Question about disclaiming part of an estate

[SecondCor521]

Widower Dad has a traditional IRA, a Roth IRA, and a taxable account. He is currently taking RMDs on the traditional IRA. He has three children. He has listed each of the three children as named primary beneficiaries with the brokerage firm holding the IRA assets (Jane Doe 33.4%, Joan Doe, 33.3%, John Doe, 33.3%). There are no secondary or contingent beneficiaries. His intent is that the three children, upon his death, split the IRAs and use the stretch rules to take RMDs from the IRAs according to their individual life expectancies.

John Doe is considering disclaiming his 33.3% portion of the Roth IRA that he would receive. If he does so, what happens to his 33.3% of the Roth IRA?

I am reading conflicting information on the web. Will provide more information as needed, just not sure what is all of the relevant information.

 

[socca]

The general rule is that when John disclaims, the assets transfer as if John had predeceased his father. I can't comment on how this general rule would apply to your particular situation. Disclaimers can be a bit tricky. When it comes time to do it, you'll want the advice of a professional.

 

[sheehs1]

I used disclaiming a couple of times.

I used it once when I and my 3 siblings inherited an IRA from my Mom but it was not a Roth IRA. It depends on how the beneficiary designation is written. If it is "per stirpes", my understanding is, if John Doe disclaims, it goes to John Does' next of kin (as if John Doe died). If it is not "per stirpes", it forces it back to the estate "by default" such that the estate pays the taxes. What's left is distributed to the estates heirs. That is what we did with one of my mom's IRA's and we did so at the time because the Unified Tax Credit was much lower and having her estate pay the tax resulted in more net dollars being distributed to her heirs under the Unified Tax Credit amount. Her estate paid the tax rather than us personally paying the tax. Due to how the beneficiary designation was written we could not "disclaim" and route the other IRA to her estate. But since yours is a ROTH IRA, taxes may not be an issue for you. At least for now. In this case, my father was still alive but this did not affect the flow of the disclaiming since the asset had been left to me (and my siblings).

The other time I used it was to disclaim my percentage of family business stock held in my Moms trust. It was as if I had died. It went to my daughter (next of kin in the next generation) and that was my point. I wanted to get that small percentage of family business stock into my daughter's hands and out of my estate. In this case, my father had passed away and the assets held in the marital trust established by my mom and originally for his benefit were being distributed.

I suggest getting your hands on the original Roth IRA account set up and look at the beneficiary destination and how it is written. What you can do is based on that. If the words "per stripes" are in it then if John Doe disclaims, it goes to John Doe's heirs. If those words are not there, it is possible it is routed to the estate and subject to the terms of the will or trust if your father has one or both. If you have additional questions, I further suggest contacting your accountant or the IRS or researching the IRS website about disclaiming.

Hope this helps some but as always I am not a legal or tax professional.

 

[SecondCor521]

Thanks, both of you.

I had read various things, both that a disclaimer had the effect as if John Doe predeceased his father, and that it was as if John Doe were not named a beneficiary. I had also read that it could go to the contingent beneficiaries in the case of a disclaimer. In this particular situation, each of these three options could result in different outcomes.

What John Doe is really after is to possibly disclaim the Roth IRA so that his 33.3% portion goes to his (now teen-aged) kids, and that his kids then get tax free income over their lifetimes. Since John Doe has enough money and this would result in stretching of income over a much longer period, it's something he might consider doing.

This would be in line with Dad Doe's wishes, but not sure if that's what the rules would actually effectuate. The beneficiaries are listed at the brokerage firm's site without the "per stirpes" designation - it is just the three names.

I'll suggest John Doe contact the brokerage firm and/or a good estate attorney.

 

[kaneohe]

...............................

I suggest getting your hands on the original Roth IRA account set up and look at the beneficiary destination and how it is written. What you can do is based on that. If the words "per stripes" are in it then if John Doe disclaims, it goes to John Doe's heirs. If those words are not there, it is possible it is routed to the estate and subject to the terms of the will or trust if your father has one or both. If you have additional questions, I further suggest contacting your accountant or the IRS or researching the IRS website about disclaiming.

Hope this helps some but as always I am not a legal or tax professional.

Agree w/ sheehs1 with the same caveat. Besides looking at the beneficiary designation, you might have to look at the IRA agreement...........all those fine print words that apply in non-typical situations......the "default" situation where a beneficiary is deceased. If not specifically in the agreement, it may be that state law applies.......likely the state where the custodian's HQ located but a possibility that it may be the IRA owner's state.

 

[CaliKid]

Agree w/ sheehs1 with the same caveat. Besides looking at the beneficiary designation, you might have to look at the IRA agreement...........all those fine print words that apply in non-typical situations......the "default" situation where a beneficiary is deceased. If not specifically in the agreement, it may be that state law applies.......likely the state where the custodian's HQ located but a possibility that it may be the IRA owner's state.

"you might have to look at the IRA agreement." This is the key in my opinion. Get a copy of that and then talk to legal counsel. It's a tricky situation.

 

[audreyh1]

What about John Doe asking his Dad to remove him as a beneficiary in favor of his siblings?

 

[Texas Proud]

As you have found out, this is complex.... I would not rely on anybody's answer here as state laws are different... I would only rely on an estate attorney in your state...


It also matters how the designation is worded... what you think is an easy read might not be legally... as an example I will give one that I knew a little about... a lady wrote on an envelope (legal in Texas) that she leaves her estate to her son and her grand kids.... by the time I did tax work for the estate it had been in litigation for years...

Those words can mean... I leave 50% to my son and 50% to my grand kids, which would be split equally to all of them. Or it could mean, I leave my son and grand kids an equal share of my estate... Also, does it mean the grand kids she knew about or the illegitmate ones.... the estate was over $100 mill (in the early 80s), so it made a big difference...

 

[SecondCor521]

What about John Doe asking his Dad to remove him as a beneficiary in favor of his siblings?

Both John Doe and Dad would prefer that his portion would be divided equally among John Doe's three kids if John Doe doesn't want it.

Also, it would lose the stretch benefit of teenagers getting it instead of middle-aged siblings getting it.

Finally, John Doe's situation could change and he'd like to preserve the option of inheriting his portion normally (i.e., not to disclaim).

Thanks to everyone for the comments. Given the amount of money, John really should consult an estate attorney in his state.

 

[Walt34]

As you have found out, this is complex.... I would not rely on anybody's answer here as state laws are different... I would only rely on an estate attorney in your state...

Yes, what he said.

 

[pb4uski]

Wouldn't the easiest thing be for John Doe to ask Dad Doe to change his beneficiary designation replacing John Doe's 33.33% with 11.11% to each of John Doe's kids but keeping the 33.33% each to Jane Doe and Joan Doe?

If John changes his mind then Dad Doe can simply execute a new beneficiary designation.

 

[audreyh1]

Yeah.

 

[socca]

My Dad disclaimed part of his mother's estate. I don't recommend this approach if there are other options available.

 

[sheehs1]

My Dad disclaimed part of his mother's estate. I don't recommend this approach if there are other options available.

I am curious as to the reasons why. In my case both times I used it, it worked well and exactly as intended. And one of my reasons is the exact reason the OP stated John Doe was interested in.

I am just curious when your Dad used it, what happened? Was the outcome not what he thought it would be?

John Doe can have Dad Doe change his beneficiary designation to include the possibility of disclaiming and having assets go to his children presumably using the per stripes verbiage. That does not mean John DOE HAS to disclaim and gives him the option of either doing so or not doing so. Again it sounds like John Doe wants to keep his options open and this may fit the bill.

To actually invoke the "disclaim" one has to fill out paper work with the estate tax filing of Dad Doe. Regardless of how the beneficiary designation is worded, if it has per stripes in it, another step is required to actually Disclaim if John Doe still wants to do so. And if he chooses not to, he doesn't have to go thru that step.

Again...with the caveat of checking your own state laws...etc. etc. etc.

 

[SecondCor521]

Wouldn't the easiest thing be for John Doe to ask Dad Doe to change his beneficiary designation replacing John Doe's 33.33% with 11.11% to each of John Doe's kids but keeping the 33.33% each to Jane Doe and Joan Doe?

If John changes his mind then Dad Doe can simply execute a new beneficiary designation.

Easier only if John Doe is certain that he wants that to happen.

One risk with the above is if Dad Doe changes his beneficiary designation to Grandkid Doe x 3 @ 11.11% each, then becomes senile or is incapacitated for a year or two, then dies, and during that time John Doe's situation changes and he decides not to disclaim.

As sheehs1 inferred, John Doe wants to keep his options open. The "Jane Doe per stirpes @ 33.4%, Joan Doe per stirpes @ 33.3%, John Doe per stirpes @ 33.3%" designations seem to fit the bill, but he still should consult an attorney in his state. The amounts involved (plus the other assets involved in the estate) make it a reasonable idea to double check.

Thanks again to all for the continued comments and suggestions.

 

[Texas Proud]

I agree that if the outcome as stated is wanted then you have to put in per stirpes...

When we were setting up my mom's will that was one of the questions asked by the lawyer... if one of your kids dies before you, what do you want to happen to their share... mom said it should go to the remaining kids...

IMO, without the per stirpes the account will be split 50-50....

 

[Sunset]

....
John Doe is considering disclaiming his 33.3% portion of the Roth IRA that he would receive. If he does so, what happens to his 33.3% of the Roth IRA?

.....

Why ?
It seems to me, since it's a ROTH, that John could simply give the $$$ without any tax issues to who-ever he wanted after the death of the Father.

 

[pb4uski]

Why ?
It seems to me, since it's a ROTH, that John could simply give the $$$ without any tax issues to who-ever he wanted after the death of the Father.

True, but he wants his kids to get the benefit of tax-free growth that goes along with the Roth. How important that really is depends on John's kids' tax brackets and the amount involved.

 

[sheehs1]

The other consideration without knowing how the will/trust (if there is one) is written or if this is handle within the will/trust in another manner, is that in the event John Doe predeceases Dad Doe, "per stripes" ensures that 33.33% goes to John Doe's children.

 

[MooreBonds]

What John Doe is really after is to possibly disclaim the Roth IRA so that his 33.3% portion goes to his (now teen-aged) kids, and that his kids then get tax free income over their lifetimes. Since John Doe has enough money and this would result in stretching of income over a much longer period, it's something he might consider doing.

This can't happen directly with an IRA (since I don't believe you can 'gift' an IRA)....but, if the intent is to move assets to younger generations to enjoy longer growth, for non-retirement accounts, why not have John Doe simply inherit the funds, then turn around and gift them to the grandchild, using part of John Doe's estate tax exemption (currently about $5.45 million, +/-)?

And, even if the funds are in a ROTH IRA, John Doe could simply withdraw 100% of the funds from the ROTH IRA as soon as the beneficiary account is transferred to him, and then (again) use part of John Doe's estate exemption by gifting the funds to John Doe's son (the teenager).

I realize that you are then taking the funds out of the ROTH IRA and are losing tax-exempt growth....but at least you are able to completely avoid the issues of having parental changes later, issues with disclaiming and a sibling trying to have that added back to the estate vs going to John Doe's child (depending on your state's inheritance laws and how the IRA was listed regarding beneficiaries, etc.). In a tax-efficient investment - especially with qualified dividends taxed at 15% (or possibly even 0% if son's in a low enough tax bracket), you won't owe much taxes anyway compared to a ROTH.

Only other issue is if the teenage son wants to look for financial aid for college. Some extremely high % of a student's personal assets are expected to be used for college tuition, so any appreciable amount the teenage son inherits in an IRA or other manner would greatly reduce any financial aid the child may otherwise qualify for.

 

[pb4uski]

Actually an easy, controllable option would be for John Doe to leave things as is and when he inherits the Roth IRA he can always annually give his kids a gift for the maximum annual Roth contribution and they can fund their own Roth IRAs and the kids ultimately get the Roth money without having to use their own cash flow.

One benefit over the other options being considered is that with this John can do a portion if his situation is such that he is uncomfortable doing the whole thing... whereas the disclaimer is probably all or nothing.

 

[MooreBonds]

The other consideration without knowing how the will/trust (if there is one) is written or if this is handle within the will/trust in another manner, is that in the event John Doe predeceases Dad Doe, "per stripes" ensures that 33.33% goes to John Doe's children.

even if there is a will or trust, the IRA must list the trust as the primary beneficiary 100%. And even then, it would have to be titled correctly, such as "Grandpa Joe's Revocable living trust dated 1/1/2001, and any amendments thereto". And even furthermore - some companies may consider that any trust which is listed as the beneficiary must receive the assets of the IRA (considered a withdrawal, and taxable as income), and then disbursed outside of the IRA to the trust's beneficiaries. The reason for this is that some brokers/financial institutions may consider the trust to be a separate legal entity as a beneficiary (just like if you listed a charitable organization as a beneficiary), since it's not a person. The money can only be transferred once to a new entity IRA from the original IRA account - except for the death of the heir, you may not be able to transfer an inherited IRA multiple times from one legal entity (a revocable trust after death) to another legal entity (John Doe), I think. Some brokers/institiutions may allow you to do this, but some may not.

 

[Texas Proud]

Actually an easy, controllable option would be for John Doe to leave things as is and when he inherits the Roth IRA he can always annually give his kids a gift for the maximum annual Roth contribution and they can fund their own Roth IRAs and the kids ultimately get the Roth money without having to use their own cash flow.

One benefit over the other options being considered is that with this John can do a portion if his situation is such that he is uncomfortable doing the whole thing... whereas the disclaimer is probably all or nothing.

+1.... this thought was just running through my head when reading last pages posts...

The only problem is if the amount in the current ROTH is pretty big... it might take a bit of time to fully gift.... if you ever could.....

 

[sheehs1]

even if there is a will or trust, the IRA must list the trust as the primary beneficiary 100%. And even then, it would have to be titled correctly, such as "Grandpa Joe's Revocable living trust dated 1/1/2001, and any amendments thereto". And even furthermore - some companies may consider that any trust which is listed as the beneficiary must receive the assets of the IRA (considered a withdrawal, and taxable as income), and then disbursed outside of the IRA to the trust's beneficiaries. The reason for this is that some brokers/financial institutions may consider the trust to be a separate legal entity as a beneficiary (just like if you listed a charitable organization as a beneficiary), since it's not a person. The money can only be transferred once to a new entity IRA from the original IRA account - except for the death of the heir, you may not be able to transfer an inherited IRA multiple times from one legal entity (a revocable trust after death) to another legal entity (John Doe), I think. Some brokers/institiutions may allow you to do this, but some may not.

I think we may all be loosing the original point to the OPS question. I may have inadvertently added a complicated layer to this discussion by mentioning a will or trust.

If Dad DOE retitles his ROTH IRA beneficiary designation to 33.33% per stripes for each of his children and if something happens and John Doe predeceases his Dad, then at Dad Does' passing, John Doe's children will get his original 1/3rd. (unless Dad Doe changes the beneficiary again).

A direct beneficiary designation of 33.33% to each of Dad Does' children "per stripes" typically overrides anything in a will or trust. An IRA does not have to have a beneficiary designation leaving it to a Trust or THE TRUST unless the ROTH IRA is meant to be routed thru the trust. It doesn't have to route that way.

I think the OP has it right, pending John Doe's checking with an estate attorney. Dad Doe's ROTH IRA designation should read 1/3rd to each child "per stirpes". That gives John Doe the right to disclaim or not disclaim and in the event of his predeceasing his Dad, it would go to his children.

Changing a beneficiary designation is the easy part.

 

[socca]

I am just curious when your Dad used it, what happened? Was the outcome not what he thought it would be?

My Dad was also co-executor of his mother's estate. The disclaimer just added more complexity to the settlement of an already complex estate. The result was mostly as he intended. All else being equal, I prefer to keep things simple.