The problem here is with the fact that this is a retirement account (specifically, an IRA) which you cannot really "gift" to another person.
As a result, the entire transfer would be (or should be) treated as a distribution and then a gift to the kids. Of course, that would leave the sisters stuck with liability for any income taxes due on the distribution.
In short, if the interest actually "vests" in the sisters (as a result of having missed the 9-month deadline), then they cannot actually "gift" the IRA to the kids without tax liability.
As I indicated earlier (and in another thread, I believe), this would not be an issue if the property were something like a car, real estate, or stocks/bonds/mutual funds in a regular brokerage account. It is a problem because it is an IRA.
