Beneficiary dies prior to IRA split
IRA owner named 4 beneficiaries. IRA owner died and the 4 beneficiaries were alive at the time the IRA owner died. Prior to the IRA being split into inherited IRAs, 1 of the benficiaries died. The original IRA owner’s benficiary form did not specify successor or contigent beneficiaries. Prior to dying, the deceased beneficiary completed a new beneficiary form for her new inherited IRA though that IRA has never been funded. As of today, the original owner IRA has never been split. Do the 3 remaining beneficiaries split the entire amount? Should the IRA be split 4 ways and passed to the deceased beneficiary or has that beneficiary been eliminated. This has occured in the last 5 months so it is prior to next year’s determination date.
Thank you.
Permalink Submitted by Alan Spross on Sun, 2007-09-30 03:19
The IRA agreement is the governing instrument here. Most likely, the estate of the deceased beneficiary will acquire the rights to that beneficiary’s undistributed balance. The other 3 should be able to establish individual accounts as long as the deadline of 12/31 following the year of owner’s death has not passed. Again, this is most likely, but the IRA agreement rules.
If the 4th beneficiary had passed PRIOR to the owner’s death and there was no contingent beneficiary for the deceased beneficiary, then the others would typically receive the interest of the deceased beneficiary. But this does not hold true when the beneficiary passes after having inherited a share.
Permalink Submitted by Denise Appleby on Sun, 2007-09-30 08:01
I agree that the [url=http://www.retirementdictionary.com/Plan-agreement.htm%5DIRA Agreement[/url] governs. For instance, IRA agreements often state that the [url=http://www.retirementdictionary.com/Beneficiary-Designation-Form.htm%5Dben… designation form[/url] is in effect, only if it is received by the financial institution by the time the owner of the IRA assets dies. If the agreement was received by the IRA custodian/trustee before that beneficiary died, then the beneficiary form should govern that decedent’s share of the inherited IRA assets. Moving the assets is merely an operational requirement, instituted by financial institutions that are unable to perform the distributions from the decedent’s account and meeting the tax reporting requirement at the same time.
For instance, assume the decedent’s Account # is 12345689… a financial institution may permit the assets to remain in that account, but perform sub-accounting, which in effect not only creates the separate accounting requirement, but allows the financial institution to issue a 1099-R in the TIN of each beneficiary that receives distributions from the assets.
In other cases- mostly with brokerage firms- the assets must be moved from (the) Account # 12345689 to separate and distinct account numbers for the beneficiaries. This is merely a step that is required, due to the requirements and capabilities of the financial institution’s systems. If the beneficiary provided his/her beneficiary-designation form prior to death, the fact that this movement from Account # 12345689 to his account did not take place before he/she died does not make his beneficiary-designation form inapplicable.
Permalink Submitted by Alan Spross on Mon, 2007-10-01 03:47
Of course, the issues of beneficiary designations and successor beneficiary designations, as well as agreement default provisions are of primary importance relative to accounting and RMD issues. If a designation does not get done timely or correctly, an entire share can be diverted elsewhere than intended, and whether the intended beneficiary receives their share may deterioriate into a matter of default “luck”.
However, Denise raises a valid and interesting issue regarding separate share accounting of beneficiary interests. The recent non spouse transfer from an eligible employer retirement plan to an IRA has been lauded due to the ability of a beneficiary to stretch distributions longer than some employer plans provide, but this transfer also shortens the time where multiple beneficiary interests are subject to separate share accounting within the same account. It appears to me that there is plenty of potential for error in allocation of investment changes and partial distributions correctly to each such on going account, so the sooner a beneficiary can get their share into a separate inherited IRA account, the better.
Let’s say 25% beneficiary A takes a partial distribution from a plan and 25% beneficiary B takes another partial distribution. After these distributions, if you are 25% beneficiary C, are you going to get a thorough accounting showing that the other’s distributions were added back to the account before calculating how much of your interest has been distributed to you? I would doubt that the transparency required is there, so the sooner I could get my share into my own inherited IRA, the better.
And, if I inherited a multiple beneficiary IRA, I think I would want to be the first one to have my interest transferred to a separate account #.