Titling the Inherited IRA

There are two main reasons to properly take care of this important step following an account owner's death.

Natalie Choate, 11/08/2013

Question: I attended your recent presentation at the Notre Dame Tax & Estate Planning Institute. In "The Fiduciary's Guide to Retirement Benefits" and the seminar material, you suggest that the fiduciary should (promptly after the participant's death) rename an IRA account to be titled "John Doe, f/b/o Estate of John Doe" or "XYZ Bank, Executor of the estate of John Doe, as beneficiary of John Doe." Why do you recommend such retitling at the time of death, and what are the benefits of such retitling?

Answer: I'm sorry I didn't make this clearer in the seminar presentation! Here's what "retitling" is all about.

Suppose John Doe dies, leaving his IRA to "my estate" as beneficiary, or fails to name any beneficiary, causing the estate to become the beneficiary of the IRA by default. Now the estate "owns" the IRA as beneficiary, but the executor has not established that ownership with the IRA provider. As far as the IRA provider is concerned, this account still belongs to John Doe. It will take instructions only from John Doe. Once the IRA provider realizes that John Doe is dead, it will not take instructions from anybody until the account beneficiary shows up and establishes his or her identity.

This is required for any beneficiary of an IRA of a deceased person. In the particular example I discussed at the seminar, the beneficiary of the IRA happened to be the estate of the deceased participant, so I'll illustrate with that.

Suppose Rita Roe has been duly appointed as executrix of the estate of the deceased IRA owner John Doe. As executrix, Rita wants to start getting the monthly statements for the account and otherwise take control of it, maybe to sell the investments inside the IRA or take a distribution from the IRA. But she can't do any of these things until the account is formally registered in the estate's name on the IRA provider's books. If she just calls up the IRA provider and says, "Hi! I'm the executrix of John Doe. Please send me some account statements and, by the way, sell all the IBM stock and send me a distribution for $10,000," the IRA provider will say, "Who the heck are you?"

In short, the IRA provider will not deal with the executrix until the account has been formally retitled, or reopened, in the name of the estate. As of now, the only "customer" the system recognizes is John Doe. The executrix is "nobody" until she:

--Presents her certificate of appointment to the IRA provider, to prove she is entitled to act for the estate of John Doe.

--Gives the IRA provider her name, address, email address, and phone number, and the tax ID number of the estate, so they can communicate with her and do the IRS-required reporting for this account.

--Signs the IRA provider's standard form account agreement showing she agrees to their standard account terms and so they have her signature on file.

The minute John Doe died, the IRA "belonged" to his estate as beneficiary. But until the paperwork catches up with the real-time events, the executrix (or trustee, or child, or spouse, or whoever is the beneficiary of the account) can't do anything with it. It's like when you buy a house. You give your money to the seller, and the seller gives you a signed warranty deed. You now "own" that house, but the property tax bills are going to keep coming addressed to the seller unless and until you record your deed, because the property is still in the seller's name on the record.

So all I'm saying is, in order to take any actions, or even get any information with respect to this inherited IRA, the executrix has to complete all the paperwork to get the account documented into the name of the estate as beneficiary. That's the step I call "retitling." There are two reasons I put so much emphasis on this step.

First, some beneficiaries handle this step in a casual or even careless manner with the result that the IRA provider thinks a distribution is being requested, and the IRA provider simply closes out the IRA account and distributes 100% of the proceeds to the beneficiary. That occurrence is an all-too-common tax disaster, because once money has been distributed from an inherited IRA, there is no way to get the money back INTO the tax sheltered IRA (unless the beneficiary who receives the distribution is the surviving spouse). That's why the owner of an "inherited IRA" has to be extremely careful in communications with the IRA provider. All communications should emphasize that the beneficiary is not seeking a distribution; he or she is merely asking for a change of title.

Second, I regularly get emails from upset beneficiaries and their advisors complaining that "I want to transfer this inherited IRA to the financial firm we usually deal with, but the decedent's IRA provider is telling us we have to open an inherited IRA with THEIR firm!" These callers don't understand that they have to open the inherited IRA at the decedent's IRA provider's firm FIRST before that IRA provider can take any instructions from them--and then after they do that, they can transfer the IRA to another firm. But the beneficiary cannot transfer his or her inherited IRA to another IRA provider unless he or she, as beneficiary, is first established as a "customer" or account holder with the original IRA provider.

 Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.