Beneficiaries for taxable and non-taxable accounts

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naveen
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Beneficiaries for taxable and non-taxable accounts

Post by naveen » Sat Jul 25, 2015 9:16 pm

As part of checkup, I realized that some of my accounts do not have beneficiaries named. During the process, I learnt that naming trust as a beneficiary is typically not a good idea as it will not allow the surviving spouse to stretch the IRA.

Background
1. I have a revocable trust that I have named as beneficiary for all taxable accounts. My only son (not-minor) is named as secondary trustee.
2. Both me and my wife have 401K, Rollover IRA and Roth IRA have about $500K each.
3. Objective - plan to minimize the tax impact.

Questions
1. Have spouse vs Trust as primary beneficiary?
2. Have son vs Trust as secondary beneficiary?

Thoughts?

Thanks

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Kevin M
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Re: Beneficiaries for taxable and non-taxable accounts

Post by Kevin M » Sat Jul 25, 2015 10:33 pm

Typically there is no benefit to naming a living trust as beneficiary of a tax-advantaged account--it just complicates things. It still may be possible to stretch distributions for the inherited IRA(s), but there are restrictions, and it has to be set up correctly.

Some attorneys recommend naming a trust (not a living trust) as beneficiary of the IRA to protect the assets from creditors and spouses, but this is not what you are doing.

I just name my beneficiaries directly in my tax-advantaged accounts. What would be your reason to do otherwise?

For taxable accounts, naming a living trust as beneficiary is redundant, and may complicate things for your heirs. You can either just set up the accounts as trust accounts, or name individuals directly as payable on death (POD) beneficiaries. POD accounts are not subject to probate, and avoiding probate is often the primary reason to have a living trust (it definitely is my main reason).

I use both trust accounts and POD accounts. The latter are easier to set up, and if the trust dispositions are straightforward, POD accounts accomplish the same thing. If the trust dispositions are more complex, then I would just set up every account as a trust account.

Kevin
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naveen
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Re: Beneficiaries for taxable and non-taxable accounts

Post by naveen » Sat Jul 25, 2015 10:52 pm

Thanks for quick and insightful response.

Is there any benefit for my son (unmarried) have Living Trust, that I setup, as a beneficiary?

Thanks

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Matahari
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Re: Beneficiaries for taxable and non-taxable accounts

Post by Matahari » Sat Jul 25, 2015 11:54 pm

Regarding your IRAs and Roth IRAs: it would be most beneficial if you name your spouse as the primary beneficiary because, in both cases, your spouse has the option to "make the IRA and Roth IRA his/her own."

That means that, in the case of the IRA, the spousal beneficiary can delay (if younger) taking RMDs until s/he is age 70.5 and, in the case of the Roth IRA, not have to take any RMDs at all during his/her lifetime.

Also, as the owner of the IRA/Roth IRA, the spouse can name his/her own beneficiaries.

In lieu of describing it here, I'm linking this helpful Inherited IRA guide put together by Charles Schwab:

http://www.schwab.com/public/schwab/inv ... erited_ira

You'll want to pay particular attention to the distinction between the treatment of spouse and non-spouse beneficiaries.

Here's the Wiki for Inherited IRAs: http://www.bogleheads.org/wiki/Inheriting_an_IRA

And for Inherited Roth IRAs: http://www.bogleheads.org/wiki/Inheriting_a_Roth_IRA
Last edited by Matahari on Sun Jul 26, 2015 7:07 pm, edited 2 times in total.

naveen
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Re: Beneficiaries for taxable and non-taxable accounts

Post by naveen » Sun Jul 26, 2015 4:50 am

very helpful.

Thanks

pshonore
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Re: Beneficiaries for taxable and non-taxable accounts

Post by pshonore » Sun Jul 26, 2015 9:26 am

Kevin M wrote:Typically there is no benefit to naming a living trust as beneficiary of a tax-advantaged account--it just complicates things. It still may be possible to stretch distributions for the inherited IRA(s), but there are restrictions, and it has to be set up correctly.

Some attorneys recommend naming a trust (not a living trust) as beneficiary of the IRA to protect the assets from creditors and spouses, but this is not what you are doing.

I just name my beneficiaries directly in my tax-advantaged accounts. What would be your reason to do otherwise?

For taxable accounts, naming a living trust as beneficiary is redundant, and may complicate things for your heirs. You can either just set up the accounts as trust accounts, or name individuals directly as payable on death (POD) beneficiaries. POD accounts are not subject to probate, and avoiding probate is often the primary reason to have a living trust (it definitely is my main reason).

I use both trust accounts and POD accounts. The latter are easier to set up, and if the trust dispositions are straightforward, POD accounts accomplish the same thing. If the trust dispositions are more complex, then I would just set up every account as a trust account.

Kevin
Note that in CT and possibly other states, POD accounts as well as Revocable trust assets are subject to probate (solely to collect probate court fees but not for supervision of asset distribution, etc).

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Kevin M
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Re: Beneficiaries for taxable and non-taxable accounts

Post by Kevin M » Sun Jul 26, 2015 2:34 pm

naveen wrote:Is there any benefit for my son (unmarried) have Living Trust, that I setup, as a beneficiary?

Can you provide more specifics about what your goal is here?

My main purpose for using a living trust is to avoid probate, which in California is time consuming and expensive. In some other states, the probate process is quick and inexpensive, so there is less benefit in having a living trust. I have no personal experience outside of California.

In California you can use a small estate affidavit to avoid probate for assets under $150K, which does not include assets that directly name beneficiaries, such as IRAs, 401k/403b plans, living trusts, and POD/TOD accounts. So someone with most of their wealth in tax-advantaged accounts, and no significant real property equity, can avoid probate without a living trust.

Kevin
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dcdowden
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Re: Beneficiaries for taxable and non-taxable accounts

Post by dcdowden » Sun Jul 26, 2015 3:09 pm

If you name your spouse as the primary beneficiary of your retirement account and your son as the contingent beneficiary, then your spouse would have the option to 'disclaim' part or all of that account upon your death. The part that was disclaimed would then pass directly to your son as an inherited IRA with RMD's over his life expectancy. This could be useful if your spouse was at an age where the RMD's on their IRA including what they inherited from you might be far more than they needed and push them into a higher tax bracket. The portion inherited by your son would have a much lower RMD and the tax deferral extended over a longer period of time.
Doug
PS - I have verified with Fidelity that they support the ability to partially disclaim an IRA inheritance. I presume other IRA custodians offer the same option.

naveen
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Re: Beneficiaries for taxable and non-taxable accounts

Post by naveen » Sun Jul 26, 2015 3:18 pm

@dcdowden, what you mentioned is very interesting. Does this feature differs from custodian to custodian (e.g. Schwab to Ameritrade).

Alan S.
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Re: Beneficiaries for taxable and non-taxable accounts

Post by Alan S. » Mon Jul 27, 2015 1:53 pm

naveen wrote:@dcdowden, what you mentioned is very interesting. Does this feature differs from custodian to custodian (e.g. Schwab to Ameritrade).


Qualified disclaimers are accepted by all major custodians, and by smaller ones that want to compete for clients that have above average assets. There would not be any reason for a custodian to recognize a full disclaimer, but not accept partials. Not accepting disclaimers would result in a custodian incurring a major competitive disadvantage.

But a disclaimant must understand that they cannot accept an account before disclaiming it. The IRS has made an exception for the date of death RMD of a retirement plan that a beneficiary must complete if the participant did not. Anyone planning to disclaim inherited assets should be very careful not to invalidate the disclaimer, and may want to consider using an estate attorney to execute the disclaimer after thoroughly determining where the assets will go as a result. A disclaimant cannot re direct assets where they want, the assets will go to contingent beneficiaries, default beneficiaries, or where operation of law dictates.

naveen
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Re: Beneficiaries for taxable and non-taxable accounts

Post by naveen » Thu Jul 30, 2015 12:59 am

Should beneficiaries on HSA accounts be treated the same way as 401K or IRA?

Thanks.

bsteiner
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Re: Beneficiaries for taxable and non-taxable accounts

Post by bsteiner » Thu Jul 30, 2015 3:38 pm

Alan S. wrote:... a disclaimant must understand that they cannot accept an account before disclaiming it. The IRS has made an exception for the date of death RMD of a retirement plan that a beneficiary must complete if the participant did not. ...


The IRS didn't make an exception for required distributions. Under the regulations under Section 2518 (which deal with disclaimers), accepting some assets in an account doesn't preclude disclaiming other assets in the account. However, until the IRS issued Revenue Ruling 2005-36 in 2005, people didn't focus on this in the context of an IRA. Here is a link to the ruling, which cites the applicable provisions of the regulations: http://www.irs.gov/irb/2005-26_IRB/ar11.html.

I took advantage of this regulation in the late 1990s where the surviving spouse had already sold or received income from some of the securities in a joint account, but was able to disclaim her survivorship interest in the remaining securities in the account.

Alan S.
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Re: Beneficiaries for taxable and non-taxable accounts

Post by Alan S. » Thu Jul 30, 2015 8:20 pm

Bruce, just to be sure I am following this.
Are you saying that even though this entire Notice deals with an RMD in each and every example and the holdings, the distribution could just as well have been a non RMD distribution?

And if so, as long as all the income is calculated and allocated correctly, the disclaimer is not otherwise impaired by these distributions?

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One Ping
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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Mon Sep 11, 2017 1:55 pm

Sorry for the zombie thread.

I have a question about naming of joint taxable account heirs. These heirs would be our nieces and nephews.
Kevin M wrote:
Sat Jul 25, 2015 10:33 pm
For taxable accounts, ... You can ... name individuals directly as payable on death (POD) beneficiaries.
Kevin
So, how does (can?) POD work in the case of a joint taxable account where the joint owners die at different times.

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celia
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Re: Beneficiaries for taxable and non-taxable accounts

Post by celia » Mon Sep 11, 2017 2:10 pm

One Ping wrote:
Mon Sep 11, 2017 1:55 pm
So, how does (can?) POD work in the case of a joint taxable account where the joint owners die at different times.
When the first co-owner dies, the account belongs to the other co-owner. After both of them have died, the account belongs to the beneficiaries.

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One Ping
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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Mon Sep 11, 2017 2:44 pm

celia wrote:
Mon Sep 11, 2017 2:10 pm
One Ping wrote:
Mon Sep 11, 2017 1:55 pm
So, how does (can?) POD work in the case of a joint taxable account where the joint owners die at different times.
When the first co-owner dies, the account belongs to the other co-owner. After both of them have died, the account belongs to the beneficiaries.
That's what I thought/hoped for. Unfortunately, I just got off the phone with Vanguard and they no longer allow that option for JTWROS accounts.

Any ideas on how to 'functionally' implement this type of arrangement for a JTWROS account at Vanguard?
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celia
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Re: Beneficiaries for taxable and non-taxable accounts

Post by celia » Mon Sep 11, 2017 2:58 pm

One Ping wrote:
Mon Sep 11, 2017 2:44 pm
celia wrote:
Mon Sep 11, 2017 2:10 pm
One Ping wrote:
Mon Sep 11, 2017 1:55 pm
So, how does (can?) POD work in the case of a joint taxable account where the joint owners die at different times.
When the first co-owner dies, the account belongs to the other co-owner. After both of them have died, the account belongs to the beneficiaries.
That's what I thought/hoped for. Unfortunately, I just got off the phone with Vanguard and they no longer allow that option for JTWROS accounts.

Any ideas on how to 'functionally' implement this type of arrangement for a JTWROS account at Vanguard?
What did Vanguard say would happen when the first co-owner died? And when the last co-owner died?
(Note that the last co-owner has the right to change beneficiaries so if you are a co-owner who dies first, your beneficiary wishes don't matter.) The account titling (JTWROS) focuses on who the account owners are. They can always remove the money. So the beneficiaries are less important.

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One Ping
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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Mon Sep 11, 2017 3:28 pm

celia wrote:
Mon Sep 11, 2017 2:58 pm
One Ping wrote:
Mon Sep 11, 2017 2:44 pm
celia wrote:
Mon Sep 11, 2017 2:10 pm
One Ping wrote:
Mon Sep 11, 2017 1:55 pm
So, how does (can?) POD work in the case of a joint taxable account where the joint owners die at different times.
When the first co-owner dies, the account belongs to the other co-owner. After both of them have died, the account belongs to the beneficiaries.
That's what I thought/hoped for. Unfortunately, I just got off the phone with Vanguard and they no longer allow that option for JTWROS accounts.

Any ideas on how to 'functionally' implement this type of arrangement for a JTWROS account at Vanguard?
What did Vanguard say would happen when the first co-owner died? And when the last co-owner died?
(Note that the last co-owner has the right to change beneficiaries so if you are a co-owner who dies first, your beneficiary wishes don't matter.) The account titling (JTWROS) focuses on who the account owners are. They can always remove the money. So the beneficiaries are less important.
When the first dies, the JT gets the whole thing. They didn't say, and I forgot to ask :oops:, but presumably when the second dies, if no changes/additions were made, it just goes into the estate of the second to die.

Our situation is that I am the one with the interest in investing and financial management. We both are >65 yo and agree on what we want to do with our residual estate after the last to die dies. After the first to die dies, we wanted everything to be on 'autopilot' for the survivor. We have primary and contingent beneficiaries set up on all our retirement accounts and our Schwab taxable account. Vanguard doesn't allow that. So, short of moving the account, I'm trying to figure out a way to accomplish essentially the same thing at Vanguard. Apparently it's not as easy as I'd hoped. :(
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celia
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Re: Beneficiaries for taxable and non-taxable accounts

Post by celia » Mon Sep 11, 2017 3:54 pm

I would ask Vanguard what kind of account would serve your purposes. There are several kinds of joint accounts.

But I think possibly the first rep was misinformed.

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FIREchief
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Re: Beneficiaries for taxable and non-taxable accounts

Post by FIREchief » Mon Sep 11, 2017 4:47 pm

Upon the death of a co-owner of a JWROS account, the account should become an individually owned account (the surviving spouse) and would then qualify for adding a POD beneficiary designation. Unfortunately, VG seems to discount the possibility that two joint owners would ever die at the same (or almost the same) time. VG's beneficiary designation process has had numerous problems over the years, and this is likely the main reason that I no longer hold any assets there.
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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Mon Sep 11, 2017 5:49 pm

celia wrote:
Mon Sep 11, 2017 3:54 pm
I would ask Vanguard what kind of account would serve your purposes. There are several kinds of joint accounts.

But I think possibly the first rep was misinformed.
Good thought. I'll try again.
FIREchief wrote:
Mon Sep 11, 2017 4:47 pm
Upon the death of a co-owner of a JWROS account, the account should become an individually owned account (the surviving spouse) and would then qualify for adding a POD beneficiary designation. ... VG's beneficiary designation process has had numerous problems over the years, and this is likely the main reason that I no longer hold any assets there.
This is essentially what rep implied. I agree that then you could set up POD beneficiary designation. If I'm the survivor, I'm okay doing it that way. If I'm not the survivor, I'm pretty sure it won't get done, although it is in our expanded IPS ... so maybe. I'm hoping we don't have to move the account, but this might be enough to cause us to make the jump.
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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Tue Sep 12, 2017 1:11 pm

One Ping wrote:
Mon Sep 11, 2017 5:49 pm
celia wrote:
Mon Sep 11, 2017 3:54 pm
I would ask Vanguard what kind of account would serve your purposes. There are several kinds of joint accounts.

But I think possibly the first rep was misinformed.
Good thought. I'll try again.
FIREchief wrote:
Mon Sep 11, 2017 4:47 pm
Upon the death of a co-owner of a JWROS account, the account should become an individually owned account (the surviving spouse) and would then qualify for adding a POD beneficiary designation. ... VG's beneficiary designation process has had numerous problems over the years, and this is likely the main reason that I no longer hold any assets there.
This is essentially what rep implied. I agree that then you could set up POD beneficiary designation. If I'm the survivor, I'm okay doing it that way. If I'm not the survivor, I'm pretty sure it won't get done, although it is in our expanded IPS ... so maybe. I'm hoping we don't have to move the account, but this might be enough to cause us to make the jump.
I talked to the Vanguard rep(s) again. After much passing around to various ‘specialists’ I found that the bottom line is Vanguard no longer allows beneficiaries on a jointly held account. As near as I can tell this is a (somewhat arbitrary) policy implemented ‘a while back’ by Vanguard to avoid ‘problems’ they’d had with joint accounts having ‘beneficiaries.’ No one could tell me what these 'problems' were or when the policy changed. We spent a lot of time going around and around and discussing the different types of joint accounts though (see below.)

Joint Tenancy with Right of Survivorship (JTWROS).
  • Ownership by two or more persons (owners)
  • Owners hold equal shares
  • Owners may sell or give away their share without the permission of the other owner(s)
  • There are rights of survivorship. If an owner dies, the deceased owner's share passes equally to the surviving co-owners.
Tenancy by the Entirety.
  • Ownership limited to married couples
  • Spouse hold equal shares of the asset
  • Spouses may not sell or give away property without permission from the other spouse.
  • There are rights of survivorship. Property with tenancy by the entirety does not become part of a decedent's estate; rather, the deceased's share automatically passes to the surviving spouse.
Tenancy in Common.
  • Ownership by two or more persons (owners)
  • Owners may own equal or unequal shares of the property.
  • Owners may not sell or give away property without permission from all owners.
  • There are no rights of survivorship. If a co-owner dies, his/her share of the property becomes part of his/her estate and passes to his/her heirs.
I’ve concluded there is no way to do what we want while holding our assets in a joint account at Vanguard.

To Review - We want contingent beneficiaries identified now so that when one of us dies the survivor would have to do nothing to have our desired beneficiary/heir distribution structure already in place for the surviving spouse. The reason we want that in place now is that, should I die first, my spouse does not feel confident enough to make any modifications to any of our accounts after I'm gone. Having contingent beneficiaries on our retirement accounts and our other joint account (Schwab) allows us to set it up that way now. Vanguard does not allow that.

As I thought about what we were trying to accomplish it occurred to me that we could hold the account as an individual account. Then we could set up primary and contingent beneficiaries. We would put the account in my spouse’s name with me as the primary beneficiary and our heirs as the contingent beneficiaries. If I (the primary beneficiary) were die first then when my spouse dies, since the primary beneficiary (me) is already dead, the assets would pass to the contingent beneficiaries (our desired heirs.) Apparently, I could also be set up as a ‘Full Agent’ on the account and continue to monitor and manage the account (buy, sell, trade) as I’ve always done. Voila’.

A downside to this arrangement is if my spouse dies first. Then to accomplish what we want, I think I would have to add primary beneficiaries to the new, inherited account. Right now that is not a problem for me. In the future, with the potential for cognitive decline, … who knows?

Thoughts, comments, criticisms on this approach? Any other alternatives I'm missing?

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FIREchief
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Re: Beneficiaries for taxable and non-taxable accounts

Post by FIREchief » Tue Sep 12, 2017 4:51 pm

One Ping wrote:
Tue Sep 12, 2017 1:11 pm

Thoughts, comments, criticisms on this approach? Any other alternatives I'm missing?

One Ping
Have you considered establishing a living trust and just retitling all accounts (and other assets) into the trust? This is what many do who are concerned with cognitive decline and the other issues you mentioned.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Beneficiaries for taxable and non-taxable accounts

Post by One Ping » Tue Sep 12, 2017 4:58 pm

FIREchief wrote:
Tue Sep 12, 2017 4:51 pm
One Ping wrote:
Tue Sep 12, 2017 1:11 pm

Thoughts, comments, criticisms on this approach? Any other alternatives I'm missing?

One Ping
Have you considered establishing a living trust and just retitling all accounts (and other assets) into the trust? This is what many do who are concerned with cognitive decline and the other issues you mentioned.
Thanks, chief. Yes we have. That was our first thought. But after thinking about a little more we were wondering of it couldn't just be done by naming beneficiaries. A trust is our ultimate fall back if we can't make that work.
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