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Inheritance

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N

nerf

Junior Member
NY

Hi all,

My grandmother recently passed away, leaving my mom with a small inheritance. The money is invested in an actively managed account with a large brokerage. The statement is very difficult to interpret, perhaps intentionally so, but it looks like some of the money is in an IRA and some is in a taxable cash management account. My grandmother paid little attention and it is my impression that she was taken advantage of. The money is divided into 15-20 speculative investments, including something called "ML &Co Curr Rupee USD Nts" (currency arbitrage for a 90 year old retired teacher?).
I will be helping my mom make decisions about what to do with the money. Needless to say, I want to get it out of this large, expensive (unethical) brokerage as soon as possible. But I would like to understand the tax implications of making a change at this point. If we sell the investments, what would my mom's cost basis be? Will she suffer a big tax hit? Any thoughts or guidance on this would be much appreciated.

Regards,

Nerf
 


LdiJ

LdiJ

Senior Member
nerf said:
NY

Hi all,

My grandmother recently passed away, leaving my mom with a small inheritance. The money is invested in an actively managed account with a large brokerage. The statement is very difficult to interpret, perhaps intentionally so, but it looks like some of the money is in an IRA and some is in a taxable cash management account. My grandmother paid little attention and it is my impression that she was taken advantage of. The money is divided into 15-20 speculative investments, including something called "ML &Co Curr Rupee USD Nts" (currency arbitrage for a 90 year old retired teacher?).
I will be helping my mom make decisions about what to do with the money. Needless to say, I want to get it out of this large, expensive (unethical) brokerage as soon as possible. But I would like to understand the tax implications of making a change at this point. If we sell the investments, what would my mom's cost basis be? Will she suffer a big tax hit? Any thoughts or guidance on this would be much appreciated.

Regards,

Nerf
Click to expand...
Your mom can roll the IRA portion of it into an IRA of her own and avoid any current tax consequences (that's something new). However the money has to go straight from the brokerage's hands into the hands of the new IRA administrator. It cannot go through your mother's hands.

The non IRA portion would have a stepped up basis, as of the date of your grandmother's death, therefore unless the investments really jumped since your grandmother's death, there should be minimal capital gain and possibly even some small capital loss.
 
E

efflandt

Senior Member
Make sure you get the advice of someone who really knows before transfer of an IRA. You can transfer an IRA to a different trustee (broker), but last I knew, it has to remain in the name of the deceased for benefit of the beneficiary to retain its tax deferral. It also might have required minimum distributions at some point. Only a spouse of the deceased can transfer it to their own IRA. See page 20 of http://www.irs.gov/pub/irs-pdf/p590.pdf
 
LdiJ

LdiJ

Senior Member
efflandt said:
Make sure you get the advice of someone who really knows before transfer of an IRA. You can transfer an IRA to a different trustee (broker), but last I knew, it has to remain in the name of the deceased for benefit of the beneficiary to retain its tax deferral. It also might have required minimum distributions at some point. Only a spouse of the deceased can transfer it to their own IRA. See page 20 of http://www.irs.gov/pub/irs-pdf/p590.pdf
Click to expand...
Sorry Effandt, but the law has recently changed on that issue. Now anyone inheriting an IRA can roll it into an IRA of their own.....as long as it a direct trustee to trustee rollover.

From Publication 590:

Rollover by nonspouse beneficiary. Beginning in 2007, a direct transfer from a deceased employee's IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about rollovers, see Rollovers under Can You Move Retirement Plan Assets? in this chapter.
 
A

anteater

Senior Member
LdiJ said:
Sorry Effandt, but the law has recently changed on that issue. Now anyone inheriting an IRA can roll it into an IRA of their own.....as long as it a direct trustee to trustee rollover.

From Publication 590:

Rollover by nonspouse beneficiary. Beginning in 2007, a direct transfer from a deceased employee's IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity (section 403(b)) plan, or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. The IRA is treated as an inherited IRA. For more information about rollovers, see Rollovers under Can You Move Retirement Plan Assets? in this chapter.
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LdiJ -- I admit that I have not looked at the 2007 changes in depth, but isn't "employee's" the operative word in the phrasing "...deceased employee's IRA." Is this referring to SEP's or SIMPLES's?

Elsewhere in Pub 590, it appears that the rules have not changed for inherited tradiional IRA's:
Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.
Click to expand...
 
LdiJ

LdiJ

Senior Member
anteater said:
LdiJ -- I admit that I have not looked at the 2007 changes in depth, but isn't "employee's" the operative word in the phrasing "...deceased employee's IRA." Is this referring to SEP's or SIMPLES's?

Elsewhere in Pub 590, it appears that the rules have not changed for inherited tradiional IRA's:
Click to expand...
Based on your post, my firm just had three people spend an hour researching this, and we are finding contradictory information regarding whether or not the new law is inclusive of traditional IRAs.

We also now have a concern as to whether or not it applies to plans when the "employee" is no longer an employee and has already retired.

I think that we are going to ask NATP to research this one. It seemed crystal clear from the original information that we received on the subject, but seems less clear now.
 
A

anteater

Senior Member
Just to add a bit of info (since a bit is all my poor brain can handle) from IRS Notice 2007-7:
Q-11. Can a qualified plan described in § 401(a) offer a direct rollover of a distribution to a nonspouse beneficiary?

A-11. Yes. Under § 402(c)(11), a qualified plan described in § 401(a) can offer a direct rollover of a distribution to a nonspouse beneficiary who is a designated beneficiary within the meaning of § 401(a)(9)(E), provided that the distributed amount satisfies all the requirements to be an eligible rollover distribution other than the requirement that the distribution be made to the participant or the participant’s spouse. (See § 1.401(a)(9)-4 for rules regarding designated beneficiaries.) The direct rollover must be made to an IRA established on behalf of the designated beneficiary that will be treated as an inherited IRA pursuant to the provisions of § 402(c)(11). If a nonspouse beneficiary elects a direct rollover, the amount directly rolled over is not includible in gross income in the year of the distribution. See § 1.401(a)(31)-1, Q&A-3 and-4, for procedures for making a direct rollover.

Q-12. Can other types of plans offer a direct rollover of a distribution to a nonspouse beneficiary?

A-12. Yes. Section 402(c)(11) also applies to annuity plans described in § 403(a) or (b) and to eligible governmental plans under § 457(b).

Q-13. How must the IRA be established and titled?

A-13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.”
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And some links on comments about some of the curve balls included in that Notice:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070312/FREE/70308004/1037
http://advisor.morningstar.com/articles/doc.asp?docId=12772
 
LdiJ

LdiJ

Senior Member
anteater said:
Just to add a bit of info (since a bit is all my poor brain can handle) from IRS Notice 2007-7:


And some links on comments about some of the curve balls included in that Notice:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070312/FREE/70308004/1037
http://advisor.morningstar.com/articles/doc.asp?docId=12772
Click to expand...
One thing that is interesting...is that on the websites for groups like Fidelity etc., they specifically state that all IRAs are included. Now, those groups have lots of high priced lawyers on staff that thoroughly review changes in the tax laws. Therefore generally what they publish is accurate.

However yes, we did review notice 2007-7. We think that its unclear.
 
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