Appleby

The IRS has just issued Notice 2003-53 (attached) , in which it is provided (among other things) that the Custodian/Trustee is not required to report the earnings on ESAs on IRS Form 1099-Q. This relief is for tax year 2003. Further, the IRS provides that if the Custodian/Trustee does not have records indicating whether a gross distribution from an ESA made in 2003 was a trustee-to-trustee transfer, we may leave box 4 of Form 1099-Q blank. Earnings on excess contributions are required to be reported . The document also addresses FMV reporting The IRS expects to publish further guidance about required reporting for ESA distributions made in 2004 and future years. IRS_Notice_2003_53.pdf

Can’t put my hands on the ruling right now, but recently.. it was held that a distribution request that was in-transit when the participant died is not considered received by the plan. Therefore, the distribution request was null and void. The same may apply to a Roth conversion request, which is in effect a distribution and a rollover. Further, once an IRA Custodian is notified that the IRA owner is deceased, the IRA should be flagged as such and the only transactions that are allowed after that are distributions ( or transfers or rollovers for spouses ) to the beneficiary/ies.

jmelamed it appears that you misunderstand the rules. This relates to excluding qualified foreign income…not US income . If you were right , then we should all accumulate our retirement funds until certain time and go live overseas when we are ready to distribute the assets ...but unfortunately, you are not

True…in the majority of cases where a beneficiary refuses to sign, it stems from advice received from an attorney…. Most times, in cases such as these, when I explain to the attorney the purpose of the document, they usually agree to allow the beneficiary to sign. The refusal comes in because the attorney may think that the movement of assets from the account of the deceased is a distribution …as you know, a death distribution to a beneficiary is not rollover eligible ( unless the bene is a spouse) and therefore taxable. Most financial institutions will just re-title the same account to add the name of the beneficiary, show the IRA owner as deceased, and has the system flexibility to process distributions from the same account of the deceased, and have it reported in the tax ID number of the beneficiary, while still being able to accommodate any required 5498 reporting for the deceased. Some institutions do not have that system flexibility and as such must transfer the assets to a new account (number). Once the attorney understands that the movement of assets is a non-reportable and non-taxable transaction, which is necessary to accommodate required tax reporting, i.e. 5498 and 1099-R when the beneficiary eventually decides to distribute the assets, he/she usually agrees to allow the signing of the adoption agreement by the beneficiary. As Derelict mentioned in an earlier post, brokerage firms may have different operational requirements for documents used to assign a new account number, even if that account is established just to receive a transfer of inherited assets. The key( for the beneficiary and the attorney) is to make sure the signing of the document does not represent the establishing of the beneficiary’s ‘own’ IRA...instead, it must be an ‘inherited/beneficiary’ IRA, established solely for the purpose of proper audit trail and to accommodate any tax reporting that cannot be accomplished under the account established by the deceased….notwithstanding all that , the new adoption agreement is not a regulatory requirement…there is no revocation that could occur and no IRA disclosure statement that is required. It is merely an operational requirement, which could be negotiable at some financial institutions. It may be less aggravating to the beneficiary, and reduce the occurence of going back-and forth, if he/she just signs the document and allow the transactions to occur seamlessly

mbozek funny you should ask “what does the custodian do if the beneficiary refuses to sign an adoption agreement”…I started to add reference to that in my original response and then decided against it. Derelict's operational requirement seems similar to ours... Our IRA plan document does make “the beneficiary the owner of the IRA after the owner dies with all the rights of ownership”…however, due to systematic limitations, we require a new account number to be assigned and a new account established for the beneficiary. The assets are transferred (non-reportably) to this new ‘inherited/beneficiary’ IRA for the beneficiary ( established in the name of the beneficiary and the deceased and the tax ID # of the beneficiary. We have had instances where beneficiaries have refused to sign any new adoption agreements, because they seem to think it means establishing their ‘own’ IRA instead of an ‘inherited IRA’. In those instances, we waive the requirement for a new adoption agreement and use the information provided on the other documents that are required to establish the ‘inherited/beneficiary IRA’, such as tax ID number of the beneficiary , name and address etc. If no beneficiary designation form is completed by the beneficiary, the default beneficiary provisions of the document applies.

So do we...one of the reasons ...because (as you stated Weick) the beneficiary is allowed to designate a successor beneficiary...

Right on the money mbozek... the beneficiary options are the same , whether the spouse is the beneficiary by default of the plan document or state laws, or by being named as a beneficiary of the IRA.

Bruce, From what I read in these PLRs , they address the spouse being allowed a spousal rollover, despite the fact that a trust was the beneficiary, not the spouse. The allowance was made because the spouse was the beneficiary of the trust. I do not have access to your article, but this appears to be a different issue. Further, an article written in 1997 is unlikely to explain the allowable options for the question asked by Foley, as the Final RMD regulations, issued April 17, 2002, changed some of the rules under the proposed RMD regulation

No. For purposes of a SEP, including a SARSEP, a year of service may be any period , regardless of how short the period may be. For instance, is a participant worked for one day during 2002, the participant has worked 1 of the five preceding years… because you have a 1-year service requirement, the participant will be eligible for a 2003 contribution...

Actually…the IRS is right- as they were responding to the amendment question, not the 204(h) notification...If it is truly a merger, then it is sufficient to amend the surviving plan, providing the amendment is retroactively done to amend the MPPP for the new tax laws.

I can see your point Weick… when the son ( or any disqualified person) is the beneficiary, your explanation rings true. Bear in mind though that an IRA owner can name anyone/any entity as the beneficiary...so what then if the beneficiary is not a disqualified person, such as a friend? Wouldn’t the sale then be an arms-length transaction, if it occurs while the IRA owner is still alive?

I think the reliance may be more on logic than a reference to a specific cite? You asked in your first post if the definition of beneficiary, as provided under 1.408-2(b)(8) would apply here. The answer is a qualified yes?because the beneficiaries as defined under 1.408-2(b)(8) can be changed during the IRA holder's lifetime, for the purpose of your question, such beneficiary would be affected only if he/she is the death beneficiary (i.e. the designated beneficiary/ies who remain after the death of the IRA owner) This may be somewhat meandering ...but let's see? Given that the " account ceases to be an individual retirement account as of the first day of such taxable year ",a prohibited transaction occurs IRC § 408(e)(2)(A), the question would then be "Who is the owner of the IRA when the taxability is determined? ?..I.e. to whom would the distribution be taxable? Given that any distribution that occurs after the death of the IRA holder is reportable to the beneficiary (Ref Instructions for filing IRS Form 1099-R) , this is where it gets murky for me ? who is the distribution reportable/taxable to? The deceased or the beneficiary? If the deceased was alive as at the first day of the year, then the language suggests that 1099-R will be issued in his/her name and SS#. If not, then the 1099-R will be issued in the name of the deceased. What is the prohibited transaction occurred after the death of the IRA owner, but after the beginning of the year???? Not sure! You could also refer to the IRA plan document for some guidance As provided in IRS form 5305, the IRA Custodian/Trustee may use Article Vlll for any additional provisions. Article Vlll is where you will generally find rights, features and benefits provided by the Custodian. One such is the identity of the party who will assume the responsibilities (including directing investments ? prohibited or not) of the IRA owner upon his/her death. The document will generally provide that the beneficiary assumes ownership of the assets upon the death of the IRA owner?This sort of leads into IRC § 408(e)(2)(A) which provides that "If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year." Excluding POAs and the like, the beneficiary does not have the authority to engage in any transaction relating to the IRA, until the IRA assets becomes his/her, which is upon the death of the IRA holder. Maybe we will get more comments?

Absolutely. See the following message thread for more information http://www.benefitslink.com/boards/index.p...ering,and,rules

For this purpose, the beneficiary is affected by the rules only when he/she has the authority to effect such a transaction, which is upon the death of the IRA owner.

The spouse is in fact a “designated beneficiary” by default and has the same options as a spouse who was a named ‘designated beneficiary’. Because the spouse beneficiary is not the sole primary beneficiary, he/she cannot treat the inherited IRA assets as his/her ‘own’. The options are … 1.Transfer his/her portion to an inherited IRA 2.Distribute and roll his/her portion to his/her own IRA

Regarding the question of reporting and rollover eligibility, the assets are rollover eligible unless they fall under on the of list of non-rollover distributions. The Code does not address whether the distributions are due to a triggering event, only the type of distribution in determining the rollover eligibility of assets. As long as the distributed assets are not due to any of those on the lists, then they are rollover eligible… we can only assume that Congress assumed that distributions would not occur from plans unless there was a triggering event. If the assets were distributed directly to the IRA, then it should be reported as a direct rollover (Code ‘G’ on the 1099-R- reportable but not taxable) Can’t address how it will affect the plan qualification issue…Maybe Earl’s way would solve that …assuming the client is never found out… I wonder why the accountant made such a recommendation…maybe the plan does not offer loans? Because if it did, it may have been a better choice to take a loan from the plan, as the assets would continue to earn tax deferred growth, the interest repayments would be made to the participant’s account, and quiet likely (or hopefully) the assets would be taxed at a time when the participant was in a lower tax bracket, i.e. .at retirement

Sounds like he would be an “outside director” which would mean that he is eligible to use the fee’s and fund an employer sponsored plan. Revenue Ruling 68-595 provides that “Fees nd other remuneration received by a director of a corporation for services performed on committees of its board of directors are self-employment income”

IRA assets that are rolled to a qualified plan assume the identity of qualified plan assets are subject to the rules thereof. I.e. these assets lose their IRA flavor

Only pre-tax amounts can be rolled from an IRA to a qualified plan. After tax ( non-taxable) amounts and amounts representing required minimum distributions and excess contributions cannot be rolled to a qualified plan

Either is acceptable, i.e. the original IRA type or a traditional IRA. If the assets were converted from a 'conduit'/rollover IRA (i.e. an IRA that holds assets distributed from a qualified plan) it may better suit the individual to recharacterize the amount to the conduit IRA. Of course, retaining the conduit status only affects individual whose qualified plan balance include balances that accrued before 1974 and individuals born before 1936. Another factor you may consider is fees. For instance, an IRA Custodian may charge a higher fee for a SEP or SIMPLE than it would for a regular IRA. If the individual has no reason for maintaining the SEP or SIMPLE, such as for receiving future SEP or SIMPLE contributions, and the fees for a regular IRA is less, then it would be more practical to move the assets to a regular IRA. Appleby

In your first scenario, it does not matter when the distribution occurs as along as it occurs by June 30,2003. The trick is to look at this on a year ( calendar of fiscal perspective) instead of month-to-month. For instance, assume the IRA owner is required to distribute $12,000 per year. He/she decides to distribute $1,000 each month, on the 30th of each month. He/she started distributions at age 40, which means that by age 59 ½ the duration requirements ( five years or until age 59 ½, whichever is longer ) is met. The last year is 2003. He/she reaches age 59 ½ in August 2003. He/she may either a) continue taking monthly payment of $1,000 until December 2003 or b) take a lump-sum at anytime before December 2003. It does not when the distribution occurs as long as the $12,000 is distributed for the year , by the last day of the year,

mbozek, In your post, # 3 would not be an option for a non-spouse beneficiary, as non-spouse beneficiaries are not allowed to rollover death distributions from qualified plans. IRC § 402©(9); Treas Reg § 1.402©-2, I agree with Mary Kay about five years being too long. IMO, the plan should be terminated by the end of the year following the year of death ( if not sooner) When you have a situation such as that posted by mwyatt, you now have an orphan plan or wasting trust. There are several issues here that would suggest that an orphan plan must be terminated promptly in order to prevent the plan from losing its qualified status. An orphan plan cannot be continued for an extended period, as a qualified plan must be maintained by an employer IRC 401(a). If the sole proprietor dies, then there is no employer to maintain the plan. Therefore the successor trustee (assuming there is one- if there is not, we have a different issue/challenge) must terminate the plan as soon as administratively feasible There is the issue of updating the qualified plan for tax law changes. If there is no employer, it is likely that the plan would not be amended for tax law changes...Beneficiaries may not be aware of this requirements Important reminder…the plan must be amended for GUST prior to termination.

The consequence is that the SIMPLE contributions for that year would be disqualified and contributions to the SIMPLE for that year would be excess contributions

Note too that he could be subject to expatriation tax if he is found to have tax avoidance as a principal purpose See http://www.irs.gov/businesses/small/intern...d=97245,00.html

I agree with GBurns. It is prudent to obtain a copy of the death certificate. If it is found later that the participant lied, the plan may be required to recover the funds , to provide the spouse with due benefits. See [Hearn v Western Conference of Teamsters Pension Trust Fund, 1995 US App Lexis 27941 (9th Cir 1995)] An ounce of prevention is better than a pound of cure!!