Purchasing A Financial Institution
Having Inherited IRAs-
Caution Is Warranted
Most everyone tends to believe what
the IRS says is correct and must be followed.
That is not always the case. The
IRS must follow the statutory law and its
regulations, and the U.S. Tax Court has
no problem ruling that the IRS is wrong
in its tax position. Courts give some deference
to the IRS, but it is not absolute.
For example, in the Bobrow rollover case
the tax court ruled the IRS did not have
the authority to expand the once per year
rollover rule to permit a person to make
rollovers on a per plan agreement basis.
Sometimes a taxpayer should be more
conservative and adopt a position more
conservative than the IRS' position. This
is the case with inherited IRAs. In IRS
Notice 2002-27 and the instructions for
Forms 1099-R and 5498 the IRS had stated
an IRA beneficiary is responsible to
calculate and withdraw the applicable
required distribution. The IRA custodian
is not required to send a beneficiary a
required distribution notice as it must for
someone age 70½ or older.
An IRA custodian must remember that
its relationship with its IRA clients is primarily
governed by the IRA plan agreement
and not by what IRS guidance provides.
The IRA plan agreement requires
that certain distributions be made to IRA
owners who are age 70½ and older
and to an IRA beneficiary after the IRA
owner dies. A strong argument exists that
the IRA custodian has a duty to make
sure such distributions are taken.
The law imposes a 50% excise tax
when a person fails to take their RMD by
the applicable deadline. This 50% tax is
an annual tax. For example, if a beneficiary
had an RMD of $400 for 2013 and
fails to withdraw it for 2013-2016 but
withdraws it in 2017, the beneficiary
owes $800 plus interest and applicable
penalties (i.e. $200 for 2013, 2014, 2015
A financial institution wants to protect
itself against the following situation.
Bank A had purchased Bank B in 2013.
Bank B had a long time IRA client, Jane
Smith, who had died in February of 2012
at age 73. She had designated her daughter
Mary (age 48) to be her IRA beneficiary.
It is now May of 2017. Mary's IRA
CD has just matured and she is in the
process of deciding if she will reinvest it
with Bank A or have it transferred to
another IRA custodian. Mary understands
her IRA is an inherited IRA. The
problem is - Mary's IRA is not listed on
the computer system at Bank A as an
inherited IRA. It is listed only as her own
IRA. She has not taken any required distributions
What's to be done? What are the possible
adverse tax consequences and the
possible adverse non-tax consequences?
Jane is required to pay the 50% on her
missed RMDs unless she can convince
the IRS she should not have to pay the tax
on account of the IRA custodian's failure
to perform its duty of distributing the
RMD for each year. The IRS may well rule
she owes the taxes on account of Notice
2002-47. Jane may well commence legal
action to include the IRA custodian
(Bank A) in her tax dispute with the IRS. Litigation is
expensive and it is to be avoided.
When a financial institution buys another financial
institution (and its IRAs) the buyer wants to determine
that there are no inherited IRA problems within the seller's
IRA portfolio. There should be a thorough review
conducted before the closing and possibly the inclusion
of a contract provision where the seller remains liable if
any unknown problems arise after the sale/purchase.