Florida Estate Planning and Probate Law Blog focused on recent case law and planning ideas.

IRS DENIES RETROACTIVE STATE COURT REFORMATION OF RETIREMENT ACCOUNT BENEFICIARY

The Internal Revenue Service (IRS) can easily take away what any state court giveth. Under the case facts, the decedent maintained 2 IRAs prior to his death. The IRAs listed his revocable trust as the death beneficiary. The trust qualified as a "look through" trusts, and provided each beneficiary the ability to stretch the payout period for the IRAs over their respective life expectancies. However, prior to death, the decedent moved the IRAs to a new investment firm which incorrectly listed his estate as the death beneficiary of each IRA account. This precluded the beneficiaries from stretching the IRA payout over their life expectancies. To overcome this problem, the trustee petitioned the state court for a declaratory judgment changing the beneficiary designations back to the trust. The court ordered the modification, retroactive to the date the new beneficiary designation forms were signed. The trustee then sought a private letter ruling to give effect to the state court order. The IRS, in reliance on Estate of La Meres v. Comm., 98 TC 294 (T.C. 1992) denied the request and ruled that the state court order could NOT retroactively change the tax consequences of the decedent having died with his IRA beneficiaries being designated to be his estate. The Tax Court held such reformation ineffective for tax purposes, explaining that courts generally disregard the retroactive effect of state court decrees for Federal tax purposes. It is important to note that this is not the first time the IRS has ruled against giving tax effect for IRA stretch purposes to a retroactive reformation (PLRs 201021038, 200235038 and 200620026). Individuals should take note of this result and ensure that their retirement account beneficiary designations are accurate.