inherited IRA from estate to heirs

Submitted by Bill Ferrell on Fri, 2020-10-23 17:22

Hello,

My father passed away at the age of 85 this past April 7th. He had been taking RMD;s. Unfortunately, he named his estate as the beneficiary of his IRA. Their are seven siblings who are heirs to the estate. My research has shown that the IRA needs to be re-titled as the Estate IRA, Deceased. Once that is done, according to Revenue Ruling 78-406, the IRA can be divided into seven equal IRA’s “for the benefit of: Sibling”. Also that neither of these events are considered a taxable event.

The attorney’s handling the estate seem to have no clue that this is possible despite my sharing a lot of documentation from many sources, such as Kiplinger, Investopedia, and Fidelity. They also seem to be pushing for a PLR. I know a PLR cannot be used as precedent, however, a revenue ruling can be. I think this is a money grab on the part of the attorneys.

The executors (my brother) have asked for the following questions to be answered. Any thoughts or advice would be appreciated.

1. When an estate is the named beneficiary of the traditional IRA, the executors can transfer the entire balance of the account into separate accounts for the benefit of each of the estate beneficiaries;
2. This transfer is not a taxable event and that the entire balance will not be taxable in the year of transfer;
3. The beneficiaries can then stretch out the collection of their respective accounts for up to 10 years; and,
4. That neither the co-executors of the estate or Morgan Stanley can be held liable for any penalties or taxes due as a result of this lump sum division in the initial year, or in any subsequent years if the beneficiaries do not take out their required minimum distributions and pay their respective taxes, penalties and interest.

Thank you,

Bill Ferrell
818-590-1590



Submitted by Alan - IRA critic on Fri, 2020-10-23 20:16

  1. Yes, direct transfers of inherited IRAs out of the estate into individual inherited IRA accounts for the estate beneficiaries have been done for decades. Sometimes there is resistance from the IRA custodian, who would rather make a lump sum distribution and avoid opening 7 inherited IRAs, but it is rare for estate attorneys to be the source of confusion. Definitely this reflects on the knowledge and professionalism of this estate firm. Or perhaps the estate firm is simply parroting the statements from the IRA custodian?  In some situations, the custodian will just refuse to establish inherited IRAs, and while the entire account could be transferred to a new custodian, it may be challenging to find a new custodian to accept the transfer. The more beneficiaries there are, the more likely there is to be resistance.
  2. This is correct. A transfer is neither reportable or taxable, but beware of authoring any distribution, since once a distribution is made, there is no solution to immediate taxation of the balance.
  3. Under the Secure Act, the RMD situation for estates is the same as is was prior to Secure. For death after the RBD, the estate or any beneficiaries of the estate must distribute the inherited IRA over the remaining life expectancy of the decedent. That’s about 6-7 years in this case. The 10 year rule is not an option. An annual beneficiary or estate RMD is required starting in 2021. Take your father’s age on 12/31/2020 to get the 2020 divisor (but no 2020 RMD), and reduce it by one for each year starting in 2021. Father would obviously have been either 85 or 86 at the end of 2020.
  4. Whose requirement is this?  I would not sign this, letting the executors off the hook for any error they make. If the desired transfers will be made, it may be worth it to hold the the custodian or executor harmless for any actions as a result of such a transfer, but certainly not if they refuse a transfer.
  5. A PLR may cost upwards of 20,000. It is unnecessary and should not be considered. This is often a tool used by custodians to resist making the clearly allowable transfers.
  6. Following is a link to sample letter for executors or trust trustees to send to IRA custodians in this situation from noted retirement plan authority Natalie Choate:
  7. https://www.coloradoestateplanning.com/design/images/Nancy-Choate-Sample-Letter.pdf

Submitted by Bruce Steiner on Sat, 2020-10-24 14:01

  • While I’ve obtained many private letter rulings involving IRAs, before applying for a ruling, if the current IRA custodian won’t do this, the executor could set up an inherited IRA for the estate and then move it to a friendlier custodian and set up the seven inherited IRAs there.
  • While I generally don’t like to criticize other lawyers, if you end up applying for a private letter ruling, you may want to work with a lawyer other than one who “seem[s] to have no clue that this is possible.”
  • Bruce Steiner

Submitted by Alan - IRA critic on Sat, 2020-10-24 17:30

If you choose to attempt to transfer the inherited IRA to another custodian, your chances of acceptance may be best with a custodian who holds the most assets collectively for the 7 beneficiaries. Large holdings may provide some leverage in this situation.

Submitted by Bill Ferrell on Mon, 2020-10-26 21:31

Thank you for your responses.  The estate attorney handling the Will is insisting that we need a PLR. I think it is a monrey grab and/or their lack of knowlegde in this matter and an attempt to CYA! I wonder if it is possible to get a written legal opinion (willing to pay for this) that states this is allowed and not a taxable event.Any thoughts on where/how I can get this? The custodian representative at Morgan Stanley stated he asked  the retirement services department if they would -“split the Inherited IRA into seven different inherited accounts FBO each beneficiary as established by the Will through thre probate process.  The answer was, “No, we do not allow any attempt to bypass the estate.  How can they be so ignorant?  

Submitted by Bruce Steiner on Sun, 2020-11-15 17:54

  • Yes, it’s possible to get a legal opinion.  You would get a legal opinion from a lawyer.  However, before getting one, you might want to check with the current custodian to see whether they would accept it.
  • It might be easier to set up an inherited IRA for the estate at the current custodian, then set up an inherited IRA for the estate at a different custodian, then transfer the inherited IRA to the new custodian, and then divide it into separate inherited IRAs at the new custodian.
  • It might be worth having a trusts and estates lawyer speak with the current custodian.  Perhaps there’s some miscommunication.
  • Another possibility is to keep the estate open until the entire IRA has been collected.  Since the IRA owner was 85, the iRA owner’s life expectancy won’t be very many years.  The executor can then make distributions to the beneficiaries of the estate as desired.
  • Bruce Steiner

Submitted by Alan - IRA critic on Mon, 2020-10-26 22:09

  • They aren’t ignorant. A small firm might be, but this is a major custodian. They know this is allowed but wish to discourage it so they can make a lump sum distribution and wash their hands of the entire issue. They are stonewalling you because they don’t want 7 inherited IRAs and they do not like estate owned IRAs either due to the possible threat of estate related litigation. Possibly, if you were the sole beneficiary, their attitude would change. Each additional beneficiary wanting a separate inherited IRA makes the situation more undesirable for the IRA custodian. Incorrectly blaming the IRS is an easy out for them.
  • Does the attorney know what a PLR costs these days in addition to the delay in getting resolution? Did you review the current PLR link posted by Bruce Steiner?

Submitted by Bill Ferrell on Mon, 2020-10-26 22:25

I think the estate attorney is not well practiced in this area, to say the least.  I am sure she would be very happy to do a PLR and she has commented on underestimating the attorney fees for doing so.  I have seen enough proof that our scenario is one that is performed many times.  I spoke with Sarah Brenner as ell and she stated the PLR was not a requirement.  So from what you are telling me, collectively, is that Morgan Stanley just doesn’t want to do this cause it is a pain in the arse.  That tells me I need to find a strong tax attorney who will light a fire under them to get them to perform.  Or we need to take the IRA away and place it with a more user friendly custodian. 

Submitted by Alan - IRA critic on Tue, 2020-10-27 00:56

Is the IRA large enough to be worth this battle? Will all the beneficiaries agree to finance the legal fees of a well respected tax or estates attorney? Unfortunately, despite a continued flow of stories like this, people are still leaving retirement plans to their estate. Actually, it’s even a worse experience if the plan is a qualified plan than if it’s an IRA, since a qualified plan left to an estate cannot be rolled over to an inherited IRA per IRS rules.

Submitted by Bill Ferrell on Tue, 2020-10-27 03:41

Alan,Would you be willing to talk off line on this. I would rather not put numbers on this thread.If so I can give you my email or phone number.Thanks, Bill

Submitted by Alan - IRA critic on Tue, 2020-10-27 16:46

Sorry Bill, but I limit my involvement to comments made in this forum only.  However, my question about the IRA balance does not need an answer, and I would not have any idea of what the legal fees might be. I do know that the more beneficiaries there are the less likely that all of them would be on the same page. Note that the most frequent scenario is resistance from the IRA custodian to assignment to individual inherited IRAs out of the estate, but you have a double issue here with the estate attorney as well. That makes it much tougher to accomplish what should have been fairly simple.

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