Estate Planning for a Marital Property
Interest in IRAs
by Andrew J. Willms
isconsin's
Marital Property Act presents tough questions to estate planning
attorneys. Does a married person have a marital property interest in the
spouse's IRA? If so, can the marital property interest be used to fund
the spouse's unified credit if the spouse dies first? Can the pre-tax
growth of the spouse's marital property interest in the IRA be preserved
after his or her death?
The Scenario
Suppose your client is a married Wisconsin resident and has funded an
IRA by a rollover of his account balance with an employer-sponsored
qualified plan (the "rollover IRA"). Your client (for simplicity, called
the "account owner" even though both spouses may own a marital property
interest in the account) and his spouse are both age 70. The account
owner's spouse also has established her own IRA (the "spousal IRA").
However, the rollover IRA represents the vast majority of the parties'
total assets. The account owner's IRA is worth more than $2,000,000,
while the spousal IRA is worth about $50,000. The couple's assets
outside the IRA total approximately $400,000.
The Estate Plan. The couple would like to be in a
position to fund the spouse's unified credit with part of the rollover
IRA if the spouse dies first, and also would like to allow their
children to continue the tax-free growth inside the rollover IRA for as
long as the minimum distribution rules allow regardless of who dies
first. In an effort to accomplish this objective, the couple executes an
estate plan that provides:
- The parties enter into a marital property agreement that classifies
the rollover IRA as marital property. The spousal IRA is classified as
the spouse's individual property by the marital property agreement.
- The marital property agreement provides that Wisconsin's terminable
interest rule1 does not apply to the
rollover IRA and, therefore, the spouse's interest will not be
terminated at her death by application of state law.
- The spouse's will and the marital property agreement provide that
when the spouse dies, the spouse's one-half interest in the rollover IRA
should be transferred to the account owner if he is alive.2 If the account owner disclaims this interest, the
will and marital property agreement provide that the spouse's interest
in the rollover IRA should be distributed directly to the spousal IRA.
- The spouse files a beneficiary designation with the custodian of the
rollover IRA that is consistent with her will and the marital property
agreement.
- The beneficiary designation for the spousal IRA names a trust for
the benefit of the couple's children (the "children's trust") as the
beneficiary. The children's trust will be a qualified beneficiary, as
defined by Prop. Treas. Reg. 1.401(a)(9)-1 (as modified).3
- On or before her Required Beginning Date (RBD), the spouse will
direct the custodian of the spousal IRA to make annual distributions to
her during her lifetime based on her and the oldest trust beneficiary's
joint life expectancies, subject to the minimum distribution incidental
death benefit rule.4 For this purpose,
neither life expectancy will be recalculated.
The Estate Plan's Effect
In the author's opinion, the effect of the above estate plan should
be:
- A spouse may have a marital property interest in an IRA
notwithstanding I.R.C. §
408(g).5
- The anti-alienation rules and the corresponding provisions of the
Employee Retirement Income Security Act, do not prevent the spouse from
having a marital property interest in an IRA.6
- Classification of the rollover IRA of taxpayer as marital property
should not be considered a taxable distribution for purposes of I.R.C.
§
408(d)(1).7
- State law does not prevent the transfer of spouse's interest in the
rollover IRA to the spousal IRA if the terminal interest rule is
waived.8
- If the spouse dies first and the account owner makes a qualified
disclaimer of her interest in the spousal IRA, amounts passing to the
children's trust as a result of the disclaimer can be protected from
transfer tax by the spouse's unified credit.9
- If the spouse dies first and the account owner makes a qualified
disclaimer, it should be possible to make a tax-free transfer of the
spouse's one-half interest in rollover IRAs to the spousal IRA.10
- So long as the children's trust meets the requirements of proposed
Treasury Regulations § 1.401(a)(9)-1 (as modified), then after the
death of the spouse, minimum distributions from the spousal IRA can be
taken on the remaining joint life expectancy of the spouse and the
oldest trust beneficiary.11
Andrew J. Willms, University of Miami 1984 cum
laude, LL.M.-Estate Planning 1985, is a shareholder with the Thiensville
firm of Willms Anderson S.C. He is a frequent author and speaker on
estate planning and related topics. |
If the above analysis is correct, then Wisconsin residents have a
very favorable solution to an otherwise perplexing dilemma. Not only is
it then possible to use the spouse's marital property interest in the
rollover IRA to fund the spouse's unified credit, it should also be
possible to transfer that interest to an IRA created in the spouse's
name and classified as her individual property. Furthermore, the minimum
distribution rules should be applied to the spousal IRA based on the
life expectancy of the spouse and her designated beneficiary. Note,
however, that the IRS may take the position that the spouse's interest
in the rollover IRA may not be transferred to the spousal IRA.12
For a more complete discussion, including legal analysis, of estate
planning for a marital property interest in IRAs, please see the
author's related
article.
Endnotes
1 Wis. Stats. §§
766.62(5), 766.31(3).
2 Wis. Stat. §
766.58(3)(f).
3 See Campbell, Terry L.,
The IRA Maze: Finding a Way Out, 73 Wis.
Law. 10 (July 2000).
4 I.R.C. §
401(a)(9)(A).
5 PLR 9937055; PLR 8040101.
6 I.R.C. §
401(a)(13), ERISA § 206(d), PLR 1999 37055.
7 PLR 9937055; PLR 8007024, PLR
8929046, PLR 94190396, and PLR 9439020.
8 Wis. Stat. §§
766.01(4)(a), 766.17(1), 766.31(3)0, 766.62(1)(a), and
766.62(5)(b).
9 See I.R.C. §§
2518, 2011. See also Herbers, John A., Funding the Credit Shelter Trust with IRA
Benefits, 73 Wis. Law. 14 (July 2000).
10 See PLR 8040101,
9439020.
11 See Campbell, supra note 3.
12 See Bunney v. Comm'r,
114 T.C. No. 17, Docket No. 20713-97; PLR 9937055.
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