Non-Spousal Inherited IRA

Submitted by Ron Bernat on Wed, 2017-01-18 02:09

My mother who died in Oct 2016 has an IRA with a reputable brokerage firm. Her eight children are the beneficiaries. The brokerage firm indicated that they would not be opening inherited IRA accounts for each of the beneficiaries, so each beneficiary opened an inherited IRA account properly titled as my mother’s name IRA for the benefit of the beneficiary name at a different financial institution. The brokerage firm plans to do a trustee-to-trustee transfer of each beneficiaries share from my mother’s IRA to the inherited IRA account setup by each beneficiary. As I understand it, the transfer would be in the form of a check or wire transfer in my mother’s name IRA for the benefit of the beneficiary. Is this OK or will it create problems for the beneficiaries with the IRS? How should the original custodian and new custodian report this transfer to the IRS on forms 1099-R and 5498 to avoid any tax liability owed by the beneficiaries? Do I need to get something in writing from the brokerage firm about how they are handling this in case there are any issues down the road with the IRS or am I being overly concerned and this sort of thing does occur and is not going to create any problems?



Submitted by Alan - IRA critic on Wed, 2017-01-18 03:01

  • The transfer is OK as long as the inherited IRAs are titled correctly showing your mother’s name as decedent and each beneficiary’s name on the account and a direct transfer is done. A distribution would be a disaster because it cannot be rolled over. Probably best to have each inherited IRA custodian handle the transfer from their end. A check made out to the “custodian FBO  beneficiary” qualifies as a transfer even if mailed to the beneficiary for delivery.
  • There will be no 1099R issued because the funds must be moved by non reportable direct transfer. Any 5498 would be issued only to report the year end account value, not the receipt of a rollover contribution.
  • It would be helpful if all 8 could act fairly close in time, only because there is no easy way to verify the accuracy of the old custodian’s math since the account will change value daily unless it is all cash. For example, the first transfer would be for 1/8 of the account value at that time, the next for 1/7 of the remaining value etc. If the custodian messes this up it will be a nightmare to straighten out. Another potential problem would be a holding that the old custodian will hold that the new one does not. This might happen if there are any oddball holdings in the account. All the beneficiaries that complete this transfer by year end 2017 will use their own life expectancy for RMDs this year. They would use their age at the end of 2017 and 1/8 of the old inherited IRA account balance on 12/31/2016.
  • If your mother had an RMD requirement for 2016 that was not completed, the beneficiaries are jointly responsible for completing that year of death RMD. Jointly means that if one or two need the money they can complete that RMD and  the others do not have to take a distribution.
  • If your mother had any tax basis in the IRA from non deductible contributions (Form 8606), each beneficiary will inherit their share. If this is the case, better post back.

Submitted by Ben Meyer on Wed, 2017-01-18 18:05

Would it also be possible to have the brokerage perform one transfer of the total account value to the new institution, to an account titled as an inherited account.  Then, the successor institution can make simultaneous transfers to the accounts of the individual beneficiaries all at the successor institution.  This would simplify the accounting since the amounts transferred to the individual beneficiary accounts would all be the same 1/8 fraction, assuming that each beneficiary receives the same percentage.  RMD for year of death can be taken from the main account prior to splitting, which would also be the simplest alternative.

Submitted by Ron Bernat on Wed, 2017-01-18 19:00

My mother’s IRA account holdings were sold and everything is currently in cash.  Each beneficiary opened an inherited IRA at different financial institutions. So, the brokerage firm plans to directly transfer from my mother’s IRA account 1/8th of the account value to each beneficiary’s inherited IRA account at the financial institution where his/her account was setup.  Based on the comments above, it sounds like this is an acceptable practice.It has also been suggested to rollover my mother’s IRA to another firm that is willing to setup inherited IRAs for each beneficiary and then transfer the funds from her IRA to the each beneficiary’s inherited IRA.  At that point, each beneficiary could then transfer his/her inherited IRA to another inherited IRA setup at the firm of her/her choice.  Is this approach more preferred over the other? 

Submitted by Alan - IRA critic on Wed, 2017-01-18 20:09

  • Either will work, but the first option has fewer transactions, particularly since the inherited IRAs have already been established, presumably where each beneficiary prefers. The fewer the number of transfers, the less chance for problems. Besides a taxable distribution, the other costly error is if a transfer is made into an owned IRA will a prior balance, so if a beneficiary has established an inherited IRA at the same firm in which their own IRA is held, be sure to get the account numbers right.
  • Having the account totally in cash should reduce the chances of a math error by the custodian, even if the transfers do not get done at the same time. Each beneficiary should carefully verify the balance in the new inherited IRA and be sure it is titled correctly in beneficiary format as soon as possible after the transfer. They should also name a successor beneficiary on the inherited IRA.

Submitted by Chuck 2009x on Wed, 2017-01-18 20:55

I used to work for a transfer agent.  The less paper the better.  The children should pick a team captain and submit one letter to the current brokerage with instruction details for all 8 transfers out so they can all happen on the same day.  All 8 beneficiary signaures on the same doc.  If all in cash, tell the custodian who to give the extra 1 – 7 cent remainder to, if any. 

Submitted by Alan - IRA critic on Wed, 2017-01-18 23:03

  • Pretty impressive if all 8 provided the necesssary documentation promptly. With 8, there is usually at least one procrastinator or bonehead. A few people have reported that some custodians push to hold up the transfers until they get the papers from ALL beneficiaries.
  • Most beneficiaries would probably prefer to maintain their inherited IRA at their own preferred IRA Custodian rather than a new custodian. Therefore, setting up inherited IRAs at a single new custodian will probably result in the beneficiary’s doing another transfer to their preferred custodian, which is not efficient.
  • The beneficiaries may also want to take the year of death RMD if not completed in unequal amounts, so they should not be forced to ratably complete that RMD. The higher tax rate beneficiaries probably do not want that RMD and the lower rate beneficiaries probably are more likely to need that income.

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