Question: Can a surviving spouse change the beneficiary designation on an inherited IRA? What if the spouse becomes incapacitated, is her financial agent (under Power of Attorney) authorized to change the beneficiary designation?
Answer: Most estate plans commonly include a durable power of attorney (POA). A named agent can perform financial activities for the power’s creator, even if the creator becomes incapacitated. Typical state laws include many provisions covering what the POA agent can do with IRAs and other retirement accounts. There often is one major omission, though: the ability to name beneficiaries.
Suppose Mary has created a durable POA. Mary’s financial agent is able to make IRA contributions, take withdrawals, and make investment decisions if Mary is unable to do so. But what happens if Mary’s husband Scott dies, naming her as the beneficiary of a sizable IRA.
If Mary were to become incompetent, her agent named in the durable POA must act for her. Mary can roll over Scott’s IRA to her own IRA. Often, a spousal rollover will extend the required minimum distributions (RMDs) and provide greater tax deferral. Most state law permits such a rollover by a POA’s agent. However, state laws generally don’t allow the agent to name beneficiaries for the IRA that Mary will own. If Mary dies with money left in that IRA, it will have no designated beneficiaries, so the IRA balance will be payable to her estate. RMDs will be accelerated, compared to an RMD schedule with named beneficiaries. Potential tax-deferred buildup could be lost because of reduced tax deferral, and the amount involved could be substantial.
The POA could authorize the POA’s agent to name specific beneficiaries for a spousal rollover IRA and the intended beneficiaries should be specifically identified in the document. In case the beneficiaries are minors, the documents should instruct the agent that any benefits will go to a custodian under the Uniform Transfers to Minors Act or similar act until the beneficiaries come of age.
Comment: While a POA is often helpful, it can also work to the detriment of a client who does NOT want a spouse to be able to alter the beneficiary. This is very important to understand, that is, by adding flexibility to the plan, there are now unintended consequences that were not thought through.
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ABOUT STEVE SHANE
sshane@offitkurman.com | 301.575.0313
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
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