A client’s two sons are beneficiaries of their deceased fathers IRA accounts (mother and father divorced several years ago). The executor of the father’s estate has shut down the IRA accounts and did not request to open two inherited IRA accounts for the sons and is having the funds wired directly to them into their personal accounts. Will they have the option to open inherited IRA accounts at another firm in order to avoid paying taxes? And if so, what rules must they meet?
If sons were named on a 401k, they are able to do direct rollovers to an inherited IRA. If the estate was the 401k beneficiary, a lump sum distribution would be made to the estate. If the estate was named on an IRA, the executor should be able to assign the inherited IRA out of the estate to the beneficiaries under the will. If the sons were named on the IRA, they can create separate inherited IRA accounts by the end of the year following the year of death and stretch the inherited IRA over their individual life expectancies. Again, the IRA custodian should not be taking instructions from an executor unless the estate was the beneficiary.
So I spoke with the attorney representing the estate, here are the facts: the father’s trust was named as a beneficiary for his IRA; all of the assets are now set up in an inherited IRA. There are four beneficiaries: 2 universities and the 2 sons(both in their 20’s) Will the sons have the option of opening their own inherited IRA accounts and be able to have the funds distributed using the 5 year rule?
What was the date of death? If the universities are paid off by 9/30 of the year following the year of death, the distribution period for the inherited IRA will be based on the age of the oldest son, but only if the trust is qualified for look through treatment. If not qualified, then the distribution period will be 5 years if father passed prior to his RBD, or his remaining life expectancy if he passed after his RBD. The distribution period therefore depends on several different factors. Regardless of the distribution period, the trust cannot be terminated unless the trust provisions allow it or give such discretion to the trustee.
Father passed in May of 2017 – so we are beyond the date unfortunately; he passed prior to his RMD. I informed the attorney that the sons have the option of opening up inherited IRA accounts and the accounts must closed out by December 2022. I am awaiting feedback from the attorney.
The sons may want to consult with counsel to see if they may have a claim against someone for this result that could have been avoided.
Permalink Submitted by Alan - IRA critic on Sat, 2019-05-25 01:24
If the sons were named beneficiaries, the executor should have no authority to deal with the IRA custodian. Was the estate of the client the actual beneficiary of the IRA? Are the sons minors? One money is distributed from a non spouse inherited IRA, it cannot be rolled over and will be taxable. If the amount is substantial and the sons may have legal recourse against the executor for destroying their opportunity to stretch these dollars. More details would be helpful in explaining why this has occurred.
Permalink Submitted by Rene Nourse on Mon, 2019-05-27 18:54
The amount is substantial: $675K for each son who are not minors….I have been in contact with the mother, who is not in direct conversation with the executor, and is getting feedback/commentary from her sons instead. I’ve asked if perhaps this is money from a 401k vs an IRA and the mother indicated that she was told by her sons that it was an IRA and that they were named as beneficiaries. If the estate was named instead as the beneficiary, would the rules be different? Also, would the rules be different if the funds were in a 401k instead?