My brother messed up Inherited IRA title 18 mos ago. Fixable?

Submitted by philip berens on Wed, 2022-02-23 16:49

18 months ago he transferred money from a Vanguard “Dads name deceased inherited IRA” to a bank CD titled “My brother’s name IRA”. He foolishly asked for check from Vanguard to new bank to be made out to his personal name. Not sure why Vanguard didn’t question that.

We have stretch status from prior to new rules, so we recalculate based on our life expectancy yearly, and he already has taken 2 RMDs since dad passed (RMDs had to start right away) , but he is only 60 years old so in 1 of the years he was 58, so he was under the regular IRA age for no penalty distribution if that matters.

This money was never comingled with his other regular IRA at another bank.

Also it is now in a third bank since second bank dumped their IRA division so it’s at a trust company in a cash account, again under “brother’s name IRA”.

Questions:
1. In your experience any chance we could get vanguard and the cd bank and the new trustee all to retitle it retroactively from 18 mos. ago. Vanguard’s initial response was not favorable.

2. Would IRS notice this from say the 1099 R? I assume it says the title of account on 1099r, but wouldn’t a human have to compare it to previous years? Would they care since taxation is the same…annual recalculation of rmd based on life expectancy.

3. If we can’t get banks to open a new cd in Inherited IRA name any chance IRS would allow it to remain as regular IRA or some other remedy?
Thanks.



Submitted by Alan - IRA critic on Wed, 2022-02-23 17:52

No chance of getting this corrected. Once the VG check was issued to him, the inherited IRA was distributed and he likely has a 1099R for 2020 showing the distribution Code 4. That distribution must be reported on his 2020 return. At least, because it was a Code 4 death distribution, there will be no penalty, just ordinary income tax. The addition to an owned IRA is an excess contribution for the year of the contribution (apparently 2020), and that will produce an excise tax for 2020 and 2021. He apparently did not get the help he needed from any of these custodians, but the unlimate error was his. Sometimes a mistitled inherited IRA can be corrected, but the initial distribution from VG instead of a direct transfer was a fatal error.

Submitted by philip berens on Wed, 2022-02-23 19:38

Thank you, but to be clear the money went directly from Vanguard to the new bank, and not thru him personally. (Sorry if I confused you…the bank cd application asked how he wanted check made out from the sending institution, vanguard. I assume the bank sent that form to vanguard to initiate.) Does that help?  He did receive a “contribution” form 5498 for the entire cd amount for 2020 from the new bank. I can’t believe they took a 6 figure check from an account titled “inherited ira’ and stuck it in a traditional ira without someone there thinking to double check. So he now has an excess contribution, I assume, for 2020 to his regular ira unnoticed so far, without IRS having contacted him yet.  On top of a distribution from inherited ira of full amount? Any chance that 2020 form 5498 can be reversed and have it just be a trustee to trustee traditional ira transfer, retroactively, in a way IRS would accept?  FYI he didnt take any RMDs from that bank. He took the whole rmd for entire inherited ira from the money he left behind at vanguard.

Submitted by Alan - IRA critic on Wed, 2022-02-23 21:22

Did he get a 1099R from Vanguard for 2020?  If so, how did he report it on his 2020 return? And what type of contribution shows on the bank’s 2020 5498? 

Submitted by philip berens on Fri, 2022-02-25 17:24

Great points…Vanguard did not issue a 1099R for 2020.  The bank it went to issued 5498 form of contribution for the entire cd amount.  So that is a major mismatch I guess, that one trustee didn’t show distribution, yet the other trustee shows same money that in theory hasn’t been distributed out of Inherited IRA, as a contribution to new IRA.  So unless one old inherited ira magically went into a new traditional ira that can’t happen? So a trustee miscommunication?

Submitted by David Mertz on Fri, 2022-02-25 17:39

If Vanguard didn’t issue a Form 1099-R, apparently Vanguard believes that the payment was not made to your brother personally as you alleged in your original post.  Since this appears to be entirely a bank error, it should be possible to get the receiving bank to correct the Form 5498 to show that there was no receipt of a rollover by his own IRA and to correct get the funds into a correctly titled inherited IRA since this was apparently a trustee-to-trustee transfer. 
Banks often make errors like this due to inadequate training of the bank personnel.
If the bank can’t make the correction, it will have to be treated as a distribution from the inherited IRA that was not eligible for rollover.

Submitted by philip berens on Fri, 2022-02-25 17:47

Great, thanks. But to be clear the check went from vanguard directly to bank, but the form had preprinted “Capital One FBO” so when my brother added his name it was “Capital One FBO brother’s name” which is what was on check that went from Vanguard directly to Capital One.I should have mentioned the preprinted FBO part – but I dont think that would change your thinking? Even better maybe?

Submitted by Alan - IRA critic on Sat, 2022-02-26 00:47

While VG treated this as a direct transfer, by not showing “brother inherited IRA” as the check payee, they are partially responsible for the error. There is precedent for inherited IRA funds deposited in error to a newly opened owned IRA for the receiving custodian to review documentation and retitle the account properly, the bank staff needs to be willing to review documentation with an open mind. How was the new IRA opened and by who? Did brother have a hand in it? Did brother work primarily with VG or the bank in opening the account? An inherited IRA must contain both the decedent’s name and brother’s name included in the title. 

Submitted by Alan - IRA critic on Sat, 2022-02-26 00:48

While VG treated this as a direct transfer, by not showing “brother inherited IRA” as the check payee, they are partially responsible for the error. There is precedent for inherited IRA funds deposited in error to a newly opened owned IRA for the receiving custodian to review documentation and retitle the account properly, the bank staff needs to be willing to review documentation with an open mind. How was the new IRA opened and by who? Did brother have a hand in it? Did brother work primarily with VG or the bank in opening the account? An inherited IRA must contain both the decedent’s name and brother’s name included in the title. 

Submitted by philip berens on Sun, 2022-02-27 11:46

Thanks again. So did my brother “have a hand in it?” Kind of. Because the bank doesn’t even offer inherited IRAs…he must have spoken to a rookie who assumed they did and told him to use traditional ira form….he just wrote his personal name in on the form that bank shared with vanguard to initiate transfer. It had “FBO” preprinted so vanguard sent it made out to “Bank FBO Brother’s name.”  I don’t think Vanguard should have done that with inherited funds.  My brother should have thought that was weird, but he isn’t sophisticated about such things.

Submitted by Alan - IRA critic on Sun, 2022-02-27 16:24

Since all Capital One IRA business was recently transferred to Millennium Trust (MT), then MT has assumed responsibility to address all Cap One outstanding issues, including this one. You indicated that the amount here is 6 figures so worth the effort to at least make one attempt to get MT to rescind the 5498 and retitle the IRA as inherited. I assume that no other additions or withdrawals have been made from this account. I would send MT a copy of the VG statement showing an inherited IRA using the last available statement VG issued. Brother should state that a TtoT transfer was made from VG to CO, and that no 1099R was issued by VG, that the current funds are improperly held in an IRA owned by brother that needs to be retitled as an inherited IRA as VG should show on that statement. The 5498 issued by CO should be rescinded since a direct transfer of an inherited IRA is not reportable on a 5498. Again, this is very much a long shot but worth the effort considering the tax bill brother would owe on a full distribution, along with excise taxes for excess owned IRA contributions.
If the balance is large enough, perhaps brother should hire a tax attorney to write the letter, but it would be a challenge locating one that is expert in this area. 

Submitted by philip berens on Mon, 2022-02-28 18:01

Thanks again…great advice. Will do all of this, including maybe an attorney if Vanguard and Capital One/Millenium don’t work it out on their own. Our Vanguard guy is working on this. 

Submitted by Alan - IRA critic on Mon, 2022-02-28 23:58

Let us know what VG decides to do, if anything. About the only way they could help is to write a letter to CO/MT confirming that the account was an inherited IRA and how it should be titled. MT will have to retitle their IRA to actually resolve the problem, and that’s the hard part.

Submitted by philip berens on Wed, 2022-03-02 13:08

Vanguard washed their hands of it. I guess the form my brother filled out to open Capital One IRA CD, which was shared with Vanguard in order to allow them to send the money, makes it my brother’s fault. I still don’t think they should have made out a check from an inherited IRA to anything but another “inherited ira” elsewhere.  I’m trying to rationalize that my brother files jointly, and neither is a high earner, so the additional taxes for that one year huge bump in income, if it’s a full distribution, would be only like 2% since will bump him from 22% (his usual bracket) to 24% for about half of the IRA.  3 or 4k extra due to margin level jump,  but all paid now ( total of 30-35k) vs over 30 years. Hopefully IRS will waive that 6% penalty on excess contributions and let us unwind the new ira that the cd created.  And I realize we are ignoring the time value/growing tax free benefit of it staying in IRA longer, but my brother would rather spend it on a new Corvette anyway. But still waiting for Capital one to respond, and Millenium next after cap one gives us response.

Submitted by philip berens on Tue, 2022-03-01 11:42

Will do, and thanks again. That is what we are doing- giving our Vanguard rep the guilts over this situation happening to 35 year clients- my entire family. He seems to be on it. He has the Form 5498 from Capital One so he sees the obvious miscommunication between VG and Cap One.

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