People who inherit IRAs from somone’s Estate Planning need to be careful before they take any actions. They also need to be clear with the IRA custodian. Otherwise, the IRA might be inadvertently liquidated, triggering significant taxes. There are two mistakes commonly made by beneficiaries or custodians.
After an IRA is inherited, it has to be retitled from the name of the deceased owner to the beneficiary. The new title has to include the original owner’s name, that he’s deceased, and that it is FBO (for the benefit of) the named beneficiary. For example a valid title is: John Doe IRA, deceased, FBO Jane Doe, beneficiary.
Too often, beneficiaries and executors don’t under-stand the importance of proper terms, or custodians misunderstand instructions. The custodian thinks it is receiving an order to liquidate the IRA instead of to retitle it. So, the custodian sends the IRA balance to the beneficiary in a check. Once this happens, not much can be done. The IRA is liquidated and must be included in the gross income of the beneficiary. Therefore, the orignal owner of the IRA must have detailed estate planning instructions.
Another problem occurs when the beneficiary wants to transfer the IRA to the mutual fund or broker where the rest of his or her accounts are. But the current custodian can’t do that until the IRA is properly retitled. First, the IRA has to be retitled as described above. Only after that is done can the IRA be transferred from the current custodian to the new one.
A third point is transfers or rollovers of Inherited IRAs can be done only from custodian to custodian. A beneficiary can’t take the IRA balance and deposit it to a new IRA within 60 days. If the beneficiary takes money from the IRA, it is included in gross income.
Beneficiaries of someone’s estate planning can learn these and other details about inheriting IRAs through my report, Bob Carlson’s Guide to Inheriting IRAs. It is available on the web site at www.RetirementWatch.com by clicking on the ?Bob’s Library? tab.
RW February 2014.