IRA non-spouse beneficiaries die before setting up & opening Inherited IRA

Submitted by Allan Bass on Wed, 2020-05-06 21:10

Trying to research what happens to the IRA of a descendant where both non-spouse beneficiaries die a few months after the IRA owner, but before the IRA is converted into 2 inherited IRAs and there is no contingent beneficiary. It would seem to me it would revert back to the original owners estate versus becoming the estate of the beneficiaries since they never took ownership prior to death. The IRA is currently titled in the original owners name appended with deceased. Any help would be appreciated, especially a legal or IRS reference. Thanks!

IRA owner died 9/2019, beneficiary 1 died 11/2018, beneficiary 2 died 3/2020

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Permalink Submitted by Bruce Steiner on Wed, 2020-05-06 21:14

If they survived the IRA owner, it became theirs upon the IRA owner’s death. Upon their deaths, it became assets of their estates.

Permalink Submitted by Alan - IRA critic on Thu, 2020-05-07 00:43

Sounds like the death was reported, but the beneficiaries had not filed the death Cert or their contact info and SSNs, or provided the name of any successor beneficiary. If so, the executor of their estates would have to submit the info for both the owner and the beneficiaries, and create inherited IRAs for each estate.
Also sounds like owner passed prior to the Secure Act, but when did the beneficiaries pass? Following is copied from Pub 590B:
“Note. If a person who is a beneficiary as of the owner’s date of death dies before September 30 of the year following the year of the owner’s death without disclaiming entitlement to benefits, that individual, rather than his or her successor beneficiary, continues to be treated as a beneficiary for determining the distribution period.”
Therefore, if the beneficiaries passed in 2019, each individual beneficiary under their will could complete the older beneficiary’s Table I RMD schedule after being assigned their share of the IRA out of their estate. On the other hand, if a beneficiary passed in 2020, the Secure Act indicates that the 10 year rule would apply to any beneficiary under their will to whom the share of the IRA was assigned out of the estate.
It would be helpful to know the dates of death of the owner, and of each of the two beneficiaries, due to the several variables existing in this case.

Permalink Submitted by Allan Bass on Fri, 2020-05-08 11:45

IRA owner died 9/2019, beneficiary 1 died 11/2018, beneficiary 2 died 3/2020 Thanks so much for your help.

Permalink Submitted by Bruce Steiner on Sat, 2020-05-09 21:33

Is that a change in the facts? Did one beneficiary predecease the IRA owner? If so, what does the beneficiary designation say happens to that one’s share? To his/her issue? To the surviving beneficiary? Something else?

Permalink Submitted by Allan Bass on Thu, 2020-05-07 00:48

I’ve had differing opinions on this issue, that’s why I am inquiring and would like to be able to point to law or IRS code. The other opinions were since it was never converted to an inherited IRA and there was no contingent beneficiery it would default to the original owners estate.

Permalink Submitted by Alan - IRA critic on Thu, 2020-05-07 02:13

The wording of the beneficiary clause in the IRA adoption agreement specifies who and in what circumstances the IRA is inherited. The IRS must approve various agreements, and I doubt there is much variance, even given possible beneficiary laws that could differ from state to state. For example, I have never heard of a state where a beneficiary must survive for a specified period for their estate to qualify to inherit the IRA. If a beneficiary is living at the time of the owner’s death and there is no stated survival period specified by the owner, that beneficiary or their estate if they pass after the owner, will inherit the IRA. The quote I posted above from Pub 590-B deals only with the IRA distribution period, ie RMDs, not with who actually inherits.
Bruce Steiner, who posted above is a trust and estates attorney, and he appeared to assume that in this situation, the usual IRA agreement results in the estate of the beneficiary inheriting the account if the beneficiary passed after the owner. A contingent beneficiary only comes into play if the beneficiary predeceased the owner OR if the beneficiary, or perhaps beneficiary’s executor, disclaims the account.
Therefore, in this case, the agreement itself will state in the “Designation of Beneficiary” clause or similar who inherits the IRA upon the owner’s death. The stated beneficiary has inherited the IRA whether they have it retitled, submit a death certificate or not. They must complete a formal qualified disclaimer in order to be treated as if they pre deceased the IRA owner. This should be evident after a careful review of this particular IRA’s beneficiary clause.

Permalink Submitted by Allan Bass on Fri, 2020-05-08 11:56

Just to be clear, so I as the Executor of both beneficiaries could Disclaim the IRA on their behalf, and it would then revert back to the Estate of the original owner? And what I also researched there is a 9 month time limit to Disclaim, correct?Thanks so much for your time and expertise.

Permalink Submitted by Bruce Steiner on Sat, 2020-05-09 21:32

That would be a terrible result. It would destroy the stretch.

Permalink Submitted by Alan - IRA critic on Fri, 2020-05-08 15:42

So only one beneficiary survived the owner. The IRA agreement needs to be carefully checked to determine where Beneficiary 1’s share went when they pre deceased the owner. Most likely, Beneficiary 2 inherited the entire IRA balance upon the owner’s death in 2019, but this needs to be verified. Review the beneficiary clause in the IRA agreement or discuss with the IRA custodian if the beneficiary clause is not clear. If Beneficiary 1 has the term “per stirpes” or similar after their name, then the heirs of beneficiary 1 would inherit upon the owner’s death, rather than Beneficiary 2.
Assuming the above confirms that Beneficiary 2 did inherit the entire IRA balance, then you as the executor has until 12/2020 (9 months from owner’s DOD) to disclaim the interest of Beneficiary 2. Again, the IRA agreement needs to be checked to determine where the death benefit goes should you disclaim. Most likely it goes to owner’s estate, but check the agreement to be sure. The procedure for an executor to disclaim probably varies by legal jurisdiction, so you will probably need to hire an estate attorney if you wish to pursue the disclaimer.
Also, note that for a disclaimer to be qualified, the disclaimant (Beneficiary 2’s estate and therefore beneficiaries under 2’s will) cannot receive benefits as a result of the disclaimer. Therefore, if the beneficiaries under 2’s will are the same as under the owner’s will, there is a complex problem and another major reason to consult with an estate attorney.
There could be additional issues and some legal exposure on your part to any beneficiaries under 2’s will should you disclaim.

Permalink Submitted by Allan Bass on Sat, 2020-05-09 21:19

This is pretty complex and I will definitely consult with an estate attorney once I get the beneficiary statement for the IRA. Unfortunately, the probate process with this court is very slow to the COVID crisis, and I’m trying to look at options, if any, to be better prepared. Let me clarify this situation some more in hopes of narrowing down potential outcomes, since I am now the Executor on all 3 estates. When the IRA owner died, her 2 adult children were equal beneficiaries on the IRA. Both children were both very ill themselves. Beneficiary 2 was the executor of his mother’s will, and he never pursued converting his mother’s IRA into an inherited IRA for himself and his sister before her death in November 2019, then subsequently his death March 2020. It would be beneficial to all, if legally this could be assigned to the IRA owner’s estate, and was hoping you could give me one last assessment/opinion. Thanks again!

Permalink Submitted by Bruce Steiner on Sat, 2020-05-09 21:35

How would that be beneficial? It would destroy the stretch.

Permalink Submitted by Allan Bass on Sun, 2020-05-10 13:01

I realize the stretch would be destroyed, but going through various options looking at the tax hit in each.

Permalink Submitted by Alan - IRA critic on Sat, 2020-05-09 22:54

If mother’s estate inherited the IRA as a result of a disclaimer, the stretch period would be her remaining life expectancy as I assume she passed after her RBD. If she was 85 in 2019, the stretch would be 6.6 years including 2020 for which there are no RMDs. However, consider whether different beneficiaries will inherit under her will compared to Beneficiary 2’s will. Or, is the stretch not a factor in your thinking, and your question relates to the amount of probate work on the 3 estates should the IRA pass under Beneficiary 2’s estate?

Permalink Submitted by Allan Bass on Sun, 2020-05-10 13:25

The stretch is a factor, but looking at options in each case based on who will be inheriting from Beneficiary 1 & 2. Would the stretch rule extend to the new Inherited IRA beneficiaries, or would it be locked at the life expectancy of origininal owner or deceased Beneficiaries 1 & 2 in this case? For example IRA owner died at 88, Beneficiary 1 died at 66 and Benefiary 2 died at 63 prior to the inherited IRAs being set up, but the IRA will now be inherited by 2 subsequent individuals in their estates; one at 70 and one at 67. So do the inherited IRAs use the original beneficiary ages 66 & 63, or the next in line beneficiary (via their estates) ages for the RMD, and do they need to start the distribution immediatly or can they wait until the 70 1/2 rule?

Permalink Submitted by Alan - IRA critic on Sun, 2020-05-10 18:20

With a complex disclaimer strategy of Bene 2’s interest in which the owner’s estate becomes the beneficiary, the remaining LE of 88 year old owner would be only 5.3 years including 2020. About as long as the 5 year rule except there would be annual LE RMDs to take starting in 2021. Any assignment out of the estate inherited IRA to the will beneficiaries of the owner would not change this distribution period. It would remain 5.3 years counting the 0 RMD year 2020.
Beneficiary 1’s interest most likely was inherited by Beneficiary 2 under the IRA agreement since Bene 1 pre deceased the owner, but that should be verified, and it is also too late for beneficiary 1’s interest to be disclaimed.
As it presently stands, Bene 2 likely inherited the entire balance in owner’s IRA in 2019. While Bene 2 could have taken LE RMDs had they lived, the death of Bene 2 in 2020 triggers the 10 year rule of the Secure Act. Bene 2 did not name a successor beneficiary before passing, so the IRA balance will pass to the beneficiaries named in Bene 2’s will, and if the IRA is assigned by you to them, they will likewise be subject to the 10 year rule. That means they will have no annual RMDs, but their inherited IRAs must be drained by 12/31/2030.