IRA change of ownership
Client age 76 is taking RMD’s from 2 separate IRA’s in fixed annuities. He also owns a NQ annuity with same carrier. September of 2015 client signs policy change form to make son age 50 the owner of all annuity contracts. Carrier changes ownership to son in spite of IRA endorsement on annuity contract that prohibits ownership changes. No RMD letter sent in 2016 since son is owner. In 2017 dad calls insurance carrier and says he never wanted son to own the IRA’s. Is there any recourse for the carrier to correct this IRA ownership error or is this a total taxable disbursement to the dad and a gift to the son?
Permalink Submitted by Alan - IRA critic on Wed, 2017-07-12 22:31
Client needs to call back and insist on talking to supervisory or higher staff of the IRA annuity custodian. This is blatant incompetence on custodians part that may or may not be addressed in the IRA agreement. Since such a change is in obvious conflict with the tax code, perhaps the custodian will simply redact the change in ownership with son’s written agreement. Otherwise, client will become subject to prohibited transaction rules under which either 50% or 100% of the IRA is considered distributed and taxable to the client. Therefore, if custodian will not redact the ownership change, client needs to hire legal counsel to protect his interests and transfer as much of the blame for this to the custodian as possible. A PLR is another possibility here if this cannot be resolved otherwise and the cost for that will be about 15k. I could not hazard a guess how this will end up, but it is potentially very costly. A copy of any forms submitted by client to the carrier will be important, if not critical.
Permalink Submitted by Jose Morales on Thu, 2017-07-13 23:02
Did the IRA custodian issue a 1099R in 2015? If they did then it’s an indication that they knew what they were doing and decided to take the stance that they are following the direction of the account owner, with no obligation to try and discourage the action which they would have known to be negative towards the acct owner. If they didn’t then they were just as clueless to the consequences of the action as the account owner and may be more agreeable to taking steps to “fix” a mutual mistake or at the very least cover the financial damages that will be incurred if the IRA has effectively been dissolved.
Permalink Submitted by Alan - IRA critic on Thu, 2017-07-13 23:46
Yes, if the custodian was aware of a prohibited transaction, they would issue a 1099R including code 5 in Box 7 to denote a prohibited transaction. While anything is possible, poorly trained processing people could have made the name change without asking supervisors , but later on the tax reporting Dept might have recognized the prohibited transaction and issued a Code 5 1099R. Usually, the taxpayer will do a prohibited transaction on their own but it is very rare for the custodian to be complicit in the process when they had a final clear chance to prevent the error. First I have ever heard of this particular snafu.