Different rules apply to qualified retirement plans and IRAs, and those rules affect an account holder’s right to name a beneficiary other than a spouse.
Under the Retirement Equity Act of 1984 (REA), a participant in a qualified retirement plan must obtain the written consent of the spouse in order to name a beneficiary other than the spouse.
The REA restrictions are inapplicable to IRAs because IRAs are not covered by the applicable parts of the Employee Retirement Income Security Act (ERISA) and are not included in Internal Revenue Code Section 401(a)(11).
1. The Surviving Spouse
In general, naming the surviving spouse as beneficiary (with disclaimer as an option in favor of contingent beneficiaries such as a trust that has credit shelter and qualified terminable interest property (QTIP) provisions) is an advantageous selection for several reasons.
First, it is simple and, at least in the case of a qualified retirement plan, mandated unless the spouse consents in writing pursuant to a certain required procedure to a different beneficiary. For both income tax and estate tax purposes, the selection of the surviving spouse usually provides the most tax deferral opportunities. This is because the surviving spouse, through a “rollover” or direct transfer from either a qualified plan or an IRA to a new IRA and treating that IRA as the spouse’s IRA, can get a “fresh start,” with an effectively “new” IRA and recalculate life expectancy annually.
A new IRA affords the spouse the opportunity to restart and “stretch out” the required minimum distributions to a later required beginning date (April 1 of the year following the year that the surviving spouse attained the age of 70½). This assumes that the surviving spouse is younger than the deceased spouse. The new IRA permits younger beneficiaries, e.g., the surviving spouse’s children, to use their own life expectancies for remaining distributions after the surviving spouse dies.
Additionally, if the surviving spouse is the recipient of the IRA benefits and if the deceased spouse’s estate is estate taxable, then the distribution outright to the spouse would qualify for the marital deduction.
Lastly, a surviving spouse can defer the minimum required distributions until December 31 of the year in which the deceased spouse would have attained the age of 70½. The surviving spouse also could be named as primary outright beneficiary but allow the surviving spouse to timely disclaim all or some part of the benefits to the contingent beneficiary, which could be a B (credit shelter) trust or even a QTIP-able trust.
Despite all of the benefits of naming a surviving spouse as the beneficiary of a retirement plan or IRA, many people do not wish to do this.
There are a variety of possible reasons for this position, about which some clients are adamant. These reasons can include a desire on the part of the client to give those benefits to someone other than the surviving spouse, e.g., children of a prior relationship or charity, a desire to fully exhaust the account holder’s applicable exclusion amount at death and a desire to not “stack” these assets into the surviving spouse’s estate.
Sometimes, it is purely a matter of preferring their own selections of the ultimate recipients over those whom the surviving spouse may select, particularly in a blended family situation. Clients must be told about the advantages of naming a spouse anyway, but let them make that call in favor of an alternative beneficiary.
Since it is possible that the surviving spouse already has an IRA, or will create one after the rollover, it is a good idea not to commingle the funds from the rollover with the separate IRA funds of the surviving spouse. This is particularly true where the surviving spouse is trying to preserve the remaining assets from each IRA for different sets of beneficiaries, e.g., step-children and the surviving spouse’s own children.