Transfer of decedent IRA from one plan to another. Which plan document controls?

[jevd]

One non-spouse beneficiary of several named transfers an inherited IRA from one institution to another. The IRA plan documents have different language regarding the hierarchy of beneficiaries.

The original plan eliminates any and all contingents at the death of the IRA participant if a primary beneficiary is alive at the death of the participant unless a "Per Stirpes" designation is used.

The receiving IRA provides that a contingent beneficiary receives the funds in the event of the death of the primary beneficiary regardless if the primary dies before or after the IRA participant. The receiving plan also does not allow beneficiaries to name beneficiaries.

There are many permutations of this example possible involving multiple primary & contingent beneficiaries and transfers of inherited IRAs between plans.

I have not found any guidance in regard to this type of issue. Is it a contract or other state law issue? How are other trustee/custodians handling decedent IRA transfers when plan language differs?

Thanks

[Appleby]

One non-spouse beneficiary of several named transfers an inherited IRA from one institution to another. The IRA plan documents have different language regarding the hierarchy of beneficiaries.

Thanks

The plan that currently holds the assets prevails.

The original plan eliminates any and all contingents at the death of the IRA participant if a primary beneficiary is alive at the death of the participant unless a "Per Stirpes" designation is used.

I am not sure how this affects contingent beneficiaries, except that the per-stirpes designation would make the heirs of the primary beneficiary the successor beneficiary

The receiving IRA provides that a contingent beneficiary receives the funds in the event of the death of the primary beneficiary regardless if the primary dies before or after the IRA participant. The receiving plan also does not allow beneficiaries to name beneficiaries.

I think this could be enforced only if the original IRA owner died while the IRA was at the receiving Custodian. Since the assets were transferred to the receiving Custodian after the death of the IRA owner, the receiving Custodian would have no knowledge of the identity (or existence) of any contingent beneficiaries (unless they request this information as a condition of accepting the transfer of assets). It appears then that since no beneficiary designation is allowed, the document provisions (in the event there is no beneficiary) would apply

[mbozek]

IRAs are contractual arrangements between the IRA owner and the IRA custodian. A beneficiary usually becomes the owner of his or her interest in the IRA upon the death of the owner, including the right to invest or transfer the funds to another IRA. The IRA funds are now subject to the rules for inheritance as proscribed by the reciving IRA, not the transferring IRA. If the IRA owner wanted to limit the rights of a benficiary to assign the IRA benefits or eliminate the right of contingent beneficaries at his/her death then the owner should have provided for the IRA payments to be made to a trustee who would make payments as required under the terms of the trust to prevent the beneficary from being able to assign his interest in the IRA.

[BPickerCPA]

I think you need to speak to an attorney as to how state law affects all this. The IRA custodian cannot, in my opinion, decide who will receive the IRA benefits if the primary beneficiary dies. As a matter of law, once the primary beneficiary becomes the owner of the account after the account holder's death, he/she has absolute ownership which includes control of what happens after their death.

[jevd]

Thank you for your replies. This is just an example of many situations encountered in the transfer of decedent (inherited) IRAs from plans with plan provisions regarding beneficiary rights that differ from the receiving plan.

Do any of you have specific procedures in place such as requiring the plan information including beneficiary designation information and copies of the IRA plan document from the transferring plan?

This situation may be relieved to some degree if pending legislation allowing a non-spouse beneficiary to rollover benefits to an IRA in their own name passes. I'm not holding my breath.

Thanks again

[mbozek]

Jevd: The receiving IRA custodian will not want to be involved in any prior beneficiary designatons or restrictions on payment which were imposed on the transferring IRA since the transferred assets will be subject to the terms of the new custodian's IRA including the designation of beneficaries. The transferee/beneficiary as the owner of the new IRA can designate primary and contingent benficiaries as permitted under the tems of the custodial account.

Also in answer to Barry's question, an IRA beneficiary designation can give discretion to an IRA custodian to determine the beneficiary of an decedent's IRA since the IRA is a contract between the owner and the custodian. However, IRA custodians routinely decline to accept such beneficary designations to an IRA because it makes the custodian a fiduciary subject to law suits by disgruntled beneficiaries. An IRA owner can permit discretion in determining the beneficiary by providing for the IRA payments to be made to a trust where the trustee determines who is to receive the income.

[Appleby]

jevd,

We do not require copies of document for transferor IRAs. Once the IRA is transferred to our IRA the transferee IRA becomes subject to the provisions of our document, which incidentally allows a beneficiary to name a beneficiary and includes a default provision in the event the beneficiary fails to name a successor beneficiary.

This may not be applicable here, but I will mention it anyway. Some 403(b) accounts have strict requirements that the account owner must meet in order to receive a distribution from the 403(b) account. Should the account wish to transfer the 403(b) to a successor custodian, the transferor Custodian requires confirmation that the receiving 403(b) document provision is at least as strict as theirs. If an IRA Custodian employees such strict rules as those you mention, the only way they can ensure this is enforced is to implement similar requirements.

From a marketing perspective, it does not make good marketing sense to restrict the beneficiary options in that regard. As you may know, the IRA market is very competitive at this time (with the new portability rules, the mass distributions from qualified plans triggered by baby boomers reaching retirement age… and all), and one of the major (and most important to most IRA owners) selling points is ‘allowable beneficiary designations’ and beneficiary options...

An IRA Custodian that employs such restrictive rules may be well served to consider amending their document provisions to allow more flexibility.

[jevd]

Thanks again all.