Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

Dealing With IRAs In An Estate
(11/18/01)

Those of you who regularly read this column know I have written quite a few articles on the new IRA distribution rules. I've spent more time on this topic than usual because there have been significant changes in the rules as a result of a new law passed in January of this year.

Most of my discussions have centered on how to maximize your benefits and stretch out your payments over the longest possible period of time to take advantage of the tax-deferred nature of IRAs and Qualified Plans.

I've completely ignored what to do if you are the executor or personal representative of an estate that contains an IRA or Qualified Plan. This deficiency has been pointed out to me by several people recently, so I thought I should try to shed some light on the subject.

My Father Just Died And I'm the Personal Representative.
What do I do now?

The first thing to do is get answers to some basic questions. Did you father have an IRA or Qualified Retirement Plan? If he had an IRA, was it a regular IRA or a ROTH IRA?

You also need to know how old your father was when he died and if he had already reached the Required Beginning Date ("RBD") or begun receiving distributions from his plan.

How do I find out all this information?

You will need to find out who has the Qualified Plan documents or the IRA agreement, any disclosure statements, and the beneficiary designation forms. Request these as soon as possible, as it takes quite awhile for the account custodians to mail them to you.

Once you obtain these documents, you will need to know whether your father was required to take "Required Minimum Distributions" ("RMD") from his plan. The rules are different depending upon whether your father died before or after his RBD. For example, the IRA may be controlled by the Life Expectancy Rule, the Five-Year Rule, or the At-Least-As-Rapidly Rule. If your father had a Roth IRA, the RBD is immaterial as either the Life Expectancy Rule or the Five-Year Rule will control. Remember, an owner of a Roth IRA does not have an RBD during his lifetime.

You need to know your father's Annuity Starting Date. This is the date when his annuity payments began or would have begun. If your father has already passed the Annuity Starting Date, his distribution choices are probably irrevocable.

Are There Any Particular Problems I Should Be Watching Out For?

A common one is the decedent hasn't taken Required Minimum Distributions during his or her lifetime. If your father was required to take distributions and didn't, there may be penalties assessed against the estate.

Another problem is verifying that your father named qualified beneficiaries for his plans. For example, he could have named his children, a trust, a charity, his or someone else's estate or any number of other entities as his beneficiaries. If he named a trust, it must meet certain requirements in order to qualify as a "designated beneficiary." If he named individuals and a charity, you need to pay the charity its share early so the other beneficiaries can stretch out the withdrawals from their respective shares.

My Mother Was Named As Beneficiary. What Do I Need To Do Now?

How old is your mother? Has she reached 59½? If so, she can take distributions without being penalized. If she is less than 59½, does she need money now or can she wait? If she needs the money, she will probably want to elect treatment as a beneficiary, rather than as an owner of a spousal rollover IRA, to avoid the 10% income tax penalty on early distributions.

If your father started taking RMDs, be sure he has withdrawn the full amount required during the year of his death. If he hasn't, the custodian will have to pay the remaining required minimum distributions before your mother can become the owner of the IRA.

Are The Rules The Same For Roth IRAs and Qualified Plans?

You've been doing your homework. With Roth IRAs, most owners use either Form 5305-R or 5305-RA. This form identifies the surviving spouse as the owner and not as a beneficiary. Unless your father gave your mother the right to elect out of this ownership status, she is locked in. If she is under 59½, becomes the owner of the IRA, and withdraws any funds from the IRA within the "Five-Taxable-Year Period" (as defined in the regulations), she will have to pay a 10% income tax penalty unless she qualifies for a special exception.

I Have One Last Question. What is this Five-Taxable-Year Period You just Mentioned?

I thought I could get away without having to touch this nasty subject, but I guess I can't. Basically, this rule deals with two different triggering events. First, if a beneficiary under age 59½ makes a withdrawal from an IRA within the Five-Taxable-Year Period beginning with the "taxable year" in which a rollover or conversion was made by that spouse, he or she will be assessed a 10% early withdrawal penalty.

The penalty will also kick in if a spouse under 59½ withdraws earnings from a Roth IRA within the Five-Taxable-Year Period beginning with the first taxable year in which the decedent or the spouse made a contribution to a Roth IRA. In other words, neither the owner of the Roth IRA nor his or her spouse can withdraw funds from the Roth IRA within five years of its creation without being subject to this 10% penalty.

I'll finish answering the rest of your questions next week. Aren't you glad you asked?

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