disclaiming IRA/non-spouse beneficiary
Hi, wanted to get some perspective on a somewhat complex situation.
My father died (intestate and single) in IL in July 2010 at the age of 66 yo. (He wasn’t buried until January 2011 overseas, estate finally opened in April 2011 here in IL, I’m executor).
I’ve found out he had a portfolio with Fidelity valued ~$330K (w/ ~$270K in traditional IRA, and ~$60K in “Fidelity individual account”)
My cousin is the designated beneficiary with no contingents on file. She wants to disclaim it so my siblings and I can inherit in equal part. A few problems with this, first being from what I’ve read disclaimer must be executed w/in 9 months of death, and we are approaching 11 months. Also, I’ve read a disclaimant cannot direct to whom the monies would flow? In this case, it would be probated within his estate, unfortunately my dad’s primary residence is completely under water and foreclosure proceedings had begun shortly after his death but were halted when we notified bank of his passing. If the account passes into the estate, it will disappear due to bank’s claim and multiple cc (he had run up debts, taken out 2nd mortgage on home, and stopped payments as he was in the process of permanently relocating overseas).
I know my cousin can liquidate the account…but I believe she will pay a stiff penalty if cashing out since she’s not rolling over into an inherited IRA, she is 45, and also she is in a high tax bracket as she and her husband are both physicians.
Not sure of best route, wanted to get an opinion. All parties are IL residents.
Permalink Submitted by mk foss on Wed, 2011-06-08 16:36
Because the federal law relating to estates was changed in December 2010 – the deadline for disclaimers for 2010 deaths has been extended to September 17, 2011. However, the disclaimant cannot direct where the funds go. You’d need to check the adoption agreement that controls the IRA to see what happens if someone passes away with no named beneficiary; if it would go to children you’re fine but most agreements will provide that it goes to the estate.
An IRA included in the estate must be probated and it’s likely that not only will the proceeds go to creditors but the estate will be taxed on cashing in the IRA. You should check with the attorney for the estate to see if you are compelled to liquidate the IRA. Your father’s estate could take RMDs over 5 years to spread out the tax liability but you’re constrained by following what the probate court directs if the IRA must be probated.
If your cousin transfers the account to an inherited IRA, she would take distributions over her life expectancy measured by her age in 2011. That’s about 37.9 years, if she were to cash in the IRA she’d have no penalties but the income tax bill would be hefty. If she wants your family to have the proceeds, you’ll have to work something out so that she’s not penalized taxwise because of her generosity. Transferring proceeds over a number of years would be better for her taxwise.
Permalink Submitted by AD Nwazota on Wed, 2011-06-08 18:19
Thanks so much for the response mgtf4cpa!
I’m glad to hear we haven’t missed the deadline to disclaim, but (unfortunately) everything else you said was pretty much as expected. I really would not want her to deal with that type of tax burden of cashing out, just to help us out…but the idea of her having to make take distributions for life and port them to four people seems like a pain…hmmm
The dad’s creditors have already reached out to us to try and negotiate even before we were able to open up his probate estate. I’m thinking the best we can do now is just negotiate with what is actually currently in the estate and then return to the idea of her disclaiming in a few months when we’ve hopefully settled some of the accounts. We’ve retained a real estate lawyer, and our hoping to do a deed-in-lieu for his residence…then we can focus on the credit cards. Perhaps after that is done we can again revisit the idea of her disclaiming and having the funds flow thru the estate, have the estate pay the tax on that, and see if there is anything else after the dust settles? Sounds like a long shot, but its the best idea I can think of…
Permalink Submitted by Bruce Steiner on Fri, 2011-06-10 02:52
You don’t probate an IRA. You probate a Will (except in this case, if the decedent died without a Will, you can’t probate the Will). And if the cousin disclaims, and the IRA becomes payable to the estate, the court isn’t going to tell the administrator what choices to make. That’s up to the administrator.
The disclaimer doesn’t sound promising. It would reduce the stretchout, and expose the IRA benefits to creditors. Why doesn’t the cousin accept the IRA, stretch it out, and make gifts as desired. The benefit of the long stretchout will likely offset her being in a high income tax bracket.