Nonspousal inherited IRA relief
I have a client that inherited an IRA from her father. The plan was to stretch out the IRA over her life expectancy. The IRA, at the time of death of the owner, was invested in a qualfied annuity. The investment advisor cashed out the annuity and the funds were put in an estate checking account of which the daughter was trustee. The estate then wrote a check to another insurance company and an annuity purchased and titled as an inherited IRA.
TSince then, the daughter has received word that the company that currently has the annuity is going to bust the annuity and put funds in a nonqualified account. They say the deal failed the trustee to trustee rule for an inherited IRA, so now all of the IRA is taxable. The investment advisor says that he followed all of the steps that he was told to do to strech ira.
Is there any IRS relief for receiving bad investment advice? I can find PLR relief for spousal IRAs but non for Nonspousal inherited IRAs. Many thanks.
Permalink Submitted by Alan Spross on Fri, 2011-08-19 03:35
I am not aware of any letter ruling allowing relief for this situation because the usual rollover extensions do not apply here as any distribution is not rollover eligible in the first place. This is the most frequent and costly error made with inherited IRAs. Relief may only come from proceeding against the advisor. This rule has been in place for many many years and it is amazing that the advisor committed this error. Perhaps he never realized the annuity was in an IRA account.
Permalink Submitted by Eric Woodfill on Fri, 2011-08-19 10:18
So based upon this situation where a non-spouse inherited the annuity, what would you recommend? My understanding there is not a continuation policy for non-spouses, so how would someone liquid the annuity and transfer it to another investment without this taxable situation happening – does the question makes sense??
Permalink Submitted by Angie Harris on Fri, 2011-08-19 13:44
This should have been a trustee to trustee transfer or a retitling of the account and there would have been no problems. The beneficiary could have received distribututions over her life expectancy.
Was that your question?
Permalink Submitted by Bruce Steiner on Fri, 2011-08-19 14:33
How was the advisor able to cash in the annuity without the signature of the named beneficiary?
Permalink Submitted by Angie Harris on Fri, 2011-08-19 15:43
Named beneficiary was aware of cash out and merely followed advisor’s instructions. Advisor says he received bad advice on how to handle.