Coordinating Beneficiary Designations with Your Estate Plan Can Help Avoid Unintended Tax Consequences

By Michael J. Weaver. A recent Tax Court case illustrates the importance of making sure beneficiary designations are consistent with your estate plan. (E. Morris, 109 TCM 1411, TC Memo. 2015-82) In this particular case, a father had listed his son as the sole beneficiary of his IRA. After his father passed away, the son was named the administrator of his father’s estate. In his capacity as administrator, the son requested a lump sum distribution of the IRA and then split the IRA among himself and two of his siblings, believing that this is how his father wanted the account handled. Son consulted with a local law firm and was advised that splitting the IRA in this manner would not subject the distributions to tax.

Unfortunately, the Tax Court held otherwise. Because the son was listed as the sole beneficiary on the IRA, requesting a lump sum distribution and then splitting the account among himself and his two siblings resulted in a taxable distribution of the entire account to the son that was includible in his gross income. The Tax Court noted that the son was not required to transmit the IRA distributions to his siblings as a trustee or a mere conduit. Despite the son’s honorable intentions in following what he believed to be his father’s wishes, his good intentions did not change the fact that the distribution was included in his gross income.

Had the beneficiary designation on the IRA been changed by their father during his life to be consistent with his wishes, i.e., if the three children were listed as equal beneficiaries of the IRA, this result could have been avoided. As such, making sure beneficiary designations are consistent with your estate plan is an important part of any planning process. Failure to do so can result in unintended tax consequences.

2015 Houghton Vandenack Williams

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