Retirement tax questions

Vanguard has the account set up correctly as an Inherited IRA as custodian for the deceased.  

The original institution is Navy Federal Credit Union.  I called today and I believe they are treating it as a rollover.  I'll call again tomorrow and dive deeper into this.  I read every piece of IRS literature i could on the subject and came to the same conclusion you did.  I believe it was issued in error.