Ghost Rule in a SECURE Act World
For a non-married IRA owner who has attained RBD and whose sole beneficiaries are adult children, assuming that probate costs are minimal in the state of residency, what are the pros and cons of naming the estate as the IRA beneficiary rather than naming the children directly?
For reference: IRS Private Letter Ruling 202031007
https://www.wealthmanagement.com/estate-planning/ira-goes-estate-inherited-iras-individual-beneficiaries
Permalink Submitted by Alan - IRA critic on Tue, 2021-03-30 18:33
The article was very good, but the referenced PLR simply follows suit with decades of similar PLRs, and the applicant may well have gone to the high expense of attaining the PLR due to a non cooperative IRA custodian. Unless the decedent is very old, their remaining LE may well be longer than the 10 years of the 10 year rule, however use of decedent’s LE comes with annual RMDs and therefore lacks the flexibility of the 10 year rule. It may take a 12 year decedent’s stretch period to have an advantage over the 10 year rule due to this lack of flexibility.
One issue with leaving the IRA to the estate is that IRA owner’s rarely check with their IRA Custodians regarding accepting assignment of the inherited IRA to individual inherited IRAs of the beneficiaries. The owner passes and the custodian then refuses to cooperate even though they know that the IRS has continually approved assignment out of the estate or trust. Sometimes they insist that the executor pursue their own expensive PLR which is another form of stonewalling. IRA owner should therefore make sure their IRA is with a custodian that will cooperate with executor or trustee assignment requests. Might be a good idea to have this put in writing.
I suspect that it is not that easy to find a new custodian who will accept a transfer of an inherited IRA for the purpose of assignment to separate inherited IRAs. Perhaps the executor needs to have substantial deposits with the custodian which provides leverage for accepting assignment. Behind all this is the fact that IRA custodians would rather not deal with executors and get involved with estate related disputes. They would probably rather cooperate with an estate with one or two beneficiaries and avoid those with several beneficiaries which just results in more and smaller inherited IRAs. Non spouse inherited IRAs are wasting assets.
Leaving an IRA to an estate when assignment is refused and no replacement custodian can be found will either result in having to keep the estate open an abnormal length of time and filing a 1041 each year, or receiving a lump sum distribution so the estate can be closed.
Some similar issues apply to trusts, although a trust can provide various benefits that an estate cannot. That said, it makes little sense to leave an IRA to a trust when the trust will distribute it’s assets in a short time. Might as well have left the IRA to beneficiaries outright.
The IRA owner also needs to consider the competence of the executor when dealing with IRA custodians and beneficiaries with diverging expectations.
Permalink Submitted by Betsy Ratashak-Vogel on Tue, 2021-03-30 19:32
Thank you for this thorough response to put some closure to my question!
Permalink Submitted by Bruce Steiner on Fri, 2021-04-02 22:15
I know the author. She’s very knowledgeable.
The planning was poor. Why would anyone leave an IRA to his/her estate, then have the estate go to a trust, and then have the trust immediately terminate? Why not simply leave the IRA directly to (or to trusts for) the beneficiaries of the trust? Before the SECURE Act, that would have allowed the beneficiaries to stretch the distributions over their life expectancy.
Why did the apply for the ruling? The IRS user fee was $10,000, and the legal fees were probably about that much. The ruling was predictable. If the IRA custodian insisted on the ruling, they could have moved the IRA to a friendlier custodian. Perhaps another custodian would have allowed the distribution of the inherited IRA in kind with a legal opinion.
Bruce Steiner