• Strategy
  • CFO Magazine

Passing the Bucks

Want to share your nest egg across the generations? A disclaimer gives a surviving spouse the right to play dead so that IRA assets can be transferred to others.

The strategy addresses the often
ignored distribution side of the inheritance
equation. “Distribution planning is
the black hole of estate planning,” contends
Ed Slott, an IRA expert and author
of Parlay Your IRA into a Family Fortune. He says that too often investment advisers
focus on wealth accumulation, while
accountants come in after the estate-planning
sessions to tally the tax damage. But
distribution planning has begun to receive
attention in the past few years, particularly
among those who are not worried about
outliving their retirement assets, but who
want to ensure that such assets pass to
others with as small a tax bite as possible.

Although disclaimers were written
into the U.S. Tax Code in 1976, they did
not become popular components of
retirement strategies until retirement
account balances began to swell in the late
1990s. That was also about the time Congress
raised the estate-tax lifetime exemption,
which coaxed more retirees to take
advantage of the tax break. In aggregate,
IRA assets hit a record $3.7 trillion in
2005, up from $3.3 trillion in 2004 and
$2.7 trillion in 1999, according to the
Investment Company Institute, a trade

With that much family wealth tied up
in IRAs, the use of disclaimers is likely to
rise. But disclaimers are complicated to
construct, and you will have to hire a
lawyer to assemble one, says Mellon
Financial’s Doyle. Disclaimers require a
significant amount of discussion about
estate planning and strict attention to
detail in order to create an effective plan.

In fact, while most retirement plans
accept disclaimers, some don’t allow
them, because they are deemed too cumbersome
to process, notes Doyle. Primary
beneficiaries must notify the IRA custodian
and complete their disclaimers
within nine months of the account
owner’s death. In addition, the beneficiaries
cannot have accepted any (prior) interest
in the IRA, and the person disclaiming
the inheritance cannot direct the
funds. The money must flow in accordance
with the owner’s will or beneficiary-
designation form. And while most
state laws follow federal law, some don’t:
in Massachusetts, for example, disclaimers
used on probate property have
to be approved by a probate court.

Surprisingly, Slott says, one of the
most common mistakes IRA owners
make regarding disclaimers is that they
don’t name contingent beneficiaries, or
don’t update the list to reflect changing
circumstances such as births, deaths,
marriages, and divorces. The documents
also don’t work well for nontraditional
families, especially when the surviving
spouse is a stepparent who has less-than-ideal
relationships with the children of the
original IRA owner. Because each primary
beneficiary has discretion over how
or whether to take all or part of the IRA
and pass any remainder along, even the
most carefully constructed disclaimer
becomes a matter of trust.


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