Beneficiary's IRA's, Stretching, Titling...

Q. Hi Jeff, my father passed away a couple weeks ago. He left us 2 separate IRA accounts, $28,000 and $44,000. My 12 year old son is to receive 10 % of his estate also. He left us life ins and savings also. We are leaning toward stretch IRA's. Can we combine these 2 accounts, or must we keep them with the original company and bank IRA's? My brother is 44, I'm 40. I was told we would stretch them over my brother’s life expectancy. What age is that? What is the minimum distribution we need to take out each year? How do we get the distribution? Do we just call the financial institution and tell them we want a certain amount or do they distribute it automatically to us? Should my brother and I keep the IRA's and give my son cash, or how should we handle this and how long do we have to transfer these into our own accounts? Once in my name can these be used for my son's college tuition?

Also, what is the specific wording to use to re-title the IRA in our names?
I know I have several questions, but any advice is greatly appreciated. Thanks, Greg


A. It is important to know whether you and your brother were both primary beneficiaries on each IRA or whether you were the beneficiary on one and him on the other. That determines whose age is used in stretching the IRAs. If you are both the primary beneficiaries on each IRA then you heard correctly that they required minimum distributions will be calculated based on your older brothers life expectancy. You consult the IRS life expectancy table the first year only. Then you just subtract 1 from the previous years life expectancy every year until all the funds are withdrawn.

For instance, a quick look shows that at age 44, life expectancy is 38.7 years. That means that 1/38.7th will need to be withdrawn that year. Next year, 1/37.7 (38.7 minus 1) will need to be withdrawn, 1/36.7th the next year and so on.

It is up to you both to make sure that the distributions are made and made properly. Do not rely on the advice of the financial institution because most times it will be wrong and the penalties if you don't do this correctly are very high. You will contact the institution and tell them you need to withdraw X amount and they will send you the checks.

Before you begin distributions, it is imperative that the IRA be titled correctly. It is now considered an 'inherited IRA' and the IRS mandates that your father's name must stay on the account. If you or your brother retitle the IRA in your own names then the account will become immediately taxable.

According to Ed Slott, the author of The Retirement Savings Time Bomb...And How To Defuse It, your fathers IRA should be split into two inherited IRAs--one for you and one for your brother. Suggested titling is something like:

Father's name, IRA (deceased X/X/XXXX) FBO Your Name, Beneficiary. The important thing is that your father's name be on the account along with your name as the beneficiary. Your Social Security number (and your brother's on his) will be used.

Once the IRAs are retitled, you have the option of transferring them to another financial institution if you want for any reason. This is referred to as a custodian to custodian transfer.

Regarding your son receiving a portion of the estate, it is important to realize what is considered your father's 'estate'. Anything that has a beneficiary named on it such as life insurance, bank accounts (payable on death), brokerage accounts (transfer on death) and the IRA's you mentioned ARE NOT considered to be a part of your father's estate and thus the Will have no bearing over those assets. They go to the beneficiary named. So your son is only entitled to his portion of the estate and shouldn't share in the IRAs.

There is a caveat here. If your son was named as a contingent beneficiary on your father's IRA or life insurance policies (or anything else with a beneficiary), the primary beneficiary can 'disclaim' all or a portion of what they are entitled to and that amount would then go to the contingent beneficiary.

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