Is a court order really required?
Please bear with me, as this is somewhat challenging. Client inherits IRA from father, refuses to name a beneficiary for his new IRA-BDA at Schwab (despite all advice to the contrary), and begins taking RMDs based on his own life expectancy. He then dies in June of this year (2011) at age 52. No RMD has yet been taken for 2011.
According to the terms of the Schwab custodial agreement, his estate becomes the default beneficiary. His will then pours his residuary estate, which includes the IRA-BDA, into an existing trust which will ultimately distribute the estate in equal thirds to two educational institutions and a brother. The trust further directs that any assets distributed to charities be drawn first from tax-deferred annuities and retirement accounts, which again would include the IRA-BDA.
Here’s the problem. It seems clear that the client’s intent was to get the IRA-BDA rolled over into the existing trust so it could be distributed to the educational institutions, both of which appear in IRA Publication 78 as approved charities. But if the IRA-BDA must go first to the estate, can it subsequently be rolled over income tax-free into the trust? Schwab says “no” — that the objective can only be achieved by providing Schwab with a court order allowing direct rollover into the trust. The account is frozen until it can be re-titled, and I’m concerned that a court order as required by Schwab may not be available before Dec 31 when the RMD becomes due (the client died in Ireland, which has caused endless delays every step of the way).
Alternatively, might there be an easy way to “correct” the beneficiary designation in the existing IRA-BDA, given the clear intent of the deceased as expressed in the trust? Or is there some other way to work around this problem? Thanks for your help!
Permalink Submitted by Alan Spross on Sun, 2011-11-13 18:57
Here is a link addressing assignment of the IRA to the desired entity, whether it be to the estate, to the trust or if the trust permits, to the trust beneficiaries. Schwab wants to be sure that they assign the IRA to the court approved executor or trustee, since Schwab can be held responsible if assignment or distributions are made to the wrong entity. Depending on the terms of the trust in this case, it may be possible if the trust permits to have the IRA assigned directly to the trust beneficiaries. Schwab cannot force a distribution, even the RMD, so the RMD or other distributions should be delayed until the IRA is assigned to the desired entity.
After the owner’s death, the year of death RMD is frequently delayed for legal reasons, and the IRS is very likely to waive the penalty. If needed, a penalty waiver can be requested using Form 5329 and explaining the “reasonable cause” giving rise to the delay. If another IRA custodian can be located who requires less documentation, the Schwab account can be titled to the estate and then tranferred to another custodian’s estate IRA.
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by Bruce Steiner on Sun, 2011-11-13 19:43
I’m not even sure that a court would issue such an order, though if it did, it might charge the attorneys’ fees against the financial institution for refusing to follow the executor’s directions.
It may be possible to get to someone higher up at Schwab.
If not, the executor may be able to transfer the IRA to an inherited IRA at another financial institution.
This is more complicated than usual, since it involves the death of the beneficiary rather than the death of the original IRA owner.
It’s also more complicated than usual because the Will pours over into a trust rather than having the dispositive provisions included in the Will itself.
Permalink Submitted by Jose Morales on Tue, 2011-11-15 16:38
Has an executor been named? Is that the person approaching Schwab?
Permalink Submitted by Russ Rauhauser on Tue, 2011-11-15 16:51
Thanks to all who have responded!
The executor and the trustee are one and the same. Schwab was willing to explain their requirements in this case to me, as I still have viewing privileges on the account, and the executor/trustee has engaged my services. But of course, Schwab made it very clear they will accept further instructions only from the executor, who is now consulting with an estate planning attorney.