Use of “Income with respect to Decedent” for RMD after death
As Executer of my mother’s estate, all assets passed as POD or TOD. She passed before taking her RMD. Our Financial Advisor suggested we could use “Income with respect to Decedent” to change the tax obligation back to the decedent 1040 tax form. This would be advantageous for all beneficiaries. IRS Publication 559 refers to Publication 590-B Distribution from IRA. Neither publication actually answers the question regarding “Income with respect to Decedent” for an RMD. Neither publication instruct how to actually proceed with “Income with respect to Decedent”. Is it possible to use “Income with respect to Decedent” in this situation? What forms are used to accomplish this? Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2021-11-26 17:20
The advisor is incorrect. IRD is income the decedent would have been taxed on had they taken a distribution while living. The named beneficiaries of the IRA, or the estate if there is no named beneficiary, is responsible for completing the year of death RMD of the decedent to the extent that the decedent did not. This distribution is taxable to the recipient (beneficiary) in the year distributed, and the beneficiary is also responsible for the penalty if they do not complete the year of death (but no other years) RMD.
The advisor’s confusion on this may be due to how the IRD deduction works. If mother has a federal estate tax liability, which is highly unlikely given the huge credit of over 11 million, then the amount of the estate tax that is attributed to the IRA distribution (year of death RMD), is eligible for a misc itemized deduction for the beneficiary to offset some of the taxable income from the RMD. If no estate tax is due, then the IRD deduction does not apply.
Either way, this does not push the RMD income back to the decedent’s final return because the decedent did not receive the distribution. The 1099R will be issued to the beneficiary who receives the RMD, and that beneficiary would also receive the IRD deduction only if federal estate taxes were due on mother’s estate.
You may have a different challenge if the estate itself has no liquidity because all the other assets passed with direct beneficiaries (TOD, POD, Life Ins or Retirement accounts with named beneficiaries). While those who inherited retirement accounts must complete the year of death RMD, you may have a challenge getting them to reimburse you for final expenses, taxes, funeral and final medical costs, etc). If these expenses are large enough some of these creditors could go after those beneficiaries, but that is not likely for modest expenses of mother that do not get paid.