Estate Inherited Traditional IRA

Submitted by David Buttacavoli on Tue, 2017-09-05 23:55

I am an ordinary guy with little to no experience in such matters but my father passed away at age 86 in June of 2016 and had a Traditional IRA with Morgan Stanley (M.S.) with the beneficiary listed as the Estate of xxx. I am the executor of the Estate and was advise by M.S. that the IRA had to be set up as inherited IRA in the Estate of xxx. I probated the will, filed for an EIN and established an estate account with M.S..

The Inherited Ira was transferred into the Estate account in August of this year and I have requested that M.S. equally transfer this IRA as a plan to plan transfer into two individual Inherited IRAs, one in my name and the other in my sister’s name as we are the only survivors and named as equal beneficiaries in his will.

M.S. has refused to do this and claims that they are not allowed to do so. I have requested written documentation to support their position but they refuse to do so. I have offered them numerous resources that would indicate that my request is appropriate including an article from your website (https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees) supporting my request.

Any advise or documentation support my position would be greatly appreciated or even confirmation that my request is not appropriate and M.S. is correct. I just need to have a clear direction as I believe that this must be resolved prior to the end of this year.

Thank you in advance,
Dave B.

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Permalink Submitted by Alan - IRA critic on Wed, 2017-09-06 04:17

Surprising that a very large firm like MS would balk at doing this. Have you elevated the discussion to their estate or inherited IRA specialists? Ask them if they won’t do it, what is the reason? Surely, they must know that their competitors will do this if provided with required documentation. There is probably more than one PLR where the IRS has approved this, but they may take a hard line and require you to get your own PLR. You do not want to do that, since you would be out 15k of more. If still no luck, as Natalie Choate indicates you may have to transfer the inherited IRA to another IRA custodian that will permit you to assign the IRA to the will beneficiaries.

Permalink Submitted by David Buttacavoli on Wed, 2017-09-06 14:22

Thank you for the input…there is no vehicle to elevate my discussions. They are arrogant and when I have tried to obtain a second opinion within MS they refer me back to my advisor. Very much a good old boys club. I have asked them numerous times for documentation to support their position but they refer to their MS Legal as giving them direction.What is a PLR?

Permalink Submitted by David Mertz on Wed, 2017-09-06 12:21

PLR 201128036 appears to be identical to your situation.
PLR 200647029 appears to be similar to your situation except that the PLR proposed transferring the original IRA directly to separate inherited IRAs for the estate beneficiaries.
PLRs 200646025 and 200343030 appear to be similar to your situation except that the estate was the beneficiary by default and PLR proposed transferring the original IRA directly to inherited IRAs for the estate beneficiaries.
There are probably other examples. The ones I listed are the ones that I have in my notes.
Although it would be helpful to resolve this by the end of 2017, I don’t think that there is any requirement to do so. In each of the PLRs, as will also be required in your case, RMDs were determined based on the remaining life expectancy of the deceased as of the deceased’s birthday in the calendar year of death, reduced by one for each subsequent year. For years prior to establishing separate inherited IRAs for the beneficiaries under the estate, RMDs can be paid to the estate and distributed to the estate beneficiaries. For years after the separate inherited IRAs are established, the RMDs would be distributed directly to the estate beneficiaries for whom the separate inherited IRAs are maintained. The taxable result is identical in either case. Transferring to a separate IRA for each estate beneficiary simply allows the estate to be closed and avoid the overhead of maintaining the estate.
Natalie Choate addresses this her book “Life and Death Planning for Retirement Benefits” where she discusses how doing this does not constitute assignment or alienation of the IRA that is prohibited under § 401(a)(13).

Permalink Submitted by David Buttacavoli on Wed, 2017-09-06 14:45

Thank you for your reply and the referenced information. From what you have explained, the PLRs are Private Letter Rulings by the IRS, correct? I pretty much understand the basics regarding the RMDs and fully accept the legal terms and conditions of such.The frustration lies with the inability to get MS to transfer the IRA out of the Estate and into it’s beneficiaries. They will not accept the PLRs but will not provide any documentation supporting their position that our request in not an option.Do you know of any other avenue to provide documentation to MS that would give me the ammunition needed to get them to move on this…some form of legal opinion or IRS memorandum?

Permalink Submitted by William Tuttle on Wed, 2017-09-06 15:46

Why not take the path of least resistence and do as previously suggested. Transfer the estate Inhereited IRA to a much lower cost custodian who agrees rollover the balance to two inherited IRAs for the benficiaries.

Permalink Submitted by David Mertz on Wed, 2017-09-06 15:54

The closest thing to a legal opinion that I’m aware of is what Natalie Choate (who is an attorney who specializes in estate planning covering such matters) has written in her book. I’m not aware of any IRS guidance on the subject. A PLR from the IRS legally applies only to the taxpayer to whom the PLR was issued, but the PLRs indicate that the IRS’s general position is that such transfers to inherited IRAs for the benefit of the estate beneficiaries are permissible.
The only reason I can think of that MS might actually be unable to do such transfers is if their IRA agreement explicitly precludes such transfers, even though such transfers are permitted under the tax code. If that was the case, they should be able to point you to the relevant section of their IRA agreement.
It may be that, as Alan suggested, you will have to transfer the inherited IRA to another custodian who will then allow the IRA to be split and transferred to inherited IRAs for the benefit of each of the estate beneficiaries.

Permalink Submitted by Ben Meyer on Wed, 2017-09-06 16:11

You should be aware that obtaining a PLR is expensive, probably with a cost pushing $20,000, or more, considering legal cost and IRS fees. So you should consider the cost in regard to the value of the account, and also bear in mind the amount of personal involvement effort it will require. Even after you obtain a PLR you may face difficulty from MS in accepting it, judging from what you have reported.
If you continue to strike out at MS, the best alternative here sounds like transferring the account to a more hospitable custodian, as described by Natalie Choate and Alan. The receiving account should be titled to the estate the same as the MS account. You should open the receiving account first, with a zero balance, before making the transfer. In making such a transfer, it is very important to be completely certain that the transaction is performed as a non-reportable direct transfer from one custodian to another, and NOT as a distribution. The paperwork for the transfer should be initiated by the new custodian receiving the transfer.
It would also be helpful if you would identify the general city or state area where the MS account is held.

Permalink Submitted by Alan - IRA critic on Wed, 2017-09-06 18:28

Dave, there is a general bias against estate inherited retirement accounts that often leads to IRA custodians attempting to push a lump sum distribution to the estate. Therefore, you may also encounter that pressure from MS, and they know that you do not intend to keep the estate open for the 7 year applicable distribution period for this inherited IRA. By resisting assignment of the IRA to the estate beneficiaries, they figure that they will not be living with this account for nearly that long. As has been indicated, an assignment will not extend this 7 year distribution period nor will it change the RMD divisors, but it would provide each beneficiary with their own IRA to manage including investment selection, timing of the RMDs, and naming their own successor beneficiaries. You might check with Fidelity, Schwab, or Vanguard to determine if they will allow you to open an estate inherited IRA and then assign that IRA to each estate beneficiary immediately thereafter. FInally, note that if your father had not completed his 2016 RMD prior to passing, the remainder of that RMD should have been distributed to the estate by 12/31/2016. If that deadline was missed then that RMD should be distributed ASAP and Form 5329 for 2016 filed to request that the penalty be waived. The IRS routinely waives this penalty if the year of death RMD is completed and the 5329 filed properly.

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