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  • Barry Boscoe

Retirement Planning Spousal Rollover

Your plan is to leave your retirement benefits to your spouse upon your death, assuming she will do something with them. Her choices – roll them over to her own retirement plan in an effort to continue the maximum tax deferral, disclaim the benefits so they can go directly to your children, or a Bypass Trust as the contingent beneficiary. What happens if the surviving spouse is unable or does not accomplish one of these tasks? The overall strategy of leaving your retirement benefits to your surviving spouse, assuming she will roll them over into her own IRA, works exceedingly well in most cases. This type of plan will provide financial support to the spouse and income tax deferral allowing the plan to remain almost intact until the surviving spouse is in his or her late 80s. The IRS requires the use of the Uniform Lifetime Table (ULT) to be used in determining the Minimum Required Distributions (MRDs) beginning at age 70 ½. These tables have been designed so that the retirement plan will not drop in value below its original 70 ½ valuation until a spouse reaches age 89, provided withdrawals are no greater than the MRDs and the plan has earned at least 6% or better. On the other hand, if the participant bequeaths his benefits to a Qualified Terminable Interest Property (QTIP) Trust for his spouse’s benefit, which would provide income for life to the spouse with the balance going to the participant’s children, the MRD, which will flow from the IRA to the trust, must begin the year after the participant’s death as opposed to when the spouse reaches age 70 ½. In addition to that, the MRDs will be computed using the spouse’s single life expectancy as opposed to the ULT over the joint life expectancy of the spouse and former participant. This will result in a much larger MRD and a complete depletion of the IRA assets by the time the spouse reaches her late 80s. The advantage of the spousal rollover plan is the potentially longer income tax deferral after the spouse’s death for the benefit of the children as well as during her lifetime. On the other hand, if the retirement benefits were left to a trust for the benefit of the spouse, and if the spouse should die prematurely, then the remainder amount must continue to be paid out over what was the remaining spouse’s original life expectancy, providing no possibility for the child to stretch out the payment over the child’s lifetime. The risk of leaving retirement benefits outright to the spouse is the possibility that the surviving spouse is unable to complete the rollover and dies while still holding the plan benefits as the participant’s beneficiary as opposed to having transferred the plan benefits into the spouse’s name. If this should occur, the income tax deferral options are dramatically reduced, albeit for an exception or two in which both spouses died prior to Dec. 31 of the year the participant reached age 70 ½, or the plan documents specified the successor beneficiary to be the child. However, the usual result is the Application Distribution Period (ADP) for the benefit of the child will be the remaining surviving spouse’s single life expectancy, or even worse, the payout must be within five years after the surviving spouse’s death. Possible solutions to this dilemma are: Charitable Remainder TrustNaming a successor beneficiaryRequiring a minimal survival periodCreating a durable power of attorney If the desire of the participant is to have a charity be the contingent beneficiary rather than an individual, then leaving the benefits to a Charitable Remainder Trust (CRT) for the spouse’s lifetime will eliminate the income taxes on the benefits. This solution will also limit the spouse’s access during his or her life to the payments from the CRT, and as such is not always appropriate for all clients. Naming a successor beneficiary, often times not allowed by IRA providers, will provide that the successor beneficiary will be treated as the spouse’s designated beneficiary for minimum distribution purposes. The result is a long term life expectancy payout. This solution works if the participant has not reached age 70 ½ and names the spouse as the successor beneficiary to take the benefits if she survives the participant and then dies before the end of the year in which the participant would have reached 70 ½. Additionally, this will work if the successor beneficiary has not named her own successor. This solution is of little value once the spouse lives past the year in which the participant would have reached age 70 ½ due to the fact that the ADP on the death of the surviving spouse after that point would be the surviving spouse’s single life expectancy. Another solution which will reduce the risk of allowing the surviving spouse to inherit the participant’s benefits when the spouses’ deaths occur as the result of a common disaster is to include a requirement in the beneficiary designation form that the spouse must live a certain period of time after the death of the participant. The use of a durable power of attorney is a good stop gap measure and should be used by the surviving spouse while the participant is still living. The surviving spouse signs a durable power of attorney directing the attorney to rollover the benefits inherited from the participant and instructs the attorney who the beneficiary should be. This will come in very handy if the surviving spouse is incapacitated when the participant dies. A good estate plan will always anticipate the possibility of simultaneous or close-in-time deaths and must take whatever steps necessary to reduce the likelihood of adverse results.

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