No Contingent Beneficiary Named on Keogh and IRA Variable Annuity
In 2024, Dad was owner/annuitant of a Keogh Variable Annuity and an IRA Variable Annuity. Mom, age 85, was the primary beneficiary and passed away two years before Dad passed at age 93. The insurance company did not provide an opportunity to name contingent beneficiaries unlike all of his other IRA accounts with other companies.
Dad and Mom had a Trust with wills and 100% of all assets are to be split between the son & daughter. The Trust identified the Keogh and IRA on the Community Property Schedule at the back of the Trust. Since there was no named contingent beneficiary, the accounts are in Probate. Upon completion, I’m understanding the funds will pass in and out of the Estate bank account and then in and out of the Trust bank account before distribution could be made to the son & daughter.
Insurance company said payments must be made out to the Estate and the distribution options are either lump sum payment or a 5-year deferral. The 5-year deferral option would mean we would have to leave the Probate open for 5 years and that is unusual.
We did not do an RMD in 2024 using the published 7/19/24 IRS final RMD Regs allowing an RMD in the year of death to be made by December 31 of the year following death rather the year of death.
What is the most tax advantage way for the heirs to receive the Keogh and IRA money? Is there a way to avoid full taxation in year of distribution and roll them into inherited IRA’s?
By not doing an RMD in 2024, is there any RMD requirement if we do a full distribution to beneficiaries in 2025? It would greatly help the beneficiaries to delay the possible full distribution into 2026 but the insurance company will only allow a full distribution and not a partial distribution even to fulfill an RMD requirement. Is that common and allowed?
Permalink Submitted by Alan - IRA critic on Thu, 2025-02-06 17:36
Thiis is typical for insurance company custodians. When there is no contingent beneficiary, the IRA agreement must be checked to determine the default beneficiary, although with the spouse already gone, the default beneficiary is likely the estate. Thus the probate requirement.
When the plan owner passes after their RBD with the estate as beneficiary, IRS rules state that the remaining LE of the decedent determines the beneficiary RMDs. The stretch for a 93 year old would only be around 4 years. With many IRA custodians the executor or trust trustee can request assignment of the IRA out of the estate to the will beneficiaries, but insurance companies are much less likely to cooperate with an assignment request than non insurance custodians. That makes an annuity IRA with no designated beneficiary a very bad combination. As such the only options are likely a total distribution so the estate can close or keeping the estate open to better control the taxes.
Not that it matters much in this case, but the insurance company cannot allow a longer payout deadline (5 years) than the decedent’s remaining LE, but if the decedent had been younger with a longer LE, the insurance company could still apply their 5 year limit.
A total distribution in 2025 will satisfy all RMDs including the year of death RMD of the decedent. You could try, but they will not likely agree to delaying the full distribution until 2026.
Permalink Submitted by Mike Vartanian on Fri, 2025-02-07 14:18
If insurance company agrees to assignment of IRA out of estate to will beneficiaries, is it possible to rollover funds to inherited IRA at another financial institution since insurance company is not providing this option to avoid immediate taxation? I understand your reference to the remaining LE being 4 years or less.
Could an inherited IRA rollover to beneficiary also be possible after full distribution and passing through the estate and trust bank accounts to avoid taxation?
Permalink Submitted by Alan - IRA critic on Fri, 2025-02-07 17:18
Once a distribution is made to a non spouse beneficiary including a trust or estate, that distribution cannot be rolled over to another inherited account.
Inherited IRAs can only be moved by direct trustee transfers to a new custodian. Since the beneficiaries will be better off with a non insurance custodian it will probably work better to set up a trust inherited IRAs with a new custodian who will also accept a subsequent assignment request, initiate a direct transfer through the new custodian to the inherited IRA at the new custodian for the trust, and then have the trustee of the trust request that assignment to separate inherited IRAs.
It’s more likely that the insurance company would cooperate with a transfer request than an assignment out of the trust.
Permalink Submitted by Mike Vartanian on Fri, 2025-02-14 14:20
Let me see if I am understanding correctly once the funds can be released from probate. The current insurance custodian will do a full distribution to the estate bank account. The executor of the estate will make a transfer of funds from the estate to the trust bank account. The trustee sets up a new trust inherited IRA with a new non insurance custodian who will accept a subsequent assignment to separate inherited IRA’s of the will beneficiaries. New non insurance custodian executes the above into separate inherited IRA’s of the will beneficiaries.
Permalink Submitted by Alan - IRA critic on Mon, 2025-02-17 10:00
That will not work after the current custodian makes a distribution to a non spouse beneficiary. The assignment out of the estate can only be done before any distribution from the inherited IRA.