201cper stirpes\u201d to be used.\u00a0 s. \u2013 the financial institution lost a major account.\u00a0 two other ira owners had the same experience with the same financial institution.<\/li>\n
        8. another ira owner selected a trust<\/strong> for the benefit of a child as the beneficiary of his ira. the financial institution rejected the form because the institution, for whatever reason, did not wish to have a trust as the beneficiary of the ira.\u00a0 again, the financial institution lost the account.\u00a0 another ira owner had the same experience with the same financial institution.<\/li>\n
        9. another ira owner listed minor beneficiaries<\/strong> directly as the beneficiary of his ira. on his death legal problems were triggered and the stretch payment rules were lost because of potential legal cost issues.\u00a0 had provisions for the minor been done in another manner, then the ira stretch payment rules would have been saved.<\/li>\n
        10. another ira owner came to me with a letter<\/strong> from the financial institution requesting that she fill out another ira beneficiary form. i knew that she had previously prepared a beneficiary form with the financial institution when she opened the ira account.\u00a0 i called the ira institution and was told that a number of ira beneficiary forms were lost and that it was therefore necessary to update the ira beneficiary form.<\/li>\n
        11. another ira owner had prepared a detailed ira beneficiary form<\/strong> in a manner that i had suggested. at a later date the financial advisor moved to another financial institution and transferred the ira to the other financial institution.\u00a0 the financial advisor had the ira owner prepare a new ira beneficiary form that was incorrect.\u00a0 i caught it and modified the new ira beneficiary form.<\/li>\n
        12. another ira owner had set up a trust for the benefit of his wife<\/strong> as the beneficiary of his ira. the purpose of the trust as the ira beneficiary was to save his estate tax exemption.\u00a0 at a later date the financial advisor moved to another financial institution and transferred the ira to the other financial institution.\u00a0 the ira owner then made the wife the direct beneficiary of his ira instead of a trust for the benefit of his wife.\u00a0 this change was done without my knowledge.\u00a0 he subsequently died and the estate tax exemption was lost.\u00a0 the wife stated that she did not wish to do anything about it because the financial advisor was a close relative and a major beneficiary of her will.<\/li>\n
        13. most of the ira beneficiary forms that i have reviewed over the last 20 years or so had to be amended for several reasons.<\/strong> i often ask clients to read the fine print on their existing ira beneficiary forms.\u00a0 after that i explain the effect of the ira beneficiary form language to the client.\u00a0 for the most part i suggest that the issue of a predeceased child should receive the predeceased child\u2019s share.\u00a0 the client generally agrees to make the change.\u00a0 most taxpayers do not realize the legal consequences of their existing ira beneficiary forms.<\/li>\n
        14. many ira owners have misplaced<\/strong> their ira beneficiary forms. at my insistence they obtain copies of the ira beneficiary forms from their ira institutions.\u00a0 i have found that a few clients never selected any beneficiaries for some of their existing ira accounts.<\/li>\n
        15. many individuals have sole proprietorship keogh plans.<\/strong> i’ve found on occasion that there is no beneficiary form on file with anyone or that the form is lost or misplaced.<\/li>\n
        16. an ira owner should not fill out an ira beneficiary form<\/strong> that designates the beneficiary \u201cas stated in my will\u201d or words to that effect. according to the irs the beneficiary under the will cannot use his or her life expectancy in determining required minimum distributions from the deceased ira owner\u2019s account.\u00a0 see irs letter ruling 200846028 dated august 20, 2008.<\/li>\n
        17. a client executed and dated a customized beneficiary form<\/strong> listing four trusts by percentages as the beneficiaries of her significant roth ira account. the customized beneficiary form was given to the financial advisor for processing.\u00a0 about a year later after the death of her husband i asked her to send me a copy of her beneficiary form for my files.\u00a0 she did not have a copy so we asked the financial institution for a copy.\u00a0 the financial institution confirmed that there was no beneficiary form on file with the financial institution.\u00a0 the default beneficiary under the ira custodial agreement was her surviving spouse and if none then her estate.\u00a0 the initial customized beneficiary form was never located.\u00a0 we immediately had the client execute and date a new customized beneficiary form listing the four trusts by percentages as the beneficiaries of her significant roth ira account.<\/li>\n
        18. one financial institution does not permit<\/strong> per stirpes designations. it provides in the beneficiary designation form the following language: \u201ci designate that upon my death, the assets in this account be paid to the beneficiaries below.\u00a0 the interest of any beneficiary that predeceases me terminates completely, and the percentage share of any remaining beneficiaries will be increased on a pro rata basis.\u00a0 if no beneficiaries are named, my estate will be my beneficiary.\u201d<\/em><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

          comments<\/strong><\/span><\/h3>\n

          the ira owner should periodically review<\/strong> his\/her ira beneficiary forms that are on file with the ira institution and make the appropriate modifications when necessary.<\/p>\n

          in addition, the ira owner should send copies of the ira beneficiary form to the ira institution in duplicate and ask for a receipted copy to be sent back to him\/her.<\/p>\n

          the ira owner should check<\/strong> to see how flexible the ira institution is with respect to adding language to the canned ira beneficiary form.\u00a0 if the ira institution is not flexible and the modifications to the form are important to you, then consider using another financial institution that is more flexible.<\/p>\n

          \n

          common errors in retirement distribution planning<\/strong><\/span><\/h3>\n

          in general, the following common errors often take place when dealing with the retirement distribution rules from an estate planning point of view:<\/strong><\/p>\n

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          1. \n
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            1. failure to timely update<\/strong> and\/or review your existing beneficiary forms on file with the ira institution and the employer-sponsored retirement plan.<\/li>\n
            2. failure to periodically review<\/strong> your existing legal instruments to determine whether the retirement assets are charged with an allocable portion of the estate tax upon your death or are exonerated from the estate tax liability allocable to the retirement assets. if exonerated, ensure that there are sufficient other assets to pay the estate tax allocable to the retirement assets.<\/li>\n
            3. exonerating the retirement assets<\/strong> from any estate tax liability will permit more tax-deferred growth of the retirement assets and tax-free growth of roth iras. however, this exoneration approach is at the expense of other beneficiaries of the estate.<\/li>\n
            4. failure to do an estimated estate tax liquidity analysis<\/strong> to determine the extent of your estate tax liability and the source of payment of the estate tax liability.<\/li>\n
            5. failure of your beneficiaries<\/strong> to know how the inherited ira distribution rules work after your death.<\/li>\n
            6. failure of your surviving spouse<\/strong> to know about the spousal rollover rules or direct transfer rules after your death.<\/li>\n
            7. failure of your surviving spouse to timely implement<\/strong> the spousal rollover rules or direct transfer rules after your death.<\/li>\n
            8. failure to know that an unpaid required minimum distribution<\/strong> must be paid for the year of death of the plan participant or ira owner.<\/li>\n
            9. failure to know that roth iras<\/strong> are subject to post-death required minimum distribution rules.<\/li>\n
            10. failure to know that retirement distribution post-death payments<\/strong> paid to a beneficiary are generally not subject to the irs 10 percent early distribution penalty.<\/li>\n
            11. failure to know that the balance in an inherited ira account<\/strong> is included in the gross estate of the beneficiary for estate tax purposes when the beneficiary subsequently dies. this can be avoided if a trust is the beneficiary of the ira owner\u2019s account.<\/li>\n
            12. failure to know that an ira beneficiary<\/strong> may timely disclaim an inherited ira.<\/li>\n
            13. failure to know that a minor<\/strong> should not generally be directly designated as the beneficiary of a retirement account.<\/li>\n
            14. failure to use the uniform transfers to minors act<\/strong> in a manner permitted under state law as the beneficiary of an ira account.<\/li>\n
            15. failure to have a power of attorney<\/strong> that provides for the retirement distribution transactions, including rollovers and beneficiary designations.<\/li>\n
            16. failure of your beneficiaries<\/strong> to know about the separate account rule if there are multiple beneficiaries of your retirement accounts.<\/li>\n
            17. failure to know that a rollover <\/strong>from a previously tax-qualified plan that has not been timely updated is not valid and subject to significant irs penalties.<\/li>\n
            18. failure to know that a specifically designed trust<\/strong> may be the beneficiary of retirement assets provided that the irs rules are satisfied.<\/li>\n
            19. failure to know that irs penalties a<\/strong>pply to beneficiaries of inherited iras when post-death required minimum distributions are not timely made.<\/li>\n
            20. failure to maintain paperwork<\/strong> on the inherited payout period for the beneficiaries.<\/li>\n
            21. failure to know that the federal estate tax<\/strong> attributable to retirement accounts may be deducted by the beneficiaries on a pro-rata basis.<\/li>\n
            22. failure to know how the ira trust works<\/strong> when the beneficiary of an ira is a trust.<\/li>\n
            23. failure to know that certain irs trust documentation requirements<\/strong> must be satisfied with the ira financial institution by no later than october 31st of the year following the ira owner\u2019s death.<\/li>\n
            24. failure to know that the pension protection act of 2006<\/strong> permits a non-spouse beneficiary of an eligible retirement plan to establish an inherited ira.\u00a0 certain trusts may qualify for this relief as well.\u00a0 these provisions apply to non-spouse beneficiaries with respect to amounts payable from a qualified retirement plan, governmental section 457 plan, and a 403(b) tax-sheltered annuity.\u00a0 if the paperwork is done correctly and spousal consent, if applicable, is obtained, then a trust can be the beneficiary of a participant\u2019s death benefit from an eligible retirement plan. according to the irs the provision was optional under the 2006 act and not mandatory.\u00a0 however, under the worker, retiree, and employer recovery act of 2008 (wrera) this provision is mandatory for plan years commencing after december 31, 2009.<\/li>\n
            25. failure to know about the one-per-year limit on ira rollovers.<\/strong> see irs announcement 2014-32.<\/li>\n
            26. failure to know that the surviving spouse<\/strong> may not rollover a required minimum distribution attributable to the deceased (spouse) ira owner.<\/li>\n
            27. failure to know that roth ira conversions<\/strong> can no longer be recharacterized under the tax cuts and jobs act.<\/li>\n
            28. failure to file irs form 5329<\/strong> with the irs when there is a client who has not taken required minimum distributions.<\/li>\n
            29. failure to be aware of the statute of limitations<\/strong> issues if irs form 5329 is not filed for the client who has not taken required minimum distributions.<\/li>\n
            30. failure to be aware of the personal liability<\/strong> of the fiduciary for debts to the u.s. government on death of ira owner or death of ira beneficiary if unpaid required minimum distributions were not taken by ira owner or the beneficiary of the inherited ira as the case may be.<\/li>\n
            31. failure to timely prepare a customized designation<\/strong> of beneficiary form for a trust as the beneficiary of an ira account holder (traditional and roth).<\/li>\n
            32. failure to timely prepare a successor-in-interest<\/strong> designation of beneficiary form for an inherited ira account holder. if not done, then the default beneficiary under the ira agreement becomes the successor beneficiary.<\/li>\n
            33. failure to recognize that many designation<\/strong> of beneficiary forms use per capita instead of per stirpes.<\/li>\n
            34. failure review existing designation<\/strong> of beneficiary forms when implementing an estate plan.<\/li>\n
            35. failure to list basis in roth ira<\/strong> account(s) on schedule a of form 8971.<\/li>\n
            36. failure to list basis in plan accounts<\/strong> and 403(b) arrangements on schedule a of form 8971.<\/li>\n
            37. failure to list basis in bifurcated assets<\/strong> such as a non-qualifying annuity on schedule a of form 8971.<\/li>\n
            38. failure to list basis in traditional ira<\/strong> account(s) that contain after-tax dollars resulting from non deductible contributions made to a traditional ira on schedule a of form 8971.<\/li>\n
            39. failure of ira owner<\/strong> (traditional and roth) to maintain permanent file of beneficiaries of all ira accounts. this also applies, for example, to 403(b) arrangements, 401(k) plans, keogh plans, other qualified plans, a 457 governmental plan, annuities, life insurance policies and deferred compensation agreements.<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

               <\/p>\n

              \n

              major sections<\/strong><\/span><\/h3>\n
                \n
              1. \n
                  \n
                1. common errors in retirement distribution planning<\/li>\n
                2. why many beneficiary forms are defective<\/li>\n
                3. unintended beneficiaries of retirement accounts.<\/li>\n
                4. important ira beneficiary state court cases<\/li>\n
                5. customized sample beneficiary forms<\/li>\n
                6. advantages of trusts as ira beneficiary<\/li>\n
                7. disadvantages of trusts as ira beneficiary<\/li>\n
                8. ira beneficiaries and unpaid estate tax liabilities<\/li>\n
                9. creditor rights and inherited iras under state law<\/li>\n
                10. danger zone: practitioner tips in avoiding use of revocable trusts\u00a0as an ira beneficiary where appropriate<\/li>\n
                11. ira custodial agreements and default beneficiaries<\/li>\n
                12. waiver of penalty rules under secure<\/li>\n
                13. special separate account rules when there are multiple beneficiaries of a deceased\u00a0ira owner\u2019s account<\/li>\n
                14. what happens when attorneys and other self-employed individuals with keogh plans die without nominating a successor to take charge of the keogh plan<\/li>\n
                15. fixing common plan mistakes – using epcrs to terminate an orphan plan<\/li>\n
                16. major change in required beginning date<\/li>\n
                17. major irs penalty changes under secure 2.0 act of 2022<\/li>\n
                18. major irs statute of limitation changes under secure 2.0 act of 2022<\/li>\n
                19. comment letter to treasury department involving an oversight in drafting conduit\u00a0trusts<\/li>\n
                20. irs notice 2022-53<\/li>\n
                21. estate tax watch article<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n

                   <\/p>\n

                  \n

                  bonus sections<\/strong><\/span><\/h3>\n