Life and Death Planning for Retirement Benefits

Chapter 4: Inherited Benefits: Advising Executors and Beneficiaries

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Inherited IRA: No Code Definition

Someone notifies the IRA provider of the participant’s death. The IRA provider then typically has the beneficiary sign a new account agreement, appropriate to an “inherited IRA,” and retitles the account accordingly. See Rev. Proc. 89-52, 1989-2 CB 632, and Notice 2007-7, 2007- 5 IRB 395, A-13. An inherited IRA (or plan account) should be titled so as to make clear that it is an inherited account, and to indicate the names of the both the beneficiary (who now owns it) and the deceased participant (whose account it originally was). For example: Individual: If the beneficiary is an individual, the inherited IRA or plan account could be titled “John Doe, deceased, f/b/o Junior Doe,” or “Brian Young as beneficiary of Joan Smith” (see Rev. Proc. 89-52, § 3.01) or similarly. Estate: For an IRA or plan account that is payable to the deceased participant’s estate, the titling could be “John Doe, f/b/o Estate of John Doe,” or “XYZ Bank, Executor of the estate of John Doe, as beneficiary of John Doe,” or something similar. Trust: An IRA or plan account held by a trust as beneficiary could be titled “John Doe, f/b/o John Doe Testamentary Trust,” or “XYZ Bank, Trustee of the John Doe Revocable Trust, as beneficiary of John Doe,” or similarly. The IRS requires the IRA provider to show the name of the decedent, as well as the name and taxpayer identification number of the beneficiary, when reporting the value of and distributions from an inherited IRA. Rev. Proc. 89-52, § 3.01; see Instructions for IRS Forms 1099- R and 5498 (2010), p. 15. See ¶ 4.4.04 (B) regarding preserving the option of disclaimer by the beneficiary when retitling the account. The Internal Revenue Code does not define “inherited IRA.” The Code provides that “in the case of an inherited” IRA, distributions from the account may not be rolled over (and rollover contributions may not be accepted). § 408(d)(3)(C) . But instead of defining inherited IRA, § 408(d)(3) says only that an IRA “ shall be treated as inherited if-- (I) the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and (II) such individual was not the surviving spouse of such other individual.” Emphasis added. All this sentence tells us is that, for purposes of the rule that rollovers are not allowed for inherited IRAs , an IRA held by the surviving spouse as beneficiary is NOT treated as an inherited IRA. The rule does not mention IRAs held by nonindividual beneficiaries, because the rule allowing rollovers of IRA distributions ( § 408(d)(3)(A) ) only applies to distributions to the individual for whom the account is maintained.

Post-death distributions, IRA-to-IRA transfers

For definitions of (and differences among) “direct rollovers,” “60-day rollovers,” and “IRA-to-IRA transfers,” see ¶ 2.6.01 . A. Nonspouse beneficiary cannot roll over a distribution received. If, after the participant’s death, the retirement plan or IRA makes a distribution to a beneficiary who is