Decedent (inherited) IRAs and beneficiaries

[Guest Jeanne]

I need to know if a decedent/inherited IRA (non-spousal beneficiary) can have its own beneficary.

In other words, Joe Smith dies and leaves his IRA to his daughter Mary Jones.

Can Mary now name a beneficiary on the IRA she has inherited from her father? Does it matter if distributions have begun or not?

Is that what is meant by a "stretch IRA"? Did the new regs change the rules?

Thanks for your help!

[mbozek]

generally yes if the beneficiary is a natural person. Check with the custodian or IRA sponsor for the proper forms.

[Guest Jeanne]

Thank you, mjb, for your response.

However, I work for a custodian/transfer agent and without going into a long story, I thought I'd give this board a shot at finding the answer I need to provide a customer.

I even called BISYS/UPI and got a vague answer - "It's best to not establish the practice of adding beneficiaries to an inherited IRA because of the various states' trust law issues."

Huh?? The phone rep was unable to elaborate further.

Does anyone know where I can get more specific info?

Thank you!

[mbozek]

You need to remember that custodians, TPAs, etc who hold assets and administer IRAs do not practice law and thats why they avoid answering the issue you raise. The answer is deceptively simple. IRAs are non probate property that can be transferred by the owner to his/ her beneficaries under state law without regard to inheritance laws or a will. Under most IRA custodial agreements, the IRA beneficary is given all rights of ownership of the IRA upon the death of the owner, including the right to designate contingent beneficaries. This language is in the custodial agreement. Under State law, the owner of property can designatate a beneficary who will inherit the property when the owner ( I.e., designated beneficary) dies (e.g, In NY EPTL Section 13.3.2) without the need to execute a will. Under IRS reg 1.401(a)(9)-5, A-7©(2), the designated beneficary's remining life expectancy will be used to determine the distribution period for the payments to be made to the subsequent beneficary designated by the deceased beneficary. In other words, state law, not the IRS determines the procedure for designating who can recieve the remaining payments from the IRA after the designated beneficary dies. IRS rules only determine the amount of the minimum payment to be made each year.

[jpod]

The issue is a state law issue; not an IRC issue. The IRC is concerned only with how fast/slow the money is paid out; who gets the money is a question of local law.

The issue of concern to some trustees/custodians is whether the IRA trust instrument or custodial agreement, combined with applicable state law principles, allows the beneficiary to name a beneficiary. For example, if the beneficiary dies before he/she has received everything in the IRA, who gets the balance:

The beneficiary(ies) named by the beneficiary?

The estate of the beneficiary (and his/her heirs)?

The estate of the IRA depositor (and his/her heirs)?

I don't know the answers, only the questions.

[Guest AFRICA6796]

Jeanne,

It can be done- however, the second beneficiary must be aware that they must use the life expectancy applied to the first beneficiary.

Pershing's IRA document does permit this. See their website at www.pershing.com.

You have to do through one of their broker dealers to use their documents, as they are just the document provider/clearing house..

[Guest Jeanne]

Thanks, AFRICA!