Simultaneous Death Laws Can Impact Retirement Savings Inheritance
By Mike Rahn, CISP
Two things in life that are said to be certain are death and taxes. Both of these facts of life can intersect with the financial resources that we’ve saved for retirement. But some of the nuances may not be readily apparent.
Though unpleasant to contemplate, it is highly probable that one member of any couple will outlive the other. When this happens, ownership of the assets in their IRAs or employer-sponsored retirement plans will be passed on to a beneficiary, or beneficiaries, as will any potential taxation. The beneficiary may be one that was named before death, or one identified by a default provision of the retirement account’s governing document. In the case of IRAs, the default beneficiary is often the decedent’s estate.
Couples—married or otherwise—commonly name one another as mutual beneficiaries of property and/or financial assets, including IRAs or other retirement accounts. There are of course exceptions. Perhaps there have been savings accumulations sufficiently large enough that some will be passed on to other individuals, or to a charitable organization. Perhaps a couple is now in a subsequent marriage or nonmarital relationship, and yet they still wish to provide financial benefits to family members of a previous marriage or relationship.
There can be more than one level of beneficiary, too. In addition to a person or entity being named as a first-level or primary beneficiary, an account owner may also name contingent beneficiaries. These beneficiaries would inherit only if a primary beneficiary or beneficiaries predecease the account owner.
It is uncommon for two persons who have named one another as a primary beneficiary to die as a result of the same event. But it does happen, as when a couple dies as the result of a motor vehicle accident, or a natural disaster. In such cases, if the order of their death can be determined, and beneficiary elections were properly made, inheritance will generally be clear: the assets of the one who died first will pass to the other. Subsequently, if that person’s death occurs before they can name a successor beneficiary, the IRA or employer plan document will determine subsequent ownership. This is often the estate of the inheriting individual.
But there are circumstances when the actual order of death cannot be positively determined. Why does this matter? The order of death may determine whether an IRA or retirement plan account becomes the property of a contingent beneficiary, versus a primary beneficiary’s estate. Sometimes the financial stakes can be quite high.
To avoid unresolvable ownership conflicts when the order of death cannot be determined, many states have adopted what are called “simultaneous death” statutes to address and settle potential inheritance and ownership conflicts. To this end, uniform statutory language has been drafted, and has been adopted by numerous states.
If a generalization can be made, when actual times of death cannot be determined and simultaneous death statutes are in play, they tend to keep a financial asset within the inheritance framework of the original owner. Simultaneous death statutes define a time interval, generally expressed in days or hours, for these situations. A common interval is five days, or 120 hours.
How is this implemented? If actual times of death cannot be determined, yet both individuals die within the statutory time interval, then neither party is considered to have survived the other. In the context of IRA or employer-sponsored retirement plan beneficiary determination, each would be disregarded as a beneficiary of the other. This means that each of their respective accounts would pass to any other primary beneficiary, to a named contingent beneficiary if there is no other named primary beneficiary, or—if no contingent—to a beneficiary determined by the document default.
EXAMPLE 1: Joan and James Smith are both IRA owners. Each is the beneficiary of the other’s IRA. James has as contingent beneficiary his son John by a former marriage. Joan’s contingent beneficiary is the American Cancer Society, her favorite charitable organization.
Joan and James both die as the result of an auto accident. By the time law enforcement and emergency medical care arrive on the scene, both are deceased, and no forensic determination of their order of death can be made. Because the order of death cannot be determined, yet both deaths were clearly within the five-day/120-hour period of the Uniform Simultaneous Death Act adopted by their state, each will be disregarded as beneficiary of the other. As a result, the contingent beneficiary of each—James‘ son, and the American Cancer Society—will receive James’ and Joan’s IRAs, respectively.
Example 2: Joan and James are both victims of a fatal auto accident. James dies on September 20, and Joan dies one day later, on September 21. Because Joan’s death was clearly after that of James, she inherits his IRA. And, because she died before she could transfer his IRA to her own, or name a successor beneficiary for these inherited assets, the IRA document’s default will govern, and her estate will ultimately receive James’ IRA. As for her own IRA, because Joan clearly survived her primary beneficiary James, her contingent beneficiary—the American Cancer Society—will inherit Joan’s IRA.
The legal concept of simultaneous death has importance only in limited circumstances, chiefly for inheritance purposes. But in the world of retirement accounts—some of whose values can be very substantial—at those times when it does matter, it can matter a great deal.
