Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

conversion. Here are other issues and concerns with respect to a post-mortem recharacterization of a pre-mortem Roth conversion:  Fiduciary problems. If the Roth IRA is payable to a beneficiary other than the estate itself, there is a conflict of interest, with respect to the recharacterization decision, between the probate estate (which would get to “keep” the income taxes the decedent would otherwise have owed on the Roth conversion, if the conversion is recharacterized) and the beneficiary of the Roth IRA (whose IRA distributions will be income-taxable instead of tax-free if recharacterization occurs). Unless the will provides to the contrary, the executor’s fiduciary duty to the estate may require him to recharacterize any Roth conversion (assuming the executor can figure out how to do so), in order to recoup the income taxes and so maximize the estate value.  Estate tax consequences. If recharacterization does not occur, any income tax owed by the estate on the Roth conversion would be deductible for federal estate tax purposes as a debt of the estate, despite the fact that the executor could have undone the conversion and thus “cancelled” the income tax debt. See Reg. § 20.2053-6(f) .  Gift tax concern. If recharacterization requires the consent of the Roth IRA beneficiary (which would appear generally to be the case, unless the account documents provide otherwise), and as a result of the Roth IRA beneficiary’s consent the beneficiaries of the probate estate are “enriched” at the formerly-Roth-IRA beneficiary’s expense, there may be a question whether the Roth IRA beneficiary has made a gift to the estate beneficiaries (unless the beneficiaries of the Roth IRA and of the estate are the same people in the same proportions).  “Acceptance” is not a concern. One requirement of disclaiming retirement benefits (¶ 4.4) is that the beneficiary must not have taken any actions to “accept” the inherited account. No such requirement applies to the recharacterization election. Thus, the Roth IRA beneficiary could register the IRA in his name as an inherited IRA (see ¶ 4.2.01 ) and/or change the investments inside the account (compare ¶ 4.4.04 ), without adversely impacting the ability to recharacterize. 4.1.03 Who can make or withdraw decedent’s IRA contribution? See ¶ 2.1.08 regarding a participant’s ability to “cancel” an IRA contribution by withdrawing the contribution (and earnings thereon) prior to the extended due date of his tax return. If the participant died prior to that deadline without having withdrawn the contribution, can the executor or account beneficiary exercise this right on the deceased participant’s behalf? The beneficiary, not the executor, owns the IRA upon the participant’s death ( ¶ 4.2.01 ). Absent contrary language in the IRA documents, it would appear that only the beneficiary has the right to withdraw an IRA contribution or any other moneys held in the IRA. As to whether an executor can make a regular IRA contribution on behalf of the decedent, the only guidance is PLR 8439066, in which the IRS ruled that an executor could not make a regular IRA contribution on behalf of the decedent (or the decedent’s surviving unemployed spouse).