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Sunday, May 5, 2024
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Case Studies |
Martha's New Vows and New IRA Beneficiaries
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Case:
Martha Smith was a true delight to the people who knew her. A theater performer for over 50 years, Martha definitely knew how to entertain. Even at the age of 85, she continued to amaze people with her abundant energy and love for life. In fact, when she had moved into an assisted-living facility at age 78, she organized a dinner theater production with the local residents. Their performances received wonderful praise from family and employees alike. Martha had truly become a glorious part of her new home.
The only dark time for Martha was three years ago when her husband, Kyle, passed away. Not surprisingly, the loss devastated Martha, especially considering that Kyle and Martha had been married for over 55 years. However, with time and love from family, Martha regained her spirit and her love for life. Wonderfully, she also fell in love again. The lucky man was Tom, 73, who was director of the dinner theater. Martha and Tom enjoyed their newfound relationship, and, soon thereafter, decided to marry.
A short time after their marriage, on the advice of family, Martha reviewed her estate plan. At that time her estate was worth about $600,000 and her plan was quite straightforward. Martha left her home and stocks valued at $300,000 to her children and a $100,000 bequest to the assisted-living facility. The only remaining asset was her $200,000 IRA, from which she was taking mandatory distributions. She planned for her new husband Tom to receive the IRA when she passed away if he was still living. If Tom was not still living at her death, she desired that the IRA would pass to the assisted-living facility. Currently, the designated beneficiary was Martha's late husband, Kyle.
Question:
How can Martha make Tom her designated beneficiary and charity her contingent beneficiary? How will this change affect her mandatory distributions from her IRA?
Solution:
Martha can request a change of beneficiary form from her IRA trustee or custodian. Upon receipt of the form, she merely has to list Tom as the primary beneficiary. As for the assisted-living facility, Martha will simply list it as the secondary or contingent beneficiary. Once the form is completed, Martha must mail the new information back to her IRA trustee or custodian. Consequently, when Martha passes away, her instructions regarding the IRA will be followed and the appropriate beneficiary will receive the funds. It is important to note that Martha's will does not control the disposition of her IRA.
With respect to Martha's mandatory distributions, naming Tom as the beneficiary will affect the required distribution each year. Under the 2001 IRA Rules, the majority of IRA owners calculate their minimum required distributions ("MRD") using a uniform table. However, there is a special rule when an IRA owner names his or her spouse as sole beneficiary and that named spouse is more than 10 years younger than the IRA owner. In that case, the actual two-life actuarial table will apply, instead of the uniform table. Here, Martha is 85 and Tom is 73. Because there is a 12-year age difference, the special rule will apply.
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