Rollover and conversion in process when client passed away

Submitted by Glenn Wager on Sat, 2014-11-22 16:03

Two weeks ago we initiated a conversion from TIRA to Roth IRA for a client. The request was processed two days later. Turns out that the client passed away the day after we forwarded the request, but the day before it was processed. Are there rules governing this type of situation? Should the conversion be left as is since the request was made while he was alive or should it be reversed since he died before it was processed?

A second question. The same client withdrew $32,000 from his Roth about 50 days ago (to buy a car). The money is still in his checking account. The executor of the estate would ideally like to put the money back into the Roth. I spoke to the trustee and they indicated that we would need a letter from the IRS in order to do it. However, since it’s within 60 days of the distribution, it seems like we should be able to put it back without this step (which would obviously take a while and put us outside the 60 days). And from what I can tell, the IRS has already “ruled” on the issue. Any thoughts? Any way to force the trustee to deposit the money if we send it back?

Thanks in advance for you input.

Glenn



Submitted by Alan - IRA critic on Sat, 2014-11-22 22:56

There are several PLRs touching on this situation. Who is the beneficiary on the TIRA, the Roth IRA, and in the will? Even if there are supporting PLRs here, the IRA custodian cannot be forced to recognize them. The various PLRs that have been released do not even comment on the challenges presented by the proposed actions effecting who actually inherits these funds.

Submitted by Glenn Wager on Mon, 2014-11-24 15:48

The client’s 2 sons are eqaul beneficiaries on both accounts and in the will, so thankfully it does not create any issues with who will end up inheriting the money.  Both understand and agree that ideally we would rollover the money back into the Roth, but getting the trustee to deposit the money sounds like a potential problem.  I’ll be following up with them today, but wanted as much insight as possible before making our case.  Sounds like a PLR would do the trick, but we woud like to get the money back in the account before the 60 days are up if possible so we do not have that much time. 

Submitted by Bruce Steiner on Sat, 2014-11-22 23:18

  • The executors can recharacterize a Roth conversion.  However, given the benefits of the Roth conversion, unless the IRA passed to the spouse, executors usually won’t recharacterize, since a nonspouse beneficiary can’t re-convert.
  • As Alan pointed out, there are several private letter rulings allowing the completion of a rollover that was in process when the IRA owner died.  I have a ruling request pending in such a case, and the IRS person handling the ruling request said she has drafted a favorable ruling and has submitted it for review.
  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL

Submitted by Glenn Wager on Mon, 2014-11-24 15:56

Bruce,Thanks for the input.  Our goal is to leave the conversion.  I just wanted to make sure that the timing of the conversion did not present any problems.  Sadly, when we initiated the conversion, the client knew that he did not have much time left, but we did not realize how quickly he would pass.  Had we known, we would have pushed the process along a little quicker.  However, it sounds like we are okay as is and that the executor can recharacterize if he wants (which he doesn’t at this point in time, but I assume he has until the normal October 15th deadline to do so?).Glenn

Submitted by Alan - IRA critic on Mon, 2014-11-24 16:11

Correct. See p 32 “Decedent” in Pub 590. The decision maker includes those responsible for filing the decedent’s final income tax return. Of course, executing these options is more difficult with certain IRA custodians than others. But the reference in Pub 590 should help.

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