I am in the process of working through a disaster with my late mother’s affairs where all of her IRAs were invested in annuity contracts. She had named her living trust as beneficiary of her IRAs/annuities. Based on the representations of her financial advisor, beneficiaries elected to stretch the IRAs as non-spouse inherited IRAs.

We have come to learn that the successor trustee took lump sum distributions, which makes our inherited IRAs invalid. Further research disclosed the fact that all of the IRAs were invested in annuity contracts; because a trust was named as beneficiary, the only death benefit option was a lump sum distribution. With one contract, death benefit options were further limited due to an expensive income rider.

At this point, it appears that the financial advisor was and still is unaware of all of the who, what, why and when kind of problems that made it impossible for my mother’s intent to pass these funds onto her heir as tax-deferred assets.

I have filed a complaint with the financial advisor, who also manages my account. The financial firm has agreed to recode my account from a tax deferred account to a taxable account. The account was opened in 2012 and the clearing house firm still does not know if they will have to reverse the trades in the account and/or have to cancel advisory fees. The decision to correct the error was just made this week, so I have no idea how long this will take to resolve, nor do I know what I might end up with at the end of this.

As part of the complaint, I have requested compensation. Currently, my request is limited to a general description of the nature of losses (income taxes, penalties and interest and professional fees) that have been incurred along with the lost earning potential of a tax deferred asset.

My post is partly to inform others and also to ask questions. It has taken beneficiaries more than one year to get to this point of information, and it is apparent that we still have much more time and expense ahead of us in terms of working this out. Questions I have are:

– Recoding of the account: this sounds like a very rare solution. Has anyone else encountered this, and if so, how was it handled?
– Compensation request: if the financial firm has gone so far as to take responsibility for the error by agreeing to sign a letter of indemnification for the clearing house to recode the account, what kind of precedent does this set in terms of negotiating a claim for damages? If there is a strong case against the financial advisor/institution, are they likely to settle privately? My thought is that they would want to stay away from the public scrutiny of FINRA arbitration. The unintended combined tax hit for all beneficiaries is in excess of $500K.