Strechout IRA: Recent PLR?

[Guest reg_h2b]

Yesterday I noticed a CFP commenting on CNBC about a recent PLR allowing a "strechout IRA". Does anyone know the PLR referenced?

I know there was a PLR allowing the bene of a bene to continue the MRD distributions and not to be forced to take a lump sum (as some custodial agreements state).

Additionally, there was a PLR that stated that you can use "seperate accounting" for the MRD's if there are individuals on the bene form.

Any other PLRs that broke new(?) ground??

[BPickerCPA]

The custodial agreement trumps the law. If the custodian insists that the IRA be terminated after the beneficiary's death, then the IRA has to be terminated.

The IRS rules have ALWAYS permitted the IRA to be stretched over the beneficiary's life, even if the bene dies sooner. The "new" PLR (already over a year old) only states that the bene can name a new bene directly, rather than having the IRA go through the bene's estate.

As for "Stretchout" IRA, it's nothing new, but it's getting more play now and someone gave it a nice name.

Bottom line, no new ground has been broken.

[Guest reg_h2b]

Thanks Barry.

That's what I thought. My point on the custodial agreements is that some custodians still restrict the distribution of the bene of a bene to being a lump sum which- as you rightly say- trumps law.

Seems a little short sided to say the least. One would think they would want to hold onto the clients money as long as possible.

[John G]

OK, lets name some names. What custodians provide these limits. It does not make a lot of sense to me that the custodians would have an internal requirement that was so negative for the benefitiaries.

Also, is there anything that stops the bene from transfering the account to a more reasonable custodian?

I would think the threat of a lawsuit and adverse publicity might make a custodian think twice before enforcing the agreement.

[Guest reg_h2b]

John- I agree it doesn't make any sense. Perhaps, as you say, the custodian would allow the bene of the bene to do a custodial transfer of the IRA post-death pre-lump sum to salvage the situation...but obviously it would be far easier and far more certain for the original bene to transfer the inherited IRA pre-death.

Here is an excerpt from a 07/19/1999 Wall Street Journal article that you may find amusing:

"The retirement-plan industry has been divided over the issue of inherited IRAs. Some IRA providers require all IRA assets be distributed upon the death of the original account holder's beneficiary. Spouses who inherit IRAs from the original owner don't have this problem, since they get to roll the inherited account over into their own name and select new beneficiaries.

A growing number of firms, however, are allowing non-spouse beneficiaries to name their own beneficiaries, who can then spread distributions over the remaining life of the IRA. Several major players, including Fidelity Investments and Charles Schwab Corp., revised their policies this spring along these lines; T. Rowe Price Associates is in the process of making the change right now. Earlier converts to the practice include Vanguard Group and TIAA-CREF.

Still, there are many holdouts. Chase Manhattan Corp., for example, cites IRS code in saying that beneficiaries cannot name beneficiaries. Morgan Stanley Dean Witter & Co. says it has no written policy at all, but is currently reviewing the matter. OppenheimerFunds Inc. currently prohibits the practice, but says it, too, is reviewing its policy.

"Most of our clients do not" allow it, says Michael J. Finch, director of research and compliance at Universal Pensions Inc., a major retirement-plan consulting firm in Brainerd, Minn. The new letter ruling, he says, may prompt many of them to rethink the matter. Those interested in competing for very large IRAs may even want to specifically notify those clients with inherited IRAs so that they are aware of their options."

[Mary Kay Foss]

I've run into a similar problem. Since you can't recalculate the life of a nonspouse beneficiary, payments from the inherited IRA would be coming out using a term certain after the owner's death. When the beneficiary dies, the term certain should not end but I find custodians cutting a check to the estate as soon as they learn of the death. This is not in accordance with the IRA document but many times the check is cashed and the family has lost the remaining stretch-out.

When we've caught this in time and sent the checks back, we've been able to reinstate the term certain.

[John G]

Originally posted by reg_h2b

Those {custodians} interested in competing for very large IRAs may even want to specifically notify those clients with inherited IRAs so that they are aware of their options."

Wow. Intelligent customer service. Now, if the custodians can actually get the account holders to read the notices.

[Guest mfinch]

John G/reg_h2b,

As silly as forcing payouts is, I believe the reason many custodians/trustees forced payouts in the past is because of the relatively small balances contained in IRAs at the time such policies were established. Why bear the administrative and overhead costs to hang on to such small balances, especially with the tight regulatory restrictions placed on IRAs? With the growth of 401(k)s and the economic nirvana people have experienced over the past decade, however, balances have grown immensely, hence the current trend of reviewing and reversing previous positions and instead trying to retain such accounts.

As for ignoring the plan agreement, I would never suggest to a custodian/trustee that it engage in a breach of contract on account of an angry client. Such advice serves only to endanger the person/firm that gave such advice. If a potential IRA holder did not like the terms of the plan agreement he/she shouldn't have agreed to its terms in the first place.

I agree with BPickar, no new ground broken. Distribution regulations were issued 13 years ago and have not changed. The issue addressed by the PLR was whether a bene can name a bene. While the IRS has granted at least one PLR allowing this practice, I believe there are trust law issues that each custodian/trustee must have reviewed by counsel before implementing the practice.

[John G]

Originally posted by mfinch

Why bear the administrative and overhead costs to hang on to such small balances, especially with the tight regulatory restrictions placed on IRAs? .....

...If a potential IRA holder did not like the terms of the plan agreement he/she shouldn't have agreed to its terms in the first place.....

Response: you assume small balances created these policies, I think it more likely that custodians just did not think it though. They could make a small balance rule. But there is no point in damaging the options of a benefiting party. Firms that take this kind of cavalier attitude will be punished by bad PR, money walking away, loss of new accounts, etc. Too often custodians act like it is their convenience that is the driving force.

Second point: The benefiting party is not normally consulted and often not even aware of a custodian's policy. The original owner does not have "standing" in a legal sense on the issues of benefitiaries rights. But the benefiting party sure has legal standing and rights. I can't imagine a court upholding a policy that a custodian can negatively impact a benefitiary and prohibit any transfer of the assets to a custodian that is more flexible, especially when there are variations in the marketplace and the IRS does not mandate the treatment.

[BPickerCPA]

In a recent PLR, the IRS permitted the beneficiary of an IRA, duly named as of the RBD, to take distributions over their own life expectancy even though the IRA holder elected single life recalculation.

In this particular ruling, the custodian's internal policy was to pay out such an IRA in the year after death. In other words, the custodian's policy was more restrictive than the law.

What was interesting in this ruling was that the IRS said it was OK for the bene to do a trustee to trustee transfer to another custodian, who had more liberal rules.

Barry

[Guest mfinch]

John,

I think we're both correct on your first point. Some custodians simply didn't think it through. However, prior to IRS PLRs, the perception of all involved who did think about it was that benes could not name benes and benes could not transfer IRAs (i.e. they could not alter the terms of a contract/trust in which they had only a beneficial interest). Therefore, if a bene died, assets were paid to his/her estate shortly thereafter. The practice of transferring or bene naming bene was clearly thought to be too risky prior to the issuance of the PLRs to justify keeping what used to be such small, highly regulated accounts.

Regarding your second point, now that we have multiple PLRs addressing the issues referred to above, I don't disagree that a transfer could take place (though it may still raise trust issues in some states). My point was that custodians should never simply ignore the terms of the plan agreement just because something may appear to benefit a beneficiary (i.e. continue to service the same account in-house when the plan agreement clearly states that the assets should be distributed). If there are proper ways around the plan agreement (i.e. amending it, transferring the account, bene naming bene,) and still benefitting the client, I agree a custodian would be foolish not to do so as long as the custodian's counsel is comfortable with the IRS analysis provided in the PLRs since they cannot be relied upon by anyone other than the recipient.

As for how courts would see these issues, we'll have to wait and see. I think the discussion that has taken place in this thread as well as the discussion the PLRs have generated throughout the industry over the past 1 1/2 years are a good indication that unresolved issues remain.

Good discussion.

[Guest reg_h2b]

I think this discussion demonstrates that what may not be "new ground" for the IRS may indeed-in practice- be "new ground" for the custodian and the custodial agreement you are dealing with.

The quote below--from a Barron's article (10/9/2000)-- illustrates the point. Of special note is the amusing speculation at the end of the article by various custodians on the maximum allowed strechout period. I want to find the custodian quoted who thinks that "there is no reason why an individual IRA can't go on and on":

//For a variety of reasons, the mutual fund industry and other custodians of IRAs haven't made it easy to stretch out individual retirement accounts. Sometimes, it's a computer-system issue or a matter of staffing. "We have to review the beneficiary designations very carefully because we have to be sure that we can administer what is being asked of us as custodians," explains Christine Fahlund, a financial planner at T. Rowe Price, who has spent three years working on a soon-to-be-published guide that explains all the options T. Rowe Price offers.

Adding to the uncertainty is that the Internal Revenue Service has never finalized its rules concerning the distribution of inherited IRAs. "Going on two years ago, there were some private-letter rulings by the IRS saying that it was appropriate for another beneficiary to be named in those inherited IRAs, but not all custodians allow that to occur because private-letter rulings are not IRS regulations yet," explains Rene Kimm, vice president of Charles Schwab's retirement-products group.

The largest custodians tend to be the cheapest, yet they also tend to be the least flexible," according to Williams. A boutique or a small institution like a bank trust department may have a bigger and more specialized staff to cater to the needs of beneficiaries than a large mutual-fund company.

Some custodians put fairly drastic restrictions on stretch IRAs. Others will permit all sorts of variations, but have not formalized or written down their rules. "You can start calling, and since it isn't written down anywhere, you might not get to the right person and find yourself transferred all over the company," warns Fahlund.

But more funds are waking up to the size of this market. Liberty Financial, for one, has been busy getting with these programs. Stretch IRA's are "in the best interest of the client and also in our best interest since the money can stay invested longer," says James Blakeslee, senior vice president in Liberty's wealth-strategy group...

...Because of the lack of clear guidelines from the IRS, nobody can say with 100% certainty how many years an IRA can be stretched out. Some tell Barron's 75 years, others, 100; and one custodian even asserts that if the account is large enough and everybody dies in the right order, there's no reason why an individual IRA can't go on and on.//