Timing of splitting an inherited IRA w/out contingent benes
Dear Alan et al,
‘Jim’ passed away recently with an IRA worth $400K. His four children are named as equal beneficiaries at 25% each. He has taken his RMD this year. He did not list any contingent beneficiaries or elect ‘per stirpes’ on the beneficiary form.
One of his sons, ‘Hank,’ has had health problems. My understanding is that, if Hank dies prior to the IRA being split up where Hank can name his own beneficiary, then Hank’s share would be paid out to his estate and the tax-deferral would be gone.
Thus, it seems like we would want to split this account up as soon as possible. Does this sound correct or am I missing something?
Thank you,
Chris
Permalink Submitted by Alan - IRA critic on Mon, 2015-11-30 18:42
Chris, while it is possible the IRA agreement could specify a different destination for his share, the estate is by far the most likely recipient of Hank’s share. If Hank has a will his will beneficiaries would then end up receiving the IRA death benefits over Hank’s remaining life expectancy. As you indicated, if Hank creates a separated inherited IRA account and names his own successor beneficiaries, then probating the will with respect to the IRA will be avoided. However, the stretch that Hank’s beneficiaries would receive is the same either way – Hank’s remaining life expectancy. This is the case as Hank is never the IRA owner, and his named beneficiaries are successor beneficiaries who must continue Hank’s RMD schedule. Similarly, if Hank’s estate receives the IRA instead, the executor could assign the inherited IRA to the will beneficiaries as part of the probate process, and Hank’s will beneficiaries would then have separate inherited IRAs, but still have to use Hank’s remaining life expectancy. Therefore, this situation is different with respect to the stretch than if Hank had owned the IRA. But I would still have Hank create a separate inherited IRA very soon to eliminate the executor having to deal with the IRA as part of the probate process and possibly a balky IRA custodian. When IRA custodians encounter an estate as the beneficiary or successor beneficiary, their first inclination is to try to push out a lump sum distribution to the estate.