A Suboptimal IRA Beneficiary
September 11th, 2017
Charles Sukenik executed his will on November 4, 2004. His estate was to be divided between his surviving spouse, Vivian, and the couple’s private foundation. His revocable trust was restated at the same time, giving Vivian certain real property and the balance to the foundation. Roughly five years later, in 2009, Charles designated Vivian as the beneficiary of his IRA, worth some $3.2 million. That hardly seems like a controversial move—but it turned out to be.
When Charles died in 2013, the heirs discovered that the estate plan was not very tax efficient. Vivian was looking at potential income taxes of $1.6 million on the IRA distributions. She proposed to reform the estate plan, giving the IRA to the private foundation in exchange for other estate assets of equal value. The charity was not opposed to the plan. Being tax exempt, the new plan would make the income tax obligation that comes with an inherited IRA disappear. Certainly, this approach would more effectively implement Charles’ testamentary intentions. However, an estate plan cannot be rearranged simply by agreement among the beneficiaries; the probate court has to approve the change.
The court in this case couldn’t swallow the proposed changes, because “the reformation requested here is prompted by neither a drafting error nor a subsequent change in law. Several years after executing his will and trust, decedent himself thwarted the tax efficiency of his own estate plan by making [Vivian] the beneficiary of the IRA. There is nothing in the record indicating why, after executing these estate planning instruments, [Charles] chose to leave additional assets to his wife in this manner or why, in the four years before his death, he did not take steps to cure the unfavorable tax consequences of his choice of IRA beneficiary.”
The court concluded that if reformation were allowed in these circumstances, the decision “would expand the reformation doctrine beyond recognition and would open the flood gates to reformation proceedings aimed at curing any and all kinds of inefficient tax planning.”
Did Charles have any understanding of the tax time bomb included in his estate plan? It appears probable that he did not consult his attorney before designating his wife as his IRA beneficiary, which is an ordinary, everyday occurrence. According to a footnote to the decision, at some point Charles’ estate planning attorney suggested to him that he make a change, designating the foundation as the IRA beneficiary and substituting additional property of comparable value for Vivian. Unfortunately, soon after the advice was given, Charles became too ill to make changes to his plan. The estate planning attorney died soon after Charles did, so the attorney was not available to testify.
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