Minor Non-spousal Beneficiary
Decedent died in 2008 at age 61 leaving 100% of 401K balance to minor child. Plan established a beneficiary account in the name of the minor child but would not transfer funds to inherited IRA without court order. A New York State Court ordered the guardian to establish a guardianship account and deposit all monies in the name of the guardian. Plan appears to allow life expectancy payout “if you elect to receive distributions that commence within one year of the participant’s death…”. They probably meant by the end of the year following the date of death.
A. Can a guardianship account be structured to hold an inherited IRA?
B. If not, it seems there is no way to avoid current taxation on the transfer of funds to the guardianship account.
C. If yes to A or if the court can be pursuaded to permit the establishment of an an inherited IRA for the minor:
1. Is an RMD required for 2009 to establish the fact that the beneficiary is electing a life expectancy payout even though RMDs are not required for
2009? i.e. if you don’t make the RMD, will it default to the 5-year payout?
2. If the 401K plan allows life expectancy payouts, would a 2010 transfer to an IRA preserve this option? I understand that if the Plan does not have a provision for life expectancy payouts, the distribution to the inheritied IRA would need to occur in 2009.
Permalink Submitted by Alan Spross on Tue, 2009-12-15 20:32
A) Yes. It is standard procedure in NY to appoint a “guardian ad litem” for minor beneficiaries. The inherited IRA registration would reflect the guardianship account FBO the minor. Transfer to the IRA is tax free in a direct rollover.
B) See above
C) 1) No RMD is required for 2009 and life expectancy RMDs are not affected.
2) It is critical to complete the transfer to the IRA before year end if the plan REQUIRES the 5 year rule. If the transfer is not completed by the end of the year following the year of death, an IRA transfer done later must retain the RMD provision that applied to the plan, and the IRA cannot broaden it. The waiver of the RMD in WRERA does nothing to extend the deadline year for the transfer to an inherited IRA to supercede the plan provisions. That deadline remains year end 2009 if the plan provisions are to remain immaterial to the life expectancy option for RMDs from the inherited IRA.
The RMD options including those if the transfer is not done by year end are included in Notice 2007-7, Q&A # 17 – see special rule 2:
http://benefitslink.com/IRS/notice2007-7.pdf
Permalink Submitted by Timothy OKeefe on Tue, 2009-12-15 21:26
Thank you.
Can you be more specific about how the inherited IRA should be set up under the guardianship account? Would you title it something like:
Mrs. Guardian
IRA Account Miss. Beneficiary as beneficiary of Mr. Decedent
Permalink Submitted by Alan Spross on Tue, 2009-12-15 23:18
IRA registrations vary according to the IRA custodian, and the guardian account is subject to state law requirements. The IRA custodian will usually determine what is acceptable and their legal Dept probably already knows the NYS requirements. If not, let them do the research if they will. The IRS is simply concerned that the IRA is identified as to the beneficiary AND the original owner, but are flexible on the order and method as long as the interests are clear.
An improper registration can be corrected and does not automatically result in a taxable distribution, as many think.
Bruce Steiner may enhance this issue if he sees this post and is licensed in NYS.
Permalink Submitted by Bruce Steiner on Wed, 2009-12-16 22:55
Alan: yes, my office is in New York and I’m licensed in New York (as well as in New Jersey and Florida).
A guardian ad litem represents a minor in a probate or similar proceeding, while a guardian of the property holds the minor’s property until he/she reaches majority. If there is property payable to a minor outright (rather than in trust or to a custodian under the Uniform Transfers to Minors Act), a guardian will generally be appointed. Except in unusual circumstances, the person(s) named in the Will as guardian(s) will be appointed.
Unlike trustees and custodians, guardians are closely supervised by the court. For that reason, it’s unusual to have a guardianship.
I don’t know why the plan wants a court order to set up an inherited IRA. The choices appear to be (i) to get such a court order, (ii) for the guardian to set up an inherited IRA and persuade the plan to transfer the benefits to the inherited IRA without a court order, or (iii) if the plan permits stretchouts (some do but some don’t), to leave the benefits in the plan and take annual distributions from the plan.
Since a guardian has been appointed, then presumably a lawyer is involved. He/she should be able to provide more specific advice and recommendations based upon the facts and the guardian’s objectives.
Bruce Steiner
Permalink Submitted by Timothy OKeefe on Fri, 2009-12-18 20:37
Thanks!
1. Prior to any attempted distribution, the 401K Plan changed the name on the 401K account from the decedent to the minor beneficiary c/o the guardian. They indicated on a statement that “a beneficiary account has been established for you”. I assume even though the 401K account is now in the name of the minor beneficiary, it would still be possible to transfer these funds into an IRA in the decedent’s name FBO the minor beneficiary? i.e. the fact that the 401K plan has the money in the beneficiary’s name rather than the decedent’s, does not prevent a later distribution into an inherited IRA in the decedent’s name FBO the beneficiary?
2. It seems that based upon question 3 of Notice 2009-82, a transfer to an inherited IRA would not have to be completed until December 2010 to avoid being tied into the 401K Plan distribution rules. Normally to avoid being subject to possibly more restrictive distribution rules of a Plan (i.e. only allows 5 year payout rather than life expectancy payout) the distribution to an inheritied IRA would have had to be completed by the end of the calendar year following death (i.e. December 31, 2009), but it seems Notice 2009-82 gives an extra year for 2008 decedents. Is this correct?
Permalink Submitted by Alan Spross on Fri, 2009-12-18 23:32
1) Yes, an inherited IRA transfer is still possible and starting in 2010 will be mandatory for custodians to offer it.
2) Yes, 2009-82 provides the extra year for 2008 deaths, so you are correct. And the transfer is mandatory in 2010 per above.