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Tyler and Julie are a married couple who have lived in California throughout their lives. They bought their home many years ago and took title as "Tyler Jones and Julie Jones as community property with right of survivorship." Upon Julie's passing, the family's estate attorney prepares a new deed reflecting Tyler's 100% ownership, presents the death certificate to the county recording office and files the new deed. Because of the right of survivorship, probate court administration is not required to complete this change of ownership.
Sally's attorney drafts a revocable living trust and explains the need to transfer certain assets to the ownership of the trust. After signing the trust document, Sally contacts the custodian of her brokerage account to arrange for the change in ownership. She is asked to sign a form on the custodian's letterhead to authorize the change of the account owner from "Sally Duncan" to "Sally Duncan, as trustee of the Sally Duncan Revocable Trust."
After Sally's passing, the successor trustee is authorized by the trust document to assume possession of the brokerage account and distribute the proceeds among Sally's nieces and nephews. The successor trustee is permitted to carry out these arrangements without approval of the probate court.
Terry worked in the software industry for many decades. Upon his retirement he sought the assistance of his financial advisor to roll over his sizable employer-sponsored 401(k) plan to an IRA with a new custodian. Once the rollover was completed, Terry's financial advisor presented him with a beneficiary designation form to complete and sign. Terry filled in the document as follows:
BENEFICIARY DESIGNATION FORM
Account Owner: TERRY THOMPSON
Account #: xx-xxxxxx
Primary Beneficiary/ies:100% to KASEY THOMPSON (wife)
Secondary Beneficiary/ies:40% to CARL THOMPSON (son), per stirpes
40% to ANDREW THOMPSON (son), per stirpes
20% to SMALLTOWN ANIMAL SHELTER
The form also included the beneficiaries' contact information. At the time of Terry's passing, Kasey had predeceased him and Terry had failed to update his beneficiary form. Carl had also passed away five years prior in an accident.
Due to the per stirpes designation on Terry's beneficiary form, Carl's two living children, Caitlin and Meghan, were entitled to split Carl's 40% share equally between them. After receiving notification of Terry's death and confirmation that Kasey and Carl had predeceased Terry, the custodian transferred 40% of the IRA to Andrew, 20% each to Caitlin and Meghan and 20% to the Smalltown Animal Shelter, a qualified nonprofit. It was not necessary for the probate court to approve this distribution because of the beneficiary designation form on file for the IRA.
Sydney worked for many years as a psychology professor at the local university. As part of her compensation package, her employer contributed a portion of her paycheck into a 403(b) retirement account for her benefit. Upon her departure from the university, Sydney rolled over the 403(b) account into an IRA. Since the balance was relatively small compared to her other investment accounts and real estate holdings, Sydney monitored the balance but did not think much more of it. Since her other assets and the bulk of her wealth were owned jointly with her husband, Gerald, she felt confident that if something happened to her, Gerald would have unfettered access to the family finances.
Earlier this year, Sydney passed away at age 68. Gerald sought the assistance of an estate planning attorney to help settle her estate. Gerald recalled Sydney mentioning the IRA and was able to locate a recent statement from the account. The attorney contacted the IRA custodian and was informed that no beneficiary designation had been set up. The attorney informed Gerald that in the absence of a beneficiary designation, the IRA would need to be transferred through the probate court process. Until the probate court gave its approval, the funds in the account would not be accessible to anyone.
The estate attorney hired to administer Sydney's estate called Gerald with an update. The attorney informed Gerald there was a date on the court calendar for the probate proceedings to begin. Gerald wanted to know if he would have to take Sydney's IRA as a lump sum once the probate proceedings concluded, or if he had a more favorable option to delay taking payments or stretch them out for a period of time.
The attorney explained to Gerald that in many cases, a surviving spouse can roll over an IRA inherited from a spouse and then take required minimum distributions based on the surviving spouse's life expectancy. However, for this to be possible, the surviving spouse must be named as the primary beneficiary of the account. Since the account was not designated directly to Gerald, but rather would have to pass through Sydney's estate, Gerald could not utilize the spousal rollover option. As a result, the IRA would need to be fully distributed within five years of her passing with the income taxes paid accordingly.
An IRA rollover allows people age 70½ and older to reduce their taxable income by making a gift directly from their IRA.