Tricks, traps to be aware of when advisor is creating an Inherited IRA?

[LostDollar]

Not absolutely sure, but think these are basic details.

So there is an employer retirement plan (I think 403(b)) with a major US financial organization.

Plan holder dies, funds are held in a trust in some manner.

Trust has multiple beneficiaries.

One of the beneficiaries is also estate executor and trust administrator.

His financial advisor is now talking about creating Inherited IRAs.

After doing some brief scanning of generally available information, it appears the most desirable situation for a beneficiary is an IRA of the life expectancy or "stretch" persuasion.

Are there other "hard issues", technicalities or traps a beneficiary should be aware of in discussing this situation with the executor/administrator and the financial advisor?

 

[DHK]

7 Mistakes to Avoid with Inherited IRAs – Things You did not Learn in School | Ed Slott and Company, LLC

 

[mickeyma]

7 Mistakes to Avoid with Inherited IRAs – Things You did not Learn in School | Ed Slott and Company, LLC

Thanks for the link. Helpful.

 

[Allen Trent]

Not absolutely sure, but think these are basic details.

So there is an employer retirement plan (I think 403(b)) with a major US financial organization.

Plan holder dies, funds are held in a trust in some manner.

Trust has multiple beneficiaries.

One of the beneficiaries is also estate executor and trust administrator.

His financial advisor is now talking about creating Inherited IRAs.

After doing some brief scanning of generally available information, it appears the most desirable situation for a beneficiary is an IRA of the life expectancy or "stretch" persuasion.

Are there other "hard issues", technicalities or traps a beneficiary should be aware of in discussing this situation with the executor/administrator and the financial advisor?

Are you saying the beneficiary of the 403b was a trust? If so, the trust beneficiaries may not be able to utilize the inherited/stretch IRA. That could be the case for several reasons, especially because of Treasury Regulation 1.401(a)(9)-4, Q&A-5. mainly that the custodian of the funds may not be willing to take the risk to interpret the trust to determine if it meets the legal standards needed for the see through-look through to allow for a stretch IRA death claim settlement. The other reason is if the trust also has has any charity/entity as a partial beneficiary, that can cause the trust to not meet the requirements to complete a stretch Ira claim settlement because you need a date of birth to execute a stretch IRA account. Lastly, even if these 1st two items are met, the law mandates that a trust bene would have to base RMDs on the oldest beneficiaries age instead of each beneficiary being able to use their own age for RMD calculations as is done when individuals are named directly on retirement account instead of a trust

It is much easier for cases where living people with a date of birth are directly named as a beneficiary. This way, each beneficiary can make their own claim settlement based on their own needs as spousal assumption or lump sum or 5 year deferral or payout annuity or inherited RMD/stretch IRA.

Lastly, naming individuals along with per stripes clause, rather than a trust, can also allow for a high income beneficiary to disclaim their share of the funds & therefore have their children receive the funds & calculate RMD based on their much younger age. Disclaiming is treated as if the beneficiary is deceased & therefore the shares are paid out to the other beneficiary if per capita designation or to the children of the disclaimer if designation was per stirpse. Excellent planning resource when a primary beneficiary is already well off

 

[LostDollar]

Allen,
Thank you so much for the time and effort you put into that response for me.

(the comment in this paragraph will surprise no members who have followed activity in the Senior Forum over the last 2 years.) When I attempted to ask questions of the Estate Executor/Trust Trustee and his trusted financial advisor, within two days I had succeeded in creating a rupture which may be irreparable.

The advisor has 40+ years of experience, a Cambridge education and social standing and wealth far beyond anything I could ever aspire to. When after attempting to ask some questions I wasn't getting the answers to, I suggested to the trustee that the financial advisor was not giving us complete information, I really struck some sparks, from both of them.

That leads me to one basic question which I have. Can an estate executor/living trust trustee (who with his wife also inherits over 50% of the estate) force actions on the other heirs, or do the other heirs have some legal recourse to support strongly requesting their choice of options?

As long as oldest beneficiary's age means oldest LIVING beneficiary's age, that doesn't bother me, because according to whitepages, which knows everything, I am it. In my personal opinion, that would be an extremely stupid tax position for the other 3 beneficiaries and the financial advisor to force us into if there are other available options, because the others are 10-30 years younger than I am.

It also deprives all of us of some level of additional income from those assets, over the longer distribution period.

If I understand the computations correctly, my 2020 age (for 2019 decedent) would provide a 13 year distribution, compared to the 5 year period.

It's a fascinating situation because the heirs are two couples and in both cases (again using whitepages and personal knowledge) there is an age difference of 15-20 years between spouses, so while 13 years is nice, it falls short of the time periods I think could be worked out on joint returns for both couples.

From my position in the shadows, the financial advisor is telling the executor/trustee that the only options are lump sum distribution or taking the funds over 5 year period. The executor/trustee is only giving me those two options when requesting how he should plan to have funds distributed. HOWEVER, when carboned in on an email chain, The financial advisor provided an article by Julie Garber (multiple times) which presents 4 choices rather than two, and includes the option of creating an Inherited IRA which can be paid down over the beneficiary's life expectancy.

When I then inquired why he was not presenting stretch IRA's as an option to the trustee and the beneficiaries, he got pretty pi$$y and I had to back off for the moment.

At this time, I can't even get a straight answer as to whether or not the 2019 RMD's have been, or will be, taken care of in the estate tax work that is currently going on.

 

[Allen Trent]

That leads me to one basic question which I have. Can an estate executor/living trust trustee (who with his wife also inherits over 50% of the estate) force actions on the other heirs, or do the other heirs have some legal recourse to support strongly requesting their choice of options?

the trustee has sole discretion to distribute funds from the trust to the beneficiaries within the stipulations of the trust. The trustee also has sole liability for their own actions. If the trustee screws up in some fashion with the law or expenses or paying out funds properly, the trustee can be held responsible to personally pay for the losses caused by their negligence. The have basically become a fiduciary to the beneficiaries of the trust. If the trust has no provisions stated to delay payment to the beneficiaries, I don't believe the trustee could force an inherited RMD decision onto all beneficiaries unless that power was granted in the trust document regarding distribution of the trust assets.

As long as oldest beneficiary's age means oldest LIVING beneficiary's age, that doesn't bother me, because according to whitepages, which knows everything, I am it. In my personal opinion, that would be an extremely stupid tax position for the other 3 beneficiaries and the financial advisor to force us into if there are other available options, because the others are 10-30 years younger than I am

Actually, tax wise, the inherited RMD is likely best for all of you. If you don't take that option, you would be getting a lump sum that would all be taxable in 1 single tax year rather than spread over many years like can be done with the Inherited RMD

It also deprives all of us of some level of additional income from those assets, over the longer distribution period.

Actually, the opposite is true. If you got a lump sum & owed 30% in taxes, you would only have 70% left to reinvest someplace. An inherited RMD would let you leave 95% or so still on deposit earning interest/returns & spreading taxes over the years, maintaining compounding of the account

If I understand the computations correctly, my 2020 age (for 2019 decedent) would provide a 13 year distribution, compared to the 5 year period.

It depends on your age right now. Also note, the RMD chart you are used to seeing for a 70 year old that must take out their own RMD each year is different than the chart for beneficiaries. Here is a chart for RMD of beneficiary:

From my position in the shadows, the financial advisor is telling the executor/trustee that the only options are lump sum distribution or taking the funds over 5 year period. The executor/trustee is only giving me those two options when

Actually, if you said the proceeds are in a 403b plan with the trust as the beneficiary, I do not believe the IRS allows the claim settlement of the 5 year deferral if the decedant was already over age 70. I believe you are limited to Lump sum or Inherited IRA or Immediate Annuity

At this time, I can't even get a straight answer as to whether or not the 2019 RMD's have been, or will be, taken care of in the estate tax work that is currently going on.

Unless the decedant and their spouse were worth more than $20+ Million, there shouldn't be an estate tax issue. However, if the trust must stay open for the length of the inherited RMD payments, the trust could continue to incur legal costs for many years. Also, if the trust receives the annual RMD payment from the fund company in the trust name, the trust would have to file tax returns in the trust name each year & pay the much higher income taxes due by trusts before distributing the annual amount left over after legal costs & trust taxes. Ideally, this could have been avoided had the individuals been named directly as beneficiaries as they could have elected their own option.

The financial advisor provided an article by Julie Garber (multiple times) which presents 4 choices rather than two, and includes the option of creating an Inherited IRA which can be paid down over the beneficiary's life expectancy.

Both could be true. every type of account has a different set of IRS allowed claim settlement that also varies based on if the person was under age 70 or over age 70 & then if the beneficiary was a spouse, was a non-spouse, or was an entity/trust/charity. So,sometimes a Traditional IRA with a decedant under age 70 might have 5 or 6 options, but a 403b over age 70 1/2 to a trust may only have 2 options with a possible 3rd (inherited IRA) if the trust meets the See through trust provisions & the custodian will honor it.

 

[LostDollar]

At this time, I can't even get a straight answer as to whether or not the 2019 RMD's have been, or will be, taken care of in the estate tax work that is currently going on.

Unless the decedant and their spouse were worth more than $20+ Million, there shouldn't be an estate tax issue. However, if the trust must stay open for the length of the inherited RMD payments, the trust could continue to incur legal costs for many years. Also, if the trust receives the annual RMD payment from the fund company in the trust name, the trust would have to file tax returns in the trust name each year & pay the much higher income taxes due by trusts before distributing the annual amount left over after legal costs & trust taxes. Ideally, this could have been avoided had the individuals been named directly as beneficiaries as they could have elected their own option.

I think I have some other questions too, after I go through those comments more carefully, but in regard to RMD's, here is thrust behind my comment.

My info is pretty scarce. What I think I know is that there are retirement plan(s?) at TIAA-CREF. 403(b) is an assumption of mine which may or may not be true.

Information from the decedent's living trust trustee indicates the ownership of the retirement plan(s?) passed from the decedent to the decedent's living trust.

An email attachment from the living trust trustee's financial planner suggests to me that the financial planner will be recommending inherited ira's to the living trust trustee, but I have no firm statements about that yet.

Retirement plan owner died in 2019.

My internet reading within this framework of information suggests that the decedent or their estate must take the decedent's required RMD's for the year of death. If this does not happen, when the heirs start their RMD's in the following year, they will also be liable for the missing RMDs plus a 50% penalty.

So far, my question about whether the 2019 RMD has been taken, or my comment that the tax work being done should include consideration of the 2019 RMD, have been totally ignored by both the living trust trustee and the financial planner. I will just have to wait and stick it in the conversation again at a later date and hope that the issue does not require amended tax returns. I'm hoping that is an issue that an estate savvy CPA will catch.

 

[LostDollar]

It depends on your age right now. Also note, the RMD chart you are used to seeing for a 70 year old that must take out their own RMD each year is different than the chart for beneficiaries. Here is a chart for RMD of beneficiary: View attachment 5117

My internet reading about Inherited IRA's suggests that the relevant starting age is the beneficiary's age at the end of the year following the year of the decedent's death.

I did come up with that table from whichever the relevant IRS pub is, so age 76 in year 2020 based on that table is how I got to the 13 year payout period I mentioned. (And that is a different table than the one used for my IRA RMD's.)

 

[Allen Trent]

My internet reading about Inherited IRA's suggests that the relevant starting age is the beneficiary's age at the end of the year following the year of the decedent's death.

I did come up with that table from whichever the relevant IRS pub is, so age 76 in year 2020 based on that table is how I got to the 13 year payout period I mentioned. (And that is a different table than the one used for my IRA RMD's.)

I don't believe the RMD required once the money is in inherited IRA has anything to do with the decedent being age 76. An inherited RMD will use your own age as the RMD from the account once it has become an "inherited RMD". the decedents age only mattered for determining their own RMD they took while they were alive. So, unless you are also age 76, you wouldn't be required to take that amount. Also, the factor changes each year based on your age as the beneficiary, so you wouldn't be required to exhaust the inherited IRA in a 13 year period anyway, even if you were 76 currently as a beneficiary.

In terms of the current year RMD, you are correct. An RMD for someone already over age 70 1/2 must be taken in the year of death. Most custodians of the money (TIAA Cref) will distribute those proceeds prior to processing the entire death claim. If not, the trustee of the trust (if actually named as beneficiary with TIAA Cref) would be liable for requesting the RMD be paid before settlement of the death claim.

 

[LostDollar]

I don't believe the RMD required once the money is in inherited IRA has anything to do with the decedent being age 76. An inherited RMD will use your own age as the RMD from the account once it has become an "inherited RMD". the decedents age only mattered for determining their own RMD they took while they were alive. So, unless you are also age 76, you wouldn't be required to take that amount. Also, the factor changes each year based on your age as the beneficiary, so you wouldn't be required to exhaust the inherited IRA in a 13 year period anyway, even if you were 76 currently as a beneficiary.

In terms of the current year RMD, you are correct. An RMD for someone already over age 70 1/2 must be taken in the year of death. Most custodians of the money (TIAA Cref) will distribute those proceeds prior to processing the entire death claim. If not, the trustee of the trust (if actually named as beneficiary with TIAA Cref) would be liable for requesting the RMD be paid before settlement of the death claim.

Thanks for the trustee information. That is helpful.

In regard to the RMD factor, What I found for an Inherited IRA factor is that it works differently than a normal IRA. You go to the table once for the starting point and then just subtract 1 each following year until the funds are entirely distributed.