All that could go wrong, did go wrong in the transition of this inherited retirement account.
There are several important decision points with associated deadlines for the successful transition of non-spousal inherited retirement accounts. Unaware of these issues and absent sound advice, one family managed to miss almost every one of them. They have since been able to get back on track, but their story is a warning to all advisors who have not yet dealt with this situation.
A beloved sister and favorite aunt, Sally, completes her estate planning, including the drafting of a new revocable living trust naming her nephews as beneficiaries. She then designates the trust as the beneficiary of her substantial 403(b) plan with her university. The following year in 2010, at the age of 71, Sally dies. Her brother, Tom, is named as the executor of her estate, and her younger sister, Mary, is named as the successor trustee of the now irrevocable trust for the benefit of Mary's children, ages 15 and 20.
The 403(b) account was invested in a retail mutual fund. Shortly after Sally's passing, Tom submitted a death certificate to the fund company, which then changed the registration of the account to: Sally Smith, Deceased c/o Tom Smith. The fund company sent Tom an extensive forms package with a 20-page instruction booklet, which Tom passed on to Mary telling her to take care of this "IRA" and leaving it in her inexperienced hands.
Not knowing what to do, Mary did nothing.
Fast forward to three years later. Tom is anxious to close out the estate and get on with his life. He suggests that Mary see an attorney to figure out what to do about the account. She takes the forms to a local attorney for help in completing them. Fortunately for Mary, her attorney realizes at once that she has a can of worms on her hands and refers her to a local investment advisor with experience in inherited retirement accounts.
Identifying the Problems
1. The account is actually a 403(b) under Sally's former employer's plan, not an IRA.
2. Sally was taking her 2010 required minimum distribution (RMD) monthly that stopped at her death, leaving an undistributed RMD of $2,000 for 2010.