IRA beneficiary options

Submitted by Philip Melanson on Tue, 2015-09-22 17:46

I have a client who passed away with four beneficiaries, all non spouse. If one or more of them want to simply take a full distribution for their portion are they required to establish and Inherited IRA and then take the distribution or can they simply request the funds be sent to them? Are all beneficiaries required to take the same option or is each individual allowed to make their own choice?



Submitted by Alan - IRA critic on Tue, 2015-09-22 19:03

  • Each individual is allowed to make their own choice. Such choices are a full distribution, creation of separate inherited IRA accounts or a direct trustee transfer to another inherited IRA custodian. If the year of death RMD of the decedent had not been completed, a full distribution to one beneficiary will satisfy the decedent’s RMD and the others do not have to take a distribution for the year of death RMD.
  • IRA custodians handle this situation differently. The most conservative and transparent method is to establish inherited IRA accounts for each beneficiary, and from there each beneficiary can make their own distribution choices. Some custodians may be willing to make a lump sum distribution to a beneficiary that requests one and do the accounting internally without creating a separate inherited IRA for a beneficiary desiring a lump sum distribution. Some custodians also will attempt to delay establishing separate accounts for a beneficiary until they have all the documentation from ALL beneficiaries and then they can divide the assets into inherited IRAs at the same time. This can create a problem for efficient beneficiaries when another beneficiary procrastinates or submits incorrect info. There is no reason that a custodian cannot do the internal bookeeping to set up the separate inherited IRA accounts as each beneficiary supplies the documentation, and that will free up the beneficiary to have complete control of their respective account. Beneficiaries with inefficient relatives should make it clear to the custodian that they want their account established as soon as they submit their own documentation.
  • would like to see urusei’s comments on this since he has actual custodian experience.

Submitted by Jose Morales on Wed, 2015-09-23 16:56

Hello Alan,  your comments were accurate.  Whether the step of creating an inherited IRA is necessary when a beneficiary elects to take a full distribution of their share is going to be mostly driven by the account platform the financial institution is using or the financial institutions procedures.  Some platforms allow for a distribution directly from the original IRA with the reporting properly assigned to each beneficiary, other platforms do not have this capability.  Whether each beneficiary can make their own choice on their own timeframe will be influenced by each financial institutions procedure (or lack of procedure).  I can’t think of any system limitations that would force each beneficiary’s decision to be processed at the same time only.  It is very commmon in the banking world for operations departments to believe that they can’t process one beneficiary’s election until all have submitted their elections for processing as well.  In those situations you need to insist that they contact whoever provides them with IRA guidance (often they have a help line to one of the IRA document/administration companies to call when they are faced with a situation above their capabilities).

Submitted by Ben Meyer on Wed, 2015-09-23 17:58

In the event that the IRA custodian is unaccommodating, can the decedents account be transferred to a new custodian, as a direct rollover?  Is such a transfer a matter of right under the IRC, or would it depend on the consent of the original custodian?  The new custorian would then complete the distribution(s) to the beneficiaries, according to the choice of each.  With multiple beneficiaries, who can direct the custodian to make such a transfer?  The executor/personal representative of the decedent?  How would the new account be titled?  

Submitted by Alan - IRA critic on Wed, 2015-09-23 18:36

  • Unlike qualified trusts, there is no requirement in the tax code for IRA custodians to offer direct transfers. However, refusal to do so would probably be a death wish for their IRA business. If some could separate their inherited account business from their owned accounts, they would probably not miss the inherited account business since these accounts do not get deposits, only distributions and possible estate related problems. But unfortunately, IRA owners eventually pass.
  • The executor would have no standing with the IRA custodian unless executor was also a beneficiary, and only for their personal interest as beneficiary. All named beneficiaries would have to agree to to the transfer and new custodian. If the IRA as inherited was transferred, the new IRA would have to be titled showing all the beneficiaries and the decedent to do the transfer. I don’t think there is a way to transfer directly into separate inherited IRA accounts unless the original custodian first establishes those separate accounts.  

Submitted by Ben Meyer on Thu, 2015-09-24 13:40

Even without standing to speak formally to the IRA Custodian, the Personal Representative seems to be the only person in a position to advise each beneficiary the amount of remaining IRA basis that should be attributed to each beneficiary distribution.  This is the only person who has full knowledge of the most recently filed form 8606, aside from the surviving spouse.  If a probate case has not been opened, then the surviving spouse can perform this function, through an accountant if necessary.  If no surviving spouse exists, but if there is a successor trustee of the decedent’s personal trust, then this person seems to be the one to distribute the remaning basis.  This is a somewhat informal activity, but is necessary where there is remaining IRA basis.  (If any dissention arises among the beneficiaries it may be necessary for the personal representative to seek a ruling from the probate court to establish the distribution of basis, but this should be a rare occurrence.)  Alan, do you concur?

Submitted by Alan - IRA critic on Fri, 2015-09-25 03:01

Benn, I agree. In many cases, the executor or trustee was chosen for other reasons than their tax knowledge. With some cooperation with one of the non executor beneficiaries they should be able to determine the IRA basis, or at least determine that the decedent had basis but failed to file 8606 forms for many years. That becomes a major problem, but for those cases where the basis is identified, it just gets pro rated in proportion to each beneficiaries share of the inherited IRA. The amount of inherited basis is determined AFTER the amount of basis used in any decedent distributions in the year of death that have not been reported yet. And in applying basis for the decedent’s final return the IRA balance used on the 8606 is not the year end balance, it is the DOD balance. (Not in the 8606 line 6 Inst, but so indicated on p 14 Note of Pub 590-B).

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