Transfers of IRA Assets by Non-Spouse Beneficiaries

[Guest David Hammond CISP]

Hi Everyone,

A very common transaction of the last few years is an IRA Trustee/Custodial Transfer of Assets of a Deceased IRA Owner by a Non-spouse Beneficiary.

When successfully completed, the IRA resulting from the transfer is usually titled referencing the original owner as being deceased with the resulting IRA existing for the benefit of the non-spouse beneficiary. For Example: "XYZ Firm as Trustee of the IRA of John Smith (deceased) for the Benefit of John Jones, Beneficiary".

No doubt this has become a commonplace transaction recently with many IRA fiduciaries sending and receiving these transfers routinely without giving it a second thought.

Over the past several months I have become aware of an increasing number of these transfers being refused by a variety of financial institutions. They base their refusal of this kind of transfer on the lack of legal qualification of a non-spouse beneficiary to execute an IRA Plan Document (Form 5305/5305A and such) in the name of or on behalf of a now deceased IRA owner (this assumes that the deceased IRA owner did not have an established IRA at the organization receiving the IRA transfer).

While I know on no instances where the IRS has recently shown concern or interest over this matter, it is interesting to note that in earlier times, the IRS did see fit to issue a proposed regulation permitting an employer to execute an IRA Plan Document on behalf of an eligible SEP participant who was unwilling or unable to open an IRA to receive employer SEP contributions. (Prop. Treas. Reg. 1.408-7(d)(2). No doubt, these base circumstances are very different but, it appears to address the apparent need at that time to legally enable someone other than the participant to execute IRA Plan documents on their behalf.

I would be interested in any of your thoughts or discussions on this matter. A "Tempest in a Tea Pot" issue? Perhaps.

But with these kinds of transfers happening routinely these days, I would not want to be first on my block to have a high balance decedent IRA transferred by a non-spouse beneficiary disqualified on a document technically, remote that those circumstances may be.

Cordially,

David

[Appleby]

David,

In 1991, the IRS allowed two individuals, who happened to be sisters, to transfer their deceased father's IRA to another financial institution, which means that they had to sign adoption agreements on behalf of their father.

One condition was that the IRA was maintained in the name of the deceased ( of course)

However, for tax reporting purposes, the SS# used , would be that of the beneficiary.

These are PLR's 9106044 and 9106045. One is attached.

Your client may want to get his/her own PLR- it is always safer to err on the side of caution.

[Guest Randy Ehle]

My firm generally allows such transfers, on the basis of the fact that the account is being opened by the beneficial owner of the IRA (i.e., the decedent's beneficiary), who has the authority to act on the account in accordance with the IRA custodial agreement.

[Guest Sharon Tate]

Originally posted by Randy Ehle

My firm generally allows such transfers, on the basis of the fact that the account is being opened by the beneficial owner of the IRA (i.e., the decedent's beneficiary), who has the authority to act on the account in accordance with the IRA custodial agreement.

Randy Ehle

It seems logical that your firm would require the beneficiary to open the inherited IRA- the deceased certainly cannot.

David, the key here is the IRA plan document.

For example, I moved my IRA to Pershing ( located in New Jersey) because their IRA plan document allows the IRA beneficiary to assume the responsibilities and roles of the IRA owner, upon death ( of the IRA owner). If this is not permitted in the plan document, then there could be trust compliance issues. I agree with Appleby, if the plan document is silent of the issue, then make a recommendation to the client to obtain a PLR