IRA Beneficiaries Inadvertently Changed to Estate
Someone purchased a Prudential variable annuity in 2007 from part of the funds in their Merrill Lynch IRA. Afterwards, they own a Prudential Variable Annuity IRA and the Merrill IRA which contains the balance of the orginal funds not used to purchase the annuity. When variable annuities are purchased from funds in a Merrill IRA (I have discovered), Merrill Lynch sets up the annuity in a bizzare way with themselves listed as owner and beneficiary of a custodial IRA annuity thereby creating a system reliant soley on the beneficiary designations set up in Merrill’s proprietary system for the original Merrill Lynch IRA. Merrill also files the annuity application through an electronic system which does not create the normal application paper trail so Prudential has no record of beneficiaries since it is set up as a proprietary Merrill custodial IRA annuity. In other words when Merrill does this, no original application exists to show who the beneficiaries are according to Pru.
The person’s Merrill Lynch broker later leaves Merrill Lynch. The client of the former Merrill broker wants to remain with the broker so the Merrill Lynch IRA is transferred to the new BD and the client requests Prudential to update the person of record on the variable annuity via Prudential’s annuity update form. The only section filled out on the update form was the agent of record info. All other areas including the beneficiary update section are not filled out because the annuity owner only wanted to change one thing: the agent of record, and in their mind thought the beneficiaries from Merrill remained.
The annuity owner passed away in July of this year. Prudential says when the annuity owner did not indicate beneficiary information on the update form, they had to default to the estate since it removed Merrill Lynch from the annuity which caused the beneficiary information, which was available ONLY to Merrill, to no longer apply to the annuity. Ultimately this means Pru believes the only payout option on the annuity is a lump sum to the estate which means the three beneficiaries that were listed at Merrill cannot have an inherited IRA. It appears to me the annuity holder did not intend to change the beneficiary from her three daughters to her estate, it just appears to have inadvertently happened due to the way Merrill sets things up. Prudential says the only option in this case is a lump sum payment to the estate.
Prudential says they mailed a letter to the annuity owner after she sent them the update form to let her know her beneficiary was her estate and that several statements went to the annuity owner before she passed away indicating her beneficiary was her estate.
The three daughters would like the annuity to be split between them in their inherited IRAs as they believe their mother intended rather than as a lump sum to the estate which makes it fully taxable. The IRA cannot be transferred to another more sympathetic/friendly custodian because the annuity has a death benefit more than $100,000 higher than the account value and would be lost.
Any suggestions?
Permalink Submitted by Alan - IRA critic on Tue, 2013-10-15 18:06
It does not appear that there is reason to contest the estate as beneficiary of the IRA annuity. However, there is no reason that the estate executor cannot request that Pru set up inherited IRA accounts for each beneficiary and/or have these inherited IRAs transferred to another custodian. Unless their contract so states, Pru has no basis for insisting on a lump sum distribution or any distribution other than RMDs. Getting this done will not change the RMD implications for the beneficiaries so the date of death in relation to the RBD is key. If mother passed prior to her RBD, the 5 year rule would apply meaning the IRA could only be stretched for 5.5 years. If she passed on or after the RBD, then the inherited IRAs could be stretched over mother’s remaining life expectancy in Table I. Both distribution patterns are shorter than daughters life expectancies but much better than a lump sum taxable in a single year.
Permalink Submitted by John Williams on Tue, 2013-10-15 20:20
The deceased had been taking an RMD for more than 10 years so the beneficiaries (now the former beneficiaries) should’ve been able to strech it over their mother’s remaining life expectancy listed in the table. Unfortunatley, Prudential says it is not their policy to allow anything but a lump sum to the estate when the listed beneficiaries at Merrill are “removed”. It seems in talking with Pru that they have dealt with this unfortunate situation created by Merrill’s archaic system before. None-the-less they do not seem to be willing to do anything but a lump sum to the estate eventhough it seems there is ample room among the rules to allow other options. The contract does say in so many words if the estate is beneficiary, then the payment will be a lump sum but some other language indicates other payout options which Pru says do not apply in this case. It just doesn’t seem right since the deceased did not seem to intend to change her beneficiaries from her three daughters to her estate. It was just Pru’s way of handling the crazy way Merrill sets up IRA annuities.
Permalink Submitted by Alan - IRA critic on Wed, 2013-10-16 00:09
If the contract indicates a lump sum payout, it does not have to be a distribution. If they want to rid themselves of the assets that is fine, but they need to make the lump sum in the form of a direct transfer to an inherited IRA for the estate. The executor can then have the the new custodian set up the inherited IRAs for each beneficiary as described in this link: http://www.ataxplan.com/bulletinBoard/ira_providers.cfm. The executor will have to be very firm and possibly elevate the issue to a higher level at Pru.