A beneficiary of a qualified retirement plan account or an IRA who inherits that account from his or her spouse or a relative may disclaim their interest in that account thereby passing it on to contingent beneficiaries or next-in-line beneficiaries. Once made, the disclaimer is irrevocable; effectively, it takes the beneficiary out of the picture.
When a disclaimer is typically used?
• Beneficiary does not want/need the funds because they have sufficient assets to support their needs;
• Beneficiary wants to pass the inherited assets to contingent or next-in-line beneficiaries;
• Beneficiary has a large estate and wishes to keep the inherited asset outside to mitigate or avoid tax exposure at death by expediting the transfer of that asset.
How much can be disclaimed?
A beneficiary may choose to disclaim either the whole account balance or a part of the account’s value. For example, a beneficiary can disclaim 1/4 of a $1M IRA account and pass the remainder to the contingent or next-in-line beneficiaries.
When should a disclaimer be made?
A disclaimer must be filed within nine months of the account owner’s death and before the disclaimed assets are accepted. The IRS issued a ruling which permits the beneficiary who inherits an IRA disclaim it even after taking a required minimum distribution for the year of the account owner’s death if one had not been taken for that year. This ruling allows account beneficiaries to take the year-of-death RMD without jeopardizing an opportunity to disclaim the benefit later, if deemed appropriate.
What are the requirements for the disclaimer?
There are eight conditions for a disclaimer to be valid:
- This disclaimer must be made before the beneficiary accepts or uses the disclaimed benefit.
- The individual disclaiming the benefit may not receive any compensation for the disclaimer.
- The disclaimer must be in writing and must be signed by the individual disclaiming the benefit.
- The disclaimer must contain an irrevocable and unqualified refusal to accept the benefit.
- The individual disclaiming the benefit may not give any direction as to recipient of the benefit
- The disclaimer must be delivered to the trustee, custodian, insurer, or plan administrator
- The disclaimer must be made no later than nine months after the later of: a. The date of death or b. The date the beneficiary attains age 21.
- The disclaimer must be in line with applicable state laws.
What are the tax consequences of a disclaimer?
If a beneficiary makes a valid disclaimer, the disclaimed benefit will be excluded from that individual’s estate for federal estate tax purposes and from that individual’s income for federal income tax purposes. Many states have a similar rule for state estate or inheritance tax purposes.
Use in Stretch IRAs
If the primary beneficiary disclaims an IRA, then the inheritance will pass to the next-in-line beneficiary or the contingent beneficiary. The younger beneficiaries then will take the minimum required distributions based on their longer life expectancy thus expanding its longevity possibly across multiple generations. The longevity of the stretch IRA and the amount its beneficiaries will receive generally depends on account investment performance, distribution frequency, amounts, and the duration of time the funds are invested.
Use in Fixing a Wrong Beneficiary Designation
Sometimes a disclaimer may be used to correct a beneficiary designation which was not updated in line with the wishes of the deceased. Consider this example: John participation in his company’s SIMPLE IRA plan. In the early years of his participation, he was single and therefore named his parents as beneficiaries. A few years later, John married Sara. Shortly after, John passed away. John’s parents believe that John’s intention was for his wife to be the beneficiary of his IRA. Therefore, they file a disclaimer with the IRA custodian. Although they can’t directly control who gets the benefit, the IRA’s default provision together with the state’s intestacy law will result in John’s wife getting the benefit. Disclaimer helps align beneficiary designation with the deceased’s intent.
First Allied Retirement Services developed a variety of tools, reports, and materials to assist you in effective communication about these and other important retirement topics. The rules are complex and to succeed you need to either become an expert or align yourself with the right partner. We are available to be an extension of your team. Retirement Services consultants are ready to partner with you in presenting solutions to your clients and prospects. But we don’t stop there; we help you implement and maintain the plan in partnership with nationally recognized record keeping vendors to offer a complete plan solution. You can reach us at (888) 926-0600 or via email to firstname.lastname@example.org.