On Inheriting an IRA

Great article.

RMDs are complex enough that I find people's eyes glazing over when we discuss them.

Inherited IRAs add a couple more dimensions - on top of the fact that RMDs are mixed into them. The rules involve everything from whether the beneficiary was a spouse or not, if the decedent had started taking RMDs or not, if the beneficiary receives the IRA via a trust (and contrary to popular belief, it is possible for a trust to be structured to allow "stretch" payments rather than the 5yr rule, but it's got to be done *just* right, so don't mess with this if you don't know for sure what you're doing).

It's hideous and, frankly, like so many things in our tax code, should fix it. But I'm not holding my breath. Most people just have no idea that this complex little mess exists at all, or that there are options other than the one that the misinformed lawyer told your reader about.

Thanks for posting!

I am wondering if the lawyer volunteered to serve as that trustee and take care of the money himself (for a substantial fee of course). And if he had served as the trustee, I wonder how he would have invested the funds. Possibly with friends or people he knows selling financial products with big loads and fees? Yes, I know, I am suspicious bugger.

care of the money himself (for a substantial fee of course). And if he had served as the trustee, I wonder how he would have invested the funds. Possibly with friends or people he knows selling financial products with big loads and fees? Yes, I know, I am suspicious bugger.

I would like to know where the lines are between "human error," "malpractice," and "fraud". Were I to claim to be a lawyer, I'd find myself in quite a pickle, yet this isn't the first one I've heard giving financial advice when clearly he was out of his league.

I have been hoping, ever since the financial meltdown, that regulations would get tougher and the lines would be shifted so that a lot more decisions in legal, financial, and banking matters would be considered as fraud and not just errors or bad judgment.

On Saturday, September 15, 2012 8:40:02 AM UTC-6, joetaxpayer wrote, regarding a piece he posted elsewhere:

I teared up as I read this. Some 70% of this country 26 years and older does not have a bachelors' degree. The ordinary person is told time and again to trust "professionals." Then this happens. Thank you, Joe, for being there for this woman and her daughter, and thank you for sharing this. It will help others to ask the right questions and seek second opinions and advice elsewhere.

Happy new year (Rosh Hashanah) to all in the Jewish community.

Joe, I just read your entire post (link above) and I really think you need to have Mom speak with the attorney again. You may be right, but you may be completely wrong.

You said "trustee" above but the questioner you responded to said "guardian" - which is something completely different. You do need a guardian to administer a minor's IRA-BDA because minors can't control the property. That can actually be a problem with some states and custodians.

Still don't believe it? Try this - see the question on Roth IRAs, answered by an attorney-author with a long list of estate-planning credentials:

-Tad

He was not giving financial advice, he was giving legal advice. And, he was still out of his element.

My daughter now has a Roth IRA. I am listed as custodian. I agree that the child can't own such accounts outright, so the titling becomes a bit more complex than any other account, as it will be both an inherited IRA as well as have the parent as custodian. The article you linked suggests the OP ask the credit union if they are ok with that. She seems less concerned about the cash-out, perhaps since the account is probably now that high (it was divided among 10 beneficiaries) and since it was a Roth, with no tax due on withdrawal. The Nolo Lawyer writes "Alternatively, cash those accounts out, open up a custodial account at the credit union, and don?t let those kids touch that money. When the custodial accounts end (25 in my state; varies by state law), make them open up IRA?s with the money because that was your father?s wish." Huh? When the custodianship ends, there's no making anybody do anything.

I answered my reader's question from my own experience as well as from reading Pub 590 many times over, along with the collective works of Ed Slott.

I'd be curious to see any IRS document that suggests I was actually mistaken. Mr Slott talks and writes, time and time again, about the benefit of the minor as beneficiary to enable IRAs to get the most benefit for one's family. And the Pub 590 has an RMD table going down to age 0, suggesting that so long as one is a born person, they are able to inherit an IRA.

There's no question a minor can be an IRA beneficiary, but the typical designation is via a trust/UTMA given the issues that come up otherwise if the IRA owner passes away while the beneficiary is still a minor.

The question you responded to on your blog seemed to be, essentially, "does naming a minor child individually as an IRA beneficiary held with X custodian pose any problems under the probate code of X state?" That isn't something you'll see addressed in Pub 590 (which incidentally is considered non-citable anyway!). And again this whole thing may be a non-issue, e.g. if it was just erroneous advice and the granddaughter was named via UTMA. Suggest making sure though, and not by reference to a lack of IRS guidance on this state's applicable laws.

-Tad

Presumably your daughter's IRA is an inherited IRA and not based on her earnings (babysitting? lawn-mowing? paper route?). If it was inherited from her grandparent, were there any issues regarding generation- skipping transfer tax (GST) in the grandparent's estate, or was the estate (or bequests to grandchildren) small enough that this particular tax did not come into the picture?

Dilip Sarwate

I have no inheritance coming my way. My daughter made money baby-sitting, kept contemporaneous notes of date/time/client and dollars earned. Little enough that her that she didn't exceed the kiddie standard deduction, but enough to start her IRA.

Not a financial planning issue per se, but when my children began earning money before they became adults, I gifted them the total amount that they earned which sum was invested in IRAs for them. They got to enjoy the fruits of their labor as pocket money etc and got a head start in life too.

But I would be really interested in finding out whether GST tax issues come into play if a grandchild is the beneficiary of an IRA.

Dilip Sarwate

Yes, it does. The assets of IRAs, 401(k), etc, are all included in the estate for purpose of totaling up the estate tax due, if any, and are subject to GST (generation skipping tax) if over the applicable limit. See Form 706 and sch R.