Wisconsin Lawyer: Wisconsin Lawyer July 2000: Estate Planning for a Marital Property Interest in IRAs:

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July 01, 2000

Wisconsin Lawyer July 2000: Estate Planning for a Marital Property Interest in IRAs

Estate Planning for a Marital Property
Interest in IRAs

isconsin's Marital Property Act presents tough questions to estate planning attorneys. Does a married person have a marital property interest in the spouse's IRA? If so, can the marital property interest be used to fund the spouse's unified credit if the spouse dies first? Can the pre-tax growth of the spouse's marital property interest in the IRA be preserved after his or her death?

The Scenario

Suppose your client is a married Wisconsin resident and has funded an IRA by a rollover of his account balance with an employer-sponsored qualified plan (the "rollover IRA"). Your client (for simplicity, called the "account owner" even though both spouses may own a marital property interest in the account) and his spouse are both age 70. The account owner's spouse also has established her own IRA (the "spousal IRA"). However, the rollover IRA represents the vast majority of the parties' total assets. The account owner's IRA is worth more than $2,000,000, while the spousal IRA is worth about $50,000. The couple's assets outside the IRA total approximately $400,000.

The Estate Plan. The couple would like to be in a position to fund the spouse's unified credit with part of the rollover IRA if the spouse dies first, and also would like to allow their children to continue the tax-free growth inside the rollover IRA for as long as the minimum distribution rules allow regardless of who dies first. In an effort to accomplish this objective, the couple executes an estate plan that provides:

The parties enter into a marital property agreement that classifies the rollover IRA as marital property. The spousal IRA is classified as the spouse's individual property by the marital property agreement.
The marital property agreement provides that Wisconsin's terminable interest rule¹ does not apply to the rollover IRA and, therefore, the spouse's interest will not be terminated at her death by application of state law.
The spouse's will and the marital property agreement provide that when the spouse dies, the spouse's one-half interest in the rollover IRA should be transferred to the account owner if he is alive.² If the account owner disclaims this interest, the will and marital property agreement provide that the spouse's interest in the rollover IRA should be distributed directly to the spousal IRA.
The spouse files a beneficiary designation with the custodian of the rollover IRA that is consistent with her will and the marital property agreement.
The beneficiary designation for the spousal IRA names a trust for the benefit of the couple's children (the "children's trust") as the beneficiary. The children's trust will be a qualified beneficiary, as defined by Prop. Treas. Reg. 1.401(a)(9)-1 (as modified).³
On or before her Required Beginning Date (RBD), the spouse will direct the custodian of the spousal IRA to make annual distributions to her during her lifetime based on her and the oldest trust beneficiary's joint life expectancies, subject to the minimum distribution incidental death benefit rule.⁴ For this purpose, neither life expectancy will be recalculated.

The Estate Plan's Effect

In the author's opinion, the effect of the above estate plan should be:

A spouse may have a marital property interest in an IRA notwithstanding I.R.C. § 408(g).⁵
The anti-alienation rules and the corresponding provisions of the Employee Retirement Income Security Act, do not prevent the spouse from having a marital property interest in an IRA.⁶
Classification of the rollover IRA of taxpayer as marital property should not be considered a taxable distribution for purposes of I.R.C. § 408(d)(1).⁷
State law does not prevent the transfer of spouse's interest in the rollover IRA to the spousal IRA if the terminal interest rule is waived.⁸
If the spouse dies first and the account owner makes a qualified disclaimer of her interest in the spousal IRA, amounts passing to the children's trust as a result of the disclaimer can be protected from transfer tax by the spouse's unified credit.⁹
If the spouse dies first and the account owner makes a qualified disclaimer, it should be possible to make a tax-free transfer of the spouse's one-half interest in rollover IRAs to the spousal IRA.¹⁰
So long as the children's trust meets the requirements of proposed Treasury Regulations § 1.401(a)(9)-1 (as modified), then after the death of the spouse, minimum distributions from the spousal IRA can be taken on the remaining joint life expectancy of the spouse and the oldest trust beneficiary.¹¹

Andrew J. Willms, University of Miami 1984 cum laude, LL.M.-Estate Planning 1985, is a shareholder with the Thiensville firm of Willms Anderson S.C. He is a frequent author and speaker on estate planning and related topics.

If the above analysis is correct, then Wisconsin residents have a very favorable solution to an otherwise perplexing dilemma. Not only is it then possible to use the spouse's marital property interest in the rollover IRA to fund the spouse's unified credit, it should also be possible to transfer that interest to an IRA created in the spouse's name and classified as her individual property. Furthermore, the minimum distribution rules should be applied to the spousal IRA based on the life expectancy of the spouse and her designated beneficiary. Note, however, that the IRS may take the position that the spouse's interest in the rollover IRA may not be transferred to the spousal IRA.¹²

For a more complete discussion, including legal analysis, of estate planning for a marital property interest in IRAs, please see the author's related article.