Non-spouse beneficial IRA (payout options)

Submitted by Philip Detlefs on Fri, 2015-09-11 01:45

I have a client that inherited an IRA from his mother who passed earlier this year. He was the only named beneficiary. He has a brother and sister that were NOT named as beneficiaries. He would like to split the IRA proceeds with them. Is there anything that can be done besides taking it as a lump sum, paying the taxes and then splitting the money?
Also, if he decides to keep the money in an inherited IRA he wants to take the RMD’s based on his life expectancy. If he takes the RMD’s based on his life expectancy and then 10 years later decides he wants to take it out as a lump sum, can he do this? Would there be a penalty? Thanks!



Submitted by Alan - IRA critic on Fri, 2015-09-11 02:30

  • He can take out any amount he wishes from the inherited IRA. The only penalty is for distributing LESS THAN the RMD amount. One option here is to distribute the annual RMD (or more than the RMD), and then gift a tax adjusted amount to the others. He would determine his tax bill based on just his own RMD or the amount he would take out for himself, then figure it with the increased amount needed to fund the gift to the others, then reduce each of the other’s annual gift by half the additional tax bill he will have to pay. The annual gift exclusion is 14,000 to each individual, but if the IRA is large enough to generate a gift larger than that, he could incorporate either a gift to sibling’s spouse OR if he is married, a gift from his spouse to the sibling, therefore the gift could be considerably larger than 14k without having to deal with a gift tax return.
  • Another option is a partial disclaimer, but he would have to check on his mother’s will to see if the funds will go as desired. If no will, the state intestate provisions need to be checked to see if the siblings would inherit. The IRA agreement also needs to be checked to see what the default beneficiary provisions indicate. While this approach is trickier and probably will need an estate attorney’s involvement, it would eliminate the annual gifting dilemma and each beneficiary would have their own inherited IRA to manage. One problem here is that the stretch for the others will be limited if they inherit through the estate.
  • It may also be possible to leave the IRA as is and settle up with non IRA assets.
  • Note that if mother did not complete the 2015 RMD, the client must remove that prior to year end.

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