Inherited IRA issue
I believe we can do this, but I wanted to solicit other opinions. A new client came to the office. Her mother, who was 82 and therefore past her RBD, passed away with a $600,000 IRA. The only primary beneficiary of the IRA was her deceased husband. There were no contingents named. The deceased mother’s Will left her estate divided equally between her 4 children. I understand in this case there are two distribution options, the 5-year rule or the remaining life expectancy of the IRA owner since the estate is essentially the beneficiary. I checked the IRA custodial agreement and there was no favorable language. It simply said if there are no named primary or contingent beneficiaries the estate is beneficiary. We now have a situation where two of the children want their money ASAP. A third child wants to spread it out over 5 years and my new client would like to stretch hers out for the remaining life expectancy of her deceased mother. Does the IRS allow people in this situation to break the IRA into their own separate inherited IRAs as long as we follow distribution rules applicable in this situation? (Estate as beneficiary) That way the 2 children who want out can go, the third can use the 5-year rule and my client the remaining life expectancy of the deceased IRA owner. I thought I heard of a PLR in a similar situation that allowed this. I know we can apply for our own PLR, but I am hoping to avoid this. Any suggestions would be appreciated.
Permalink Submitted by Alan Spross on Wed, 2009-12-09 17:02
Yes, there is way to essentially provide each beneficiary with their wishes. The 5 year rule does NOT apply here, it only applies when death occurs prior to the RBD. However, since owner passed after the RBD, the IRA can be distributed over the remaining non recalulated life expectancy of the owner. The table I divisor for age 82 is 9.1, therefore 8.1 would be the divisor for the RMD due for the year following death, then 7.1, 6.1 etc. Basically, the max stretch is about 8 years here. Since the 2009 RMD has been waived, there is no need to determine if it was taken, but if any prior RMDs were not taken, they must be distributed ASAP to the estate.
All this does not mean that the estate must be kept open for 8 years. Attached is a link to an article about assignment of an inherited IRA from the estate to the respective beneficiaries, but it sounds like two of the beneficiaries may be too impatient to wait for this to happen. The estate can request their share of the IRA and pass it through to them on a K1. Appropriate sign offs of further interests in the IRA will be required. For the others, if the IRA custodian will not comply, the account should be directly transferred to another custodian who will cooperate with the assignment. Most IRA custodians would rather be rid of estate beneficiary IRAs and would like to simply make a lump sum distribution to the estate, but that should be resisted by the beneficiaries that want to stretch out the distributions.
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
Permalink Submitted by [email protected] on Wed, 2009-12-09 17:16
Thanks! As luck would have just as you posted your reply I found the PLR that I remembered reading about. It was from 2003 and addressed a situation just like mine, except there were three children named in the Will, not four as in my case. Nonetheless, we will be able to accommodate the wishes of all four children, although had beneficiaries simply have been named none of these hurdles would have to be jumped!
Permalink Submitted by Alan Spross on Wed, 2009-12-09 17:29
In addition, the ones stretching the IRA would have a much longer stretch by using their own life expectancies. Note that the decedent’s tax records should be checked to determine if there were any non deductible contributions made to the IRA. SInce the owner was taking RMDs, an 8606 would be included with each tax return if there was any basis. The beneficiaries each inherit their share of any remaining basis, which would result in their distributions being less than 100% taxable.
I would also warn them that they cannot roll over any of this money once they take a distribution. They cannot roll it over to either their own IRA or to an inherited IRA, and there is no way out of it once they receive a distribution.
Permalink Submitted by [email protected] on Wed, 2009-12-09 17:54
Alan….that’s the problem, the “beneficiaries” cannot use their life expectancy for distribution purposes. They are not really the beneficiaries of the IRA! The estate is. As the IRS ruled in the 2003 PLR I alluded to, (200343030) they must use the distribution rules applicable to the estate. Since the deceased IRA owner was past her RBD, the distribution option for the estate is the remaining life expectancy of the deceased owner. However, the four children are named in the Will to split the estate equally. What we want to do is break the estate IRA into separate inherited IRAs and transfer the shares into separate inherited IRAs for each child. The PLR I mentioned, (which I did not find until I posted my question) allowed three children in a similar situation to do what we want to do. Either way, the children are not beneficiaries of the IRA, the estate is. This strategy will simply allow us to close the estate and let each child decide what to do with their share of the IRA, based on distribution rules when an estate is beneficiary. My client will transfer hers to an inherited IRA and take distributions over the deceased IRA owner’s remaining life expectancy. Thanks for you help and suggestions before!