Minors as Beneficiaries of IRA’s
Our new client is the father of two minors, ages 15 and 17. The teenagers are the beneficiaries of their grandfather’s IRA (their mother’s father, and their dad’s ex-wife).
One of the IRA’s that is creating some consternation is custodied at FolioFN. The father of the girls wants to move the funds under our care, which would mean either Fidelity or TDAmeritrade. We also want to keep the funds within the IRA wrapper, and we don’t want to create a taxable event.
We believe FolioFN needs to establish in inherited IRA accounts for the girls, so we can then transfer to like accounts at one of our custodians. FolioFN tells us they don’t have the ability to establish inherited IRA accounts for minors, altho we have all documentation establishing the father’s right to function as both guardian and trustee FBO his daughters.
I’ve read thru Natalie Choate’s book, and still need some clarification.
1. Am I correct in believing that if FolioFN simply makes checks payable to a new custodian, FBO the girls/their dad, we run the risk of creating a taxable event?
2. If this is the case, any recommendations on how to get around this issue, and maintain the tax-deferred status of the IRA?
3. Would it be possible to have Folio disburse checks, and still maintain the tax-deferred status?
Thanks in advance for any guidance you can give.
Randy Brunson
Permalink Submitted by Alan Spross on Mon, 2008-10-13 01:19
1) No, not as long as the check is NOT made out directly to the beneficiaries. Set up the inherited IRAs with the new custodian in the format they require (it must show both the beneficiary and the decedent) and get the wording from them on how they want the check issued. Then provide that wording to FOLIO. This will still be considered as a transfer rather than a rollover, which as you know is not permitted.
2) See above.
3) If made out per above, NOT directly to the beneficiaries or any financial guardian of the beneficiaries, or any UTMA account.
First Folio should be asked to do a direct transfer, but if they will not, use the above procedure and get their firm assurance that NO 1099R will be issued. If they get a 1099R despite all this, then they will have to show the IRS that the transfer was done directly and the 1099R was in error. But that is a request that should not be necessary if it is made clear to FOLIO that this is NOT a distribution, but a direct transfer or a check made out to the new custodian FBO beneficiary, which is treated the same as a transfer.
Permalink Submitted by Janine Janine on Mon, 2008-10-13 01:39
Alan
1. Does the above mean that an Inherited IRA by a minor is not subject to RMD’s in the year following the death of the owner?
2.If so, when is that minor beneficiary required to start RMD’s?
3. If so, then would it behoove an IRA owner to name minors as beneficiaries to prolong the tax-deferred status as long as possible?
Thank you.
Permalink Submitted by Alan Spross on Mon, 2008-10-13 03:37
No, it IS subject to RMDs in the following year. But that does not prevent a transfer of the full balance to a new custodian. The RMD can be taken from the new custodian.
There might also be an additional RMD due if the grandfather passed after his RBD without having satisfied the current year or prior year RMDs.