July, 2018
Inherited IRAs - To Accept Transfers or Not.
Most financial institutions with the authority to be an
IRA custodian will decide to accept the transfer of
inherited IRA funds. Why? These inherited or beneficiary
accounts tend to be long term accounts. There is
usually just one distribution per year. Each institution
must decide what fees, if any, will be charged with
respect to the inherited IRA.
The following email guidance was recently furnished
to a financial institution after it had merged with another
financial institution. Prior to the merger one institution
had accepted the transfer of inherited IRAs and the
other had not. A decision was to be made as to what the
policy would be after the merger.
Subject: Deciding Whether To Accept Transfers of
Inherited IRAs Not Originating at ABC Banking and
Trust Company
I understand that some IRA custodians/trustees have
adopted the approach that they will not accept transfers
of inherited IRAs originating at another IRA trustee.
However, the IRA trustee will administer the inherited
IRA if the IRA owner had their IRA with ABC Banking
and Trust at the time of their death.
You did not send me any written explanation why the
other institution had adopted its policy that it was
unwilling to accept the transfer of an inherited IRA.
Does such a writing exist so that one can understand
the rationale for not wanting to service inherited IRAs?
For the reasons discussed below I believe a bank
should be willing and want to accept the transfer of
inherited IRA funds especially if the inheriting beneficiary
is already a bank client or wants to be a new bank client. I don't believe an IRA trustee is subjecting itself
to increased liability as long as it services the inherited
IRA as it should.
Inherited IRA funds will generally be long term
accounts as current law allows a non-spouse beneficiary
to withdraw required minimum distributions over
their life expectancy. This is true whether the IRA funds
are invested in time deposits or trust investments. Advisory
and management fee income can be earned by the
IRA trustee as long as the IRA trustee's fees are reasonable.
An IRA trustee must perform special administrative
duties for inherited IRAs. There must be special titling of
the IRA for Form 5498 reporting purposes. In general,
no additional contributions can be made except for
transfers from another like-kind inherited IRA and direct
rollovers of 401(k) or other pension funds. The inheriting
beneficiary must comply with the required distribution
rules.
The IRS has provided conflicted guidance regarding
the tasks an IRA custodian is to provide with respect
inherited IRAs. Regardless of
these instructions, we at CWF believe the IRA trustee
should assist a beneficiary with complying with the
RMD rules because Article IV of the IRA plan agreement
does require that RMDs occur after the IRA owner
has died. At a minimum assist means furnishing an
RMD notice and reminding the beneficiary he or she
will owe the 50% tax if an RMD is not timely withdrawn.
I would suggest adopting the policy that the IRA
trustee will force the distribution by a certain date if the
inheriting beneficiary has not furnished written instruction
why such distribution is not required.
Under current law an inheriting IRA beneficiary cannot
take or receive a distribution and the make a
rollover contribution as the statutory law expressly prohibits
this. This means the only way an inheriting beneficiary
may move the inherited IRA funds away from the
current IRA trustee is by a transfer.
The transfer of an inherited IRA is not identical to the
transfer of a regular IRA because with respect to the
inherited IRA because there are special beneficiary
RMD considerations. In general, is the beneficiary's RMD to be determined using the life distribution rule or
the 5 year rule, if applicable?
The basic transfer rule is - whatever rule the beneficiary
is using at IRA trustee #1 must continue to apply at
IRA trustee #2. This is a tax subject so there are time
when there are exceptions.
As long as the IRA owner designates individuals or a
non-trust entity such as a university, church or charity as
his or her IRA beneficiaries, the administration of an
inherited IRA is relatively easy.
There will be times when the IRA owner designates a
trust as his or her IRA beneficiary and then dies. An
inherited IRA will need to be established - the Jane Doe
Trust as beneficiary of Jane Doe's IRA. Admittedly the
administration - of such inherited IRAs can be complicated
because trusts can be complicated, the tax rules
are complicated and IRS guidance is very limited. I
believe the IRA trustee should assist the trustee of the
trust. As with many tax situations, the IRA trustee and
trustee of trust may need to jointly discuss the situation
and then settle on a course of action. There may be
times when the financial institution serving as the IRA
trustee is also serving as the trustee of the trust. There
should be comprehensive written explanations for the
IRA transactions and what fees are being earned for
serving as the IRA trustee versus serving as the trustee of
the trust.
It is also possible for a person to establish a trusteed
IRA. In this case, the individual and the IRA trustee will
establish trust distribution provisions at the time the
trusted IRA is established. Such an IRA can also be
transferred.
In summary, I believe the policy of never accepting the
transfer of an inheriting originating with another IRA
trustee is imprudent. ABC Banking and Trust Company
is a trust entity and it should generally want to accept
transfers of inherited IRAs. Of course, there may be
some inherited IRAs which have issues which it should
refuse to accept.
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