No beneficiaries designated on father’s IRA
My 78-year-old father passed away in February of this year. I am the executor of his will. He had two traditional IRAs, one with Charles Schwab for approx. 40,000 and one with KeyBank for approx. 100,000. He neglected to assign beneficiaries to either of those IRAs. There are six beneficiares to his will, the oldest being his sister who is also 78 years old. My father had been taking his RMDs on both IRAs. Here’s what I would like to do in order to avoid having the IRAs distributed to the estate as a lump sum payment,
Set up separate inherited IRAs for each of the beneficiaries titled, John Smith IRA (deceased February xx, 2010) F/B/O (for the benefit of) Elizabeth Smith, beneficiary.
My question is, if the IRA custodians are willing to do this, will the IRS allow this and if so, can we each use our own life expectancies for distributions or must we use my father’s (aunt’s) life expectency?
Thank you for your help,
Todd
Permalink Submitted by mk foss on Tue, 2010-03-23 20:16
When there is no designated beneficiary most IRA agreements treat the estate as a beneficiary. The estate would use your father’s life expectancy. If the aunt had been named as a beneficiary, she could have used either her age or his if he were younger.
However, with the estate as the beneficiary only the decedent’s life expectancy is used. It is still a good idea to split the IRA with one for each beneficiary because some may want to take it out faster than the minimums would indicate.
Permalink Submitted by Todd Swenson on Sun, 2010-03-28 12:03
Thank you for that clarification. The other question I had was concerning setting up inherited IRAs for the beneficiaries of the will.
Will the IRS allow setting up inherited IRAs for the beneficiaries when there were no beneficiaries designated on my father’s traditional IRAs?
Permalink Submitted by mk foss on Sun, 2010-03-28 23:12
Inherited IRAs can be set up for the beneficiaries. The IRS would not allow those beneficiaries to use their own life expectancies though. In setting them up, you’re dealing with the IRA custodian that should have a procedure for this. They may want you to set up an inheried IRA for the estate first.
Permalink Submitted by Anonymous (not verified) on Mon, 2010-03-29 03:28
to continue on the thread…..
It may be required to provide paperwork to the custodian by the executor to instruct a “look through” to the beneficiaries. That may or may not actually set up an Inherited IRA for the estate at all. But you need to check with them. In the extreme case, you may need to change custodians, if they are not willing to set up Inherited IRAs for the individuals.
pko
Permalink Submitted by Alan Spross on Mon, 2010-03-29 03:41
This may be helpful:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Todd Swenson on Tue, 2010-04-13 22:48
Again, thank you for all the help and advice. Mary Kay mentioned that the IRA custodian might first want to set up an inherited IRA for the estate before setting up IIRAs for the beneficiaries named in the will. This indeed seems to be what Charles Schwab would like me to do. My question now is, would that be a taxable event?
Todd
Permalink Submitted by Alan Spross on Tue, 2010-04-13 23:04
No, as long as the funds are directly transferred between the various IRA custodians, ie. decedent’s IRA, estate beneficiary IRA and eventually separate beneficiary IRAs for each estate beneficiary, there is no taxable distribution.
Just be sure no checks are issued payable to any beneficiary or to the estate until the beneficiaries are ready for a taxable distribution.