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MICE Factors Are Lurking in Your Retirement Accounts

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Posted on Sep 29, 2017 | Share this post: Like Us on Facebook Join Us on Google Follow Us on Twitter

Dealing with IRA’s, 401k’s, and other retirement plans is THE most complicated issue for estate planning in otherwise straight forward situations. Determining the best beneficiary designation and documents is not a simple, one-size-fits-all answer. Multiple factors have to be balanced to determine what works best in your specific situation. If you hear anyone say “ALWAYS” or “NEVER” when it comes to retirement plan beneficiary designations, be cautious.

What makes these so complicated are what we refer to as the MICE factors. The “M” is for Minimum Distribution Rules, the “I” is for the Income Tax issues, and the “CE” are for “Control and Enjoyment.”

The Minimum Distribution Rules are laws completely unique to these types of assets. These required distributions have extremely high penalties (50%) if not met. For a living individual, they set forth how much you have to take out of your own retirement account after you turn 70 ½. Additionally, after you die, there’s a different set of rules that say how fast the account must be paid out to the beneficiaries. But it’s not just a new schedule, it’s a complex algorithm that has to take into account things such as:

  • Are individuals named?
  • Is an individual a spouse?
  • How old are the beneficiaries?
  • Is an estate named?
  • Is a trust named?
  • Is a charity named?
  • If a trust, what does it say?
  • How old was the decedent?

For non-charitable beneficiaries, distributions are going to be taxable income, and most people prefer to defer the distributions and thus the taxes. As a result, we prefer the distribution period to be as long as possible. Note that these are minimum distributions; a beneficiary can always choose to withdraw more.

Because these rules are so complicated, estate planning professionals have spent a lot of time trying to learn all the rules and to structure all beneficiary designations for the best results under these rules. Unfortunately, this has led to overly general statements from some legal and financial professionals to “Never name trusts as a beneficiary!” or “Never name an estate!” or “Don’t name charities!” While there are reasons to be cautious on these issues and to understand the rules, sometimes the other MICE factors are more important.

The “I” from MICE involves the income taxation of the distributions from a retirement plan. Generally, any amount distributed from an IRA or similar retirement account is taxable income to the beneficiary. The biggest exception is that when a charity is named; that tax-exempt organization doesn’t have to pay income tax on any distributions. That’s a factor that has to be seriously considered when setting up beneficiary designations.

The “CE” from MICE is what we refer to as “Control and Enjoyment.” This is the most practical aspect to make sure the retirement account will be paid out in a manner that fits the owner’s wishes. For instance, naming an individual beneficiary may result in the greatest Minimum Distribution stretch, and certainly is simpler, BUT if the owner doesn’t want that beneficiary to have complete control because, say, they might blow the money, those Minimum Distributions Rules may be secondary. Additionally, a Special Needs Trust as a beneficiary might not be as long a deferral period as naming the individual, but the Special Needs Trust format may be much more important to preserve essential benefits and protect and manage assets.

Here are some examples of the interplay between these factors:

Example 1: Minimum Distributions vs. Income Taxes

Situation: A 60-year-old client has two assets, his $100,000 bank account, and his $100,000 IRA. He wants half his estate to go to his 30-year-old nephew, and the other half to go to his favorite local charity.

If we were ONLY concerned about the Minimum Distribution Rules, naming the nephew as beneficiary of the IRA would give it the greatest stretch-out period. About 53 years instead of only 5 years! However, the Income Tax issue means that if the IRA pays out to the charity, they get 100% of this distribution with no income taxes. If the nephew gets it, whether he stretches it out over 53 years or (much more likely) spends it more rapidly, he will pay income tax on all of the distributions. Therefore, in most cases, that elimination of income tax would be more important than the deferral, and naming the charity as the beneficiary of the IRA, and the nephew as the beneficiary of the bank account would yield the most combined financial benefit to these two beneficiaries.

Example 2: Minimum Distributions vs. Control and Enjoyment

Situation: A 60-year-old client is married and has two children from a prior marriage. Her main asset is a large IRA, and she wants her husband to benefit from that account while he’s alive. However, she wants what remains at her husband’s death to pass to her children.

Now, if we were only concerned about the Minimum Distribution Rules, the best option would be to name husband as the beneficiary upon her death. As a spouse, he has a unique ability to roll it over into his own IRA, from which he won’t need to start taking money until he turns 70 1/2. However, this allows him to spend the money however he wants, without restriction, and to name his own beneficiaries at his death. The cost of getting the deferral is to lose all control over how those funds will ultimately be spent.

A trust for the spouse is the common tool that would allow the client to provide lifetime benefit for her husband, with the limitations she wants, and with some security to the children. Trusts MAY allow some stretch out of required distributions. A Trust, IF it meets certain requirements, may allow you to use a beneficiary’s life expectancy to fix the payout period. In this case, that would allow us to use the husband’s life expectancy, which would NOT be as long a deferral period as naming husband directly, but longer than if we had no beneficiary’s life expectancy to use. However, frequently, to get this treatment the Trust would be required to pay ALL the IRA distributions out to the spouse. If the spouse survives a long time, this may mean the kids end up with very little. Still, it’s more protected than an outright distribution.

The client would also be able to write a Trust as limited as she wants for the husband, and perhaps not qualify for the stretch out, but be forced for the IRA to distribute to the trust over a shorter period.

This is a situation where the client would have to weigh what’s most important to her, controlling the funds or minimizing income tax.

Example 3: Minimum Distributions vs. Real Life

Situation: A client has about $120,000 in his IRA, his major asset. He opts to do a Will for his estate plan, and his Will is distributed among 14 friends and family members, some of whom are minors.

If our concern is the Minimum Distribution Rules, then the best beneficiary designation would be to list out all 14 individuals on the beneficiary designation form. This would allow each of them to set up their own inherited IRA and defer payout over their respective life expectancy.

However, as you can imagine, this would be a practical burden for the client to spell all this out on a beneficiary form. Furthermore, trying to deal with all the contingencies of what happens if certain beneficiaries don’t survive would be problematic indeed. Naming minors directly might require court conservatorship to manage the accounts for those beneficiaries. The estate might need funds from the IRA to pay for estate expenses. It would be a logistical challenge, and depending on the IRA custodian, could be an outright nightmare.

Then you have to consider the fact that each beneficiary is receiving on average an amount under $10,000, and many of those beneficiaries’ accounts may not last a month, let alone the full deferral period. In that situation, we might recommend the client simply name, “MY ESTATE” as the beneficiary.

This is where other professionals might recoil in horror at the worst beneficiary designation of all! That requires the IRA to be paid out over 5 years (if the beneficiary’s under age 70), or over the remaining life expectancy of the client if they’re over that age, which is generally a good deal longer. So in this situation, the “worst” beneficiary designation of all may be the best for the client and his beneficiaries.


The one universal rule we are comfortably applying is that each client’s retirement accounts must be considered individually in light of their specific wishes and estate plan. There is no one-size-fits-all rule. If you have retirement accounts, a careful and complete consideration of all the MICE factors is one of the most important aspects of your estate plan.