Cascading Beneficiary Strategy – The Best Estate Plan for Most Married IRA Owners
Retirement Daily Guest Contributor
By James Lange
The SECURE Act has radically changed the laws governing inherited IRAs and retirement plans. So, now is the time to review and perhaps make changes to your long-term planning documents, i.e., your estate plan. Many traditional estate plans take a fixed-in-stone approach that does not account for changing circumstances. Your own finances and family situation could dramatically change between the time you draft your documents—wills, trusts, and beneficiary designations—and the time of your and/or your spouse’s death.
The problem that is staring you in the face is uncertainty. On top of the uncertainty embedded in forecasting your personal future, there is a constant uncertainty about which laws will be in effect when you die and how that will affect your heirs. Most married IRA owners have “I love you” wills. They typically name their surviving spouse as the primary beneficiary, and then their children equally as the contingent beneficiaries. They name trusts for the grandchildren of predeceased children. Usually, the children don’t get any money until both the husband and wife die, and the grandchildren don’t get anything until their parents die. That’s the very “stony” part of the problem.
Using Disclaimers to Benefit your Heirs
It is possible to add flexibility to traditional wills, trusts, and IRA and retirement plan beneficiary designations, through the use of “disclaimers.” A disclaimer provision allows your named beneficiary to say, “I don’t want this money -- give it to the next person in line.” When you include disclaimer provisions your surviving spouse has up to nine months after your death to consider how much to keep and how much to pass on to your children. Your children would also have the option to disclaim to well-drafted trusts for the benefit of their own children.
The most drastic consequence of the SECURE Act is its impact on inherited IRAs. Subject to some exceptions, a non-spouse beneficiary of a traditional inherited IRA must withdraw and pay taxes on that inherited IRA within 10 years of the IRA owner’s death—this is in sharp contrast to the old “stretch” rules that allowed distributions to continue over a lifetime.
A surviving spouse is not subject to the 10-year rule. The fact that the spouse has the potential to stretch distribution for a longer period of time than the children or grandchildren is a tax disincentive to disclaim IRA dollars. But, there may be an incentive to disclaim after-tax or non-IRA dollars. There might be compelling reasons for who should get what—whether it is an IRA, a Roth IRA, a brokerage account, life insurance, an annuity, a house, or other asset—both at your death and when your spouse dies that you can’t accurately predict today.
If your estate planning documents “fix in stone” the distribution of your assets to your heirs, they are not likely to get the full benefit of your legacy. Better decisions will be made when circumstances are current and clear. Furthermore, if your estate planning documents are drafted with disclaimer options like Lange’s Cascading Beneficiary Plan (the name of the plan I created for my clients at Lange Financial Group), the nine-month-decision-making window provides time to think about options and determine the best strategies for the whole family.
Your surviving spouse can make decisions with the help of family, or ideally, with family and a trusted adviser who understands the benefits of flexible estate planning and post-mortem planning.
About the author: James Lange
James Lange, a CPA, Attorney and Registered Investment Advisor, is a nationally-recognized IRA, 401(k), and retirement plan distribution expert. Lange is the author of several best-selling books that help IRA and retirement plan owners to get the most from their retirement plans using Roth IRA conversions and tax-smart planning as an integral part of the planning strategy. For more information, visit www.PayTaxesLater.com.