NC Case Law: PLR IRA Beneficiary, No Do Over

Headline: In PLR 201628004 (July 8, 2016), the IRS ruled that a state court order changing a decedent’s IRA beneficiary after the decedent’s death (to cure a mistake) did not create a designated beneficiary under Code Section 401(a)(9).

Yikes…that sounds boring even to me. Yawn-o-rama. But most of us have retirement accounts. And if you do, this is actually very important.

So here is what happened: the decedent (wonderful word, decedent…so let’s call him Bob) had an IRA. In fact, Bob had two IRAs that named three different trusts as beneficiaries. Bob had the IRAs at a firm where there was a financial advisor that Bob liked and with whom he had a relationship. When Bob’s financial advisor changed firms, Bob took his two IRAs to the new firm (so that he could stay with the financial advisor). The paperwork that Bob signed to accomplish this designated Bob’s estate as beneficiary instead of the trusts. Everyone involved admits that Bob did not intend to change the beneficiaries, only to move the accounts.

When Bob died, the payment of the IRA proceeds into the Estate rather than the trusts presented numerous problems, not the least of which was a large tax bill. This was so because an estate cannot be a designated beneficiary for ‘tax stretch’ purposes. Designated beneficiary must be either an individual or one of certain types of trusts. The trusts Bob had established and had originally named as beneficiaries would have qualified as designated beneficiaries. So Bob’s heirs went to court and got an order paying the IRA benefits to the trusts as originally planned (which, again, would be designated beneficiaries under the applicable rule and so save the tax $). Some problems solved—no doubt for a considerable fee. But that still left the tax bill. And when presented with the question (trying to avoid paying the tax), the IRS ruled that the state court could not change the beneficiary for federal tax purposes, so the tax bill would be calculated as if the estate was the beneficiary.

While this was surely disappointing for Bob’s family, this was not a surprising ruling. And it reinforces what we tell our clients all the time—you can’t say it too often: It is CRITICAL that you check your beneficiary designations, and that they be what you want them to be, because there is no do-over. At least as to taxes…