Titling Of An Inherited IRA

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Question:

We need clarification as to how to handle the titling of IRAs after the owner has died and the beneficiary is electing to take distributions from the IRA instead of closing it out and treating it as their own. In the past, we completed the Election of Beneficiary Form for IRS reporting. The confusion comes in because some think the IRAs "must be closed out" and I don't think that is necessarily true. I think in some cases they just need to be retitled, especially in situations where, for example, a spouse would elect to take life expectancy payouts.

Answer:

There is a longstanding IRS Revenue Procedure that controls the titling of an inherited IRA. For example, the correct title would be Jane Doe, Beneficiary John Doe IRA. (Jane's SSN would be tied to the account.) Begrudgingly, I would acknowledge that some banks do simply file maintenance the name, address and TIN fields to effect the change. This saves a little work, but eliminates an audit trail, assumes the beneficiary cannot name a beneficiary, and can cause information-reporting problems if both the decedent and the beneficiary make withdrawals from the account in the year of death.

The preferred practice is to set up a properly titled new account, allow the new owner to name a beneficiary (check state law on this point) and transfer the funds from the decedent's account to the beneficiary's account. The transfer is not subject to information reporting. All distributions coming from the beneficiary's account are "distributions due to death."

First published on BankersOnline.com 08/11/03