Inherited IRA in Estate Planning

A popular retirement savings vehicle for generations of investors, Individual Retirement Accounts (IRAs) provide tax-advantaged ways for individuals to fund their retirement. Many Americans have opened their own IRAs, but virtually every day, some of us get an IRA through an inheritance.

An Investor Alert issued today by the Financial Industry Regulatory Authority (FINRA) urges brokerage account holders, family members and other IRA beneficiaries to seek information from the IRS or consider consulting with a tax specialist due to the complexity of the income tax and estate planning implications of inheriting an IRA. Whenever you have an inherited IRA or you want to set up an inherited retirement account, you need to speak with an estate planning lawyer because of the complexities and problems you will have if you don’t.

AN INHERITED IRA HAS IMPORTANT TAX AND ESTATE PLANNING IMPLICATIONS

“An aging American population has meant a new generation of IRA investors is emerging—one that has inherited, or will inherit, an IRA from a parent, spouse or other person,” said Gerri Walsh, FINRA’s Senior Vice President of Investor Education. “An inherited IRA can be challenging for new investors, especially when it comes to understanding various distribution scenarios. It’s important for investors to know that different rules and options apply to spouses and non-spouses.”

Usually, when an individual opens an IRA account, a beneficiary is named. When the owner of an IRA dies, brokerage firms generally have systems in place for beneficiaries to follow—a process that usually starts by filling out a beneficiary claim form.

“An individual who is listed as the IRA beneficiary may have questions about when and how they can withdraw money from the account—and when they must take a Required Minimum Distribution (RMD),” Walsh said. “IRS rules regarding distributions are influenced by a number of factors, including age, account type, and the relationship of the account holder to the beneficiary.”

FINRA’s alert provides an overview of these key factors and walks investors through inheritance scenarios for spouses and non-spouses. It also links investors to detailed information on RMDs and the consequences of withdrawing funds from an IRA.

To help the ownership transition process go smoothly, FINRA provides the following tips for heirs and beneficiaries:

• Notify the brokerage firm in a timely manner of an account holder’s death and be sure to provide all required documents.Contact the brokerage firm if you have questions about what documents they will need and how to obtain them.
• If you are the spouse who elects to treat an IRA as your own, know what you own. Take the time to understand your investment holdings, including the risks of each investment, associated fees and restrictions on when you can sell the investment. FINRA offers information about investment products and key investment concepts.
• As a spouse, you can assess whether the current brokerage firm and broker are right for you.You may choose to stay with the deceased’s brokerage firm and broker or transfer the account to another firm and broker. When deciding, be sure to check the background of the investment professional using FINRA BrokerCheck.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms.

FINRA FINES 12 FIRMS A TOTAL OF $14.4 MILLION FOR FAILING TO PROTECT RECORDS FROM ALTERATION

The Financial Industry Regulatory Authority (FINRA) announced today that it has fined 12 firms a total of $14.4 million for significant deficiencies relating to the preservation of broker-dealer and customer records in a format that prevents alteration. FINRA found that at various times, and in most cases for prolonged periods, the firms failed to maintain electronic records in “write once, read many,” or WORM, format, which prevents the alteration or destruction of records stored electronically.

FINRA imposed sanctions against the following firms:

• Wells Fargo Securities, LLC and Wells Fargo Prime Services, LLC were jointly fined $4 million.
• RBC Capital Markets LLC and RBC Capital Markets Arbitrage S.A. were jointly fined $3.5 million.
• RBS Securities, Inc. was fined $2 million.
• Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC and First Clearing, LLC were jointly fined $1.5 million.
• SunTrust Robinson Humphrey, Inc. was fined $1.5 million.
• LPL Financial LLC was fined $750,000.
• Georgeson Securities Corporation was fined $650,000.
• PNC Capital Markets LLC was fined $500,000.

Federal securities laws and FINRA rules require that business-related electronic records be kept in WORM format to prevent alteration. The SEC has stated that these requirements are an essential part of the investor protection function because a firm’s books and records are the “primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.” Over the past decade, the volume of sensitive financial data stored electronically has risen exponentially and there have been increasingly aggressive attempts to hack into electronic data repositories, posing a threat to inadequately protected records, further emphasizing the need to maintain records in WORM format.

FINRA found that each of these 12 firms had WORM deficiencies that affected millions, and in some cases, hundreds of millions, of records pivotal to the firms’ brokerage businesses, spanning multiple systems and categories of records.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “These disciplinary actions are a result of FINRA’s focus on ensuring that firms maintain accurate, complete and adequately protected electronic records. Ensuring the integrity of these records is critical to the investor protection function because they are a primary means by which regulators examine for misconduct in the securities industry.”

FINRA also found that each of the firms had related procedural and supervisory deficiencies affecting their ability to adequately retain and preserve broker-dealer records stored electronically. In addition, FINRA found that three of the firms failed to retain certain broker-dealer records the firms were required to keep under applicable record retention rules.

In settling this matter, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

FINRA, the Financial Industry Regulatory Authority, regulates all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms.

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