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Inherited IRA and escheatment


BruceM
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Came across one of the more strange cases I've ever heard of. Seems an elder widower died 3 years ago naming his son as 50% beneficiary of his TIRA. His inherited portion is small at under $5,000. Seems son and father were not talking and son said he'd take nothing from his father, including the IRA. So the IRA is sitting at the custodian, who has notified son but son has ignored them and said he'd burn any check he's sent for the IRA balance (his sister transferred her part out shortly after death). No RMDs have been taken. What will eventually happen to the son's portion of the IRA? Will it...

  • Be transferred to a taxable account in the son's name by the custodian and a 1099-R sent to the son for the year?
  • Eventually undergo the escheatment process and be transferred to the state with a 1099-R going to the son?
  • Escheatment and no 1099-R, it just goes away?
  • Eventually the IRS will require son pay 50% underwithdrawal penalties?
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A State’s abandoned-property law often measures an abandonment period from when a retirement account became distributable. Even if an IRA’s custodian does not treat earlier events or facts as starting an abandonment period, a custodian might treat a beneficiary’s IRC § 401(a)(9) required beginning date as making his share distributable.

I don’t know whether some IRA custodial agreements grant the custodian an administrative power to pay an unrequested, but required, distribution as a transfer to a non-IRA account with the custodian or its affiliate. Or perhaps some custodians interpret such a power as incidental to the custodianship’s minimum-distribution provision.

Yet, it might be impractical to implement such a power if the custodian lacks enough information, including the taxpayer identification number, about the would-be beneficiary.

If one’s curiosity is more than academic or intellectual, one might Read The Fabulous Document. But in my experience, a typical IRA custodial agreement is unlikely to state enough details to inform a reader about what the custodian will do in the situation described.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Did you provide them the option to disclaim the account (maybe it's to late to disclaim). If it's not too late to disclaim, and the son disclaims, the funds should go to the remaining beneficiary (his sister) who seems responsive. If it's to late to disclaim, I would escheat to the deceased and let his estate deal with making a claim on the account for the state.

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If an Individual Retirement Account’s terms and administration allow a disclaimer (not all do), a custodian likely would recognize only a disclaimer that, besides meeting all conditions to be valid under a relevant State’s law, also meets all conditions to be recognized under Internal Revenue Code of 1986 § 2518. Among other conditions, the disclaimer document must be delivered to the IRA custodian no later than nine months after the date of the participant’s death (or the date the beneficiary attains age 21, whichever is later). 26 C.F.R. § 25.2518-2(c)(1) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-B/part-25/subject-group-ECFRac39af22636eabc/section-25.2518-2#p-25.2518-2(c)(1).

In the Internal Revenue Service’s view, an amount paid over to a State’s abandoned-property administrator is subject to Form 1099-R tax-information reporting and IRC § 3405 Federal income tax withholding (to the extent of an amount not previously so treated).

Rev. Rul. 2020-24 https://www.irs.gov/pub/irs-drop/rr-20-24.pdf

Rev. Rul. 2019-19 https://www.irs.gov/pub/irs-drop/rr-19-19.pdf

Rev. Rul. 2018-17 https://www.irs.gov/pub/irs-drop/rr-18-17.pdf

The facts BruceM describes suggest the IRA custodian might treat the son as the person entitled to the unclaimed benefit. If so, and if the IRA custodian tax-reports, the Internal Revenue Service (and perhaps State and local tax authorities) might presume the son received income.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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A further observation about the IRA BruceM describes:

The IRA custodian might have no obligation to pay a minimum distribution.

IRAs a human holds as an original owner are not aggregated with IRAs the human holds as a beneficiary. Likewise, IRAs a human holds as a beneficiary of one decedent are not aggregated with IRAs the human holds as a beneficiary of other decedents. And Roth and non-Roth IRAs are treated as distinct sets.

A human might have two or more non-Roth IRAs (or two or more Roth IRAs) he holds as a beneficiary of one decedent. An absence of a distribution from a particular IRA does not by itself mean a minimum-distribution requirement was not met.

An IRA custodian reports minimum-distribution information to a holder, but providing an involuntary distribution is not a condition of an account’s or annuity’s tax treatment as an IRA. Many IRA custodial agreements do not provide such an involuntary distribution.

But an IRA custodial agreement allows, whether expressly or by implication, an involuntary distribution as needed to obey a State’s abandoned-property law.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Perhaps the custodian might exercise some common sense?  Contact the sister, make sure she knows what's going on, and ask her to help get her brother to do something (e.g., disclaim, take a distribution, etc).

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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David Rigby is right: Whatever courtesy a bank, insurance company, or other IRA custodian might extend to a beneficiary is the custodian’s choice.

BruceM’s question invited us to consider what might happen if the beneficiary persists in his unwillingness to claim a distribution.

That a beneficiary the custodian notified has not claimed a distribution three years after the IRA owner’s death suggests at least some possibility that the unwillingness to claim a distribution might persist a little longer.

Even if this BenefitsLink discussion is only academic, it helped me think about weaknesses in tax law’s minimum-distribution conditions and in States’ abandoned-property laws.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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If anyone on this board feels that the RMD rules are lacking in some substantive manner that would be within the IRS's regulatory authority to fix, this is a reminder that the comment period for the recently-proposed RMD regulations is currently open.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Two Thoughts - If son itemizes, he gives it to charity, perhaps one his father would have hated. And perhaps custodian would accept a direct distribution to charity instruction so son would not have to touch proceeds. Alternatively, son makes net gift to sister in return for payment of associated tax liability. 

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The father's IRA in effect became his inherited IRA after the sister transferred her portion out whether he likes it or not.  Failure to timely disclaim timely is deemed acceptance of the property.

Custodian should be providing 5498 to IRS each year in his name and TIN (typically SSN) showing the inherited IRA information. If he fails to provide a TIN, custodian would leave the TIN blank on the 5498.

His failure to take his RMD is subject to the 50% excess accumulations tax starting in the year after the father's death. IRS can use the 5498 to figure this out - but often they don't. IRS would automatically waive this tax if he removes entire account balance by the end of the year containing the 5th anniversary of father's death. See 54.4972-2, A-7(b).

Typically the IRA custodian cannot issue a distribution without it being requested by the owner. Probably will require custodian to escheat the funds to the state eventually (based on the criteria and timetable dictated by state law).  

 

 

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Thanks for the many thoughtful responses. This is a very unusual case.

A bit more info might help understand it. Seems the son as a parent left his 4 year old with grandparents (his father), who it was found later had abused the 4 year old while the grandfather was drunk. The son (father of the 4 year old) as can be imagined, became furious and disowned his father. This is a horrible situation but it does help explain the son's behavior.

My advice to my friend is as suggested by FPGuy....simply make a withdrawal, withhold enough to cover his (beneficiary son) tax on the withdrawal and donate the remainder to a charitable organization such as Prevent Child Abuse America. If the son finds he can't do the request for withdrawal I suggest the sister stand in to help actually do it.

And very interesting discussion on escheatment. Much thanks.

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Very sad and unusual situation.

Perhaps the son should consider taking the money and using it to establish a college fund or investment account for the grandson.

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