Marriage, minimum distributions, and mayhem: a discussion of IRAs under Florida's new elective share statute.

• Author: Lynch, Kristen M.

On October 1, 2001, Florida's new elective share statute, new F.S. [section] 732.2035(7), became effective. To most, this would not seem to be an event of utmost significance, but to those of us dealing in the world of IRA administration every day, this means change.

Historically, IRAs and qualified plans have not been subject to probate administration in Florida. As such, they have not fallen under the jurisdiction of the personal representative other than for purposes of filing appropriate tax returns unless the assets were left to the decedent's estate. Since IRAs and qualified plans now fall under the second tier (1) of the three-tier priority system imposed by the elective share statute, this presents new potential problems. For purposes of this discussion, envision a scenario in which the decedent had significant IRA monies and no other property except homestead owned jointly with the surviving spouse, which does not enter into the elective share calculation.

Challenges in Estate Planning with IRAs

Estate planning has become more difficult with changes in estate tax laws and the specter of the new elective share. IRAs have always presented special estate planning challenges because of ownership restrictions and because an IRA cannot be given away intact during lifetime by the IRA owner. The IRS released new proposed Treasury regulations on January 12, 2001, and new final IRA regulations on April 16, 2002 (2) (IRA rules), simplifying administration during lifetime and providing new postmortem planning opportunities. However, when one now combines the application of the elective share statute with the IRA rules, the results can be somewhat unsettling.

Goal of Planning with IRAs

In general, the name of the game with IRAs is tax deferral. Monies are not taxable until they are distributed to a beneficiary, at which time the distribution is taxed as ordinary income at the beneficiary's tax rate. The length of income tax deferral available depends on who is considered a "designated" beneficiary under the new proposed IRA rules which means an individual or a trust that is both valid under state law and irrevocable by its own terms upon the owner's death. Under these rules, the measuring life for postdeath distributions is based on the designated beneficiary (or beneficiaries if there are separate shares) left standing on September 30 of the year after the year of death. In a best-case scenario, a nonspouse beneficiary could look forward to taking distributions from the IRA over his or her own life expectancy. If the IRA is left to the decedent's estate, no beneficiary has been named, or if there are multiple beneficiaries and one is not an individual, the IRA will be deemed to have no designated beneficiary. Subsequently, distributions will be made based on the remaining single nonrecalculated life expectancy of the decedent (3) if the decedent died after the required beginning date (RBD). If the IRA owner died prior to the RBD, distribution will need to be made by December 31 of the year containing the fifth anniversary of the decedent's date of death. This certainly hampers the benefits of tax-deferred growth that might have otherwise been available.

Spouses are the only beneficiaries who can inherit IRA or qualified plan assets and roll them into his or her name, or simply change the name on the account. Furthermore, when a spouse does roll over assets, all future distribution dates revolve around the surviving spouse's date of birth, rather than that of the deceased owner. Considerable tax benefits could be gained by leaving IRA or qualified plan assets to a spouse. Not only would these assets be subject to the unlimited marital deduction for estate tax purposes, but also there could be substantial deferral of income taxes, particularly if the surviving spouse is younger than the decedent.

Administrative Issues in Real Practice

No laws limit the right of a beneficiary to demand immediate distribution of a decedent's IRA. In the case of an IRA, if children are named and there is a valid beneficiary designation and valid death certificate, there is currently nothing that would prevent an IRA trustee or custodian from promptly distributing those assets to the nonspouse beneficiaries. All this could transpire well in advance of the surviving spouse even filing for the election. (4) This presents many potential problems. First, what happens if the children take distribution of the IRA assets in one tax year and pay income taxes on them, and then the IRA is determined to be part of the property necessary for contribution to the elective share? At a minimum there would be amended tax returns required, or possibly an award net of taxes, although the IRS might not be happy with that result if the surviving spouse were in a significantly higher tax bracket than the children. Second, if the spouse is awarded part of the IRA after the IRA monies have been distributed to the children and physically out of an IRA account for more than 60 days, the opportunity...