Taxation & Estate Planning

NO SPOUSAL BENEFITS IN IRA OF DECEDENT WHEN OTHERS WERE THE DESIGNATED BENEFICIARIES

By Charles Rubin

Surviving spouses of a decedents who are participants in a qualified ERISA retirement plan have significant statutory protections. These protections include mandatory survivor benefits for the surviving spouse that cannot be changed without the consent of the spouse. Thus, a plan participant cannot provide for the passage of assets at death to third parties without consent of his or her spouse.

Different from ERISA retirement plans are individual retirement accounts (IRA). The statutory spousal protections applicable to ERISA plans do not apply. In a recent case, the issue was raised whether the ERISA spousal protections applied to an IRA anyway, because the IRA at issue was funded by a rollover of funds out of an ERISA plan.

In the case, a decedent had previously had his ERISA retirement plan assets rolled over into an IRA. The decedent subsequently remarried. The beneficiaries of the IRA were the children of the decedent. The participant died, and the fight was on ? the children claimed they were entitled to the IRA by reason of the beneficiary designation. The surviving spouse claimed she should get the proceeds by reason of her surviving spouse status, and that the funds came from an ERISA plan where spousal protections applied.

The appellate court?s holding was that the surviving spouse benefits of ERISA did not apply, so that the IRA belonged to the children. The analysis was detailed and technical, but the bottom line was that the surviving spouse protections of ERISA do not apply to IRAs, even if the funds in the IRA came from an ERISA plan.

One ?benefit? of the ruling is that it provides certainty as to IRA beneficiary designations ? a contrary ruling would effectively require IRA custodians to conduct historical research to determine if the IRA was previously funded from an ERISA plan when spouses are not the beneficiaries. Information on this history may not be readily available to the custodian, if it all.  If Congress finds the lack of protection in this situation objectionable, then it can change the law to provide extended protection to spouses in this circumstance.

Charles Schwab & Co., Inc. v. Debickero, 105 AFTR 2d 2010-692 (9th Cir. 2010)

Full post as published by Rubin on Tax on March 28, 2010 (boomark / email).