Can Estate inherit Mutual Fund IRA in kind?

Submitted by Cheryl Van Beek on Mon, 2017-10-30 19:45

If a Mutual Fund Traditional IRA account holder who passed away was survived by her non-spouse beneficiary, but the account did not transfer title to the beneficiary because the Custodian wouldn’t accept the authority of the beneficiary’s POA to transfer ownership of the account to the beneficiary, but did allow the beneficiary to take an RMD from it, and then the beneficiary passed away, can the IRA be transferred in kind (still as a Mutual Fund IRA) to the beneficiary’s estate with the beneficiary of that estate inheriting the IRA, taking annual RMDs? If so, does the beneficiary’s estate first take the (late) 2016 and 2017 RMDs before it transfers to the beneficiary of the estate? Or must the IRA be closed and distributed in a lump sum to the beneficiary’s estate? Or is there any other more advantageous choice? Thank you.

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Permalink Submitted by Alan - IRA critic on Tue, 2017-10-31 00:31

Until a death cert and taxpayer info is submitted and accepted by the custodian, no distributions including RMDs or account changes can take place, so there is some misinformation regarding the RMD distribution. Once the beneficiary interest (either the designated beneficiary or their estate) is accepted and the account re titled, changes and distributions can be requested. Distributions will be reported to the beneficiary payee’s TIN, whether a SSN or estate EIN. Distributions can be made either in cash or in kind at that time.
If the account was changed to beneficial ownership of the beneficiary and a distribution made, the account is frozen again upon the death of the beneficiary until the estate provides updated documentation to allow the estate to be named as the sucessor beneficiary.
The beneficiary or the estate of the beneficiary is responsible for the year of death RMD of the original owner, but not for omitted RMDs for years prior to the year of death. The account must be re titled to the estate of the beneficiary before any distributions can be made to the estate.
If the original beneficiary passed after the owner, but prior to 9/30 of the year following the year of the owner’s death without disclaiming the account, that person’s age is still used to determine the RMD schedule that applies including the RMDs for later years paid to the estate. The custodian has no authority to terminate the IRA or require a lump sum distribution unless their IRA agreement so states, and I have not heard of any IRA agreements containing such a restriction.
Generally, it is beneficial for the estate of the beneficiary to close the estate after a reasonable time and assign the IRA to the beneficiaries of the estate. There are still a few custodians that resist assignment of the IRA to the estate beneficiaries, and if that is the case the estate will have to seek out a new custodian and transfer the inherited IRA to the new custodian. Many custodians want to deal with the estate of a beneficiary even less than they want to deal with the estate of the owner, so they persist in pressuring for a lump sum distribution which they have no right to require unless the agreement so states. The estate should make it clear that there is no distribution to be made until the estate requests same.