Inherited IRA’s
I have a 58 y.o. client Jane Doe that has three inherited IRA’s and wants to transfer them to a new IRA custodian.
Scenario 1: Jane Doe inherited two of the IRA’s from her mother, who assumed them on an IRA rollover and designated her as the beneficiary. Jane inherited these IRA’s upon her mother’s death and Jane Doe is receiving RMD’s based on her age at 58.
Scenario 2: One of the IRA’s was mistakenly rolled over to an inherited IRA by the mother’s financial advisor after she and her late husband were past the age of 70.5. The financial agent filled out the inherited IRA forms even thought there was no benefit to the mother since she and her husband were over 70.5 and past the required beginning date. Therefore, Jane Doe is receiving RMD’s from this inherited IRA based on the mothers age.
Question: On the Inherited IRA distribution election form for the new custodian, 1) who will the origonal IRA owner (deceased) and who is the Individual IRA beneficiary for Scenario 1 and Scenario 2?
For the IRA distribution election form, I would assume the origonal deceased IRA owner for scenario 1 would be the mother and the IRA beneficiary would be the daughter. For scenario 2, I’m speculating that the origonal owner would be the father, and the individual beneficiary would be the mother. That way, the RMD would be calculated correctly by the new custodian.
Permalink Submitted by Alan Spross on Mon, 2012-04-09 22:48
The two IRAs on which she was the designated beneficiary should be handled in the usual manner and can be combined if she wishes since they were inherited from the same decedent, and presumably will have the same RMD divisor.
The one IRA in which she is the successor beneficiary instead of the designated beneficiary needs to be kept separate and will have a higher RMD as you indicated. The title format for this one will probably depend on the IRA custodian processing platform. If it can handle all 3 names, it will be more clear to the IRS with respect to the original IRA owner. If the platform cannot handle 3 names, then I would suggest showing the name of original IRA owner and client’s name as successor beneficiary of that owner. “Successor beneficiary”effectively means that you are not able to use your own life expectancy for RMDs but must continue those of the former beneficiary. In the end, the custodian should be able to address the titling format they can handle, but be aware of anything you think would cause problems.
Permalink Submitted by John Garland on Mon, 2012-04-09 23:18
Thank you for the reply. Two clarification questions:
1) In scenario 1, is the original IRA owner the mother since she assumed ownership of the husbands IRA (does it effectively become her IRA)? Or would it be the father since he was the original owner and designated her as a contingent beneficiary upon the mothers death?
2) In scenario 2 where she is the successor beneficiary, I assume the original owner is the father, beneficiary is the mother, and successor beneficiary is the daughter. Hence the need for three names on the custodian processing platform.
Permalink Submitted by Alan Spross on Tue, 2012-04-10 00:04
1) Since mother assumed ownership, the IRS is hers in all respects, and the father no longer is a factor in determining RMDs or included in the IRA titling.
2) Good thing you asked about this as I just discovered recent IRS guidance on how to title these sucessor beneficiary accounts. See Sec B of the following and the discussion showing that for death prior to 2011, there will be no grandfather provision to address all the ad hoc methods of listing the various parties. But from 2011 on, the two names should be that of the original beneficiary and the new successor beneficiary with the original IRA owner no longer included. This will conform to the Form 5498 instructions now appearing on p 16 of the 1099R/5498 Instructions for 2011. This paragraph was first included in these 2011 Instructions, reflecting an extended period for the IRS to recognize that original beneficiaries themselves are not immortal 😀 :
http://www.irs.gov/taxpros/article/0,,id=228977,00.html
Permalink Submitted by mk foss on Tue, 2012-04-10 02:06
Wow Alan,I’m impressed again. The IRS document was very confusing but you read it and understood it. I think I’d need a diagram to figure out what it says.
Permalink Submitted by Alan Spross on Tue, 2012-04-10 02:16
Well, maybe I understood it 😀