Inherited IRA rollovers
I have a client who took a distribution from an inherited IRA shortly after their mother passed away. I had expressed concern about the tax consequences of this, but I do not believe they were thinking clearly when they decided to take funds from the account to pay some of her final expenses. Before funds were distributed, the custodian split the IRA in to two beneficiary IRAs (she and her brother were equal beneficiaries).
We have now had time to have a conversation about the tax consequences of this, and she would like to avoid the tax on this (the distribution was about $ 100,000). Is there any good way to correct this? I have been told by the original trustee that they will take the funds back, but now they may be backing away from that. I would like to know what the best way to correct this is (if there is a good way). I have worked with a number of beneficiary IRAs in the past, but this is the first time I have seen someone take a direct distribution from an account and then want to change their mind. They only received the check less than three weeks ago.
Thanks,
Neal
Permalink Submitted by Alan Spross on Wed, 2010-12-29 04:23
Neal,
This is one of those errors for which the IRS does not offer any form of relief. And it happens quite frequently. The IRA custodian would not offer to take the funds back unless they made a severe error such as distributing the funds without the beneficiary’s consent. That is probably why they are backing off. But if there is a high degree of negligence on their part, this is the only possible relief so the beneficiary should push as hard as possible to get them to accept the check back.
Unless no circumstances can the distribution be rolled over.
Note: If there was an RMD due in the mother’s year of death that was not taken, this distribution is most likely to cover that requirement and it would relieve the brother from taking his share of the RMD. Not much relief but better than nothing.
Permalink Submitted by Neal Clemens on Wed, 2010-12-29 04:34
That is interesting. I have done a number of trustee to trustee transfers of beneficiary IRAs, but this is the first time I have encountered a situation where a direct distribution was taken.
The thing that is most interesting to me is that I called the original custodian on two separate days two weeks ago (I noted the time, ext. and name of the last call in my notes) and on both occassions I was told they would take the funds back within 60 days. They clearly knew that the beneficiary was not a spouse given that there were two checks cut. I don’t know if this would give us much basis to push for them to take the funds back given that we have a recorded conversation saying that they would. They are supposed to call me on Wednesday to let me know if they will take the funds back and if so what their deadline is.
Thanks,
Neal