Inherited IRA’s

Submitted by Richard Ernst on Fri, 2016-03-18 00:52

A client of ours called today informing us that her mother ( age 73 ) passed away with an IRA valued at about
$ 200,000.00. There was no beneficiary listed. I am assuming that leaves the estate as said beneficiary. The bank ( holder of the IRA ) has informed her ( and her sister ) that the account has to be closed and taxes paid now. Her accountant is telling her that the funds can be rolled over into an Inherited IRA through the estate with the two sisters as beneficiaries. We were hoping to get your thoughts.



Submitted by Alan - IRA critic on Fri, 2016-03-18 01:12

  • The bank cannot force an IRA distribution unless their IRA contract allows it, and you can be sure that it does not. The client should therefore not allow the bank to rush her decision. The estate is most likely the contract default beneficiary but that should be confirmed during this process. Are the two sisters beneficiaries under mother’s will?
  • If so, the executor of her will should be able to assign the inherited IRA out of the estate to each sister. They are not designated beneficiaries and will have to take RMDs based on mother’s remaining life expectancy because she passed after her RBD. Provide this link to the client and again, tell her the bank should be asked to put there opinion in writing. The only reason that banks continue this negligent advice for estate beneficiaries is that people are reluctant to sue a bank. If an IRA custodian is not going to treat estate beneficiaries fairly, then they should require the IRA owner to name a beneficiary before opening an account.
  • An article about this from a noted IRA authority:   https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees/

Submitted by Richard Ernst on Fri, 2016-03-18 12:44

Thank you Alan!!! As always.

Submitted by Ben Meyer on Mon, 2016-03-21 07:02

  • There seems to be two ways to accomplish the desired goal.  Are both of the following acceptable?  Is one method preferred?  What forms 1099-R would result for each of these methods?
  • 1)  Retitle the IRA as “Estate of John Doe, deceased, under IRA”, (or similar) using the EIN of the estate.  Then, within the same tax year for the estate, divide the account into the correct percentages for each beneficiary and transfer to separate beneficiary IRA accounts.  This method would require reporting on the estate form 1041, but would not result in any fiduciary tax due to the distribution to beneficiaries of DNI consisting of the original principal plus any earnings (or loss) for the time the account was titled to the estate.  If any estate tax is attributable to the IRA, it can be withdrawn from the IRA by the estate before further distribution. 
  • 2)  Transfer directly from the original IRA (“John Doe under IRA”) to separate beneficiary IRA accounts for each beneficiary, with the correct percentages for each.  This way, the IRA would not enter into the fiducuary accounting for estate administration.  But there would still be estate tax if the total estate valuation is high enough.  Payment of estate tax for the IRA would need to be from other estate funds. 

Submitted by Alan - IRA critic on Mon, 2016-03-21 16:49

There would be no 1099R until an actual IRA distribution is taken regardless of the number of IRA transfers. It would be more efficient to use procedure 2, but some IRA custodians might resist that and require procedure 1, even if the assignment to the estate beneficiaries is done immediately thereafter. Executor fiduciary accounting is necessary either way since the IRA is an estate asset as of the DOD and the disposition of it must be reported in most cases, even though no distribution occurs to the estate. And either way the IRA is included in the gross estate of the decedent for federal or state estate tax purposes.

Submitted by Ben Meyer on Mon, 2016-03-21 23:02

Thanks!

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