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Vol. 73, No. 7, July 2000 |
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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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