The stepchildren in Herring v. Campbell eventually sued the plan and won, as the client had already left his entire estate to them.
Beware of Bad Advice
Jeremy Rodriguez, an IRA analyst with Ed Slott & Company, brought up another beneficiary planning case where a man, Elroy Earl Morris, inherited his father’s $95,900 IRA as the sole beneficiary of the account. Morris decided that his two siblings should also get a share of the account and approached a law firm about transferring some of the money to his brother and his sister, asking if there would be any tax implications.
“If you think something will be easy, don’t just delegate it down,” said Rodriguez. “This was delegated to a paralegal who said that there would be no tax consequences if he transferred money to his brother and sister. But the paralegal was thinking about estate taxes, and those didn’t apply in this case. That wasn’t the case with income taxes."
Morris took a full distribution from his father’s IRA to split the account’s assets between himself and his siblings, which resulted in the full amount being taxable to him. In 2015, a tax court upheld the income tax charge to Morris.
Rodriguez pointed out that the tax bill could have been avoided if the account’s beneficiary form had divided it among Morris and his siblings.
“He also could have considered a disclaimer as a solution,” said Rodriguez. “He could have disclaimed that (money). ... It would have went to the estate, and the brother and sister would have gotten a piece of the IRA without him being hit with income tax.”
Rodriguez cautioned advisors to be wary of legal advice that they receive, especially concerning IRA and tax treatment in the beneficiary process.
In another case discussed by Rodriguez, Mickey Liu, an HBO executive, named an Atlantic City, N.J.-based exotic dancer as the sole beneficiary of all of his accounts. After Liu passed away at a young age, his sister sued the exotic dancer over the assets in his accounts. The court ruled in favor of the dancer.
“In general, retirement accounts can’t be assigned or transferred after death. The only exception is a qualified plan in a divorce,” said Rodriguez. “ERISA has anti-assignment rules.”