Inherited IRA Transfer Horror

Submitted by Vaughn Aubuchon on Sun, 2011-04-03 20:53

Hi IRAHelp Folks,

On April 13, 2010, I transferred my Inherited IRA funds from Wells Fargo to Union Bank.
NEITHER bank knew how to effect the transfer properly.
I followed the advice of the Wells Fargo “Financial Specialist”, which was incorrect.
He had me hand-carry a cashier’s check over to Union Bank.
The result – In January, I received a 1099-R from Wells Fargo specifying a “Gross Distribution”.
This will cost me an ADDITIONAL, unintended 2010 tax of $29,000.
I was told that I would be sent a corrected 1099-R in June, but I don’t believe it.

Union Bank now lists the account as a “Rollover IRA”, which of course is not allowed.
I have been trying to get Wells Fargo to correct the transaction,
and issue a corrected 1099-R. I may as well be talking to a stone.

1. Will I be required to pay the extra taxes for 2010?
2. When I withdraw the funds from Union Bank, will I be taxed AGAIN on the SAME funds?
3. How is a lay person expected to get the transfer right, when the Financial Officers of banks can’t do it?
4. Is my only alternative –
—– to file an action against Wells Fargo in Superior Court, or
—– to relentlessly attack Wells Fargo until I die? (I can do that.) or
—– both?

Publication 590 is pretty much useless. EVEN THE IRS refers to a “rolled-over” non-spousal Inherited IRA,
which is a contradiction in terms. It can’t be done. Pretty sloppy, nebulous, undefined stuff.

Here are the facts in detail, if I am allowed to post them here –
[url]http://www.vaughns-1-pagers.com/economics/wells-fargo-inherited-ira.htm[…
(admin please delete if this is not allowed – I wanted to try to be brief here.)

You can see that my rage has already placed me in attack mode, which I will stay in, until I see satisfaction.
If I receive no satisfaction, Wells Fargo will never hear the end of me.
I suffer from RIS – Righteous Indignation Syndrome. When you screw me, I go nuts.

So glad I found this website – Ed may be one of two people in the country who understand this stuff.
Too bad I didn’t find him (this site) before the fact.

Thank you very much for any responses.
Vaughn Aubuchon, Internet Publisher



Submitted by Alan Spross on Mon, 2011-04-04 02:20

Exactly how was the payee shown on that cashier’s check?

A hand carried check made out to the new IRA custodian can still qualify as a direct transfer as long as you could not have cashed the check. An error in titling of the inherited IRA can be corrected, but you may need legal counsel to convince Union Bank of that. See att’d:

http://online.wsj.com/article/SB125512471450876777.html



Submitted by Peter Lingane on Mon, 2011-04-04 05:09

Start at the receiving custodian next time you move a pension or IRA. Generally, your signature on their forms will allow the current custodian to send over the account in a trustee to trustee transfer. Your signature on some forms of the current custodian may be required but these forms should be given to the receiving custodian for transmittal.

It is possible, but I’m not sure of this, that a check is the only option when you start at the current custodian since current custodians seem to demand an acceptance letter from the new custodian before they will release the funds. Of course the current custodian should advise you to start with at the receiving custodian and only write a check if you insist.

It might lower your blood pressure if you think about how to minimize the damage going forward. How might you get the $100K or so (the gross distribution net of tax) back into a pension environment? Will these extra funds allow you and your spouse or children to make larger contributions to IRAs or employer pensions for 2011 and the next couple of years? Would it make sense to use the money to pay the tax on a Roth conversion or to pay down debt?

Estimate what this financial horror really cost you in net present value financial terms. Wells would be correct to take this approach if you win damages.

1. The earnings on your share or a traditional pension or IRA are approximately tax free. Your percentage ownership of the inherited IRA was $29,000 divided by the gross distribution. So your share might have been $100K.

2. What investment return do you anticipate over the next couple of decades? If it is 5%, having your money outside the IRA costs you the tax on 5% of $100K this year.

3. The actual tax cost depends on how you invest the money outside the IRA. If you trade little and invest in things which provide capital gains rather than interest and dividends, you might find that your incremental tax burden on your investment income is ten percent or less. That is, the transfer horror might have cost you 10% of 5% of $100K = $500 this year.

4. That is only this year, of course. You’ll need to write a spreadsheet and forecast the extra tax year by year taking into account investment growth and required distributions. But you can’t just add the individual savings to determine the total impact. Rather discount the extra tax year by year using your after-tax investment return. Your after-tax investment return is about 4% if your goal is 5% before tax.

You will find that the discounted values are pretty small ten or twenty years out. The discounted total (“net present value”) is probably less than twenty times the current value, no more than ten thousand dollars or so.

If you trade a lot, earn mostly nonqualfied dividends, earn a higher return, the discounted total will be larger.

5. Even considering that you probably would have paid a lower rate of tax if you have been able to distribute the IRA gradually over several years, your actual financial loss might be low enough to file a claim in small claims rather than superior court – and save lots of legal fees.

Good luck!



Submitted by Bruce Steiner on Mon, 2011-04-04 15:23

The Administration’s revenue proposals for fiscal 2012 include a provision that would allow 60-day rollovers for nonspouse beneficiaries from inherited IRAs, effective beginning January 1, 2012. Of course, there can be no assurance that this will be enacted.



Submitted by Vaughn Aubuchon on Mon, 2011-04-04 17:31

Alan of Phoenix –
Wachovia made the check out to me unfortunately. They did not understand the concept of maintaining the account in the name of the original holder “BENE OF ROBERT SXXXXXXX”. So yes, that was also an error.

Peter –
Unfortunately, there won’t be a “next time” – it was my only account.
The forms of BOTH financial institutions were bogus, and did not make a provision for an “Inherited IRA”, as I describe in detail on my web page. I also suggest that the IRS create a NEW, REQUIRED form, to be used for all “Inherited IRA” transfers. This would go a long way toward preventing inept bank officers from screwing up these transfers.

“… the current custodian should advise you to start with at the receiving custodian”. Absolutely. But he had NO CLUE about doing this. He suggested the hand-carried cashier’s check, because Wachovia’s “computers were down.”

“How might you get the $100K or so (the gross distribution net of tax) back into a pension environment?”
That’s another problem. The Gross Distribution IS back into a pension environment. Union Bank has the funds listed as a “Rollover Account”, which of course is NOT allowed for an “Inherited IRA”. I believe that this means I will have to pay taxes AGAIN, on the same funds, when I withdraw them. Not cool.

1. “Your percentage ownership of the inherited IRA was $29,000” – I don’t understand this – Shouldn’t it be 100%?
2, 3, 4, 5. – I’m sorry, I just don’t understand.

Right now, I just want OUT of this convoluted horror of financial jibberish, with minimum loss. I just want 100% control of my money, without eleventy-seven extraneous, slippery, ill-defined factors working against me at every turn. 80,000 pages of IRS regulations? What a crock. A self-perpetuating nightmare of nebulosity, all designed to separate me from my money (think really strong nasty language here).

bsteiner –
– Even if this provision were enacted, I doubt that it would be made retroactive.
– I moved the funds on April 13, 2010, and did not become aware of the error until December 20, 2010 – bye-bye 60 days.



Submitted by Jose Morales on Mon, 2011-04-04 17:57

Hello Mr. Aubuchon,

Let me first say that while I do not work for Wells Fargo/Wachovia or Union Bank, I am very sorry that you have to experience this kind of difficulty with your inherited IRA. I hope to be able to offer some guidance that can help you sort this issue out, although I will be very upfront and let you know that some of the information I will give may upset you. Please try to take a step back and view the whole picture (good and bad) and not be so distracted by information that is displeasing that you proceed based on emotion. You will be much better served having a solid understanding of where all the erros in this situation occurred, regardless of who was “responsible” from your point of view.

To first answer the questions you asked:

1. Will you be required to pay the extra taxes for 2010? Maybe. This depends on how this issue is resolved.

2. When you withdraw the funds from Union Bank, will you be taxed again? Maybe. This depends on how this issue is resolved.

3. How is the lay person expected to get the transfer right, when the financial officers of banks can’t do it? The reality is that the IRS places the responsiblity for knowing and understanding the rules under which their IRA (inherited or not) falls on the individual. However, it is also a reality that many individuals do not know or understand these rules and want their IRA Custodian to take on this responsibility for them. Financial institutions must decide for themselves how involved they wish to be in providing guidance and advice when faced with an individual that is seeking such guidance and advice regarding their IRA. They need to be sure to communicate this clearly to their front line staff so as to avoid any situations in which they could be held financially liable due to the actions or words of their employees.

4. What are your alternatives? Yes, you could sue Wells Fargo. Will this “fix” your IRA issue? Probably not, but it may result in financial compensation for any damages you incurred if it is found that they are liable. You can also relentlessly attack Wells Fargo until you die, however this may only result in your deatch much sooner than it should as well as significantly reducing your quality of life.

One alternative that you may not be aware of is to go straight to the IRS, since they are the ultimate judge of what can or cannot be done to “fix” this issue via a Private Letter Ruling. You may even be able to convince Wells Fargo to foot the bill for submitting and receiving this Private Letter Ruling, if you ask nicely. The odds that they will cooperate with anything that you request if you are holding a lawsuit over their heads is very small. You need to decide whether you wish to truly make an effort to resolve this outside of a courtroom or not. If you have made up your mind that you wan to sue them into oblivion, well then you have made your choice and there is absolutely no reason for them to agree to help you in any way. Please understand that trying to resolve this outside of a courtroom does not mean that you can’t sue them, if in the end there are real financial damages that you incurr. You can also apply for a Private Letter Ruling and then sue Wells Fargo for the costs if they refuse to pay upfront and the ruling is in your favor.

The issue of a Private Letter Ruling may be the reason why Wells Fargo seems to be stalling. They may be coming to the conclusion that they cannot simply change the reporting of a distribution when one did in fact occurr, regardless of any erroneous advice that may have been given by one of their employees. While it may be a common practice for financial institutions to change tax reporting forms out of purely customer service concerns they may want this “correction” to be completely above the board so as not to increase any liability that they may already see themselves on the hook for. Leaving this up to the IRS to sort out may be the best move for both you and Wells Fargo, although it will be the most inconvenient path for both as well.

Regarding Publication 590 and the rollover to a non-spousal interited IRA, this is limited to inherited employer plan funds. Somewhat recent legislation has provided non-spouse beneficiaries with the ability to rollover inherited employer plan funds to an inherited IRA, whereas before they either had to take full distribtuions (taxable) or receive payments only from the employer plan. As of yet, non-spouse beneficiaries of IRAs do not have a rollover option.

You bring up a lot of other issues that I would love to address but I also do not want to bog down this conversation with side issues that ultimately will have little to do with how this is resolved. I will say this however, it is in your best interest to not rely on your IRA custodian to be your advisor when it comes to what you should or can do with your inherited IRA. If the task of knowing and understanding the rules regarding your inherited IRA are too daunting you should seek out a professional financial advisor, estate planner, or lawyer that already has this knowledge to help you. Yes, that does cost money but as you are finding out mistakes can be even more costly.



Submitted by tomd37 on Mon, 2011-04-04 18:26

Last response was very nicely (and properly) stated.

Tom D.



Submitted by Alan Spross on Mon, 2011-04-04 20:58

Some relief to your situation can be realized in the fact that you will not be double taxed. If you do not get relief from these institutions or via a private letter ruling, the current situation would be taxed as follows:
1) Distribution instead of transfer from a non spouse inherited IRA. Proceeds will be taxable in the year distributed (per 1099R), but no penalty due to death coding on the 1099R (Code 4)
2) Contribution was then made to an incorrectly titled IRA, but the title is immaterial because the funds were not eligible for rollover in the first place (just for direct transfer). Therefore, the new IRA contribution is treated as an excess regular IRA contribution that you did not deduct on your return. Since you did not deduct it, the only part of the distribution that would be taxed are the earnings that accrued in the IRA. Those earnings are also subject to 10% penalty.
3) There is also a likely 6% excess contribution excise tax for the amount contributed to the new IRA that is not removed prior to 10/17/2011. The tax would be for 2010 and another 6% would accrue as of 12/31/2011. If Union cannot resolve the issue, you need to determine when to withdraw the funds to stop the excise taxes. On the other hand, if you proceed to file a letter ruling request that the IRS approved, these taxes would be erased. Legal council can give you advice whether to remove these funds prior to 10/17 to eliminate the excise tax altogether or to bet on a favorable ruling that would erase the excise tax, allow your IRA to be re titled correctly.

Note that you should take out your 2010 RMD and request the excess accumulation penalty be waived for 2010 due to “reasonable cause” per the Form 5329 Inst, p 6. The IRS will probably grant the waiver. Then also take out your 2011 RMD before year end. Even if you get a favorable ruling, the IRS will not release you from the 2010 and 2011 RMD requirements or the taxes on those RMDs. The RMDs therefore should not be part of your letter ruling request. Union cannot deny you access to your IRA funds, unless they feel there is some other legal reason for them to freeze the account.



Submitted by Vaughn Aubuchon on Thu, 2011-04-07 04:44

urusel2 –
Wow. I’ve been busy, and just checked in. My mind is spinning.
First of all, thank you very much for your candid, comprehensive, thoughtful, experienced analysis. I appreciate your straightforward response.

I had wondered if there was a way to approach the IRS directly. I have never heard the term Private Letter Ruling.

Yes, I felt so frustrated, that I felt an extreme need to strike back, especially after reading about the utter lack of success of others. I wanted to punch it out right now, because I was wronged, without any apparent course of obtaining redress. I am steering toward a more metered course now.

I will engage a tax attorney to help me steer through this. I guess it is all about minimizing my losses going forward, at this point.

alan-oniras –
More excellent knowledge from an obvious expert. A roadmap to the endpoint.

Again, thank you both very much for your thoughts, knowledge and advice. I can certainly see that I have come to the right place. I will now go and tone down the rhetoric, and then spend a few hours Googling my newly found buzz-term, Private Letter Ruling.



Submitted by Vaughn Aubuchon on Fri, 2011-04-08 21:40

Due to the advice above, I just want out now, as gracefully as possible.

I believe I have found the appropriate IRS document here –
http://www.irs.gov/pub/irs-irbs/irb11-01.pdf
“Code, Revenue Procedures, Regulations, Letter Rulings”
A mere 260 pages. I believe that I am eligible for a reduced fee of $625, due to Appendix A, (B)(2)(a).

Let me see if I have this right, from the above discussions.

1. Concede defeat (in the short term, at least) on Inherited IRA transfer failure by Wells Fargo.
2. Take a Union Bank Gross Distribution of misnamed “Rollover IRA”, to obtain funds to pay the tax from the Wells Fargo Gross Distribution. Place the funds in my Union Bank checking account.
3. Prepare my 2010 income tax form 1040, acknowledging the Wells Fargo Gross Distribution.
4. Apply for a filing extension, and pay the additional tax on the Wells Fargo Gross Distribution.
5. Have a tax attorney write a Private Letter to obtain a Private Letter Ruling. Have the IRS waive the tax liability on the Union Bank incorrectly titled “Rollover IRA” Gross Distribution.
6. File my 1040 in October 2011.
7. Withdraw the remaining funds from my checking account, never to be placed in any bank ever again. Add to my physical gold holdings, which are up 50%.

Should I follow these steps, as stated? Have I properly interpreted your advice above? That is my intent.

Once again, thank you so much for your excellent help.
(I have contacted several tax attorneys – none are interested. They all say they are “busy”, but I am wondering if it is more than that – such as, perceiving me as a “difficult case”. I don’t know. Paying them is not an issue for me, so ???)



Submitted by Jose Morales on Sat, 2011-04-09 00:18

I think step one should be to find an IRA expert, preferrably one who is also a lawyer, to review the facts and circumstances of this whole incident. They need to know everything, including having all documents and communications in hand to review. Then let them guide you through the process of making you whole, either by obtaining a favorable ruling from the IRS that will allow you to restore your inherited IRA or a reimbursement of any tax liabilty that you have incurred as a result of the actions of your original IRA custodian (if they did anything they are liable for).

I do not believe that there is any chance that the IRS will allow you to keep the money outside of an inherited IRA and not pay tax on it. The IRS isn’t going to simply decide that money withdrawn from an IRA should be tax free because the individual didn’t know that they wouldn’t be allowed to rollover the funds.

To speculate on possible strategies is a bit difficult. It would seem that you can’t ask for an extension of the 60 day rollover because a non-spouse does not have the option of a rollover to begin with. Maybe an arguement for a waiver allowing a rollover to a non-spouse beneficiary that was not aware that such a rollover is prohibited and relied on the advice of a bank employee that was similarly unaware of this prohibition?

If going the route of a Private Letter Ruling, I would speculate that you would have to first correct the “excess contribution” which occurred when you rolled over a distribution that was not eligible for rollover. Report the distribution, rollover, and excess contribution on your 2010 taxes and file a 5329 with an explanation including your intent to file for a Private Letter Ruling to allow you to restore your inherited IRA. Then follow through with the Private Letter Ruling process and see where it takes you.



Submitted by Bruce Steiner on Sun, 2011-04-10 04:48

We’ve done lots of ruling requests, but you would have to weigh the cost of the ruling (both the IRS’ fee for a ruling request, which is generally $10,000, plus legal fees) and the likelihood of success against the amount involved.

The loss isn’t necessarily equal to the $29,000 of current tax. You would have to make some reasonable assumptions about investment returns, both pre-tax in the IRA and after-tax on money not in an IRA. You would also have to take into account the fact that the IRA would eventually be taxable.



Submitted by Alan Spross on Mon, 2011-04-11 00:33

Bruce,
Genearlly speaking, during the time the PLR is being prepared and considered by the IRS, should the taxpayer’s actions in the interim assume the request will be approved or disapproved? In this case, disapproval means a large tax bill and removal of the entire disallowed rollover.



Submitted by Vaughn Aubuchon on Fri, 2011-04-22 21:44

Here is an update for those who are interested.
According to conventional wisdom, I am screwed.

I have received a response from Senior Counsel Catherine A. Rudenick at Wells Fargo Legal Department in Minneapolis, MN. It can be viewed here –
http://www.vaughns-1-pagers.com/economics/wells-fargo-inherited-ira.htm#…

Directly beneath it is my response.

This is also my response –
http://www.vaughns-1-pagers.com/economics/wells-fargo-sucks.htm
Be sure to see the parody graphics of Wells Fargo which I created. There will be many more.
This page will be split into two more pages.

and this –
http://www.vaughns-1-pagers.com/economics/wells-fargo-suit-santa-cruz.htm

and this –
http://www.vaughns-1-pagers.com/economics/wells-fargo-lawsuit-summary.htm
This page will grow a lot, but it will take me some time.

This has been quite a ride. I STILL cannot swallow the general sentiment here that –
1. Yes, banks can screw you, and
2. There is not much you can do.
I am not ready to accept that.

Particularly interesting is the fact that no less than 7 tax attorney have turned me down.
My thoughts on that –
1. It can’t be money, since NOT ONE asked the value of the account
2. I must be perceived as an unreasonable loose cannon, just because I am unhappy about being screwed
3. Deregulation has resulted in renegade banking actions, for which there is no reasonable remedy
4. Tax attorneys are a wimpy lot, only interested in harvesting low-hanging fruit. One actually told me, give me $400, and I will show you my business card. Yeah, right. On the other hand, one Irish guy in Santa Cruz gave me tons of free advice over the phone, but wasn’t interested in representing me.

Regarding the $10K Private Letter Ruling fee, I carefully read the document, and I believe that my PLR fee would be $600, and not $10,000.

I will file suit at some point, after I experience ACTUAL damages later this year.
My attorney used to teach at Georgetown Law. It should be fun.
The legal filing will be a little different than what you might surmise – think beyond small potatoes.

Thank you all very much for your help.
Vaughn F. Aubuchon, hapless customer, fiduciary prey



Submitted by Bruce Steiner on Fri, 2011-04-22 21:53

That’s generally not an issue. Most ruling requests involve proposed transactions, where the taxpayer will only do the transaction if he/she receives a favorable ruling. If the IRS will not issue a favorable ruling, the taxpayer will not do the transaction. (If the taxpayer would do the transaction in any event, there would be no point to applying for a ruling.)
———————
Alan wrote:

Bruce,
Genearlly speaking, during the time the PLR is being prepared and considered by the IRS, should the taxpayer’s actions in the interim assume the request will be approved or disapproved? In this case, disapproval means a large tax bill and removal of the entire disallowed rollover.



Submitted by Bruce Steiner on Fri, 2011-04-22 22:06

1. I’m surprised at that.

4. How aggressive or conservative we are depends on the client, and on the matter.

I didn’t see a provision for a $600 user fee in Rev. Proc. 2011-8. Did I miss it?

Best of luck in this matter. Let us know how this turns out.
——————–
Vaughn wrote:

Particularly interesting is the fact that no less than 7 tax attorney have turned me down.
My thoughts on that –
1. It can’t be money, since NOT ONE asked the value of the account
2. I must be perceived as an unreasonable loose cannon, just because I am unhappy about being screwed
…
4. Tax attorneys are a wimpy lot, only interested in harvesting low-hanging fruit. …

Regarding the $10K Private Letter Ruling fee, I carefully read the document, and I believe that my PLR fee would be $600, and not $10,000.

I will file suit at some point, after I experience ACTUAL damages later this year.
My attorney used to teach at Georgetown Law. It should be fun.
The legal filing will be a little different than what you might surmise – think beyond small potatoes.



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