Inherited IRA: Non-Spouse Beneficiary
Need advice for my situation:
My dad and I are named beneficiaries on his cousin’s (my 2nd cousin) IRA account. Our cousin passed away in January 2011. Because my dad is 90 y.o. (he had POA), he did not understand that his cousin had to take an RMD in 2010 so there was no distribution in 2010 and therefore, nothing was reported to the IRS. Side note, our cousin did take an RMD in 2009. Is it possible for my dad and I to take an RMD now and file an amended 2010 tax return for our cousin and make the distribution apply to his AGI and not ours? The IRS has no idea that this was not done and I don’t want to get in trouble. The RMD would be approximately $16k. The IRA custodian told me that they can’t back date a distribution.
Please advise…..ken
Permalink Submitted by mk foss on Tue, 2011-05-24 15:50
The 2010 RMD must be taken by the current beneficiary – it can’t be attributed to someone not alive on the date of the distribution. You also have a potential 50% penalty to contend with. If the missed RMD is taken now, you can have the cousin’s executor (POA was extinguished at the cousin’s death) file Form 5329 and request a waiver. The explanation could be that the POA was 90 and didn’t understand that an RMD was necessary for the taxpayer who has since passed away. The IRS cannot waive the penalty unless you explain that the RMD has already been taken. If the cousin’s 1040 for 2010 has already been filed, Form 5329 can be filed separately with the appropriate IRS campus. If the return is on extension, attach Form 5329 to Form 1040.
I wouldn’t risk a 50% penalty by trying to avoid income tax on $16,000.
Permalink Submitted by Ken Leho on Tue, 2011-05-24 19:24
Thank you Mary.
What would you think about these 2 solutions that I heard about:
1.Since the 2010 tax year is still open, have the IRA custodian take the 2010 & 2011 RMDs from our cousin’s account before the account becomes beneficiary IRAs and that way it will be taxable under his SS# for 2011 because I still have to file a 2011 return for him. That way these amounts will be his income and taxable to his estate.
2.If the IRA custodian will not take the RMDs under his SS# and only under mine and my dad’s, then claim the income on our 2011 returns and claim “nominee income” by taking a subtraction and entering our cousin’s SS# showing that the income should be applicable to our cousin and not to us and file his 2011 return showing this as income.
So:
Either way, the RMD for 2010 taken in 2011 cannot count towards 2010 income and therefore I cannot and don’t need to amend my cousin’s 2010 return.
Permalink Submitted by mk foss on Tue, 2011-05-24 20:19
The original owner isn’t taxed on income received after he has passed away. If the custodian reports the RMD under the decedent’s SSN, it’s still wrong. Having the beneficiaies report it and then subtract it as a nominee distribution is also wrong and would seem particularly devious if discovered by IRS.
In any case you still must deal with a potential 50% penalty,
Mary Kay
Permalink Submitted by Alan Spross on Tue, 2011-05-24 20:22
Those solutions do not comply with the tax code, and further the POA became void upon the cousin’s death. All distributions after the owner’s death must be made to the beneficiaries of the IRA and are taxable to the beneficiaries. You cannot nominee income to a decedent that was paid to a beneficiary. The IRS knows that an IRA distribution could not be paid to someone other than the owner unless the owner had passed, and the custodian will be issuing a 5498 for both the decedent and the beneficiary after they receive the death Cert.
Strangely enough, the IRS is silent regarding treatment of delinquent RMDs for a decedent OTHER than for the year of death itself (2011). For 2010 therefore, there are no IRS Regs that indicate what should be done, but as beneficiaries you DO need to take out the 2011 RMD based on what the cousins RMD would have been for 2011. For 2010, the safest way to proceed is as Mary Kay indicated.
Note: There was NO RMD requirement for 2009, so if the 2009 RMD was also taken late, it can be credited against the 2010 RMD. Check that out first just in case that happened. The distribution actually taken in 2009 cannot be used for the 2010 RMD however.
My guess is that you want the distributions taxed to your cousin for 2011 since his death so early in the year probably means he has no or minimum tax liability, but there is no legal way to do that after his death.