Inherited IRA from deceased beneficiary

Submitted by Jim Clark on Tue, 2015-05-05 19:01

Good afternoon!

I am hoping someone can point me in the right direction here.

Here is the situation I’m trying to resolve:

Dad passed away December, 2014. Mom passed away February, 2015. Mom inherited about $250k in IRAs from Dad, but never completed the rollover, so the IRAs are still in Dad’s name. Now, the 3 children are inheriting the IRAs. IRA sponsor is saying that since Mom never put the IRAs in her name, the children must take a complete withdrawal of the funds and pay tax on the entire balance… no rollover into their own IRA is allowed. This makes no sense to me, since it is still an inheritance!

If anyone has a suggestion, preferably something authoritative that I can show the IRA company that would allow the children to avoid the full distributions and tax on the full balances, I would appreciate it very much!

Thank you,
Jim
San Antonio, TX



Submitted by Alan - IRA critic on Tue, 2015-05-05 19:28

Jim, sorry to hear of your losses. Can you indicate HOW the children are inheriting the IRA? Did Mom name them as her successor beneficiaries, or is her estate receiving the IRA because she did not name successor beneficiaries? Did Dad name contingent beneficiaries on his IRA? What are the month and year of birth for both parents? As you can see, the rules are complicated and very dependent on several details.

Submitted by Jim Clark on Tue, 2015-05-05 20:41

Hi Alan,Thanks for your response.  I’m a CPA and these are clients of mine.  I just don’t recall ever seeing quite this situation and wasn’t sure where to look, and this forum was recommended by a colleague.Parents were both over 70.  Mom was the named beneficiary.  I’m not sure if children were contingents, but my guess is no.  I can find out if I need to.  Mom simply never took possession of the IRA in the two months she lived after Dad passed.  So, it’s going to her estate.Dad passed December, 2014Mom, February, 2015Jim

Submitted by Bruce Steiner on Tue, 2015-05-05 22:04

  • Mom’s executors can’t complete the rollover after her death.  See PLR 9237038.

 

  • If the children were the contingent beneficiaries of Dad’s IRA, then Mom’s executors can disclaim the IRA.  Depending on state law, Mom’s executors may need court approval to disclaim Dad’s IRA.  If Mom’s executors disclaim the IRA, and if the children are the contingent beneficiaries, then the children can stretch it out over their life expectancies.

 

  • If the above doesn’t work, Mom’s estate should be able to take distributions over Mom’s life expectancy (as if she hadn’t died).

 

  • The lesson is that the surviving spouse should complete the rollover promptly upon the first spouse’s death, since the surviving spouse’s executors can’t complete the rollover after the surviving spouse’s death.

  

  • The lawyer handling Dad’s and Mom’s estates should be dealing with this.  Where is he/she?

  

  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL

   

Submitted by Alan - IRA critic on Tue, 2015-05-05 22:24

  • In the circumstances you cited, the IRA agreement should be checked just to be sure, but more than likely, Mom’s estate is the default beneficiary at her death when she has not named her own successor beneficiaries. But that still enables the executor of her estate to assign the IRA to the children who can then base their RMDs on the remaining life expectancy of mother. For example, if mother would have been 84 at the end of 2015, that enables the IRA to be distributed over 8 years, a much more favorable situation than a lump sum. If the children had been named as contingent beneficiaries by Dad, then it might be possible for Mom’s executor to disclaim her interest posthoumously making the children designated beneficiaries.
  • Most IRA custodians immediately push for a lump sum distribution whenever the estate becomes IRA beneficiary, but unless their IRA agreement specifically stipulates a lump sum distribution in this situation, the IRA can be assigned to the children who can establish separate inherited IRA accounts, each using Mom’s remaining life expectancy. This article will explain further. The IRA custodian should not be allowed to issue a distribution to the estate, but if they refuse to establish inherited IRAs, then the entire IRA should be transferred to a custodian that will.  http://www.ataxplan.com/bulletinBoard/ira_providers.cfm

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