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Estate Transfers IRA to Beneficiary

The "stretch" or "life-expectancy-of-the-beneficiary" payout is available only to a "designated beneficiary."

Natalie Choate, 04/08/2011

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Do you have your own solutions/suggestions? Leave a comment at the end of the article!

Judging by the number of questions I get on this topic, this is one of the hottest issues out there. I've consolidated the most common questions into one typical scenario:

Question: "Yuri" died in 2010 at age 68 without having named a beneficiary for his IRA. Under the account documents for this particular IRA, the default beneficiary is Yuri's estate. He also left no will, so under the applicable intestacy laws, the estate passes half to Yuri's wife "Lara" and half to their daughter, "Tonya." The estate has no other assets. Lara, as administrator of the estate, has instructed the IRA provider to transfer Yuri's IRA in equal shares, via direct IRA-to-IRA transfer, half to Lara's own IRA and half to an "inherited IRA" payable to Tonya as beneficiary. The IRA provider refuses to do this unless an "inherited IRA" is opened in the name of the estate first. We are at an impasse. If the IRA provider insists on this condition, then the IRA will be subject to the "5-year rule." We want to instead have Lara do a spousal rollover of her half, and Tonya wants a life expectancy payout for her half. We also don't want to have to report the account as an estate asset for probate purposes. How can we resolve this dilemma?

Answer: On this one, the IRA provider is doing it right.

To back up a little bit, there is nothing wrong (in my opinion) with your goal of transferring the IRA out of the estate, intact, to the estate's two beneficiaries. Some IRA providers permit estates to do this, requiring only that the executor or administrator of the estate take control of the account and then give proper instructions for the transfer. Some IRA providers permit the transfer but have more substantial requirements--for example, the IRA provider might require an IRS ruling, legal opinion, and/or hold harmless agreements from the beneficiaries. And some IRA providers do not permit such transfers under any circumstances.

But whether or not the IRA provider permits the estate fiduciary to transfer the account out to the estate's beneficiaries, the IRA provider cannot deal with the fiduciary at all until the fiduciary has provided proper documentation to establish the fiduciary's right to give instructions with respect to this asset. Typically this means the fiduciary must (1) provide documentation of its right to deal with the account, such as a certificate of appointment from the Probate Court, and (2) sign the IRA provider's paperwork agreeing that the estate (as IRA beneficiary) is bound by the IRA provider's terms and conditions. Only once the IRA provider has this documentation can the provider begin taking orders from the estate fiduciary with respect to the deceased participant's IRA.
 
If the estate is going to transfer the asset out to the beneficiaries immediately, the IRA provider may or may not require the opening of an actual formal "inherited IRA account" in the name of the estate, before allowing that account to be closed as the IRA is transferred to the beneficiaries. If this step is required, the new "inherited IRA" account will be titled "Yuri IRA, payable to the estate of Yuri as beneficiary" or "Lara, administrator of the estate of Yuri, as beneficiary of Yuri." Some IRA providers might be willing to dispense with formally opening an account in the name of the estate as beneficiary, once the executor has provided evidence of its authority, written acceptance of the IRA provider's terms, and instructions for the transfer.

The transfer instructions would say in essence, "I, Lara, as administrator of the estate of your deceased IRA customer Yuri (see my certificate of appointment attached) hereby instruct you to divide the above account [i.e., Yuri's IRA] into two separate equal inherited IRAs, one titled 'Yuri, deceased, IRA, payable to Lara as successor beneficiary' and the other titled 'Yuri, deceased, IRA, payable to Tonya as beneficiary.'"

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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