Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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5.6 ). Although certain “regular contributions” to IRAs can be recharacterized, most recharacterizations will involve undoing Roth IRA “conversions” (¶ 5.4) ; the rest of this ¶ 4.1.02 deals with the post-mortem recharacterization of a Roth conversion done by the decedent. This discussion assumes that the decedent died prior to the deadline for recharacterizing his Roth conversion; see ¶ 5.6.02 . According to the regulations, the recharacterization election “may be made on behalf of a deceased IRA owner by his or her executor, administrator, or other person responsible for filing the final Federal income tax return of the decedent under section 6012(b)(1).” Reg. § 1.408A-5 , A-6(c). Although this sounds reasonable, there is a significant “mechanical” problem with the regulation’s approach. A recharacterization is accomplished by transferring the conversion contribution, plus earnings thereon, out of the Roth IRA and into a traditional IRA by means of an IRA-to-IRA transfer. See ¶ 5.6.03 . Unless the estate is the beneficiary of the Roth IRA, it is not clear how the executor will persuade the IRA sponsor to transfer the money to a different IRA when the executor does not have title to the account; the beneficiary owns the account from the moment the participant dies. ¶ 4.2.01 . IRA sponsors could alleviate this “mechanical” problem (and gift tax concerns; see below) by including in their IRA documents a provision to the effect that, if the sponsor receives timely notice from the deceased participant’s executor that any contribution to the account is being recharacterized, the sponsor will forthwith transfer the contribution in question (plus or minus earnings thereon) to an IRA of the other type, with the same IRA sponsor, and with terms identical (except as required to reflect that it is the other type of IRA) to the existing account; and that the beneficiary designation applicable to the original IRA will also apply to the account created by the recharacterization. The IRS could help by including such a provision in its Forms 5305 and 5305- A (sample IRA/Roth IRA documents). See PLR 2002-34074 in which an IRA sponsor proceeded in that manner (presumably without the benefit of having such language in its documents). If such a provision is not included in the IRA sponsor’s documents, the estate planner should consider including it in the beneficiary designation form. See ¶ 5.8.06 for other issues the estate planner should consider in connection with Roth conversions and recharacterizations. However, this solution is neither simple nor foolproof:  The documents would need to protect the IRA provider by providing a mechanism for it to determine with finality who is the “executor” entitled to make this election; the amount of the recharacterized contribution and the earnings thereon; and whether the recharacterization was done within the applicable deadline.  If the beneficiary cashes out the Roth IRA before the executor recharacterizes the contribution to it, the executor loses the ability to recharacterize. Recharacterization requires an IRA-to-IRA transfer, which can’t be done once the account has been distributed. See ¶ 5.6.03 (A)(1). This seems to be a trump card held by the beneficiary, unless the plan documents provide that the beneficiary may not withdraw from the account prior to the recharacterization deadline without the executor’s consent. Because of this “mechanical” problem, the IRS might have to revise its regulation to specify that the beneficiary (rather than the executor) has the power to recharacterize the Roth