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cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

Does anyone know of a process to fight/dispute a Fair Market Value (FMV) that is being calculated by a custodian for Required Minimum Distribution (RMD) purposes?  

 

The custodian in question is a large insurance company.  All they will say is that they use a "proprietary formula" to calculate the value they provide to the IRS.  The IRA in question was funded by an annuity purchase almost 2 decades ago.  The policy has a death benefit feature.  There is less than $1,000 of cash in the account, but the company is calculating over a $230,000 FMV due to a death benefit rider.  

Is there any means other than a private letter ruling?

16 Replies
macuser_22
Level 15

How to dispute a FMV provided by custodian for RMD purposes

 

So the RMD amount would be over $10,000?    Are they telling you that you can withdraw $10,000+ from an account with $1,000 in it?

 

I am not sure how RMD's are calculated on annuities - there are special rules (User @dmertz do you know?)

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

correct @macuser_22 .  It is almost $11k.  Currently there are other IRAs to draw from, but if this continues for another 7 years or so, there won't be enough liquid IRA assets to meet the stated RMD amount.

I've considered a Roth conversion of the contract, but the custodian is producing the same FMV for the taxable nature of the conversion.

Critter
Level 15

How to dispute a FMV provided by custodian for RMD purposes

Ok ... several points ...

 

1) for now make sure the total RMD required from all IRA accounts are taken timely. 

 

2) Ask for them to produce the work product in how the FMV is determined ... it is NOT a trade secret they need to hide from you. 

 

3) consider annuitizing it to free up cash ... (After all it is an annuity with a death benefit and NOT a life insurance policy) ....  you will need to do it eventually when you run out of money in the other IRA accounts ... you may find other investment opportunities that pay better  ( and now you know why although you CAN put a tax deferred  annuity into  an IRA they are serious drawbacks of doing so).

 

 

cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

@Critter as to your items:
1) done;
2) Already tried to get them to produce a calculation and their written response is "it is proprietary";
3) annuitizing would produce pennies on an annual basis and the death benefit would be lost.

My belief is that the insurance company WANTS the contract to be surrendered to get out of the death benefit.

Critter
Level 15

How to dispute a FMV provided by custodian for RMD purposes

Again ... the pros and cons of an annuity with a death benefit inside an IRA ... seek advice from several financial advisors to see what your options are in your case.  

dmertz
Level 15

How to dispute a FMV provided by custodian for RMD purposes

CFR 1.401(a)(9)-6 Q&A-12 addresses the valuation of a deferred annuity prior to the commencement of periodic payments.  Generally the custodian must include the actuarial value of any "additional benefits" in the FMV.  A death benefit can be excluded under some circumstances, but I'm guessing that the circumstances here don't to qualify for exclusion of the death benefit.  The custodian is in the best position to make that determination.

 

https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-6

 

Of course having too little cash available in one's IRAs to be able so satisfy the RMD presents a problem.  One does not have the option to simply not take the required distribution without incurring the 50% excess accumulation penalty, but for now it seems that there are sufficient funds in other IRA accounts to satisfy the RMD for the IRA annuity.

 

Perhaps the only long-term option is to annuitize the IRA annuity (commence periodic payments).  Distributions from the IRA annuity would generally then be their own RMD.  Are you sure that the death benefit would be lost?

cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

@dmertz - I'm specifically looking for a way to DISPUTE the FMV provided by the insurance company.  It is my belief that they are using a very low discount rate.  I also believe there could be an alternative method that would produce a reasonable value that is defensible with the IRS.  Here's a paragraph and link to an article from Michael Kitces:

"RMD must be based on the “entire interest” under the annuity contract, which includes both the account balance, and the “actuarial present value” of additional benefits and guarantees. Thus, for instance, if an annuity had a $100,000 cash value but a $300,000 death benefit, then the value of the annuity would be $100,000 of cash plus the actuarial value of the extra $200,000 death benefit based on the annuity owner’s age (in essence, $100,000 plus the cost of $200,000 term insurance for that year for someone of comparable age)."  https://www.kitces.com/blog/required-minimum-distribution-rmd-calculation-tax-rules-ira-401k-403b/ (note: he too references the same Q&A 12 in his article)

Also of note: there is a second contract that has a similar situation and the FMV on it from a different company is DRAMATICALLY lower.

And yes, the death benefit would disappear if annuitized.

macuser_22
Level 15

How to dispute a FMV provided by custodian for RMD purposes

As an aside since you mentioned a PLR (Private Letter Ruling) - do you know that PLR's require a tax attorney  that can cost $5-$10 thousand dollars and the PLR filing fees (that vary, but ) can be as much a $30,000 for 2019?

 

So if you want a PLR, be prepared  to spend between $10,000-$50,000 to obtain one and then it might not be in your favor.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
Anonymous
Not applicable

How to dispute a FMV provided by custodian for RMD purposes

In practice, though, the biggest complication in determining RMDs for qualified annuities with substantial additional benefits is simply determining the appropriate “actuarial present value” of the additional benefits in the first place. In most cases, annuity companies will provide a reasonable estimate, but some do not, and others do not provide very “sophisticated” or accurate valuations. (Retirees and their advisors can seek out third-party actuaries for a third-party valuation if necessary, where the prospective size of the RMD and the tax consequences are large enough to merit paying for an independent valuation.)

cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

@Anonymous this is what I'm trying to find more information about.
A) How do I find someone that does this?

B) What does it look like when the custodian sends a 1099R for $230,000 and I claim a conversion to a a Roth IRA that was for $50,000 supported by the third party opinion?

cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

@macuser_22 I'm aware that the PLR process is involved and can be quite expensive (as well as uncertain).  That's why I'm looking for an alternative.

Critter
Level 15

How to dispute a FMV provided by custodian for RMD purposes

A) How do I find someone that does this?   Seek out other companies that have annuities such as yours ... see if they will do an analysis for you and at what cost.   Or you may seek legal council to force the company to disclose their worksheet on your account.  Or write letters up the chain of command until someone at that company listens to you ... threaten to move the money to a different custodian if you don't get a better answer.  As I said before seek advice from a couple of local financial advisors that have been in the business a while and who are well versed in annuities ... they should be able to offer solutions. 

 

 

B) What does it look like when the custodian sends a 1099R for $230,000 and I claim a conversion to a a Roth IRA that was for $50,000 supported by the third party opinion?   Messy ... that is what it looks like.  If you cannot get the custodian to correctly report the amount for the conversion  then the third party opinion is worthless ... then you would need that costly PLR to support your position.   

cmsmith_2006
Returning Member

How to dispute a FMV provided by custodian for RMD purposes

@Critter this is where I smirk and chuckle and maybe bang my head against a wall...  I've been avoiding the statement of "seek out advisors" in this thread.  I'm a highly credentialed advisor (CFP, CFA, ChFC, CLU).  And note that I didn't sell the product to the client.  He hired me long after the purchase.  Just trying to find a reasonable solution for the client.  I've played all the internal angles.  I have had a broker/dealer go thru back channels trying to get a better answer.  I've had the client write the company and get their refusals in writing hiding behind "it is a proprietary calculation".  Can't move to a different location because that requires surrendering the policy and losing the death benefit.  I've talked to CPAs (the client's personal CPA and CPAs that I have a professional relationship with), no one has a recommendation.

I'm almost to the point of reaching out to the state insurance commissioner.  I don't want that outcome, but I do not believe the insurance company is operating in a good faith manner.

Critter
Level 15

How to dispute a FMV provided by custodian for RMD purposes

Well we answer these posts because they usually come from uneducated users ... you are in a unique position since you are not the user but actually a credentialed business person (which you may have stated from the beginning along with all the efforts already taken).

At this point I guess the client will have to weigh the option to seek legal council but not sure how much good that will do. As you must know the devil is in the details of the fine print of the contract ... this may not have been the best investment for this IRA in hindsight and what path they take going forward will have to be decided on after much reflection.
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