Need advice on how to handle several inherited IRA's

Submitted by Brad Sprowls on Tue, 2014-08-19 12:36

My wife recently passed away at age 60. She has an IRA with Fidelity that she inherited from her mother in 2001 and she has an IRA with Vanguard that she inherited from her father in 2009. She has been taking the proper RMD’s from each one of those every year.

She also has her own IRA with Fidelity. She has 2 children from her first marriage. They are listed as the beneficiaries of all of the IRA’s. The goal is to provide for them and not for me, her spouse.

If possible, they would like to combine some of these accounts moving them from Fidelity to Vanguard. We need some advice on how this might be handled. Can any of these accounts be combined? Can each of her children end up with their own inherited IRA? Do the original IRA’s that my wife inherited have stay separate?

I am not even sure of all of the proper questions to ask. Please provide some possible scenarios for how to handle this. Thank you in advance!

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Permalink Submitted by Alan - IRA critic on Tue, 2014-08-19 18:21

Sorry to hear of your loss. The two IRAs inherited by your wife and now her children will continue to have the same RMD divisors that would have applied for your wife. If you are positive that the 2013 divisors used were correct (they differ), the children will reduce those divisors by 1.0 for 2014 and each year thereafter. They must complete the 2014 RMD if your wife did not. These two IRAs need to be re titled showing the children as beneficiary of your wife, and her parent’s name can now be deleted. They can also be split into separate inherited IRAs for each child, but that will not affect the RMDs. The children will each have 2 inherited IRAs from this group and they cannot be combined because they have slightly different RMD divisors.
For your wife’s own IRA, the children need to create separate inherited IRA accounts for each child no later than 12/31/2015. That will allow each one to use their own life expectancies based on their age as of 12/31/2015. Again, these inherited IRAs cannot be combined with any of the others due to different RMD divisors. They must complete their mother’s 2014 RMD by 12/31/2014 if not yet completed.
For all of these inherited IRAs, each child needs to add their own successor beneficiary ASAP.
If any of these IRAs had basis from prior non deductible contributions, look for Form 8606 on your joint tax returns indicating the amount of such basis. The children inherit the remaining basis if there is any, and they would then continue to file an 8606. This would result in some of the RMDs to be less than 100% taxable.
In moving any of these accounts to another IRA Custodian, be SURE that no distribution is taken payable to a beneficiary. The funds can only be moved by a direct trustee to trustee transfer, which includes a check made out to the new custodian FBO beneficiary’s name, and mailed to the beneficiary for delivery to the new custodian.
ALL IRAs must remain inherited showing both your wife’s name and the respective beneficiary in the title. The children cannot treat these IRAs as owned IRAs, cannot roll over distributions made to them and cannot contribute new money to them.