Refusing an inherited IRA

Submitted by Mark Smogor on Thu, 2014-09-18 21:17

We have a situation where an individual with 8 brothers and sisters passed away leaving a significant IRA with only one of the siblings listed as a beneficiary. His will lists all 8 siblings for the probate estate. Is there a way that the beneficiary on the IRA can refuse the inheritance and the custodian would be able to change the beneficiary designation to include all the siblings?



Submitted by Alan - IRA critic on Thu, 2014-09-18 22:02

  • No, IRA beneficiaries cannot be added, but the IRA beneficiary could accomplish this through disclaimers. The named beneficiary can disclaim all or part of the IRA. The procedure in this case is to first check the IRA beneficiary clause to make sure that if the beneficiary disclaims, the default beneficiary is the decedent’s estate. That would result in the IRA going to the beneficiaries of the decedent’s will. However, to be a qualified disclaimer a non spouse disclaimant cannot receive funds as a result of the disclaimer, so the named beneficiary would have to first disclaim their interest under the will, so that only the other 7 receive the disclaimed IRA funds. If the goal is to end up with 8 equal shares, then the IRA beneficiary would only disclaim the portion of the IRA that would result in each person receiving 1/8 of the grand total. Finally, the inherited IRA is probably fully taxable and subject to RMDs, while the original probate estate may be tax free. To have a tax adjusted equal result, some computations would have to be made to make the disclaimant’s retained share of the IRA larger to reflect that the IRS in effect owns part of the IRA equal to the disclaimant’s marginal tax rate. Disclaimant should probably retain an attorney to get all this right. Another issue in using disclaimers in this case is that the IRA stretch would be impaired. The IRA would have to be fully distributed under the decedent’s life expectancy or if decedent passed prior to the RBD, the 5 year rule.
  • If the IRA is small enough, it may be much simpler to have the named beneficiary just take distributions and gift the tax adjusted share he wants to the others. The current gift exclusion is 14k per person. Since the beneficiaries probably do not all want to stretch the IRA, this could turn out to be an accounting and tax nightmare for the named beneficiary. I doubt that all beneficiaries would agree to the same annual payout every year.

Submitted by David Mertz on Thu, 2014-09-18 23:14

Alan, I’m not sure that I see a need to make an adjustment to have a tax-neutral result.  If 7/8 of the IRA is disclaimed and then distributed from the probate estate to the other siblings as 7 equal-sized inherited IRAs, each of the resulting 8 equal-sized inherited IRAs would carry with them the eventual income-tax liability.  Each sibling would still pay tax on distributions from these IRAs based on their own individual marginal tax rates.  Ignoring the difference in the stretch available, the result would be the same as if the owner had listed all 8 siblings as primary beneficiaries.

Submitted by Alan - IRA critic on Fri, 2014-09-19 00:28

Good point relative to the disclaimer approach. If he is able to file a partial disclaimer for the IRA, then he should also be able to file a partial disclaimer on the other probate estate assets, and should still receive his full 1/8 share of the original probate estate with basis adjustments. An estate attorney should be consulted here because disclaimers are more complex when two of them must be filed. Don’t know if the order of these is material. Regarding the gifting approach of IRA distributions, the tax adjustment would definitely be necessary or he would be paying all the taxes on the IRA.

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