Leaving Roth IRA to minors

We now have an estate plan without living trusts. I understand that all beneficiaried accounts would go outside the estate (bypass the will and probate), and in our case, nearly every liquid asset qualifies. Specifically, our brokerage and bank accounts are TOD, our Roth IRAs, 403bs, etc have beneficiaries, and our life insurance has beneficaries.

We have very young minor children and in the event of one of our death’s, we want to have 2/3 of assets go to the kids (in a testamentary trust) and 1/3 to surviving spouse. This will be enough for the surviving spouse to live on for many years and prevents the loss of any marriage exclusion (not a problem with the current $5 million federal exemption, but is already a problem with our state exemption of only $2 million).

Question 1: It seems it would be best to make the kids beneficiaries of the Roth IRAs and the 403bs, etc., and have the insurance proceeds split to reflect our desired 1/3 – 2/3 distribution. This would allow our very young kids to stretch the distributions from those tax-protected accounts over years (in fact, nearly 3/4 of a century). This would be better than making the surviving spouse the beneficiary, who then gets only 40 or so years to stretch the withdrawals. I understand there is no tax consequence to making my kids beneficiaries instead of my wife, though in some jurisdictions (including my own), my wife must agree to the plan. Do I have this right? Do you agree this is the right thing to do?

Question 2: My attorney suggested that one way to reduce complexity/confusion would be to make our estate the beneficiary of our Roths, our 403bs, and our life insurance. I am concerned that would plunk everything into probate, which seems like a step backwards. He didn’t suggest it would be a good move, only easier. Right now our probatable estate would be less than $500,000, and probate in our state is not particularly time-consuming or expensive, so we can live with that. However, if we put all these accounts and insurances into probate, the estate will be quite sizeable and that could get slow and expensive. Is there any reason to make the estate the beneficiary of any of these accounts or insurance policies? Or should I continue with the plan of making the kids and the surviving spouse the beneficiary of the various accounts/insurance policies?

Question 3: Say my wife inherits my Roth IRA at age 50, and my children are teenagers. Then shortly after my death, she dies. Can the kids inherit the Roth IRAs and now stretch the withdrawals over their lifetimes? What about the 403b, 401a, 457b, 401k accounts? In other words, can the IRAs become inherited IRAs twice?

Thank you so much.



We really can’t properly address entire estate plans in a forum like this, but will make some general comments that you may wish to consider with your estate attorney:

1) Correct – accounts with beneficiary designations are not part of the probate estate and trump any conflicts resulting from a will
2) It is NOT a good idea to leave retirement accounts directly to your estate. If you pass prior to 70.5, the 5 year rule will apply unless the spouse is legally allowed to do a rollover, and generally that is more difficult if the surviving spouse is not the sole beneficiary.
3) Your Q 3: Probably a good idea to do this. Your spouse should assume ownership of the Roth and name the kids as beneficiaries. If she passes after this is done, the kids can stretch the Roth over their own life expectancies. For the employer accounts, your wife could roll them over to IRAs in her name, either Roth or traditional, and if she needs to take distributions prior to 59.5, she can roll them over to an inherited IRA. From the inherited IRA her distributions are taxable but penalty free. She would name the kids as successor beneficiaries on the inherited IRAs. If she were to pass prior to the year you would have reached 70.5, the inherited IRAs are treated as if she owned them with respect to the kids. That means the kids would be treated as designated beneficiaries and could take their RMDs over their own life expectancies rather than having to continue based on your wife’s age. In the year prior to when you would have reached 70.5, she would then need to assume ownership of these inherited IRAs to protect the stretch for the kids. So yes, your employer plans could be retained as inherited, transferred to an IRA as an inherited IRA which the kids would eventually inherit. I think that is what you meant by “inherited twice”.
4) Q 2: Doing what is easiest can come at a high price and naming your estate certainly falls in that category. Perhaps you should consider an estate attorney or at least a different attorney to consult with on these matters.
5) In many cases, the permanent separation of 2/3 of your estate to the kids is only done if there is serious concern over how your wife would handle the funds or who she would leave the funds to. Even in second and third marriages, a trust is set up to provide lifetime income to the spouse and the kids of the first spouse get what is left. If you have these concerns, perhaps you should consider a qualified trust as beneficiary on these accounts. Leaving enough to your spouse “for many years” may come up short given our recent tendency of financial meltdowns every few years, potential high inflation and/or dollar devaluation. Granted, it costs nothing to review your setup every year or two or to make changes as the situation changes and the kids grow older.
6) Your Q 1: Retirement plan assets left directly to the kids will require RMDs to start the year after your death. Even though they will be a small % of the balance, there is still an annual RMD that grows with time. If you wife assumes ownerhip of IRA rollovers from the employer plans, she does not have to start RMDs until she is 70.5, and never in the case of a Roth IRA. And if she maintains the IRAs as inherited she does not have to start RMDs until YOU would have been 70.5, yet she can tap the accounts without penalty. This is potentially a greater total stretch for the funds than leaving them to the kids. The other side of that coin is there is no limit on the amount she could take out if she wanted to for whatever reason. Even if you named the kids, at the age of majority in your state, they would also have unlimited access to funds UNLESS you left the accounts to a trust that limited what they can take out.
7) Common disaster exposure – check your state law regarding the Uniform Simultaneous Death Act. That Act determines the number of hours in a common disaster where the beneficiary is deemed to pre decease the owner. If the second to die did not survive for the stated time (eg 72 hours), the funds would go directly to the contingent beneficiaries. But note that the plan agreement could supercede that or in some cases IRA custodians will allow you to customize your beneficiary survival period.
8) Current 2011-2012 version of the federal estate tax allows for a carryover of the first spouse’s unused 5mm exemption to the second spouse. That’s up to 10mm in total, and the first spouse’s exemption is therefore not forfeited if not used. While this would probably continue in some form, recent Congressional dysfunction does not guarantee anything, and estate exemptions are not something that should be redone every couple years. Perhaps common sense will eventually prevail. But even if you opt for a detailed trust, you will still have to revisit it and revise it for any number of reasons. Then of course your state only has a 2mm exemption and you need to determine how that applies in relation to federal law. The recent federal law changes probably do not affect the state.

Consider the above as general comments that may not necessarily apply to your situation.



First let me say thank you for such a detailed response. I’ll have to reread it several times for it all to sink in. In the meantime, let me respond to a couple of points.

In another thread, someone asks about “inheriting a beneficiary IRA” and the response was that the death of the beneficary has no impact on the RMDs. But it sounds like you are saying it is different because a spouse inheriting an IRA has different implications than anyone else inheriting an IRA?

http://www.irahelp.com/forum/viewtopic.php?f=1&t=6620

We are not concerned about federal estate taxes at any point in the near future, especially with the free spousal exemption preserved. However, we are already well over our state estate tax exemption, which is the reason for wanting the assets left in pieces to the kids and wife. The issue is not my wife spending down the money; the issue is taxes. Our will sets up testamentary trusts for the kids such that assets are distributed at ages 21, 25, and 31. However, if we don’t leave the IRAs and workplace accounts to the estate it sounds like the trust will not be in force (I realize this is an estate attorney question – I have posed the question to him and await his response – and yes, he is an estate attorney)?

Overall it sounds like the best bet might be to leave the Roth IRAs, 403bs, 401as, 457bs to my wife, which she then leaves to the kids on her death; and the taxable accounts to the estate, which would then go through the trust. Life insurance left to the estate part of which my wife can then disclaim (per the will) to the kids so as not to exceed the state tax exemption. That would prevent my kids from having to take premature RMDs from the accounts; and allow the estate to control the distribution of taxable assets and insurance proceeds via the testamentary trust. I realize that you can’t give specific estate advice but is this general idea sounding correct?

I will reread your reply at home after work tonight. Thank you again,



Right, the death of a non spouse IRA beneficiary does not change the RMD divisors from those that applied to the first beneficiary, ie there is no additional stretch. This is also true of an IRA inherited from a spousal beneficiary who does not assume ownership after the year the original owner would have reached 70.5. But once a surviving spouse assumes ownership, the IRA is treated as if they were the original owner all along, and the RMDs reset for the surviving spouse and their designated beneficiaries.

You can set up testamentary trusts, but when the estate is named as the retirement plan beneficiary, the stretching benefits for beneficiaries is lost vrs naming a qualified trust as the direct beneficiary on these plans. A qualified trust allows the stretch to be based on the oldest beneficiary of the trust, so if the kids are close in age, the younger ones are not giving up much. At all costs you should avoid the 5 year rule which applies when the estate is the beneficiary, either the named beneficiary or the default beneficiary under the agreement, and the account owner dies prior to their required beginning date, which is April 1st of the year following the year the owner reaches 70.5.

With regard to disclaimers, a qualified disclaimer can be executed on any of these plans, the will does not have to specify it. The disclaimer has to be executed within 9 months of the date of death, and the disclaiming beneficiary is then treated as if they pre deceased the owner and the assets then go to the contingent beneficiaries. A disclaimer can be made for part of these accounts, it is not an all or nothing requirement.

Note that RMDs issued to a trust and held in the trust rather than being passed through to the beneficiaries currently, are taxed at much higher rates than individuals are. Therefore, there is a tax cost to holding the RMDs or other distributions in the trust. On the other hand, a trust can provide creditor protection for the beneficiaries including spousal claimants.



There are several things that come to mind.

1. By leaving the retirement benefits to the spouse, the spouse can roll them over, possibly convert to a Roth, and name new beneficiaries, thus potentially obtaining a much longer stretchout.

2. Leaving 2/3 for the children seems inconsistent with the statement that the concern is taxes rather than the spouse. You might consider a credit shelter (bypass) trust for the nonretirement assets, to shelter up to either the Federal exempt amount or the state exempt amount. You can also leave the decision to your executors as to how much will go to the marital share and how much to the credit shelter trust. In this way, these assets will not be included in the spouse’s estate, but will be available to the spouse if he/she ever needs them. The spouse can also have whatever degree of control over the credit shelter trust that you think is appropriate.

3. The reason not to leave the life insurance and retirement benefits to the estate has nothing to do with probating the Will. In most cases, probating a Will is not particularly difficult, burdensome or expensive. In any event, the effort to probate the Will is the same regardless of the size of the estate. But leaving the retirement benefits to the estate will likely destroy the stretchout, and leaving either the retirement benefits or the life insurance to the estate will expose these assets to potential creditors.

4. By requiring that the children’s shares be paid out to them at 21, 25 and 31 (or any other age(s)), the children’s inheritances will be included in their estates for estate tax purposes, and will be subject to their potential creditors (including spouses). Instead (except where the amount involved is too small to warrant administering a trust), our clients provide lifetime trusts for their children, with each child gaining effective control over his/her trust at the desired age(s).

5. Having beneficiaries on nonretirement assets will likely destroy the estate plan.

6. If you are concerned about state estate taxes, the amount involved is sufficient to warrant consulting with an attorney more knowledgeable in this area, as Alan suggested.

7. Since you said that the state exempt amount is $2 million, I’m guessing you’re in Connecticut, Illinois or Washington State. If you’re in Washington State, there may be community property issues.



many more issues to consider.

yes we are in WA, a community property state. Therefore the 1/3-2/3 split is because 1/3 of my estate plus wife’s share of community property is more than enough for her to support herself for 20-30 years or more. 2/3 for kids excludes 529s which are substantially funded.

re: kids’ estate taxes I suppose we have not thought that far ahead. To some extent, we would say that will be their problem and not ours, but if our assets increase that it does become our problem we can solve it then.

as I understand our will, it has 2 trusts. The first is called a ‘disclaimer trust’ which my wife can use to support any of her needs then the remainder to the kids upon her death; she can disclaim any amount that would take her over, for example, the state exemption. The second is the testamentary trust for the kids.

can you describe how what bsteiner calls a “lifetime trust” differs from the disclaimer trust we have, or a revocable (living) trust which we don’t?

at this point it sounds like leaving Roth IRA and employer accounts to surviving spouse as primary beneficiary is the right thing to do as this gives greatest stretch possibilities over 2 generations. Contingent beneficiary is the kids, however, it sounds like you are saying they will get it all at age of majority regardless of testamentary trust? Re: life insurance, should leave to estate as it is the largest and most liquid amount and spouse needs to have the ability to disclaim part and/or kids need to have in testamentary trust to avoid too much money at too young age.

Roths are $250k, employer accounts are $450k, taxable are $400k, 529 are $150k, total life insurance are $2,400k.

Testamentary trust is absolutely critical, do not want kids obtaining control of $4,000k at age 18, it would be a huge disservice to them.

Thank you for the excellent feedback and help, bsteiner and alan-oniras.



By lifetime trusts for children, I meant trusts for each child that did not require distributions at specified ages. Instead, no distributions would be required, but each child would get to effectively control his/her trust upon reaching a specified age. In other words, upon reaching a specified age, each child could become a trustee of his/her trust, could remove and replace his/her co-trustee (provided the replacement trustee is not a close relative or subordinate employee), and could appoint the trust assets, either during lifetime or by Will, to anyone he/she wants (except the child or his/her estate or creditors).

Please note that while a forum such as this is useful for providing general information, for specific advice the original poster might want to consult with an attorney familiar with this area of law, who can provide specific advice based upon the facts of the situation and the person’s objectives.



if I die first and leave my 401a, 403b, and 457b to my wife, what are her options with those accounts? I have read this is governed by plan documents. thank you.



She can roll them over to a traditional or Roth IRA in any combination, assume ownership of the IRAs and name her own beneficiaries for the IRA. The 457b must be a govt plan to be eligible for rollover. There are no plan documents that do not offer this choice. Her beneficiaries would get to stretch RMDs over their life expectancies, each individually if they establish separate accounts by the deadline.

If she is not yet 59.5, she can roll them over to an inherited IRA instead and take distributions from the inherited IRA without penalty, then assume ownership at 59.5. Or she could also maintain them in the inherited IRA until the year you would have reached 70.5 if she wanted to avoid RMDs as a beneficiary for as long as possible. These choices vary in benefit according to your age difference and your age at death.

She could also take beneficiary distributions directly from the plans without penalty, although there are few reasons to choose this approach.



Alan,

She is 36 and I am 37 so assume this occurs before 59.5. So she would rollover to an inherited IRA and assuming she does not need the money, could leave it there until RMDs begin? This is for the 403b and 401a. And then she could leave the kids as beneficiaries who could then stretch out withdrawals over their expected lifetimes once she dies?

For the 457b, it is a non-gov non-profit, so does that mean it is not eligible for rollover? Then she would be required to distribute it all in a lump sum?

thank you very much.



Well, if she was totally sure she would not need the money, she would just roll it over to her own IRA (ex 457). Another possibility is to roll over part of it to her own IRA and transfer the balance to an inherited IRA just in case she finds that she would need funds prior to 59.5. But also consider that a non govt 457 plan cannot be rolled over (except to another such plan), so these funds in a taxable account would provide additional protection against needing any IRA money prior to 59.5.

Since you are not younger than she is, there is no benefit to keeping the funds in an inherited IRA for the other purpose of shielding her from RMDs at 70.5 were she to assume ownership. That leaves the only possible benefit of the inherited IRA format to the situation where she will need IRA funds prior to 59.5, despite having access to the 457b funds in a taxable account.

As for the 457, the distribution options are plan dependent. Even an installment or 5 year rollout would eliminate the one time tax bill of a lump sum distribution. Therefore, you need to find out how soon she would have to take the distribution in order to do some tax planning to try to minimize other income in those years to keep the tax bracket down.

The 457 does allow you to double up on pre tax deferrals with qualified plans, eg 16,500 to each. However, the lack of ERISA creditor protection and rollover restrictions are the trade offs.

Here is the latest portability chart, and portability options have expanded considerably in recent years, just not for non govt 457 plans:
http://www.mhco.com/Library/Articles/2008/ARoll_Chart_011008.html



The 457 does not have enough money to really worry about, other than to optimize the listed beneficiary. It sounds like in this case, leaving to the estate might be best because neither my wife nor my children can stretch it out over their lifetime regardless. If we leave it to the estate, at least it will get distributed per our will and testamentary trust instructions.

I keep confusing the pros/cons of my wife taking my IRA or employer accounts into her own IRA vs transferring it into an “inherited” IRA. Is it that an inherited IRA (by a spouse) can take distributions prior to age 59.5 without penalty? or if I were younger than her, to allow her to delay RMDs until my 70.5 rather than hers?



Yes, those two reasons you listed are the only benefits of a surviving spouse maintaining the IRA in inherited form rather than assuming ownership. Maintaining the IRA as inherited also has it’s risks if ownership is not assumed or the IRA rolled over by various critical dates.

For example, if the surviving spouse forgot to change it, once RMDs did begin, they would be considerably higher than those of an IRA owner. Further, the successor beneficiaries (children) lose the ability to stretch RMDs over their lifetime once the surviving spouse must take RMDs as a beneficiary. They would have to continue to RMD schedule of the surviving spouse instead of getting a new stretch.

This is NOT a problem if your spouse maintained the IRA as inherited until 59.5 in order to get penalty free distributions since she is NOT subject to RMDs during this period. But if the IRA was still in inherited form when she reached 69, she would have to start RMDs because you would have reached 70.5, and that is when the children’s stretch is lost were she to pass before assuming ownership.

With respect to the 457, leaving it to your estate will subject it to probate and it will still be passed through and taxable to the beneficiaries creating a high income year for them. You might as well just leave it directly to them even without a stretch. Since estate and trust tax rates are higher than individuals if the trust were to retain the distribution, the only benefit there would be potential creditor protection or protection from spendthrift tendencies of the beneficiaries, but at a higher loss to taxes.



the spendthrift tendency is the issue, since the children are minors and would receive the money at age 18. It is less than $50,000 so at the end of day it doesn’t make a huge difference what we do with it. Thank you again, very much, for your help.



If you are going to leave a roth IRA to a minor you should continue investing it until they reach 18. Doing nothing with it will just be a waste of money. I would also recommend teaching them about investing and [url=http://www.ioausa.com/%5Dinsurance%5B/url%5D.



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