Starting from October 1, 2001, changes in Florida’s elective share statute have made estate planning with IRAs more complicated. Previously, IRAs and qualified plans were not subject to probate administration in Florida, but now they fall under the elective share statute. This presents new challenges for estate planning, especially when a decedent has significant IRA funds and no other property except homestead owned jointly with the surviving spouse. These changes mean that it is now more important than ever to carefully consider the implications of IRAs in estate planning. The main goal of planning with IRAs is to delay paying taxes for as long as possible. This means that the money in an IRA won’t be taxed until it’s taken out. The rules for who can inherit an IRA and how they can take out the money are important to understand. Spouses have more flexibility and can roll over the IRA into their own name. This can lead to less taxes and more benefits. For everyone else, the rules are more complicated and the tax benefits might not be as good. In simple terms, if someone passes away and leaves an IRA to their children, the children can ask for the money right away without waiting for the surviving spouse to make a claim. This can cause problems if the spouse later wants some of the money, as the children may have already paid taxes on it. It can also cause issues if the money is moved out of the IRA before the spouse can roll it over into their own IRA. Additionally, there may be legal questions about whether the spouse is considered a beneficiary and has a right to the money. Overall, the laws around IRAs and inheritance can be complicated and it’s important to get legal advice if you’re dealing with these issues. The Supreme Court of Florida made a decision about how a portion of an IRA should be awarded to a surviving spouse. This decision might have some tax implications for the surviving spouse. It’s important to understand that the rules about who can receive the money and how it’s taxed can be complicated, so it’s best to get advice from a professional. If there are multiple beneficiaries, they might have to follow certain rules for how they can receive the money. It’s important for a surviving spouse to be aware of these rules and how they might affect their finances in the future. If a surviving spouse inherits some of an IRA through the elective share, it might affect the other designated beneficiaries and their ability to defer income taxes based on their life expectancies. The IRS has set a deadline for determining the elective share, and if it’s not determined in time, the other beneficiaries could lose out on the tax benefits. The new regulations make it clear that just because someone inherits the IRA under state law, it doesn’t make them a designated beneficiary unless they were named that way by the employee. This means that beneficiaries can be removed during the period after the employee’s death, but they can’t be replaced with someone who wasn’t named as a beneficiary at the time of death. This means that if a spouse is not specifically named as a beneficiary on an IRA, they may not have the same rights and privileges as a named beneficiary. In order for a spouse to be considered a designated beneficiary, someone would have to give up their right to the IRA in favor of the spouse. In the past, there have been cases where spouses were allowed to receive IRA assets when all other beneficiaries gave up their rights, or when there was a legal challenge to the distribution of the IRA. The IRS has indicated that they do not intend to give the same tax benefits to estate beneficiaries as they do to named beneficiaries or trust beneficiaries, but this is still being clarified. The second issue is about the waiver of rights that a spouse signs before their partner dies. The law doesn’t specifically mention ERISA waivers, but it seems like they should be included based on the committee notes. There are two types of ERISA waivers: QJSA and QPSA. These waivers need the nonemployee spouse’s signature to move money out of the plan, like rolling it into an IRA. Spousal consent is not needed for some distributions, but it is for others, like before normal retirement age or for immediate payments. This applies to certain types of retirement plans. The plan document can also require waivers, even if federal law doesn’t. If we take the law literally, it would include any ERISA waiver that a spouse signs for their partner to move money into an IRA. Section 205 of ERISA lays out the rules for a spouse to give up their rights to retirement benefits. In Florida, a spouse needs to know what they’re giving up and must have full disclosure after they get married. When someone is about to retire, they are usually given forms to roll over their retirement money into an IRA. The spouse has to sign a waiver at this time. But it’s unlikely that the people handling the retirement plan will tell the spouse that by signing the waiver, they are giving up their rights under Florida law. This is a problem because most spouses and retirees don’t get legal advice when they do this.
IRAs don’t fall under the same rules, and a spouse doesn’t have to be named as the beneficiary. Florida law says that each spouse has to tell the other about their money if they sign a waiver after they get married. This creates a problem because the spouse could sign the waiver knowing how much money is in the retirement plan, thinking they will be named as the beneficiary of the IRA. But then, after the money is put into the IRA, the owner could change who gets the money without telling the spouse. The problem is that when someone dies and leaves behind an IRA, it can be a big headache to figure out who gets what. This is because the IRA might have a mix of different kinds of money in it, like money that was rolled over from a different account and money that was contributed directly to the IRA. It’s not clear if the special rules about who gets the money (the ERISA waiver) would apply to all the money in the IRA or just the original rollover money. It would be really hard to figure out where all the money came from and how much it earned, especially if the person moved their IRA to different banks a lot. If it turns out that the special rules only apply to the original rollover money, the banks that hold the IRA money might have to change how they handle these accounts. This could become an even bigger problem in the future as more and more people move money between different retirement accounts. Trustees and custodians of IRAs have to consider the potential tax implications when distributing assets to nonspouse beneficiaries in cases where the spouse may have a claim to the assets. They are protected by the law, but there is a risk of delaying distributions to beneficiaries. There may also be concerns about how to manage the IRA assets while waiting for a decision on ownership, especially when there are multiple beneficiaries with different investment objectives. It’s important for financial, tax, and legal advisors to be aware of potential issues with handling IRA assets in the family estate plan. The elective share statute protects third-party payors from the surviving spouse, but not nonspouse beneficiaries. It’s important for advisors to be knowledgeable about the client’s assets before their death. This is especially important for IRAs, as many estate plans fail because the attorney didn’t know the client’s primary asset was an IRA. One possible idea is to set up the IRA so that if there is a challenge, the nonspouse beneficiaries can give their share to the spouse. Another option is to create a trust for the nonspouse beneficiaries, with a rule that money has to be given to the spouse before a certain date. The bank holding the IRA might also ask the nonspouse beneficiaries to sign a letter saying they won’t cause any problems. It’s important for everyone involved to be aware of any conflicts of interest, such as if the same bank is both overseeing the IRA and handling the deceased person’s money. There are no easy answers to the issues surrounding IRA distribution and elective share challenges. Trust and private client services professionals must be vigilant and informed, as they are held to a higher standard by their clients. Practitioners should advise nonspouse beneficiaries of potential challenges and take precautions to protect their clients’ assets. Ultimately, it is our responsibility to help our clients avoid costly mistakes in tax and estate planning. The author thanks Dr. Jay Shein, CFP with a financial group, and Michael L. Trop of a law firm, for their encouragement and support. This column is submitted on behalf of the Tax Section, with specific editors. The Florida Bar has a mission to teach its members about duty and serving the public, improving justice administration, and advancing legal knowledge.
Source: https://www.floridabar.org/the-florida-bar-journal/marriage-minimum-distributions-and-mayhem-a-discussion-of-iras-under-floridas-new-elective-share-statute/
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