Beneficiary IRA

Submitted by Janis Sleeter on Tue, 2016-10-04 16:42

The mother of one of our clients died.
The broker on mom’s IRA wants to just send checks to the heirs.
They are refusing to set-up beneficiary IRA’s there. Based on all of 20 years experience, they can’t do that.
I thought that the account was legally frozen and assets in kind had to be distributed to the heirs’ beneficiary IRA’s at mom’s broker/custodian. Then the heirs decide what to do.

Am I wrong? Also, would the heirs be OK if mom’s custodian made the checks out to the new custodian FBO beneficiary IRA ….?



Submitted by Alan - IRA critic on Tue, 2016-10-04 20:30

  • There are increasing reports of IRA custodians not wanting to hold beneficiary IRAs and/or pressure beneficiaries into accepting a lump sum distribution. The client needs to get ahold of the IRA agreement to determine what the contract indicates will occur upon the death of the IRA owner. In this paragraph there could be a reference to the procedures of the custodian which can not override, but can affect what the clause says. There is no legal requirement to allow beneficiaries to take advantage of the IRS distribution requirements, but if custodians keep this up, there is probably going to be requirements in the future.  In the meantime, competitive pressure is the only effective way to force custodians away from anti consumer behavior. IRA owners are going to have to start asking IRA custodians for clarity on what options their beneficiaries will have. The custodians generally want IRA owner business and do NOT want beneficiary business.
  • If they will not set up a beneficiary IRA, I suggest sending a letter to the custodian along with the death certificate and indicating the successor beneficiary they want named on the account, as well as the beneficiary information, but also indicate that they do NOT want any check to be issued to the beneficiary.
  • If the custodian wants to eliminate the account, the beneficiary should try to set up an inherited IRA with a more receptive firm and then ask for a distribution check to be made out to that firm FBO beneficiary inherited IRA. Such a check can be mailed to the beneficiary and qualifies as a direct transfer, not a distribution. Given the policy of this custodian, the letter should also clarify that the transfer check to the new custodian will be a direct transfer under IRS rules, and there is to be NO 1099R issued reporting a distribution.
  • You did not indicate if the heirs were designated beneficiaries or if the estate was the beneficiary. The approach of this custodian is more typical of estate beneficiaries than designated beneficiaries, but it seems when the beneficiaries are named, the more beneficiaries there are, the faster the custodian wants the account to be distributed or transferred.

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