Life and Death Planning for Retirement Benefits

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180 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.
 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
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
and/or change the investments inside the account (compare , without adversely
impacting the ability to recharacterize.
4.1.03 Who can make or withdraw decedent’s IRA contribution?
See 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 . 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).