Here are the steps, and we’ll discuss them in order of priority:
- Separate your portion from other IRA beneficiaries.
- Retitle the IRA.
- Name a beneficiary.
- Move it to the location you desire (if permitted by the existing custodian).
- Invest the funds per your investment plan, keeping in mind the review of assets which should and should not be placed in an IRA (covered earlier in the book).
- Complete a distribution form with the custodian for annual distributions in accordance with the required minimum distributions for beneficiaries (remember to update each year).
- Be ready to be contacted by the executor or trustee of the deceased’s trust—you might owe estate taxes
Separate your portion from other IRA beneficiaries
Find out from the executor or trustee of the deceased where the IRA resides and get a copy of the beneficiary form if possible, death certificate, and affidavit of domicile. Present this to the custodian with your identification. Know what you want the custodian to do. Do you want to leave this IRA at this institution or do you want to move it? If you want to move it, then you will need to have established your new IRA at another institution and initiated their transfer process.
Retitle the IRA
It’s likely that you want to establish the inherited IRA at the existing institution (remember the correct titling discussed earlier) and an IRA at your new custodian with the exact title. The title will be of this format: Mike Jones IRA (deceased January 10, 2004) F/B/O (for benefit of), Sally Jones. Once the titles match, the new custodian can transfer the IRA. Remember YOU CANNOT DO A ROLLOVER ON AN INHERITED IRA—YOU MAY NOT ACEEPT A CHECK FROM THE DECEASED’S CUSTODIAN AND DELIVER IT TO YOUR CUSTODIAN. THIS WILL RENDER YOUR INHERITED IRA TAXABLE.
Name a beneficiary
Think through your beneficiary selections carefully and if undecided, do not leave this option blank. Pick at least one person, (any person) and name that person as beneficiary (a good choice is always the spouse unless you’re ready to file for divorce).
Move it to the location you desire (if permitted by the existing custodian)
When you move an IRA from one custodian to another, you initiate the “trustee to trustee” transfer with a form from the accepting custodian. Just make sure that the titles of the IRA you want to transfer and the title of the new IRA match if you want things to go smoothly. If you’re not sure that you’ll be with your new custodian permanently, check the custodian’s rules to make sure you can transfer again later without restriction.
Invest the funds per your investment plan, keeping in mind the review of assets which should and should not be placed in an IRA covered earlier in the book Complete a distribution form with your new custodian for annual distributions in accordance with the required minimum distributions for beneficiaries (remember to update each year).
Each year, you divide the prior year’s December 31 IRA balance by a divisor. The divisor is the denominator you get from the table in Publication 590 for beneficiaries (printed earlier in the book) in the year of death, and each year, you subtract one. Your first distribution is the year after the year of death. Note: it’s possible that the deceased, if required to take mandatory distributions (i.e. was age 70½ or older) did not take their distribution in the year of death. He or she may have had other things on their mind. Ask. If that’s the case, you’ll need to take your share of the deceased’s distribution and pay tax.
Be ready to be contacted by the executor or trustee of the deceased’s trust—you might owe estate taxes.
If the deceased’s estate is subject to estate tax (which does not need to be paid until nine months after death), you may get a call that you must pony up some taxes. Don’t complain. You got a free IRA didn’t you? If you don’t have the cash from other sources (borrow against assets or your home if you have to), you can take the money from the IRA, but this is the worst place to get the fund. You want to let these finds grow, so use any other source possible first.
