Estate Inherited IRA’s

Submitted by John Hopkins on Wed, 2016-09-14 17:25

Have been presented a situation where a Husband & Wife each had a IRA with their primary Bank as Custodian/Administrator. Husband was Wife’s IRA beneficiary, Wife was Husband’s IRA Beneficiary, no contingent or secondary beneficiaries on file. Wife dies in 2015, husband dies six days later. Age at death for both 77 y/o.

Both took annual RMD’s as required up to year of death. RMD in year of death not distributed prior to passing. Estate opened for Husband, Estate has three heirs. Bank moves both IRA’s into Husband’s estate as Inherited IRA’s. 2015 RMD’s distributed before 2015 year-end to the Estate. Bank sends RMD letters for 2016, stating RMD amounts and states that since IRA’s are now owned by the Estate all funds must be drawn within 5 years. 2016 RMD calculation by Bank uses single life expectancy of 11.1 years using age in year of death. 2016 RMD taken and distributed to Estate.

Questions
1. Is RMD calculation from single life expectancy table the age in year of death or age in year after death?
2. Since RMD’s were started does Estate get to use original owner’s life expectancy 11.1 (less 1 each subsequent year) for RMD’s going forward or must it all be distributed within 5 years as Bank advised?
3. Can the Inherited IRA’s be moved from the Bank to another Custodian/Advisor via Trustee to Trustee like kind (Inherited IRA in name of Estate) move?
4. Does Estate need to remain open for x years to receive RMD’s, or can 3 separate Inherited IRA’s (one for each heir) be set up and receive their share to allow closing of the estate?
6 What is the remaining time heirs have to draw out funds, 5 years or the single life expectancy (less 1 year for each subsequent year) of original owner?
7. When does the clock start for 5 year close out if year of death was 2015 (if it applies)?

I am sure this happens regularly, but have not come across this particular situation. Appreciate all replies.
Thanks,
Wisconsin CPA.



Submitted by Alan - IRA critic on Wed, 2016-09-14 19:44

  1. Due to the non individual beneficiary for one IRA and successor beneficiary rules for the other, age of decedents in year of death determines an initial divisor from which the 1.0 reduction is taken each year. The initial divisor itself is not used since the year of death RMD is the RMD of the decedent as if the decedent lived the entire year. Therefore, the 11.1 divisor is correct for 2016.
  2. Estate can use the 11.1, 10.1 etc divisors but the estate will terminate before long. The inherited IRA would normally be assiged to the estate beneficiaries as individual inherited IRAs, and those same divisors would be continued for the individual beneficiaries. The IRS 5 year rule does NOT apply here because they died AFTER the RMD. If the bank has included a restriction in their IRA contract that requires the IRA to be drained in 5 years, they can do that. Suggest pressing the bank for an explanation of their 5 year indication because this is NOT required by the IRS RMD rules. Can the bank require this if it is NOT included in their agreement by calling it internal operating procedures of the bank? The answer to that is not clear, but it will cost to take on a bank in a legal fight.
  3. Yes, the IRAs can be transferred to another custodian, but it may be difficult to find one that will allow the full 11 year stretch. No chance with another bank, possibly with a brokerage firm for a beneficiary that has some leverage due to other investments with that brokerage. Most IRA custodians do not particularly like beneficiary IRAs, but for estates and trusts they want to distribute inherited IRAs ASAP. IRA owners need to ask their custodians if their beneficiaries will be allowed to utilize all IRS approved RMD rules without other restrictions.
  4. The estate does not have to remain open and file a 1041 for years. The executor can terminate the estate and have the IRAs assigned to the estate beneficiaries in the form of separate inherited IRA accounts. This might also run into resistance and require a transfer to another custodian. Suggest a major firm like Vanguard, Schwab, or Fidelity for a better chance of acceptance of a transfer.
  5. The stretch is 11.1 years. The transfers do individual inherited IRAs does not change the RMD divisors.
  6. The 5 years is NOT an IRS rule, rather it is an artibrary deadline imposed by the bank or other custodian. Therefore, they may differ on when the 5 years starts. The IRS 5 year rule (applies only for death PRIOR TO the RBD) ends on the last day of the 5th year following the year of death (12/31/2020 if these owners had passed prior to the RBD).


Submitted by David Mertz on Wed, 2016-09-14 20:21

In this case, isn’t the estate the successor beneficiary of the wife’s IRA since the husband did not elect to treat the wife’s IRA as his own?  If so, isn’t the 2016 RMD what the husband’s RMD would have been for 2016, based on the age that the husband would have reached in 2016, presumably age 78, making the divisor for this IRA 11.4, not 11.1?  (Of course a distribution calculated with a divisor of 11.1 would be greater than an RMD calculated with a divisor of 11.4, so taking the distribution calculated with 11.1 as the divisor satisfies the RMD in either case.)



Submitted by Alan - IRA critic on Wed, 2016-09-14 21:35

Yes, the estate is the successor beneficiary and I edited prior post to incorporate that, but the 2016 divisor on that IRA should still be 11.1 based on this paragraph from 590 B, p 10 “Figuring the designated beneficiary’s RMD”. This is a 2015 590B, so the actual year’s in the paragraph would apply to the situation in this thread. And the surviving spouse did pass in 2015:

Spouse as sole designated beneficiary. Use the life expectancy listed in the table next to the spouse’s age (as of the spouse’s birthday in 2016). Use this life expectancy even if the spouse died in 2016. If the spouse died in 2015 or a prior year, use the life expectancy listed in the table next to the spouse’s age as of his or her birthday in the year he or she died. Reduce the life expectancy by one for each year since the year following the spouse’s death.



Submitted by David Mertz on Wed, 2016-09-14 23:23

Got it.  Thanks.  I see that this comes from CFR 1.401(a)(9)-5 Q&A-5(c)(2).



Submitted by John Hopkins on Thu, 2016-09-15 21:25

Thank you for the timely detailed reply.  This helps a great deal.



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