THE WRONG BENEFICIARY...
CAN A DISCLAIMER HELP?

The IRA owner has died. Only one individual is named on the beneficiary form, let's call him David. He wants to do the right thing and share the IRA with his siblings or the other individuals who should have had a share of the IRA. I know, it is hard to believe but some beneficiaries do want to do the right thing!

So, what can David do? Frequently, beneficiaries look to do a disclaimer. If David disclaims the IRA he will be treated as though he died before the account owner. For many assets, that would mean the asset passes in accordance with the terms of the will. That does not always happen in the case of an IRA.

After David disclaims the IRA, you have to look at the beneficiary form. If there is a contingent beneficiary named, that is who will inherit the IRA after the disclaimer. When there is no contingent beneficiary, then you have to look at the default language in the IRA agreement. Some agreements will say that if there is no beneficiary then the account goes to the spouse, if there is no spouse the account will go to the children. Many IRA agreements will say that if there is no beneficiary, then the account will pass in accordance with the will.

Bottom line, before you disclaim an IRA, you need to know where it will go. The beneficiary cannot direct where the asset goes when he disclaims. Since a disclaimer is a legal document, you should also consult with an attorney familiar with disclaimers to ensure that you meet all the necessary requirements of a qualified disclaimer.

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PRIVATE LETTER RULING 201013067:

A taxpayer we will call Doug had a 'golden opportunity' to invest in a limited parternship...but he had to act fast!

As the admission deadline approached, Doug learned that his financial institution would be unable to distribute the funds from two IRAs by the required date.

The investment company advised Doug that the investment could be made with non-IRA funds and later, when the IRA funds were available, could be 'restructured' as an IRA. (This is completely false. There can be NO self dealing between an IRA owner and an IRA.)

Doug eventually received IRA funds and put them in a separate account in a different institution. The funds were NOT commingled with other funds and the funds were NOT used for any other purpose.

The investment company told Doug the account MUST be maintained as an IRA and that it would send the appropriate documents. On the 60th day after the withdrawal from the IRA, the fund company told Doug the IRA could NOT be established for another 10 days.

Doug is granted an extension to roll the IRA funds into an IRA. In this case, he is very, very fortunate the investment company erred. If he had done what they advised him to do and restructured the investment as an IRA, he would have had a prohibited transaction.

The amount of his investment would be taxable in the year of the restructuring (and subject to the 10% early distribution penalty if he was under age 59 1/2) and he would not have an IRA.

SO BE CAREFUL!!!