Registration/titling of an IRA that is "second-generation"

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youngatheart
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Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 8:02 am

My brother, 71 died in September 2017 and left his Roth IRA to my Father, (94 in 2017). The Roth was held at Charles Schwab. My father did a trustee to trustee rollover of the Roth to Vanguard. At transfer it was then titled as: (Father's name) INH ROTH BENE OF (Brother's name).
My father passed away in early January of 2018. My siblings and myself are the beneficiaries of this Roth. So I call it an "inherited, Inherited Roth." Is that called a second generation inheritance?
I am concerned about the proper titling/registration of this Roth. First let me mention that my deceased brother was named after my father as a JR.
So their names get confusing. I will use the pretend name Harry Rupert Smith for clarity. My father was always called "Harry", my brother went by the middle name, "Rupert."
My Vanguard inherited, inherited Roth is registered to:
My Name
ROTH IRA VFTC AS CUSTODIAN
BENEF Harry Rupert Smith Jr.

My sibling said his is registered: (His name) ROTH IRA VFTC AS CUSTODIAN
BENEF Harry Rupert Smith
(No Jr., no Sr.)
My question: Since we inherited this from our Father, Harry Rupert Smith Sr. and not from our brother Harry Rupert Smith Jr. what is the proper titling of the account? Should SR. or JR. be a part of the registration to make it clearer? Or doesn't it matter as long as it is registered as an inherited roth.
By the way, we siblings understand that the RMD my father should have taken in 2018 will be our responsibility for 2018 taken on my fathers's age and not ours. And this will continue with fathers age, minus one, for the entire length that the Roth lasts.
Thank you in advance for any help on this.

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Epsilon Delta
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Re: Registration/titling of an IRA that is "second-generation"

Post by Epsilon Delta » Mon Mar 12, 2018 1:21 pm

youngatheart wrote:
Mon Mar 12, 2018 8:02 am
By the way, we siblings understand that the RMD my father should have taken in 2018 will be our responsibility for 2018 taken on my fathers's age and not ours. And this will continue with fathers age, minus one, for the entire length that the Roth lasts.
Thank you in advance for any help on this.
I cannot answer the question on how to title the account, but I think you have the RMD wrong.

Your brother was 71 when he died so your father (and now you) need to follow the rules for the owner dieing after his required beginning date.
First you need to check that somebody took your brother's 2017 RMD.
All subsequent RMDs are the same as your father would have had to take. These are based on the longer of the life expectancy of your brother or your father and this will be your brother.

Further you are still within five years of the original death so the take it all out in five years option would still be available to your father and should still be available to you. I don't think any action was or is required by either your father or you to make the five year election except to close the account within five years. In some cases you might prefer the simplicity of this over doing a full stretch using the life expectancy method.

https://www.irs.gov/retirement-plans/re ... eficiaries

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Flobes
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Re: Registration/titling of an IRA that is "second-generation"

Post by Flobes » Mon Mar 12, 2018 1:50 pm

Ed Slott, one of the nation's IRA experts, answers questions about titling and RMDS:
Inheriting An Inherited IRA

Slott's suggested titling:
Brother, deceased, IRA f/b/o YoungAtHeart, successor beneficiary of Dad
Last edited by Flobes on Mon Mar 12, 2018 2:51 pm, edited 1 time in total.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 2:40 pm

Flores, Thank you for the link to Ed Slott and suggestion for titling. So you are saying that it does need to be titled in my brother's name, the original owner, and not my father who was the first beneficiary of the account( and from whom we inherited it) with F B O to us siblings.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 2:48 pm

Delta, why was my brother obligated to take an RMD from a ROTH IRA in 2017 as the original owner?

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Flobes
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Re: Registration/titling of an IRA that is "second-generation"

Post by Flobes » Mon Mar 12, 2018 3:10 pm

youngatheart wrote:
Mon Mar 12, 2018 2:40 pm
So you are saying that it does need to be titled in my brother's name, the original owner, and not my father who was the first beneficiary of the account( and from whom we inherited it) with F B O to us siblings.
Per Slott, the titling should include all three names. You should be named as Successor Beneficiary, not merely Beneficiary. This clarifies the different RMD rules of Inherited vs Inherited Inherited IRAs.
^Slott's suggested titling:
Brother, deceased, IRA f/b/o YoungAtHeart, successor beneficiary of Dad
My understanding is that it is always your brother's IRA, no matter how many successors become its FBO beneficiaries down the line.

Hopefully, Alan S. will come into this conversation and offer his expertise here.

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Epsilon Delta
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Re: Registration/titling of an IRA that is "second-generation"

Post by Epsilon Delta » Mon Mar 12, 2018 3:13 pm

youngatheart wrote:
Mon Mar 12, 2018 2:48 pm
Delta, why was my brother obligated to take an RMD from a ROTH IRA in 2017 as the original owner?
Sorry.

It depends on when his 71st birthday was. If it was in June or earlier he was 70.5 in 2016 and had a RMD due for 2016 and 2017. If it was between July and September then most of what I said is wrong.

Edited for clarity on which birthday matters.
Last edited by Epsilon Delta on Mon Mar 12, 2018 4:03 pm, edited 1 time in total.

Spirit Rider
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Re: Registration/titling of an IRA that is "second-generation"

Post by Spirit Rider » Mon Mar 12, 2018 3:17 pm

From the IRS Form 5498 instructions, the original decedent is not included in the title of a successor beneficiary's inherited IRA. Generally, you will have no option in this anyway. A particular custodian is going to have their titling policy and that's that.

In the case of successor beneficiaries, apply the preceding rules by treating the prior beneficiary as the decedent and the successor beneficiary as the beneficiary. Using the example above (Brian Willow as beneficiary of Joan Maple), when that account passes to Brian's successor beneficiary, Maurice Poplar, Form 5498 and the annual statement for Maurice should state “Maurice Poplar as beneficiary of Brian Willow.”

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 5:04 pm

Thank you for clarification andy to be specific my brother turned 71 on July 13th. But again I am asking for clarity. . . it was a ROTH. . . not a traditional IRA. Why would he be obligated to have taken an RMD in the year he turned 71?

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 5:10 pm

Spirit Rider, should I just leave it that Vanguard has listed the inherited Roth from my brother, the original owner of the Roth and not my father who inherited it from his son(my brother).
Last edited by youngatheart on Mon Mar 12, 2018 6:42 pm, edited 1 time in total.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 5:11 pm

BTW, this is the first I have posted to this forum and so appreciate all that I read on here and your help in this matter!

Spirit Rider
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Re: Registration/titling of an IRA that is "second-generation"

Post by Spirit Rider » Mon Mar 12, 2018 5:50 pm

youngatheart wrote:
Mon Mar 12, 2018 5:10 pm
Spirit Rider, should I just leave it that Vanguard has listed the inherited Roth from my brother, the original owner of the Roth and not my father who inherited it his son(my brother).
I would contact Vanguard and make sure they know the precise name of the original decedent (your brother), the original beneficiary (your father) and the successor beneficiaries. Then they can make sure the correct titling according to their policies is correct for all successor beneficiary accounts.

TravelforFun
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Re: Registration/titling of an IRA that is "second-generation"

Post by TravelforFun » Mon Mar 12, 2018 6:11 pm

youngatheart wrote:
Mon Mar 12, 2018 5:04 pm
Thank you for clarification andy to be specific my brother turned 71 on July 13th. But again I am asking for clarity. . . it was a ROTH. . . not a traditional IRA. Why would he be obligated to have taken an RMD in the year he turned 71?
Non-spouse beneficiaries of a Roth are subject to RMD.

TravelforFun

Scotttheking
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Re: Registration/titling of an IRA that is "second-generation"

Post by Scotttheking » Mon Mar 12, 2018 6:50 pm

TravelforFun wrote:
Mon Mar 12, 2018 6:11 pm
youngatheart wrote:
Mon Mar 12, 2018 5:04 pm
Thank you for clarification andy to be specific my brother turned 71 on July 13th. But again I am asking for clarity. . . it was a ROTH. . . not a traditional IRA. Why would he be obligated to have taken an RMD in the year he turned 71?
Non-spouse beneficiaries of a Roth are subject to RMD.

TravelforFun
Your brother would not have since it was his account. Your father would have since he inherited it.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 6:53 pm

My father did not take an RMD in the year 2017 on the inherited Roth from his son. WHAT do I do now? We have already filed my father's income tax return for 2017.

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Flobes
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Re: Registration/titling of an IRA that is "second-generation"

Post by Flobes » Mon Mar 12, 2018 7:06 pm

youngatheart wrote:
Mon Mar 12, 2018 6:53 pm
My father did not take an RMD in the year 2017 on the inherited Roth from his son. WHAT do I do now? We have already filed my father's income tax return for 2017.
Your brother died in 2017.

Your Dad, the beneficiary, faced his first RMD for the Inherited Roth IRA by December 31 of the year following the year of your brother's death. Not the year of your brother's death.

So your father did not have a 2017 RMD. But Dad did have a 2018 RMD.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 7:19 pm

Ok, that is good news! I had myself in a tizzy! Vanguard has just distributed the inherited IRA to the three siblings and told us the amount each of us needs to take from the account to satisfy the RMD for the year 2018. Vanguard indicated that we take this based on our father's age factor.
Can I wait until, like, November to withdraw that from my account (it doesn't have to be taken out by April 15th? )
Then. . . . . for next year we use Dad's factor minus one, correct? It looks like it will be completely used up by the five year mark even though we didn't choose that option because my father was so old.

Thank you so much for clearing this up for me.

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Flobes
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Re: Registration/titling of an IRA that is "second-generation"

Post by Flobes » Mon Mar 12, 2018 7:45 pm

Yes. The 2018 RMD must be taken by Dec 31. Anytime in the year is fine. (Don't wait until the last minute just in case.) Essentially, this year you are taking your father's RMD. Next year, you will begin taking your own RMD.

Yes. It will be calculated based on your father's age because it is an Inherited Inherited IRA. So the RMDs are the same.

Yes. Each year you subtract one year from Dad's initial life expectancy factor.

You can set it on auto-pilot at Vanguard, which will compute the RMD and distribute on the date(s) of your choice, to wherever you want it to go.

Be sure to name a Beneficiary for this account, who will inherit an Inherited Inherited IRA.

Welcome to the Forum. Sincere condolences on your losses.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Mon Mar 12, 2018 8:12 pm

Thank you so much. I am still concerned about the registration of the inherited Roth. What is your take on that? Should I push the envelope with Vanguard? After doing some reading here on the forum, I questioned Vanguard via email about the registration designation, thinking that my father's name should be on there. I am mostly concerned for IRS purposes that I am doing it correctly, I am a rule follower.
I am copying and pasting the response from my Vanguard transition team representative :

"The registration is correct because the Inherited Roth IRA will still
be the beneficiary of the original deceased owner, your brother Harry R. Smith, Jr. which is why it says the account was
inherited from him. The IRS keeps them separate so they can keep track of the RMD calculations and amounts."

To remind you the title/registration for mine is:
My Name
ROTH IRA VFTC AS CUSTODIAN
BENEF Harry Rupert Smith Jr.

What do you think? Thank you for your kindness regarding losing two family members.

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Kevin M
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Re: Registration/titling of an IRA that is "second-generation"

Post by Kevin M » Mon Mar 12, 2018 8:37 pm

I actually just dealt with a related issue at Vanguard. Bottom line is that the person you inherited it from is the one whose name should be listed, which is consistent with the info provided by the IRS (as shared above).

What happened at Vanguard is this. My niece inherited an IRA from her dad (my brother) who inherited it from his/my dad. The inherited IRA was originally a brokerage account on the old Vanguard platform. Without any involvement or consent from me, Vanguard upgraded the brokerage portion of the account to the new platform, but left the mutual fund part of the account on the old platform, which resulted in a new brokerage account (so now two separate accounts).

When we requested that the mutual fund portion be upgraded so that it would be rejoined with the brokerage account, it didn't happen. After several phone calls, it was determined that the reason the "upgrade" failed was because the registrations on the two accounts were different; one listed my brother's name and one listed my father's. The Vanguard rep said that it should be my brother's name (the most recently deceased), since that's who my niece actually inherited it from. So they changed the account with my father's name in it to be consistent with the account with my brother's name in it, and after that we were able to essentially merge the accounts.

So the registration now is "[niece] IRA VFTC AS CUSTODIAN [brother]".

As a side note, for inherited IRAs, they don't actually upgrade the mutual fund account; instead they transfer the assets from the mutual fund account to the brokerage account (that was previously upgraded). So your mutual funds get transferred to the brokerage account, but you still have an emtpy mutual fund account on the old platform. This took at least three phone calls to get done for my niece, but at least we didn't have to fill out a paper form.

Kevin
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celia
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Re: Registration/titling of an IRA that is "second-generation"

Post by celia » Mon Mar 12, 2018 10:54 pm

The Instructions for Form 5498 are meant for IRA (and other) custodians. It gives information on how the custodians must report things to the IRS. That likely leaves some leeway for the custodians to implement their titling procedures in different ways depending on their software platform.

If you look at Ed Slott's referenced page, there are names of 3 people in his suggested title, to help make it clear who the original owner was, the original beneficiary, and the successor beneficiary. I can imagine that there are occasionally a string of many more successor beneficiaries than that. For example, say there is a family of x brothers and the oldest dies and leaves his IRA to the next, who dies and leaves it to the next, etc. Records need to be kept on each owner's name, SSN, address, opening account value, yearly RMDs, etc. Each time the account passes to another person, a new account should be opened with updated info for the next person, so that an audit trail can be maintained and that the correct SSN is reported on each tax form. (In the year an IRA passes from one person to another, it is possible that each person took a distribution. They should each have their own distribution reported with their own SSN.)

I assume the IRS is primarily interested in the correct RMD being taken along with where the account value goes when each owner dies. Each of these are reported by the custodian to the IRS. As long as the IRS gets the information it needs to verify the correct amount of taxes are being paid and the custodian can maintain its audit trail, everyone will probably be satisfied.

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Re: Registration/titling of an IRA that is "second-generation"

Post by Alan S. » Mon Mar 12, 2018 11:26 pm

It would have been much better to title per the Ed Slott page, more on that later.

I was curious about when the IRS clarified the successor beneficiary titling regimen, since I remember several years without any consensus on this matter. It seemed that the IRS first thought that IRA owners would never pass, then that beneficiaries would never pass. The first year the successor beneficiary titling was clarified was in the 2011 1099R/5498 Inst.

Therefore, IRA Custodians have now had 7 years to get this right. Vanguard in some cases still is not on board as we have seen here, but it is hard to tell if an error is company policy or just someone in the beneficiary services crew doing sloppy work.

Another point is that the IRS recommended titling format will result in whoever follows the instructions from 2011 NOT KNOWING who the designated beneficiary is because the designated beneficiary will now appear as if they were the owner and the successor beneficiary will appear as if the designated beneficiary. And that will affect the RMD divisor by improperly reducing it since it most cases (but not in the case here where father was the designated beneficiary) the beneficiary is younger than the owner and the successor beneficiary younger than the designated beneficiary. The IRA custodian does not provide anyone with the RMD, just the year end FMV. Knowing the FMV is not enough if it is not clear whether the current beneficiary is designated or successor. There is a huge amount of "tax leakage" here.

The entire situation is a mess!

dknightd
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Re: Registration/titling of an IRA that is "second-generation"

Post by dknightd » Tue Mar 13, 2018 8:37 am

Honestly, I'd just cash it in, then reinvest the proceeds under your name.

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Tue Mar 13, 2018 8:43 am

Let me get one thing straight. When my siblings and I take out the distribution for 2018 that was actually given to us by Vanguard( they reported to us the FMV on Dec 31 of 2017 and then did the divisor for my father of 4.1 and then divided that by 3 and gave each of us the amount that each of us must withdraw). . . . . . . . . . . . .
Are we taking out MY FATHER's obligation? And then, in December 2018 there will be a new FMV for each the three accounts, that will be the amount each of us satisfy the RMD for 2019 and in that, we are taking out OUR OWN individual distribution?

Three more questions:
1. Do I need to contact the IRS to get this straight or what?
2. Do I blindly follow Vanguard in the titling of the account and let the chips fall where they may?
3. Should I, at least, make sure that Vanguard has titled all three accounts identically?

youngatheart
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Re: Registration/titling of an IRA that is "second-generation"

Post by youngatheart » Tue Mar 13, 2018 8:58 am

Alan,
Is the "mess" the IRS. . .Vanguard. . . or have I done something wrong?

p.s. I was a complete novice to investing until last year. Our son had been tutoring my husband and me on retirement issues, recommending us to
"Bogleheads." So appreciate all that I have gleaned in the past year. Then when my brother died, that threw a new monkey wrench in the mix and then my father dying on the heals of his death has added another level we were not expecting. My dad was convinced he would like to 100 like his father!
Dad had a trust and end of life issues have been fairly simple up until this. I just want to do it right!

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Flobes
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Re: Registration/titling of an IRA that is "second-generation"

Post by Flobes » Tue Mar 13, 2018 12:42 pm

youngatheart wrote:
Tue Mar 13, 2018 8:43 am
Let me get one thing straight. When my siblings and I take out the distribution for 2018 that was actually given to us by Vanguard( they reported to us the FMV on Dec 31 of 2017 and then did the divisor for my father of 4.1 and then divided that by 3 and gave each of us the amount that each of us must withdraw). . . . . . . . . . . . .
Are we taking out MY FATHER's obligation? And then, in December 2018 there will be a new FMV for each the three accounts, that will be the amount each of us satisfy the RMD for 2019 and in that, we are taking out OUR OWN individual distribution?
That's the guess. Your father died in January 2018 and probably had not yet taken the 2018 RMD. This should be confirmable. This RMD obligation must still be met, so it gets divided among the heirs.

Your RMD begins the year following the year of death, i.e. 2019 not 2018.

Note the big-picture overall flow: RMD must be taken from your brother's bequeathed Roth, every year once a year, no matter who the beneficiary.
Do I need to contact the IRS to get this straight or what?
No. A very unnessary step, not likely to be productive.
Do I blindly follow Vanguard in the titling of the account and let the chips fall where they may?
Should I, at least, make sure that Vanguard has titled all three accounts identically?
As noted upthread, various institutions do titling of Inherited IRAs differently. What's most important is that you are correctly taking the RMD based on your father's factors, not your own.

If you are concerned or queasy, copy the titling paragraph from Slott, email it to Vanguard, and ask why that format is not being used. Myself: I'd think it unnecessary.

What's the worst that can happen? In the highly unlikely scenario that one of you is contacted or audited by the IRS, you'll have done nothing wrong and everything right, and you'll have the documentation.

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