Minor Beneficiary
IRA owner died in 2000 prior to RBD and named the beneficiary as a minor child, age 10 in 2000. The custodian of the IRA would not let the parents do ANYTHING with the IRA. They would not let them move it, reallocate, rebalance, NOTHING…Now in 2007 the child will be turning 18. My question is what is the right move now? It is my understanding that in 2000 the options would have been to take distributions over the beneficiaries life expectancy or over 5 years. However, they missed the deadline to start the lifetime distributions so that option is out. Mean while the date to distribute all of the funds by was Dec 31st of 2005. So what now? I’m not sure what rules should be used, the rules at the time, or the new rules that went into effect January of this year? Should they start taking distributions over 5 years now? I just can’t seem to find a clear answer to this and I don’t want them to get hit with exorbitant penalties or taxes.
Permalink Submitted by Alan Spross on Fri, 2007-09-21 23:41
The custodians actions appear to be derelict, but what they should have done is a function of state law and the IRA agreement. In some cases, an UGMA or UTMA custodian gets control of the minor’s IRA interest, but the RMD requirements remain in effect. When the 2002 RMD regs were published, the prior 5 year default rule could have have overridden by electing life expectancy no later than 12/31/2003.
The IRS has been waiving excess accumulation penalties in most cases, so the IRA probably needs to be completely distributed and a request to excuse the penalty filed with Form 5329. There may be some legal recourse against the custodian for any penalties the IRS does not waive, and perhaps there is also a valid case that the custodian’s actions denied the minor the benefit of a lifetime stretch of this IRA and also cost the beneficiary financial education aid due to an untimely total distribution just before college.
But I would start with the IRA agreement itself with respect to a provision regarding minor beneficiaries in the designated beneficiary provisions section. Of course, the parents may have got the whole thing wrong, because the reported beneficiary actions probably do not reflect their own agreement.