Inherited IRA to Annuity ??

Submitted by Don David on Sat, 2010-02-20 21:05

I have a client who in 2009, inherited 3 TIRA’s from his mother who was in her 50’s. He aslo left his job in 2008 and had a 401K.

The insurance/annuity advisor he met with setup an anuity as a Qualified IRA, and allowed himn to rollover teh 3 inherited IRA’s AND the 401K into a SINGLE annutiy account, complete with 10years worth of surrender charges.

I told hin I don’t think that’s allowed and that I would research it further.

Am I missing something?

Also, since inherited IRA’s cannot be converted, I think the insurance company messed up. BTW, this took place last October.

If I’m wrong, please let me know.

If I’m right, how can this be fixed??

Thanks,

Don



Submitted by Alan Spross on Sat, 2010-02-20 22:17

Sounds like a disaster without a fix other than a legal settlement.

1) Were the inherited IRA funds transferred directly to the annuity IRA?
2) How is the annuity IRA titled?
3) What are the relative values between the 401k and the inherited IRAs?
4) What 1099R forms have been received?



Submitted by Don David on Sat, 2010-02-20 22:53

Alan,

Thanks, I was afraid of that.

1) Were the inherited IRA funds transferred directly to the annuity IRA? *** YES
2) How is the annuity IRA titled? *** Just in the client’s name. No reference to ‘inherited ira’ he’s the owner and annuitant.
3) What are the relative values between the 401k and the inherited IRAs? *** 401k = 200k Inherited IRA = 69k
4) What 1099R forms have been received? ** 401k form shows code = G ** all 3 IIRA forms show code = 4

Should my client consider getting an atty at this point or attempt to get the money and gop somewhere else?

Thanks,

Don



Submitted by Alan Spross on Sat, 2010-02-20 23:32

As it stands, the 69k would be taxable, but no penalty, so the damages would be accelerated taxes on the portion of that account that would not have to be distributed anyway in annual RMDs. There are too many variables to recommend legal action or not vrs a PLR request based on advisor error, but a PLR costs upward of 10k with no guarantee of success.

In some circumstances, if the funds are not distributed, a registration error can be corrected without a taxable event, and perhaps the annuity carrier would be willing to split these into an inherited annuity for the 69k and owned annuity for the rest. If their error perhaps they can be pressured first without counsel, and if that does not work, proceed with counsel if client wants to go that way. But when there is a dispute with powerful interests such as IRA custodians and insurance carriers, it is generally a waste of money if client contributed whatsoever to the error. If client was 10% negligent, that is enough for the adverse interests to drag out any settlement or just tell him too bad.

The 1099R for the inherited IRAs should not have been issued in a TT transfer, and that will bring the IRS into the picture sooner rather than later. One issue to be explored is whether the 1099R was triggered simply because the transfering registration differed from the receiving IRA. That should not happen unless it is a spousal transfer due to death of divorce.



Submitted by Al Fry on Sun, 2010-02-21 00:11

There should not be a problem with the carrier correcting this. Probably the paperwork was completed incorrectly, which would be the fault of the advisor, who represents the carrier. Or, the carrier screwed up. Or the IRA money came in without paperwork, just titled “Carrier FBO Client”. In either event, Alan’s suggestion should work by having the carrier carve out the 69K into an inherited IRA annuity contract retroactively. If you get initial resistance (common), get it elevated to the conflict resolution team. They generally will do whatever it takes to fix a problem such as this. I have seen similar situations where money came into a carrier from two different sources that were Inappropriately combined because of a common name, but only one had paperwork. The carrier corrected it ASAP once the errort was dicovered.



Submitted by Don David on Sun, 2010-02-21 13:09

Thanks both for the replies!

Great advice and I can give my client some direction.

The sad part is the company handled both the mother’s IRA distribution and the son’s annuity application.

I think it’s sloppy work on the advisors part.

Thanks again,

Don



Submitted by Alan Spross on Sun, 2010-02-21 18:32

Don,
Remember that even if the contracts can be successfully reformed into separate accounts, the 1099R for the inherited IRA is still a problem, and if not rescinded by the issuer, the IRS will consider it a taxable distribution. While appropriate documentation may still be accepted by the IRS, the IRS will have to be convinced that no actual distribution took place.



Submitted by Don David on Sun, 2010-02-21 19:25

Alan,

Good Point. During teh appt with my client, I explained that to him and he will get the documentation to shwo he had no control over the funds, but he undertands the possibilty of an IRS letter.

Thanks!

Don



Submitted by Al Fry on Sun, 2010-02-21 19:51

I meant to add the trustee (carrier?) should submit a corrected 1099-R.



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