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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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