Estate
I have a prospect that passed while working, and 64 years old. He was never married and no children. He had one brother that survived him. One retirement account did not list the brother as beneficiary, left blank. How do we make sure we keep the deferral of taxes on the account.
My thought was to set up beneficiary IRA for the estate of the deceased with the brother (authorized rep of estate) as the beneficiary. Once transferred there, we could then move to bene IRA for brother. Is this a legitimate process and/or allowable? Also, when would distributions need to be taken on ira.
Any help and guidance would be very helpful!
Joe Coffman
Indianapolis, IN
Permalink Submitted by Alan - IRA critic on Tue, 2016-08-23 18:47
With the estate being the likely default beneficiary per the IRA agreement, and the IRA owner passing before the required beginning date, the 5 year rule will apply. That means there are no annual RMDs from the inherited IRA, but the IRA must be drained no later than 12/31/2021. If the IRA owner either has a will naming the brother as the will beneficiary OR the brother becomes the beneficiary per the intestate provisions of the state, then the brother as executor can assign the inherited IRA to himself removing it from the estate. This will not change his RMDs however, as the 5 year rule will continue to apply. Note that in this situation, the IRA custodian may resist the assignment and try to push out a lump sum distribution. But they cannot do this unless their IRA agreement specficially permits it, and it is very unlikely that it does.
Permalink Submitted by Joe Coffman on Wed, 2016-08-24 14:25
So to clarify, the estate would keep the assets and disburse over 5 year to brother. For the retirement accounts, that had the brother as beneficiary, would they have to follow the 5 year rule inside of brother’s inheritered IRA? And if so, could estate inherited IRA be consolidated with brother inherited IRA? Thanks so much for your help in the complicated matter!Best,
Permalink Submitted by Alan - IRA critic on Wed, 2016-08-24 20:40
No, the brother would most likely NOT want to keep the estate open 5 years. Rather the executor would assign the IRA from the estate to the brother (himself) before taking any distributions, and he would then take distributions as needed as long as the inherited IRA is drained by the end of 2021. For the inherited IRAs on which the brother was named as designated beneficiary, the brother can take life expectancy RMDs using Table I and brother’s age as of 12/31/2017. This IRA would NOT use the 5 year rule unless the brother wanted to use it. If this IRA is small enough, he may want to elect the 5 year rule so that both inherited IRAs could be combined under the 5 year rule. However, this would not be wise if this IRA had a high enough value because the brother would be giving up several years of tax deferral by forfeiting life expectancy RMDs. Note that if the estate IRA is subject to the 5 year rule and the other IRA is being distributed under brother’s life expectancy, these two inherited IRAs cannot be combined.