two Inherited Annuity IRAs, past RBD
Same Facts below apply to both IRA Annuity #1 and IRA Annuity #2 held by the same decedent who was 76 when he died in January 2009. These annuity IRAs were held at two different annuity / insurance companies, and though IRA annuities were not treated the same. Client’s trust was named as beneficiary in both instances.
Client was past his RBD and was taking his distributions.
Client then died in January 2009, without any distributions made for 2009. If you remember, distributions were not required in 2009. Because of family issues, no estate was opened until 3Q 2011 due to some bad family politics.
IRA Annuity #1
Was held at Annuity Company #1. Beneficiary (Trust) made no claim and Annuity Company #1 treated it as Escheat property in December 2010. Annuity Company #1 withheld tax and forwards to IRS, but has no EIN, with which to report Income to IRS. They paid out IRA balance, in full, to Trust’s beneficiary at end of last year (2011), when claim was made (less withheld tax amount). IRA Annuity #1 was approximately $95,000.00 and was received by benefficiary late last year minus the 10% withholding. The delayed 1099 arrives this year, for year 2010 and it arrived at end of April 2012! Position of Annuity Company #1 seems to be that since no claim was made by December of year after death (2010) that it became an escheat issue, which justified their action in 2010. (This sounds like an old and no longer applicable rule to me).
IRA Annuity #2
Was held at Annuity Company #2. Annuity Company #2 has done nothing with the deceased Client’s IRA Annuity, in other words, no unclaimed property, no escheat. In discussing with Annuity Company #2, their position seems to be that we can use deceased’s then Life expectancy (12.1 years = 1/12.1) and then subtract one for each successive year.
I believe that in 2009, no distribution was required for either IRA Annuity, therefore no excise penalty of 50% should apply for 2009.
For 2010 the escheat of IRA Annuity #1 is probably incorrect, but if we momentarily set that aside, no distribution from IRA Annuity #2 would be required since RMD would have otherwise been fulfilled and it would be well in excess of 1/11/.1 due to Annuity Company #1 paying out Annuity #1.
For 2011, Client probably owes excise tax (for #2) based on 50% of RMD for 2011. RMD should be 1/10.1 for Annuity #2 held by Annuity Company #2.
For 2012, client should be ok to take RMD for 2012 based on 1/9.1 payout.
Five questions.
1. Did Annuity Company #1 mess up by forcing whole thing out in 2010? I am sure that in addition to accelerating all the income tax it forces client beneficiary into AMT of an additional $10,000+.
2. Relative to Annuity #2 – Am I missing something that messes up my calculation?
3. Would the beneficiary be eligible to use his own longer life expectancy?
4. Do the treatments look as if they are inconsistent? They sure look inconsistent to me. Annuity Company #1 and Annuity Company #2 seem to disagree on the treatment and surely they can’t both be correct at the same time.
5. Am I missing something in my analysis?
Permalink Submitted by Alan Spross on Thu, 2012-05-10 22:30
Were the companies domiciled in different states? Escheat provisions vary by state but there are typically notification requirements before this happens. What effort did the #1 company make to notify of intention to subject the account to escheat procedures? Another question is whether those procedures require distribution prior to transfer. Further, if there was no notification from the company, how did they know where to send the 1099R, or did it take 2 years for them to determine the address? The fine print in Annuity 1’s agreement should be checked to determine if these procedures are included in the agreement. While their approach is not typical and seems agressive, it may well be permissible and probably serves as a wake up call to all IRA beneficiaries, executors and trustees in this position.
With respect to the other issues, your RMD calculation is correct for the other annuity, including the 2010 RMD being covered by the Annuity 1 distribution. Trustee might try to get the 50% excess accumulation penalty waived by filing Form 5329 and citing “reasonable cause” for the oversight. Certainly worth a try.
Trust beneficiaries of qualified trusts can use the age of the oldest trust beneficiary to determine RMDs for all beneficiaries, however in this case it is obvious that the notification deadline (10/31/2010) for both companies was missed by the trustee and therefore RMDs must be based on the age of the decedent as you indicated for Annuity 2. Trust would be treated as a non qualified trust.
Permalink Submitted by Anthony Fantini on Thu, 2012-05-10 22:42
Thank you for your post. As for escheat, since it is an anuuity IRA, they are subject to the state insurance commission in the state of the decedent. Your point is also very interesting for another reason. Annuity Company # 1 is . . . ta da . . . Sun Life of Canada.