May 2019
Inherited IRA Reporting – Form 5498 and FMV Statement
We have received a number of consulting calls lately asking to discuss the proper reporting for Inherited IRAs.
IRS Revenue Procedure 8 9-52 , a
required procedure since 1989, dictates
how an IRA Custodian /Trustee is to
report IRAs once the IRA Accountholder
has died. The procedure has not changed
since 1989, and is to be used as soon as
the IRA Custodian/Trustee knows of the
death of the IRA Accountholder! Knowledge
of death means anywhere in your
financial institution. I f the checking
account department, the loan department,
or the safety deposit vault department
knew of the death but the IRA
department did not, that is a lack of communication,
NOT a lack of knowledge!
There are two aspects to complying
with this procedure: One for the reporting
for the deceased IRA Accountholder
the other for the reporting to the beneficiary.
The usual comment we hear is “The
beneficiary has not come in” or “The
beneficiary has not done anything with
the IRA.” Neither one of these comments
has anything to do with your required
reporting if there is knowledge the IRA
owner has died. The IRS’ position is that
th e IRA bec omes a n Inherited IRA
owned by the beneficiary at the moment
of death. And, the IRA Custodian/Trustee
must report it accordingly. This applies to
all beneficiary situations, spouse or nonspouse.
Reporting for the Deceased IRA
Accountholder
For the year of death, there is required
reporting for the decedent
.
A year-end Fair Market Value (FMV)
statement must be produced in the name
and Social Security Number (SSN) of the
deceased IRA Accountholder. The FMV
that is reported is either the FMV as of the
date of death, or zero. It is never the actual
December 31 FMV unless the IRA
Accountholder died on December 31. If
the zero balance option is reported, the
availability of the FMV on the date of
death must be disclosed to the decedent’s
representative on both the FMV statement
and in the instructions to the participant
for Form 5498.
The IRS Form 5498 for the year of death
must also be prepared in the name and
SSN of the decedent, showing the FMV
as was reported in the FMV statement at
the end of the year. (All other reports for
the decedent for IRA transactions completed
before the death are, of course,
also reported.)
These are the last reports/statements/
forms prepared in the name and SSN of
the deceased, whether the beneficiaries
address the situation or not. But the
responsibilities of the IRA Custodian/
Trustee are just beginning because it also
has reporting requirements for each
Inherited IRA beneficiary starting with
the year of death. It makes no difference
that a beneficiary has not contacted the custodian/trustee. The reporting requirements are the
financial institution’s as soon as it knows of the death.
Reporting for the Inherited IRA/Beneficiary
Beginning in the year of death, the FMV of the Inherited
IRA as of December 31 must be reported to each
beneficiary. Each beneficiary must receive the statement
showing their share of the December 31 FMV. This
applies for all beneficiaries including spouses, nonspouses,
trusts, estates, charities, foundations, etc. It is
their Inherited IRA balance and it must be reported separately.
It is reported in the name and SSN or TIN of the
beneficiary, noted as beneficiary of the decedent. For
instance,
ABC Financial Institution for the benefit of Jane Doe
as beneficiary of Mary Doe’s traditional IRA.
The SSN of the deceased can never be used for reporting
to any beneficiary, including estates and trusts. IRS
Form 5498 is also required for each beneficiary, reporting
the FMV as was reported in their year-end FMV
statement.
This reporting procedure for the beneficiary is
required for each subsequent year there is a balance
in the inherited IRA as of December 31. Of course, distributions
to a beneficiary will be reported on Form
1099-R.
Common Consulting Call Question
The IRA accountholder died in 2018, the financial
institution knew of the death, and the beneficiaries are
just coming into the office now, April 2019. The IRA is
still in the name and SSN of the deceased. What do we
do?
IRS Rev. Proc. 89-52 requires that the reporting procedures
be complied with. The year-end FMV statements
must be corrected and the Form 5498s must be prepared
correctly as described above. It was an Inherited
IRA in 2018 and must be reported as such, even if the
beneficiary is the spouse and the spouse now intends to
treat it as his or her own IRA in 2010.
What if the IRA custodian did not know of the IRA
Accountholder’s death?
Obviously, if you do not know of the death, the
reporting can not be done. But it does make a difference
when you find out about the death. If you learn of
the death before February 1 of the year after the death,
even if your FMV Statements are already sent, this procedure
applies. Any FMV Statement already sent would
need to be corrected.
If you learn of the death between February 1 and May
31, the FMV Statement does not need to be amended,
but likely should be because the Form 5498 procedure
as described above must be complied with. So that your
Form 5498 and your year end statement balance agree,
you likely will want to correct the December 31 FMV.
If you learn of the death after May 31, neither the
FMV Statement nor the Form 5498 for the year of death
needs to be corrected. However, all future reports and
statements must be prepared in a complying fashion.
And, the FMV on the date of death must be made available
to the decedent’s representative if so requested.
Conclusion
This is a fairly complicated and administratively
heavy procedure and we have heard that some systems
do not make it easy to do the mandated reporting correctly.
Never the less, it is required. IRS penalties on the
financial institution for non-complying reporting can be
severe, and can be assessed as far back as the IRS cares
to go. You will get little understanding from the IRS for
not complying with a 1989 required procedure.
If you have any questions concerning this complicated
and required procedure, please contact our Consulting
Department.