Beneficiaries Disclaiming a Portion of IRA inheritance
Can 3 named beneficiaries disclaim a portion of an inherited IRA’s so that the money goes to the Estate? My mother’s names her 5 grandchildren in her WILL with a $5,000 amount from her IRA’s for each one, but they were not listed as beneficiaries – only the children. There is no other money or property in the Estate.
Should we have 4 trustee to trustee transfers Accounts set up – 1 for each child and 1 for the Estate?
Then can the executor request a complete distribution of the Estate IRA and list it as other income on form 1041? Since there are 5 grandchildren, can a K-1 be issued to each child and they would then pay any taxes due and the Estate owe no taxes?
Will there be any State taxes owed by the Estate or will that be satified by the K-1?
Permalink Submitted by Alan Spross on Sat, 2008-05-31 00:21
In theory this could be done, but I question whether it is worth the added legal expense for just 5,000 per kid and whether the IRA custodian will have additional administrative requirements as a result. The GCs are not going to be able to use their life time stretch anyway since they are not designated beneficiaries on the IRA. Yes, any current RMD income could be passed to the GCs on a K1 for state and federal and the estate would not pay taxes. Eventually the estate could terminate and the IRAs assigned to each GC.
What will the probate expenses be in your state if the gross estate is 25,000? What will be the cost of a 1041 filing and the handling issues with the IRA custodian if and when the estate wants to terminate? A qualified disclaimer is typically handled by an attorney.
Compare all that with simply taking out 5,000 for each GC in due time from each child’s inherited IRA, paying the taxes and then using the net amounts to subsidize allowances for household chores such that the GCs could open their own ROTH IRAs which are not going to have any RMDs, no potential kiddie tax income etc. Each parent could handle this on their own, that is if they are all responsible enough to do it correctly. A Roth IRA for a child could earn tax free for decades as opposed to an inherited IRA subject to annual RMDs or perhaps even the 5 year rule if death was prior to the RBD.
These are just two approaches to compare, with the best approch dependent on the personalaties involved, state legal issues etc. and you are in a better position to consider all those variables.
Note: If the children are also named in the will, they cannot disclaim the IRA without first disclaiming their interests in the will because of the requirement in Sec 2518.
Permalink Submitted by Bob Weeks on Mon, 2008-06-02 14:17
Thanks for the info. Where can I find more info on Section 2518?
The will was already probated in January as a small estate and fees were paid based on the size of a very small estate. Most of my Mother’s money was in IRA’s.
Will there be additional probate fee’s if the 25k is sent to her Estate for distribution?
I figured that the children’s tax rates would be less than the adults. Some GC are fully grown and could use the money now.
When would the kidde tax apply if the total 1041 income is only 25,000??
Thanks again!
Permalink Submitted by Alan Spross on Mon, 2008-06-02 20:25
Like follows for Sec 2518.
http://www.fourmilab.ch/ustax/www/t26-B-12-B-2518.html
Note the 9 month disclaimer deadline for those over 21 dating from date of death. Also, that the disclaimer cannot re direct the funds to a different recipient than the existing documents specify, and other than a spouse, a disclaimant cannot himself benefit (cannot disclaim to himself).
If a disclaimer now results in funds going to the estate, the estate would have to re opened and additional probate fees would no doubt result. In addition, the total size of the estate may now exceed the small estate limits.
Good point about the kiddie tax. IRA distributions are considered investment income and therefore could be subject to the kiddie tax based on ages under the recent revisions, income etc.