Therefore, Greenblatt has advised his client to transfer the account to another company, one that will permit the beneficiary to keep the money in the decedent's account. Then the beneficiary would have access to principal, as needed, yet be able to stretch out the remainder of the account over his life expectancy. "I've been telling my client to do this for a while," he says, "but the family has had severe personal and health problems, so nothing has been done." The risk, of course, is that the client will die holding onto this plan, with its limited options for beneficiaries.
The problem, says Greenblatt, is that this is an old contract, one that was written without considering the possible desire for a stretchout, and the contract has not been revised. "It's possible to switch to a newer, more flexible contract. In fact, the same insurer might have such a contract. The client must take action, though."
In this situation, says Greenblatt, the insurance company administering the 403(b) plan does not want to incur the legal costs involved in revising an old contract. Other tales of recalcitrant custodians are not difficult to discover. For example, Wilson reports that his firm has been called in (by another advisor) to help a client who inherited half of a large tax-deferred retirement plan. "Two sisters are the beneficiaries," he says. "One wants to take the cash, but the other wants the stretchout. The insurance company is not willing to stretch: The people there have said it's 'not legal' to do so. We're working on convincing them to split the plan and stretch half of it, but it's not easy."
If an uncooperative custodian doesn't curtail a stretchout, an ill-advised professional advisor may be the culprit. "One of my clients got a divorce when he was in his mid-50s," says Woody Young, an advisor with Quest Capital Management in Dallas. "Unbeknownst to us, he used his divorce lawyer to change his IRA beneficiary designation. The lawyer named some charities along with the client's 21-year-old daughter, which meant that the daughter's life expectancy could not be used."
The client died shortly thereafter, before Young could discover how the IRA beneficiary designation had been handled. "Here was a perfect opportunity to stretch an IRA that was greater than $700,000," he says. "His daughter could have had lifelong security, enjoying tax-deferred compounding over many decades. Instead, the entire amount had to be paid out within five years, which accelerated the income tax payments on top of the estate tax that already had been paid."
Other problems with stretchout IRAs may stem from intrafamily misunderstandings. Ruhlin suggests a family meeting so that the entire IRA stretchout can be explained to all concerned. "One woman, with five kids, inherited an IRA from her husband," she says. "She rolled it to her own IRA, and split her IRA into five accounts. Now each child is the beneficiary of one IRA, which is a big advantage to the younger children because there's a 20-year age difference between the oldest and youngest child."
That is, the youngest child will have a much longer life expectancy and will be able to have a much longer stretchout for the inherited IRA. If the IRA had stayed in one account, all the money would have to be withdrawn over the eldest child's short life expectancy, after the mother's death. "This woman is now taking required minimum distributions," says Ruhlin, "evenly from each IRA, so she gets five checks each month. Some clients really get it." Thanks to savvy advisors, such clients' children and even those children's descendants may continue to get it.