Successor Beneficiaries—an Untapped Market
By Jennifer Bassett, QKA, CIP, CISP
Looking for another way to boost your IRA business? Allowing successor beneficiaries to maintain an inherited IRA (sometimes called a “beneficiary IRA”) at your organization is an easy way to achieve this goal. What exactly is a “successor beneficiary?” A successor beneficiary is the individual or entity designated to inherit the IRA assets after the original IRA beneficiary dies. Naming a successor beneficiary may be a good option for those who want their inherited IRA assets to pass directly to an heir instead of their estate.
Maintaining inherited IRAs for successor beneficiaries is fairly straightforward, but your organization may want to consider a few things before allowing this type of account.
Take Into Account State Trust Laws
An IRA is a trust, created for the exclusive benefit of an individual or her beneficiaries. In general, only the IRA owner can name beneficiaries. While nothing in the Treasury regulations appears to prohibit a beneficiary from naming a beneficiary, the issue is somewhat unclear. In 1999, the IRS released the first of several private letter rulings (PLRs), PLR 199936052, indicating that the IRA distribution requirements do not prohibit an IRA beneficiary from naming a beneficiary, as long as the previously established payout schedule is not lengthened. It is also worth noting that the IRS Instructions for Forms 1099-R and 5498 provide reporting guidance in the event that a beneficiary has named a successor beneficiary, as described later.
The PLRs, nor the instructions, however, address the issues of state trust law and IRA document language. State trust laws may differ, and—though not believed to be common—may pose obstacles to someone other than the original IRA owner who attempts to name a beneficiary of the assets. Your organization should consider applicable state statutes in developing a policy on allowing a beneficiary to name a subsequent beneficiary.
Review the IRA Document
The IRA plan document may limit beneficiary designation options. It is relatively safe to say that many documents have not been drafted to explicitly allow a beneficiary to name a beneficiary, nor to specifically prohibit the option. Thus, your organization should consult with its legal counsel to determine whether a beneficiary may name a beneficiary under the terms of the document being used.
Correctly Title Form 5498
The Instructions for Forms 1099-R and 5498 contain guidance for successor IRA beneficiary reporting. According to the instructions, when generating IRS Form 5498 for a successor IRA beneficiary, financial organizations must treat the original beneficiary as the deceased IRA owner and the successor beneficiary as the new beneficiary. In other words, the first person to own the assets—the original IRA owner—is omitted from future Form 5498 reporting. This change generally will take place for reporting for years after the year of death, unless both the original IRA owner and the original beneficiary die in the same year. When generating year-of-death reporting for an original beneficiary, however, the financial organization should still generate a Form 5498 showing the deceased beneficiary as beneficiary of the deceased IRA owner.
Example: Jessica Logan named Patty Covington as the beneficiary of her IRA. Jessica died in 2017. Patty’s 2017 Form 5498 was titled, “Patty Covington as beneficiary of Jessica Logan.” In 2019, Patty dies. Before she died, Patty named a successor beneficiary, Matt Kelly, to continue her IRA distributions. Matt’s 2019 Form 5498 will be titled, “Matt Kelly as beneficiary of Patty Covington.” The final Form 5498 for Patty (generated for her year of death, 2019) will read, “Patty Covington as beneficiary of Jessica Logan.”
Start Laying the Groundwork
Once you’ve decided to take advantage of this untapped market and offer inherited IRAs for successor beneficiaries, the next step is to get the word out. Start contacting clients who currently have inherited IRAs with your organization and let them know that they may choose to name a successor beneficiary. Make sure new beneficiaries are notified of this option when they create their inherited IRAs. When an individual names a successor beneficiary, obtain as much contact information as possible for that successor beneficiary (e.g., name, address, tax identification number, etc.). Then, watch your IRA business grow.