Path for complicated Inherited IRA
Please help with guidance for navigating Secure Act 2.o rules with Inherited IRAs
83 year old Father passes away in Jan 2022 with IRAs, 67 year old Step-Mom ( father’s wife) is beneficiary and inherits IRAs and they become her IRAs. 67 year old Step-Mom suddenly dies in Sept 2022 (9 months later). The IRAs have no listed beneficiaries. Step-Mom that passed away had no children. The State of NJ though probate laws says that 49 year old Stepdaughter(receive 35% of IRAs) and 53 year old Stepson(Receive 35% of IRA) and Stepdaughters minor children (Step-Mom’s Step Grandchildren ages 8, 10, 10 (twins) receive 10% each. IRAs are held at Vanguard and Fidelity.
New Jersey has some different Inheritance Tax laws that still haven’t been settled so Vanguard and Fidelity are not allowing anything to be done to StepMoms IRAs until NJ inheritance tax settled and paid.
Is this all a moot Point with 10 year rules and RMDS /Secure Act 2.0 – since the IRAs (StepMom) had no listed Beneficiary and the IRAs just have to be distributed within 5 years sicne they went to the ESTATE ? Vanguard is saying the 10 year rule distribution applies ? Also if any 10 year rule can apply how exactly do the step-grandchildren now 10 and 12 year old twins deal with the inherited IRAs being Minors and RMDs ?
Permalink Submitted by Alan - IRA critic on Fri, 2024-05-24 20:51
This situation is not impacted by Secure 2.0, and actually not even by Secure 1.0 since Secure 1.0 made no changes with respect to non designated beneficiaries such as estates. The usual 5 year rule applies here (not the 10 year rule), so the IRA must be distributed by the end of 2027 to either the estate or to the individual beneficiaries of the estate if the executor is eventually able to assign the IRA out of the estate to the estate beneficiaries. There are no RMDs required until 2022, but distributions might be ordered as soon as allowed to avoid a large tax impact in 2027. Assignment to the beneficiaries will allow the estate to close sooner than otherwise.
Inherited IRAs for the minors which will have to be maintained with an UTMA custodian for the minors may trigger the kiddie tax for years in which they receive distributions since they will remain minors until after the IRAs must be drained.
Permalink Submitted by Robert Laughlin on Fri, 2024-05-24 22:13
Thanks Alan!
But I see this example on your site – would there be any way to have 10 years?
By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on Twitter: @theslottreport
When an IRA owner dies, we look to the beneficiary form to determine who should receive the IRA funds. After death, there is a transition process as assets are moved into an inherited IRA for the beneficiary. But what if the beneficiary dies after the death of the original IRA owner, but prior to claiming the account? After all, it can be well over a year before any action needs to be taken by the beneficiary. A lot could happen in that time. Are the IRA dollars now suddenly in limbo with no owner? Are there any protocols or rules to follow in such a scenario?
In fact, determining how the IRA is to be distributed when the beneficiary dies before claiming the account is clear. The assets do NOT go to the contingent beneficiary. If the original IRA owner named contingent beneficiaries on the beneficiary form, those names are null and void if the primary beneficiary is still alive when the owner dies. Assuming the primary beneficiary does not disclaim any portion of the IRA, the names on the contingent line become meaningless. The moment an IRA owner dies, the primary beneficiary is immediately deemed to be the new owner of those assets.
During a normal transition period, the beneficiary determines what options she has. Is she a spouse who can do a spousal rollover into her own IRA? Does she want to take a lump sum distribution? Is she eligible to stretch required minimum distribution (RMD) payments? Does the 10-year rule apply? Additionally, if the beneficiary is establishing her inherited IRA, she will name her own beneficiaries (successor beneficiaries) on a fresh beneficiary form.
However, if this first beneficiary dies prior to claiming the inherited dollars – and prior to naming a successor beneficiary – there are definitive “next steps” to follow:
The moment the original IRA owner dies, the beneficiary owns the IRA assets.
If that beneficiary does not claim the account (i.e., complete any paperwork to officially accept/transition the dollars) and subsequently dies, the account is deemed to be an inherited IRA with no named beneficiary.
Since there is no named beneficiary, we look to the default beneficiary as determined by the custodial document. Oftentimes this is the estate.
Technically, the estate is a successor beneficiary in such cases.
As a successor, the estate would be bound by the 10-year rule. This would either be a fresh 10 years or the remainder of the first beneficiary’s 10-year period (depending on the type of beneficiary who first inherited the account).
Example: John, age 75, has a traditional IRA. He dies with his sister Kathy as his primary beneficiary and Kathy’s children (John’s nephews) named as contingents. Kathy, age 72, qualifies as an eligible designated beneficiary (EDB) because she is not more than 10 years younger than John. Eight months later, before completing any paperwork to claim the account, Kathy dies. The assets do NOT pay to the contingent nephews. Kathy, as an EDB, is deemed to have created an inherited stretch IRA. The custodial document identifies her estate as default beneficiary. An estate-owned inherited IRA is established. Since Kathy was an EDB and allowed to stretch RMD payments, the estate, as successor, receives a fresh 10-year rule. RMDs are due in years 1 – 9 based on Kathy’s single life expectancy, and the estate-owned account must be emptied by the end of year 10.
Permalink Submitted by Alan - IRA critic on Fri, 2024-05-24 22:55
No. In the Andy Ives example, the estate was the successor beneficiary to a designated beneficiary so the estate was subject to the 10 year rule. In the case here, the estate is not a successor beneficiary because the wife assumed ownership of the IRA (claimed the account) and it was no longer treated as an inherited IRA until she passed with the estate as her beneficiary.