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