RMD question

Submitted by Robert Roselli on Wed, 2020-02-05 15:10

i had a client who passed away on 01/08/2020. Her son is her 100% beneficiary. I set up an Inherited IRA for him, but his mother had not taken her RMD yet for 2020. I just processed it. Who is this taxed to? Her son because it’s his account or his mother in her final tax return?



Submitted by Alan - IRA critic on Wed, 2020-02-05 15:16

Distributions are always taxable to the recipient of the distribution and a 1099R will be issued to them showing their SSN. The son will be subject to the 10 year rule and will have to drain the inherited IRA by 12/31/2030 UNLESS son qualifies as an eligible designated beneficiary (eg disabled or a minor). 

Submitted by Robert Roselli on Wed, 2020-02-05 15:24

At our firm, the custodian usually distributes the RMD out of the decedent’s account and then transfers the money. In this case, there wasn’t enough cash to process the distribution from the decedent’s account so they made the full transfer to the beneficiary’s account. They will process the descendant’s RMD on Monday from the beneficiaries’ account. It sounds like it’s neither here nor there which account the RMD gets processed from because it’s taxable to the beneficiary. Is this correct? 

Submitted by Alan - IRA critic on Wed, 2020-02-05 15:47

  • If your firm is aware of the decedent’s death, the account should be frozen until the beneficiary submits the death cert and their contact info including SSN. The account can then be retitled and the freeze lifted. Distributions from the inherited IRA can then begin at the beneficiaries discretion, including the year of death RMD which is not actually delinquent until 12/31/2020. Distributions made to the beneficiary are reportable on a 1099R for the beneficiary coded 4 for death distribution. Therefore, the current procedures are incorrect. What happens if the beneficiary of the client’s estate is different from the IRA beneficiary, who inherited the IRA as of the DOD even though they may not have provided documentation for some time thereafter. Finally, the firm should not force out the decedent’s RMD because the client could have taken their RMD from some other IRA account not at your firm. In addition, the beneficiary could complete the year of death RMD from other accounts if they inherited other IRA accounts held elsewhere. Therefore, the proposed distribution to the beneficiary to complete the decedent’s 2020 RMD should not be made unless the beneficiary agrees to it. 
  • Note that due to automatic distribution programs, a client could pass without your firm knowing it and distributions continue to be issued after the DOD to the client. The executor should return those uncashed checks or have payment stopped on them since decedent’s estate was not entitled to those distributions. Checks issued prior to DOD but uncashed can be credited to the estate account by the executor and would not involve your firm.

Submitted by Robert Roselli on Wed, 2020-02-05 15:59

The decedent passed away on 01/08/2020. Her son was the sole 100% beneficiary of her IRA. On 01/09, we notified the custodian of the decedent’s passing. The next day the notified us that the account was frozen and they also verified that her son is the 100% primary beneficiary. They fold us in order to process the transfer to her son’s Inherited IRA, they need a death certificate to the passing of the decedent and a completed Inherited IRA application.On January 29th, I submitted the death certificate and Inherited IRA application.  On February 3rd, they opened the Inherited IRA. Normally the decedent’s RMD is processed first and then transferred. They didn’t have enough cash to process this so they transferred the money over to the beneficiaries IRA.I understand what you saying. This is the only IRA the decedent had and therefore this is the only IRA her beneficiary has as well. So since an RMD has to take place, does it matter which account it comes from? 

Submitted by Alan - IRA critic on Wed, 2020-02-05 16:23

  • All sounds normal through opening the inherited IRA. The balance from the frozen decedent’s account should have been totally tranferred to the new inherited IRA as was done. As long as distributions are paid and reported to the beneficiary, it does not matter whether they are paid from the old retitled account or the new beneficiary RMD, but most custodians do not like to have distributions made to different SSNs from the same account. They would usually transfer the entire balance to the new inherited IRA and then make any distributions from that account. But it’s OK either way as long as the distributions are paid and reported to the beneficiary. 
  • As for distributing the year of death amount right away to the beneficiary, that is fine if it is OK with the beneficiary, and it does get this obligation out of the way. But the beneficiary has until year end to complete that RMD if they wish to since it is a current year 2020 RMD and beneficiary might want the additional time for that balance to stay in the IRA.  

Submitted by Robert Roselli on Wed, 2020-02-05 16:26

Shouldn’t this RMD be the defendants and taxable income to them on their final return? my understanding is the descendant is required to make an RMD their year of death.

Submitted by Alan - IRA critic on Wed, 2020-02-05 17:06

  • The year of death RMD is required, but not from the decedent. If the decedent passes, the responsibility for the year of death RMD immediately transfers to the beneficiary. If the beneficiary does not complete it, any penalty the IRS levied would be on the beneficiary, not the decedent. These rules reflect the fact that the decedent had until the end of 2020 to take their RMD, so was not remiss in any way by passing prior to completing the RMD. The beneficiary receives the account balance and will owe taxes on it when distributed, and the 1099R Inst clearly state that the 1099R is issued to the recipient of the distributions, whether the amount was the decedent’s RMD or not. 
  • This question often comes up when the ira owner passes early in the year and therefore is in a very low or 0 tax bracket for their final return. If the IRA beneficiary and the estate beneficiary are one and the same, the IRA beneficiary would rather inherit the money through the estate and have the decedent pay the income tax on the IRA distribution at their very low rate rather than the beneficiary paying it at their higher rate. But the beneficiary does not have this option. 
  • In such a situation where the decedent’s health is failing early in the year, they should attempt to complete their RMD or even convert amounts in excess of the RMD to take advantage of otherwise limited income in the final return year.

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