IRA owner and primary beneficiary die without naming beneficiary

Submitted by Louis Windawi on Sat, 2020-08-22 00:38

I was just retained to help settle some accounts for a client who is the administrator of his parent’s estate and I would like to confirm my understanding.

My client’s father had an IRA and he named his wife as primary beneficiary and their son as contingent beneficiary. The IRA owner died in 2018 at 87 and the spouse subsequently died in 2019 at 88. Unfortunately, the IRA was never transferred to the beneficiary spouse and the IRA beneficiary was not updated. Both IRA owner and beneficiary spouse were over 70 1/2 and the son is 65. There was no trust in place and assets are going through probate.

According to the custodial agreement with Vanguard, the IRA goes to the “estate” of the spouse beneficiary since the IRA was never transferred to the spouse and there were no beneficiary updates.

Questions: Is there any way it could possibly be transferred to the contingent beneficiary of the original owner of the IRA, the son? If not, I believe we use the non-recalculated single life expectancy of the original IRA owner payable to the estate, correct?

How can we avoid keeping the estate open for such a long time? Can the estate be closed and can the administrator of the estate instruct the custodian to transfer the inherited IRA into the inherited IRA for the estate beneficiary, the son? If so, what is the tax code or rule number that support this?

Thank you for your assistance.

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Permalink Submitted by Alan - IRA critic on Sat, 2020-08-22 02:35

The surviving spouse would have had to act before passing or the executor of the surviving spouse would have had to disclaim the IRA no later than 9 months from the DOD of father. The contingent son would then have become the designated beneficiary. As it is, the IRA will pass to the estate of mother and through administration to either the beneficiary(s) under mother’s will or the intestate beneficiaries.
The estate administrator can then assign the inherited IRA to those beneficiaries, as has been the practice for many years, despite occasional resistance from IRA custodians that would much rather issue a lump sum check. This has been a consistent issue since this practice of assignment is not in the tax code or IRS Regs, but rather this practice is supported solely through various letter rulings (PLRs). In some cases, the inherited IRA must be transferred to a new custodian who will cooperate with the executor. Custodians that stonewall sometimes ask the executor to secure their own PLR which is unnecessary and very costly and time consuming. The following is just one of the many PLRs regarding assignment.
2002-34019: An executor can distribute an IRA to the residuary beneficiaries of the estate. Distribution can be non-pro rata if authorized by the will, and does not trigger income to the estate or any beneficiary. Subsequent distributions from the IRA are income to the beneficiary who received the IRA from the estate. Executor distributed IRAs to charitable residuary beneficiaries, and funded shares of the individual residuary beneficiaries with non-IRD assets. As a result, no income tax was ever paid on the IRAs (because the charities were income tax-exempt).
Once assigned, the annual RMDs are based on the remaining LE of the spouse based on her age in 2019. Divisor is reduced by 1.0 each year. Beneficiary will have to make up the 2019 year of death RMD for the surviving spouse since this has not been distributed. 2020 RMD waived.