IRA has no beneficiary (but does have spouse)
Hi. My case is very similiar to another regarding an IRA without a beneficiary.
My father died in 2003 at 65 and did not designate an IRA beneficiary. He left all his assets to my mother in a very simple will (we did not need to establish an estate).
My mother would like to rollover the IRA but has been told that it must be transferred to my dad’s estate (which she has subsequently established) and will also need to be cashed out because of the 5 year rule.
Is there any way (without a private letter ruling) that the account can be directly rolled over. She lives in NY which does not appear to be a community property state. I have also been instructed that private letter rulings are expensive and come with no guarantees.
I’ve read Bruce Steiner’s article, Postmortem Strategies… but its a bit over my head. Thanks, Aimee
Permalink Submitted by charles lore on Thu, 2008-12-04 02:31
Read the custodial document. The fine print may allow the spouse to be default beneficiary. Do not just take the word of the voice on the other end of the phone who may not have a clue.
This is a start anyway.
Permalink Submitted by Alan Spross on Thu, 2008-12-04 03:34
Chuck,
I believe the estate WAS the default beneficiary on the agreement, although this was left to our assumption. Since the operative 5 year rule requires a full distribution this month anyway, there is not much downside in ordering the distribution and then passing the funds out of the estate to the surviving spouse, who would then attempt to open an IRA account to receive the rollover. A PLR would run over $10,000 including legal costs, so in a case like this it is better to pursue it only if the surviving spouse cannot get a custodian to accept the rollover, and the amount warrants spending that much.
Perhaps Bruce has run into cases like this, since he is domiciled in NYS.
Permalink Submitted by Aimee Adamec on Thu, 2008-12-04 05:00
Hi.
I reviewed the schwab application and it does default to the estate in the event there is no beneficiary.
Permalink Submitted by Alan Spross on Thu, 2008-12-04 18:44
That is to be expected, but just for the record, the application is not the decisive document, as they change from time to time as do IRA agreement provisions. If you wanted to be absolutely sure, you would need to check the IRA agreement including any amendments made over the years. Schwab sends out these amendments all the time, but rarely updates the entire agreement. The date of death would be the determining date for the default beneficiary.
Again, while the estate would be a normal default, some agreements do default to a surviving spouse. But that should have been confirmed before any estate was set up since the IRA was apparently the only reason the estate was needed?
Permalink Submitted by Aimee Adamec on Fri, 2008-12-05 03:57
Hi and thank you for the comments thus far.
I will contact schwab about the original agreement. I also found out that my father established the account in 1994 and I wonder if the default was different at that time.
In addition, my mom received counsel from an employee at schwab today that she could pursue a court order instead of a private letter ruling. Are you familiar with court orders and if so, do you know
1) their potential for success
2) what is needed to get a court order for a rollover
As always your comments are greatly appreciated.
Permalink Submitted by Bruce Steiner on Sat, 2008-12-06 23:17
Since two people have mentioned my name, I’ll jump in.
If the IRA is payable to the estate (which appears to be the case here), and the entire estate goes to the spouse, it should be relatively easy to get a private letter ruling allowing the rollover. While my article is 11 years old, it is still current in this regard.
Unfortunately the IRS has substantially increased the fee for ruling requests involving IRAs. The fee went up from $2,570 to $9,000 a couple of years ago, and the reduced $625 fee for taxpayers with income under $250,000 was eliminated. In addition to the $9,000 IRS’ fee, you can expect to pay a few thousand dollars in legal fees. Without knowing the size of the IRA, it’s hard to say whether it’s practical to seek a ruling.
The spouse can attempt to do the rollover without a ruling. But private letter rulings are not binding on the IRS except with respect to the taxpayers to whom they are issued. So there is always the risk that the IRS will disallow the rollover. And the reporting won’t match — the reporting will show IRA benefits distributed to the estate, and the spouse making the rollover contribution.
It may be possible to get a court order saying that the spouse was the beneficiary. But no facts have been presented that would suggest that this was the case here. And such a court order would not be binding on the IRS.
Permalink Submitted by Alan Spross on Sat, 2008-12-06 23:51
Bruce,
To eliminate the reporting mismatch, would it be better to terminate the estate and have the IRA assigned to the spouse beneficiary?
I realize there may be insufficient time to get this done by year end and the 5 year rule deadline, but it may be worth a try. Another issue is whether it is worth it to assign the IRA even if the deadline is missed, and then request that the 50% penalty be excused.
Permalink Submitted by Bruce Steiner on Sun, 2008-12-07 01:47
That’s an interesting idea, though she may have to explain it to the financial institution and get them to go along with it.
Permalink Submitted by Aimee Adamec on Thu, 2009-03-12 05:28
Hi. Below is the final resolution reached on the IRA without a beneficiary.
My mom’s lawyer requested a court order directing Charles Schwab transfer the IRA directly to my mom. The basis for the request was that my mom was the sole beneficiary of the estate and that passing the IRA through the estate had the same effect as transferring it to her directly. Before the court order was secured, my mom and lawyer also spoke with Schwab to verify that they would not dispute the order. The result was that they were able to secure the order in a matter of days and once served, Schwab adhered to the order and transferred the IRA directly to my mother.
Once we decided on a strategy it only took a few weeks to execute the whole thing and the cost was obviously significantly less than what my mom would have had to pay if she took the IRA as a lump sum payout. Best of all it got down before the 5 year deadline.
Thanks for your help, I hope this strategy helps others.
Permalink Submitted by Alan Spross on Thu, 2009-03-12 20:05
Glad this worked out, and thank you for posting the outcome for the benefit of others.
Obviously, the conclusion still remains that IRA owners should designate their own beneficiaries to avoid delays and the real possibility that many cases identical to this would never get resolved without more time and expense than this one did.
Permalink Submitted by Aimee Adamec on Fri, 2009-03-13 04:35
I also think it is important to note that if you do have a trust as a beneficiary, you should still put your spouse first and your trust as secondary. It will alleviate any issues with spousal transfers as well.
Permalink Submitted by Bruce Steiner on Fri, 2009-03-13 13:16
It depends on what you’re trying to accomplish. Sometimes a married IRA owner wants the marital trust or the credit shelter trust or trusts for the children or grandchildren as the primary beneficiary.
How were you able to get a court order in New York at a cost substantially less than the cost of a ruling? What county was it in?
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aimee adamek wrote:
I also think it is important to note that if you do have a trust as a beneficiary, you should still put your spouse first and your trust as secondary. It will alleviate any issues with spousal transfers as well.
Permalink Submitted by Aimee Adamec on Sat, 2009-03-14 00:26
It was in Dutchess County. I was not privy to the details of the court order or cost, but my mother’s lawyer made it out to be a very simple proceeding. I will check with her and get back to you. As for the trust, we set up a revocable living trust as a tax shelter but our counsel still advised to put the spouse first on the IRAs so that you could transfer without liquidating it.
Permalink Submitted by Bruce Steiner on Sun, 2009-03-15 03:05
Revocable (living) trusts do not save taxes. While they are useful in some cases, and are commonly used in some states (notably California), they are not commonly used in New York.
If your father wanted to leave his IRA to your mother, he should have named her as the beneficiary.
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aimee adamec wrote:
As for the trust, we set up a revocable living trust as a tax shelter but our counsel still advised to put the spouse first on the IRAs so that you could transfer without liquidating it.