Non Spouse Inherited IRA & No settlement option or RMD prior to 12/31 Question

Submitted by Steve Ford on Fri, 2016-08-05 18:07

Hello,

A Non Spouse Beneficiary inherited an IRA in which the owner died after the required beginning date for RMD’s.

The beneficiary then goes past the deadline of December 31st of the year after the date of death without doing anything with the account. They notified the insurance company that they were not able to do anything with the account as they were traveling and therefore did not choose a settlement option or take RMD’s prior to 12/31 of the year following the date of death.

If they miss this deadline do they have to now lump sum out the money and create a taxable event ?

Thanks!



Submitted by Alan - IRA critic on Fri, 2016-08-05 18:17

No. See PLR 2008-11028. Assuming that life expectancy is the default RMD provision in this IRA contract, the stretch can be preserved by making up the delinquent life expectancy RMDs. Although this PLR required the beneficiary to pay the 50% excess accumulation penalty for the late RMDs, the beneficiary might request a penalty waiver by filing Form 5329 stating the reasonable cause for the late RMDs. The IRS may well grant the waiver. The beneficiary should advise the insurance company right away that they do not want a lump sum distribution. Note that contract likely does not require a LSD in this case since the aggregation rules apply to beneficiary RMDs if there are other IRA accounts inherited from the same decedent. For all the insurance company knows, the beneficiary could have met the RMD from another inherited IRA. http://insurancenewsnet.com/oarticle/Saving-A-Stretch-A-New-IRS-Ruling-Sheds-New-Light-On-Stretching-Inherited-IRAs-a-95813

Submitted by Steve Ford on Sat, 2016-08-06 22:18

The insurance company is saying that because no settlement option was taken prior to 12/31 of the year following the date of death that she can’t do an inherited IRA with them. Only a lump sum option is available now.Is this correct per the IRS code ? Under the settlement options on the claim form it says:Lump Sum Settlement – Marking this box will result in reporting your claim as a taxable event to the IRS, unless your claim form is accompanied by transfer paperwork and the policy is qualified.The insurance company is saying that the lump sum will be reported as a taxable event, if transferred to a new policy internally.Not sure if that applies to an external transfer being possible as qualified and keeping inherited IRA status.Thanks!

Submitted by Alan - IRA critic on Sat, 2016-08-06 23:26

  • Beneficiary needs to request a copy of the IRA agreement to determine if the beneficiary clause indicates that LE RMDs will not be provided unless a LE RMD is taken by that deadline. Not too many are that restrictive. The PLR cited above was contingent on LE being the default rule in the contract, so the PLR cannot be relied on if this agreement states otherwise. Plan B would be to determine if the beneficiary set up an inherited IRA with another custodian that would request a direct transfer from the insurance company, whether the insurance company would provide the transfer. Transfers are NOT distributions and not taxable. The lump sum distribution option on the form should be specifically rejected until this can get resolved because one a check is issued to the beneficiary, there is no option for rollover and the full distribution will be irrevocably taxable.
  • All beneficiaries should be forewarned by this situation. Many banks and insurance companies do not wish to deal with beneficiary accounts or BDAs because they include tricky RMD requirements and no deposits can be made to these accounts. They are also prone to multiple beneficiary issues under which several small inherited IRA accounts could be requested. Therefore, IRA owners should be diligent in determining what beneficiary provisions their designated beneficiaries will encounter once they inherit. Few IRA owners bother to look into this issue and many beneficiaries do not know about deadlines, rules etc. It can be very costly.

Submitted by David Mertz on Sun, 2016-08-07 13:35

  • PLR 200811028 would be relevant if the deceased died before the RBD.  However, since in this case the deceased died *after* the RBD, the required distributions under the Internal Revenue Code are based on the longer of the life-expectancy of the deceased or the life expectancy of a designated beneficiary regardless of when the inherited account is established.  In this case, distributions under the 5-year rule were never an option.
  • In the IRC, the only significance of the December 31 date is that it is the date for establishing separate accounts when there are multiple beneficiaries and is the deadline by which an RMD is required to be made so as to avoid an excess accumulation penalty.  If separate accounts have not been established by December 31 of the year following the year of the death of the account owner, RMDs are based on the life-expectancy of the oldest beneficiary rather than the life expectancy of each beneficiary separately.
  • Other than performing a prohibited transaction which would make the IRA no longer an IRA, nothing in the IRC requires a lump-sum distribution from any IRA account, inherited or not, under any circumstances.  Under the IRC, incurring an excess accumulation penalty does not trigger any requirement to make a lump-sum distribution.  Any requirement to make any distribution as a lump-sum under these circumstances would have to be a requirement imposed by the IRA custodial agreement.  In fact a requirement to make
  • If the non-spouse beneficiary in this case was the only beneficiary designated by the IRA owner, or was the only remaining beneficiary who had not established a separate inherited IRA or elected and received a lump-sum payout by the deadline, this beneficiary is the sole remaining beneficiary of the original account and RMDs are determined as they would be had this beneficiary established a separate account.  Under the IRC, it does not matter when the inherited IRA is formally established.
  • By having not taken the RMD for the year(s) after the year of death prior to the current year, the beneficiary has excess accumulations in the account subject to a 50% penalty on each missed RMD unless a waiver of the penalty is granted by the IRS upon correcting the distribution shortfall.  The penalty is the responsibility of the beneficiary, not the IRA or the custodian.

Submitted by Steve Ford on Sun, 2016-08-07 19:29

Great responses so far, thank you!As far as the IRA agreement we are talking about here, is that contained in the annuity policy or is it something that must be requested in addition to the annuity policy ?Can the IRA agreement take away the ability to do a direct transfer to another company keeping the qualified status ?On the claim form it says she can’t do an inherited IRA, because she missed the 12/31 deadline, either with their company or another company.The only option left is a lump sum.The box says: Lump Sum Settlement – Marking this box will result in reporting your claim as a taxable event to the IRS, unless your claim form is accompanied by transfer paperwork and the policy is qualified.The company told me they can’t do a direct transfer to another company of the lump sum, even though their is wording on the claim form that seems to indicate they can transfer to another company.It would seem to me, a company may not allow a person to keep the money where they are at because they don’t want to deal with the account.However, can they make it a taxable event and take away the ability to do a direct transfer because of the IRA agreement ?It seems that should be protected per IRS code ?Thanks!

Submitted by Steve Ford on Wed, 2016-08-17 20:34

Hello,In this case the insurance company is insisting on a lump sum taxable distribution even though all the information so far suggests there is nothing in the IRC that says if you miss the date of 12/31 the year after the date of death for RMD’s or making a settlement election at the insurance carrier, then you must lump sum out as a taxable event.Is there anything I can do to change their mind ? Thanks!

Submitted by Alan - IRA critic on Wed, 2016-08-17 21:52

If you do not have a copy of the IRA agreement to review their beneficiary clause provisions, you might call the insurance company and ask for the paragraph number of the agreement that states what they have indicated, ie no option other than a distribution after the 12/31 date. The tax code does NOT require an IRA custodian to offer a direct transfer like Sec 401(a)(31) does for qualified plans, but competitive pressures result in very few IRA custodians adopting such restrictive provisions. Also, note that if you opened a beneficiary IRA elsewhere and that custodian requested a transfer from the insurance company, the insurance company would be doing LESS work than making a taxable distribution because they would not have to report it on a 1099R. All they need to do is make a check out to your new inherited IRA custodian FBO SDH inherited IRA. They can then mail the check to them directly or to you for delivery. You can’t cash that check so it is a transfer, not a distribution. It is unreasonable for them to refuse that option. When you call them, ask for someone at the senior level who is more likely to understand the total picture. There is nothing in the IRS code that states they must do this, but it is true that they can be more restrictive than the code, but not more restrictive than what their agreement states.

Submitted by Steve Ford on Wed, 2016-08-17 22:27

1. Copy of IRA Agreement: The insurance company DOES NOT say it is against their IRA agreement. Therefore proving it says they can do this in the agreement does not matter to them. Again, it is IRC code, which they WILL NOT say what page or section. PUB 590 is where they refer me.2. Call them: I have spent hours on the phone with them. They absolutely WILL NOT show me the page and section of the IRC code. Again they refer me to read PUB 590.3. Talk to someone in Senior Management: They WILL NOT let me to a Senior level person. I have begged them to let me talk to a manager. They WILL NOT do this. It is only the person who answers the phone they will allow me to talk to. They even sent me a letter saying she must take a lump sum. No specifics. They are being unreasonable. Any other ideas or suggestions ?

Submitted by Alan - IRA critic on Wed, 2016-08-17 23:48

As I understand this, they admit that their agreement does not address this issue, and they are using unstated administrative procedures to force out a lump sum distribution. Pub 590 B nowhere suggests that the 12/31 date is material to anything other than establishing separate accounts or electing the 5 year rule, and that does not apply in this case. Is the balance in this account enough to warrant spending legal fees to contest this, mostly on the negative tax implications of a lump sum distribution?  Any feedback on what they will do if they get a request for a transfer from a new inherited IRA custodian?  Is this a large insurance company, which typically has an army of lawyers who can easily contest your lawyer till you cannot afford to pay any more legal costs?

Submitted by Steve Ford on Thu, 2016-08-18 16:57

1. They say it is IRC. 2. Legal Fees: I don’t know how much legal fees are ? As far as worth it, only the client could say. I will be out of the loop at this point though. 2. If they get a request to transfer: They will only send it as lump sum taxable event. So they WILL NOT do a direct transfer as an inherited IRA. 3. Yes, it is a large insurance company, one of the major players in the independent agent distribution of FIA’s. 4. Since it is hard to prove IRC 590 has nothing against this, is there any section I can point to that shows they CAN keep it as an inherited IRA in IRC ?I guess there is nothing I can do ?

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