IRA beneficiaries override a will
❓ I have never been on a forum before so I hope I am doing this right?
I have a question about an IRA. Grandpa left his IRA to Paul and Brad in his will. Never changed his beneficiaries (which I have learned override the will)and the beneficiaries are the two grandchildren. One grandchild is turning 18 this august and wants to give Paul (dad) and Brad the IRA that Grandpa wanted to leave them in his will. What is the best way for him to disburse this IRA to Paul and Brad? Should he just write each of them a check every year until they are given the amount in the will? Also, is there a certain amount you can take out each year without paying taxes, or do you get taxed for taking $1 out? And how much is the tax? Thank you so much for your help!!
Permalink Submitted by Alan Spross on Fri, 2008-03-21 00:37
Your question has many parts and some potential complications.
I think you are saying that Grandpa named grandchilden as designated IRA beneficiaries when all parties seemingly are in agreement that the funds should go to their parents who are Grandpa’s children. If the parents were the only children and Grandpa was single at the time of his death, the cleanest solution could be a qualified disclaimer filed by the disclaimer deadline (9 months after death). Before this is done, the IRA agreement needs to be closely checked to see who is the default beneficiary if there are no designated beneficiaries. In most cases it is either the spouse or the estate. Therefore, this could be a way to get the funds into the estate, but subject to will probate.
Among the variables here is the amount in question. If the amount is small and/or there is a need so that the RMDs cannot be stretched, it might be easier for the GC to take distributions and simply gift the after tax amounts to their parents. Up to 12,000 per year can be gifted to anyone under the gift exclusion. This avoids a gift tax return. With two beneficiaries and two different donees, up to 48,000 could be transferred this way.
In most cases a traditional IRA is fully taxable or nearly so. If Grandpa had ever made non deductible contributions to the IRA and filed Form 8606, then a pro rated portion of each distribution would be tax free. That would need to be checked out, but other than this the distributions would be fully taxable at the beneficiary’s marginal tax rate.
Finally, the age at which Grandpa died will become important if the disclaimer strategy is considered. SInce the IRA would then be going to the estate, it would have to be fully distributed within 5 years if he passed prior to April 1st following the year he turned 70.5
So you can see here that the best course of action depends on several variables.