Conflicting advice on IRA distribution…Merrill Edge

Submitted by Clyde Acolita on Tue, 2015-12-22 22:54

My father died in March 2015 at the age of 93.

Per his wishes, my brother (59) and me (66) are inheriting everything 50/50 per the terms of his will. He had a small IRA ($18,000) with Merrill Edge, and, unfortunately, did not have the beneficiaries configured properly. Our predeceased mother was the sole beneficiary. My brother and I were NOT listed as contingent beneficiaries.

Merrill Edge first said we qualified for Inherited IRA’s, then changed their tune and said only an Inherited IRA fbo the Estate, or a Lump Sum Distribution, is permitted. The amounts differ, but we’ve been told by professionals that we’ll be taxed heavily on a Lump Sum paid to the Estate.

How can we lessen the tax burden? Neither of us need the money immediately. We’re also concerned about what needs to be completed, if anything, by December 31, 2015. My brother’s Merrill LYNCH advisor said to take our dad’s RMD by the end of year.



Submitted by Alan - IRA critic on Wed, 2015-12-23 00:01

  • As in most of these situations where the estate is the beneficiary the IRA custodian wants to be rid of the inherited IRA ASAP, and a lump sum distribution will do that. But unless their IRA agreement requires this, they have no authority to simply make out a check to the estate. Rather, the executor needs to insist that ML assign the IRA out of the estate to the beneficiaries of the estate as separate inherited IRA accounts. Those would be titled showing the name of the beneficiary and the name of the decedent.
  • By 12/31 the year of death RMD should be distributed if your father did not complete his RMD before passing. It is preferable that the separate inherited IRA accounts be set up first and then any remaining year of death RMD distributed 50-50 to those 2 accounts (or in any other % the two of you desire – eg one of you may want their money sooner and the year of death RMD can be taken in any combination by the beneficiaries). If there are other probate assets going through the estate, the year of death RMD could also be distributed to the estate, passed through to the two of you and then have the IRA assigned afterwards. But if there will be no other income to the estate, it would simplify tax filing to avoid a distribution to the estate. While the 2015 RMD should be completed by year end, it is not that critical. In many cases, a year of death RMD is completed in the following year since there is no time to get it done in the year of death or in many cases, the existence of an IRA or a will is not even known before year end. It is more important to convince ML to allow the executor to assign the IRA so that the estate can close and you and a lump sum distribution is avoided.
  • Here is the other alternative: The IRA is small and the stretch allowed is only 3.6 years based on father’s remaining life expectancy. If the distribution is paid to the estate and passed through to each of you, that is only 9k of taxable income each. That is unlikely to increase anyone’s tax bracket. Perhaps the comment about taxes was based on the estate actually paying the taxes, but the estate would not pay them. The estate would pass the distribution out to each beneficiary on a K 1 and the tax would be calculated using the beneficiary’s lower individual rate, not the higher rates that apply to estates. Therefore in this case, a lump sum distribution is not nearly as damaging as in other cases with a higher IRA balance and a longer stretch period.

Submitted by Clyde Acolita on Wed, 2015-12-23 00:22

Thanks!I guess it’s a matter of the executor (my brother) pushing Merrill Edge hard enough.  Any tips if they refuse that option? FWIW, one of our financial guys said if Merrill Edge won’t cooperate to transfer our dad’s IRA to an Inherited IRA FBO Estate, then transfer that Inherited IRA FBO Estate to another firm he knows will split it up 50/50 as regular Individual Inherited IRA’s.  On the other hand, we’re only dealing with $18K total.The both of us incurrred a few thousand dollars in lost wages, moving expenses, legal fees, and travel costs cleaning out his property in Alabama over the course of 3 weeks and moving my dad’s items back to his California house. We also had legal (probate) costs in Alabama, which were relatively cheap.  Can this be applied to lessening the tax burden, or would that only work if a lump sum was paid to the Estate?We can still try to get the 2015 RMD pulled off.  I guess our main concern is throwing ourselves under the bus by not doing everything we should by December 31, 2015.   

Submitted by Alan - IRA critic on Wed, 2015-12-23 00:47

This link explains the situation and includes a link to a suggested letter to send to the IRA custodian. I am sure a firm a large as ML knows all about this, but would rather just have the account liquidated. I will have to look into whether any of your costs could be deducted from the estate income, but I think just the probate and court costs. Again, I would not worry about the year end deadline since the IRS will likely waive any penalty. A 5329 would just have to be filed for the estate or with a 1041 if the estate if the estate needs to file one. Is there any other income passing through the estate besides possible IRA distributions?

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