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IRS Ruling: Update Your Estate Plan Now or Suffer Economic Consequences

by Michelle C. Lerman

February 3, 2010

An IRS private letter ruling highlights the importance of an updated estate plan. In Private Letter Ruling No. 200742026, the IRS ruled that even a state court order could not salvage the damage caused by an out-of-date beneficiary designation form.

When “Bob” died, his beneficiary designation form showed his deceased wife as the primary beneficiary. Bob’s only living heir, his daughter, was not listed on the beneficiary designation form.

After Bob’s demise, his daughter tried to correct the problem by seeking a court reformation of the Beneficiary Designation Form to name her rather than Bob’s deceased wife. Bob’s daughter hoped that she would then be treated as the designated beneficiary of the IRA, with required withdrawals based on her (long) life expectancy. Otherwise, since Bob’s named beneficiary was deceased, Bob died without a designated beneficiary and required minimum distributions during Bob’s daughter’s lifetime would be based on Bob’s (short) life expectancy as listed on IRS tables.

The good news: The court granted the order and indicated that Bob’s daughter was to be treated as if he had named her as his IRA beneficiary prior to his death.

The bad news: The IRS wouldn’t follow state law and ruled that since Bob didn’t name a living person on the Beneficiary Designation Form prior to his death, he died without a designated beneficiary and the IRA would have to be withdrawn (and income taxes paid) based on Bob’s (short) life expectancy rather than on his daughter’s (long) life expectancy resulting in having to pay a lot more income tax. Don’t let this happen to you!

The lesson: bad estate planning is costly. All assets, including IRAs, real estate, brokerage accounts and life insurance have to be integrated into an estate plan that needs to be reviewed and kept up-to-date.

Call us now if you have any questions about your estate plan. An up-to-date estate plan gives peace of mind and can save you big dollars.

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