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Death of beneficiary spouse shortly after IRA owner dies


Bird
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Husband was receiving RMDs (in late 70s) and died 1/2/21, leaving IRA to wife.  Wife died 2/1; account was never moved to her name.  There is a child or children who are estate beneficiaries.

The investment company is saying that the money belongs to the wife's estate and I agree with that.  They are saying that the child/ren can set up an inherited IRA account and take it over 10 years.  After working it through and typing it out, I agree with that, but wanted to see what others think.  Nothing fancy with the estate as far as trusts.

 

Ed Snyder

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Just as BenefitsLink people say about an employer-sponsored retirement plan, Read The Fabulous Document, one might follow that idea also for an Individual Retirement Account agreement.

An IRA agreement’s beneficiary provisions vary with different providers, and sometimes vary even within one provider.

But perhaps potentially differing provisions might not matter much if the husband’s might-be beneficiaries (whether contingent or default) are the same children as the wife’s beneficiaries.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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It wasn't a question about a document.  The husband named the wife as bene, and she died without changing anything and therefore her estate is her bene, no doubt about that (I suppose I should have mentioned that there was no clause saying that if she died in a short period that it would pass to contingents).

I think that since death occured after 12/31/19, the money can pass through the estate to the child/ren and they can set up an inherited IRA(s) and take the money out over 10 years.  Just looking to confirm I am understanding SECURE Act rules.

Ed Snyder

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On 12/3/2021 at 12:10 PM, Bird said:

It wasn't a question about a document.  The husband named the wife as bene, and she died without changing anything and therefore her estate is her bene, no doubt about that (I suppose I should have mentioned that there was no clause saying that if she died in a short period that it would pass to contingents).

I think that since death occured after 12/31/19, the money can pass through the estate to the child/ren and they can set up an inherited IRA(s) and take the money out over 10 years.  Just looking to confirm I am understanding SECURE Act rules.

Peter  is right- it is a document issue. When he died, the IRA became hers.  She died without naming a beneficiary, which means that her beneficiary is determined under the default provisions of the IRA Agreement/Plan document.

On 12/2/2021 at 10:31 AM, Bird said:

The investment company is saying that the money belongs to the wife's estate and I agree with that

That would be true if the estate is the default beneficiary, under the terms of the IRA plan document . It is best to check it, to be sure. Some do default to spouse, and if not, then the children and so on until it gets to the estate.

 

On 12/2/2021 at 10:31 AM, Bird said:

They are saying that the child/ren can set up an inherited IRA account and take it over 10 years. 

If the estate is the beneficiary, the inherited IRA would be established for the estate.  Some PLRs/some custodians will allow the beneficiaries of the estate to transfer the inherited IRAs to their beneficiary IRAs in these cases. The question would then becomes: if the estate is the beneficiary, are the children the (only) beneficiaries of the estate? Because all of the beneficiaries of the estate would benefit.

On 12/3/2021 at 12:10 PM, Bird said:

I think that since death occured after 12/31/19, the money can pass through the estate to the child/ren and they can set up an inherited IRA(s) and take the money out over 10 years.

I think you are right about the 10-year rule. §401(a)(9)(H)(iii). I found no exception for a spouse beneficiary who did not move the inherited IRA to their own- I will continue to look.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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4 hours ago, Appleby said:

If the estate is the beneficiary, the inherited IRA would be established for the estate.

That's really the heart of the question.  I didn't think an estate was a designated bene and therefore would be unable to establish an IRA, and wouldn't it all be due by the end of the year after death?  And if in fact we can look through all of the documents and see that the child is the ultimate bene, should(n't) we be able to establish an inherited IRA in her name without it literally going through the estate?

Ed Snyder

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1 hour ago, Bird said:

I didn't think an estate was a designated bene and therefore would be unable to establish an IRA

That is correct. but, the financial institution is saying that , since she did not name a beneficiary, it defaults to her estate. if that is truly the default provision, then- technically, the estate was designated as the beneficiary.

 

1 hour ago, Bird said:

, and wouldn't it all be due by the end of the year after death? 

No. The 10-year rule would apply to the successor beneficiary. She was an eligible designated beneficiary- and therefore eligible to take distributions over her life expectancy. When she died, her beneficiaries ( successor beneficiaries ) gets switched to the 10-year rule .

1 hour ago, Bird said:

And if in fact we can look through all of the documents and see that the child is the ultimate bene, should(n't) we be able to establish an inherited IRA in her name without it literally going through the estate?

We should.   But, it comes down to the custodian's operational requirement. Some custodians do not allow the assets to pass-through to the beneficiaries of the estate at all.  Those that do  follow one of two paths:

  1. Transfer from the decedent's IRA  to a beneficiary IRA for the estate, then transfer from that beneficiary IRA to a beneficiary IRA for the child( beneficiary of the estate). Or
  2. Transfer from the decedent's IRA to a beneficiary IRA for the child( beneficiary of the estate)

Either is purely operational- and either works as long as the desired end result is achieved

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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Appleby, thanks for your feedback.  I am still confused though...

you agreed with me that an estate cannot establish an IRA because it is not a designated beneficiary.  But later you said that they could establish a beneficiary IRA for the estate, then transfer to a beneficiary IRA for the child.  I'm concerned about the 1099-R reporting - I think, if the money does not go directly to the child's IRA and it goes to the estate, it will be reported as taxable, and the estate has no standing to roll it over to the child's IRA.

Anyway, I'm not directly involved and was just trying to help out an attorney client who had this situation with his own client.  As you note, some of this is up to what the custodian will do operationally, and I told them to push for a rollover directly to the child's IRA.  

Ed Snyder

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8 hours ago, Bird said:

you agreed with me that an estate cannot establish an IRA because it is not a designated beneficiary.

Something must have gotten lost in translation, because it is common procedure to establish beneficiary IRAs for estates. If I said anything that gave that impression, my apologies for the confusion.  A beneficiary IRA can be established for an estate , and is usually the standard procedure when an estate is the beneficiary. It cannot be a nonInherited/beneficiary IRA. But it can be a beneficiary/inherited IRA

8 hours ago, Bird said:

you said that they could establish a beneficiary IRA for the estate, then transfer to a beneficiary IRA for the child. 

The standard procedure is to establish a beneficiary IRA for the estate and transfer the assets to  that beneficiary IRA- but, see quote below from one of my earlier responses.

On 12/9/2021 at 9:36 AM, Appleby said:

If the estate is the beneficiary, the inherited IRA would be established for the estate.  Some PLRs/some custodians will allow the beneficiaries of the estate to transfer the inherited IRAs to their beneficiary IRAs in these cases. The question would then becomes: if the estate is the beneficiary, are the children the (only) beneficiaries of the estate? Because all of the beneficiaries of the estate would benefit.

 

8 hours ago, Bird said:

I'm concerned about the 1099-R reporting - I think, if the money does not go directly to the child's IRA and it goes to the estate, it will be reported as taxable, and the estate has no standing to roll it over to the child's IRA.

You are right that it could not be rolled over if distributed. You do not want to use the term rollover when communicating with the custodian ( the unintended will likely happen if you do. Always  say 'transfer' ) This is because a distribution to a beneficiary other than a spouse beneficiary cannot be rolled over.

8 hours ago, Bird said:

Anyway, I'm not directly involved and was just trying to help out an attorney client who had this situation with his own client.  As you note, some of this is up to what the custodian will do operationally, and I told them to push for a rollover directly to the child's IRA.  

They would push for a transfer to the child's beneficiary IRA.

Summary

  1. IRA owner died and wife inherited IRA
  2. Wife did not transfer inherited IRA to her own
  3. Wife died. Custodian says because wife did not transfer to her own IRA and name a beneficiary, the beneficiary is the estate of wife.
  4. The standard procedure at this point is to transfer the assets to a beneficiary/inherited IRA for the estate. This means that 1099-Rs would be issued under the TIN of the estate.
  5. But, for various reasons, some taxpayers do not want distributions to be reported to the estate. They instead want distributions to be reported to the beneficiary of the estate.  Some custodians will accommodate that , by transferring the assets to a beneficiary/inherited IRA for the beneficiary of the estate ( in this case the child), and 1099-Rs would then be issued to the child.

Does this help? Please feel free to call me - 973-313-9877

 

 

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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