Inherited annuity to "inherited ira"

I am writing both out of personal concern and to provide some important information to those who might inherit an annuity.

Sadly my mother passed away last year, intestate. There was an variable annuity which she had not yet drawn upon. It had no beneficiary. I am anticipate inheriting as sadly my mother left no other relatives. Of course, I am concerned about the tax hit. At first the annuity company said the only option was to simply collect the funds. Now they say they can set up an inheritted IRA Account. This is much better as one only is taxed on the required minimum distribution each year rather than the entire contents of the annuity. In my case, I will simply increase my tax deferred savings through my employer by an amount equal to the RMD so it does not change my tax bill at all.

Publication 590 says that a direct transfer from a deceased employee's "qualified" "annuity plan" or "tax-sheltered annuity" or "governmental deferred compensation" is treated as an inherited IRA if one is the "beneficiary of the plan." Unfortunately, this does not completely cover the issues by the relevant sections of the Internal Revenue Code.

Section 408(d)(3)(C)(ii) of the Internal Revenue Code which concerns "inherited IRAs" and annuities. It says that the account will be treated as "inherited" if "the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual."

Thus, the fact that my mother chose not to designate a beneficiary should not affect the ability of those inheriting the annuity from doing so.

It refers to section 408(a) of the IRC Code which simply states that it be organized for the exclusive "benefit of an individual or his beneficiaries..." It does not require that the retirement annuity be set up by an employer. It is not clear from talking to the annuity company where the money came from, e. g. did the employer deposit it or did my mother choose to make an investment. I have reason to believe the latter.

However, it gets more complicated! 408(a)(6) provides: "Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an indivdual for whose benefit the trust if maintained."

401(a)(9)(A) A trust shall not constitute a qualified trust under this subsection unless the plan provides that the enitre interest of each employee--will be distributed to such employee not later than the required beginning date...over the life of such employee or over the lives of such employee and a designated beneficiary.

The required beginning date means April First of the calendar year following the later of the calendar year in which the employee attains age 70

1/2 or the calendar year in which the employee retires.

My heart sunk when I saw this since I knew my mother had the required date on her ninetieth birthday and she unfortunately passed away on her eightieth birthday. (She complained that she would want to not beginning these distributions as early as her ninetieth anniversary.)

However, I read the next paragraph entitled "Exception" Subclause (II) of clause (i) shall not apply for purposes of section 408(a)(6) or (b)(3). So it looks like I may be able to roll over, but there is the clause I which refers to age 70 1/2. (408(b)(3) refers to an individual retirement annuity.)

I checked these statutes in the United States Code Annotated and there have been no court cases regarding the inheriting of retirement accounts or their roll-over into an inherited IRA.

I also see a thread on inherited annuities in September 2007 in this group and it seems to indicate that one can roll over and it does not say anything about the "required distribution" starting at age 70 1/2. What gives?

I had the insurance company look at it.

Thanks for any confirmation that anyone might provide on this subject. Hopefully, I can get the information free but I am open to paying a financial or legal professional if they can provide value.

And I hope this information is helpful to other people who may be faced with a similar tragic circumstance. Insist upon moving the annuity to an inherited IRA and also get a copy of the original contract for the annuity.