Disclaimer of interest in IRA by Calif trustee?

Submitted by Marie Stockton on Mon, 2016-04-04 19:10

California resident died Nov 2014 with RLT that distributes remainder outright 75% to B-1 (adult son), 25% to B-2 (adult step-son), gives trustee power to adjust for tax consequences. Decedent’s will pours everything over to RLT.

Decedent had a $300k IRA with design form that purportedly named predeceased spouse as primary beneficiary, no contingent bene named. Contract purportedly says when no surviving named bene, to SS if any, otherwise to decedent’s estate. Decedent died before her RBD.

Desired result is to avoid income tax hit at rate applicable to trust on a distribution from decedent’s estate to the trust, and for plan admin to transfer (not distrib) IRA to two individual inherited IRAs with (remaining) five-year payout requirement attached which plan admin says it will do if the personal representative of decedent’s estate provides it with a state court order directing this. Benes could then control when distributions are taken over the remaining five year period and pay income tax on those distributions accordingly, and the estate could be closed.

CA probate code requires disclaimer in a reasonable amount of time. Probate petition has been filed but letters testamentary have not yet issued. Plan admin won’t locate and provide copies of desig form and contract until PR of decedent’s estate produces letters.

Questions: Can trustee still disclaim? Is a qualified disclaimer required? Does anyone out there with CA probate knowledge know of an appropriate petition/procedure to achieve desired result or see any other obstacle?

Many thanks in advance for any thoughts or references to applicable resources.



Submitted by Alan - IRA critic on Mon, 2016-04-04 21:19

  • The disclaimer deadline has passed (9 months after DOD), but would not have worked anyway. However, the trustee of the trust should be able to assign the inherited IRA to the trust beneficiaries. See the attached article from Natalie Choate:  https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees/
  • Some of the links in the article no longer work, but the IRS does not object to these transfers from either an estate or a trust. Transfer of the inherited IRA to another custodian may be the only solution if this custodian will not allow a transfer to inherited IRAs for each trust beneficiary.
  • You are correct about the 5 year rule applying, since the trust was not named directly as IRA beneficiary and the estate beneficiary is considered a non individual.

Submitted by Marie Stockton on Mon, 2016-04-04 22:31

Thanks, Alan.I’m not clear on why the disclaimer wouldn’t have worked.Also, I see the value of the transfer to inherited IRAs with 5 yr pay out restrictions if the IRA proceeds can be kept in the estate, but if I understand how this would play out correctly and the IRA proceeds go from estate to trust pursuant to the decedent’s pour-over will then distributions (of the remaining funds after the trust pays income tax) from the trust would be tax-free and could be made all at once, avoiding any need for individual inherited IRAs.

Submitted by Marie Stockton on Mon, 2016-04-04 22:57

What if the disclaimer is not qualified, but there is no estate or gift tax liability?

Submitted by Alan - IRA critic on Mon, 2016-04-04 23:11

  • Distributions from the IRA to either the estate or trust can still be passed through to the beneficiaries on a K1 and then taxed at the lower tax rate of each individual beneficiary. Of course, if no distributions were made until inherited IRAs were established, each beneficiary could easier manage the investments in their respective inherited IRAs, and spread out distributions in any manner they wanted before the 5 year period ends. The trust provisions would have to allow the IRA or it’s distributions to be distributed to the trust beneficiaries rather than retained in the trust.
  • As for the disclaimer had the time limit not expired, if the trustee of the trust were allowed to disclaim it appears that the estate would acquire the IRA, but the only difference with the estate acquiring the IRA vs. the trust would be if the trust included provisions restricting how the trust assets could be handled, such as requiring that the trust accumulate these assets. If that was the case, the higher trust income tax rates would apply. If that were not the case and distributions to beneficiaries were allowed, the taxable income would be passed through to the beneficiaries at their lower tax rates. The trust or estate would not be paying the taxes at their higher compressed rates.

Add new comment

Log in or register to post comments