This family should consider a qualified disclaimer.
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Question: Father died in December 2009 at age 66, leaving an IRA (worth $1 million) and a 401(k) plan (worth $500,000). Both were payable to his spouse Mother as primary beneficiary, with their children Son and Daughter (age 38 and 40) as contingent beneficiaries.
Mother planned to roll over these benefits to her own IRA, but she also died (at age 71) in January 2010, before having done anything with either account. Her will leaves everything to Son and Daughter equally.
Father's total estate, including these retirement benefits, was worth about $4 million. He left everything to Mother. Mother's own assets, not counting the inheritance from Father, total about $1.5 million.
Since Mother was planning to roll over these plans left to her by Father, can her executor complete the rollover on her behalf? Is there a way to preserve the "stretch" payout for the retirement benefits, or otherwise save taxes? What happens to Father's retirement plans now that the beneficiary survived him but then died before withdrawing the money? Daughter and Son are co-executors of both estates.
Natalie: For both estate tax and income tax reasons, this family should consider a qualified disclaimer.
First, let's look at the special problems that are created when a beneficiary inherits a retirement plan then dies very shortly thereafter. That creates two issues: Who is entitled to the money, now that the beneficiary has died? And, what is the minimum distribution period applicable to the benefits?
Starting with the first question, some people assume that, when a primary beneficiary dies shortly after the participant, the contingent beneficiary becomes entitled to the money. That is actually almost never true. The contingent beneficiary is entitled to the benefits ONLY if the primary beneficiary fails to survive the participant. Here, Mother survived Father, so Mother became entitled to the benefits. The contingent beneficiaries' rights "disappeared" because the primary beneficiary survived the participant and became the sole owner (as beneficiary) of the accounts. The ONLY way to change that is with a disclaimer--we'll discuss that below.