Intestate IRA Owner
IRA owner died in November,2016 at the age of 72. He was a widower and died without having completed his will. Most of his estate was comprised of Traditional & Roth IRA’s. He was taking his RMD’s up until the time of his passing. By beneficiary designation, he left 60% of his IRA assets to his adult children which was not a problem. Separate accounts were set up for the adult children and they each took their share. This is where the problem comes in. He left 40% to his granddaughter, a minor who was also his adopted daughter. It’s a long convoluted story as to how that came about. It was intended by the decedent to set up a trust for the assets passing to the granddaughter (adopted daughter). The executor for the estate petitioned the courts to have a trust set up for the benefit of this minor child. The court has just granted authority for the trust to be set up last month in November. In the meantime for the past five years no one had the authority to do anything with these assets or to act on behalf of the minor granddaughter. Nothing was added or distributed from any of these accounts. Now the question is how to proceed. There is approximately $490,000 of traditional IRA accounts and $24,000 of Roth IRA accounts presently with T.Rowe Price as custodian. Obviously it would not be prudent to liquidate the IRA acccounts and put them into the trust and trigger a large tax. Should the estate go back and take RMD’s for what should have done in the past five years and file amended 1041 returns? Any thoughts or comments on how to proceed with this situation would be appreciated.
Permalink Submitted by Alan - IRA critic on Fri, 2021-12-17 22:37
Wasn’t the minor named on the IRA contracts as a 40% beneficiary? If so, TRP won’t make a distribution to anyone but the minor or to the custodian of an UTMA account established to benefit the minor according to state requirements. TRP may still need their own legal team to determine if the court decision allows them to recognize the trust as the beneficiary for the benefit of the child, and whether this can be done retroactively to the DOD or not. Delinquent RMDs cannot be caught up until TRP determines who they should be distributed to. The RMDs can then be caught up and 5329 forms filed for 2017-2019 and for 2021 to request the penalty be waived. The IRS can be expected to waive the penalty given the reason for the delinquency.
Another problem is whether the trust can be treated as qualified for look through or not when it did not exist by Oct, 2017. If not qualified, the RMDs will have to be based on decedent’s remaining LE. If qualified, and if the creation of separate accounts for the others was completed by 12/31/2017, perhaps the only interest remaining in the decedent’s IRA will qualify as a separate account for the minor. If so, and if the trust can be treated as qualified, the minor’s RMDs would be determined using minor’s must longer LE than the decedent’s. There are alot of “ifs” here and therefore the determination is not obvious.
For just the inherited Roth, the Roth owner is treated as passing prior to the owner’s RBD because there is no RBD for a Roth IRA. Therefore, if the trust cannot be treated as qualified because of it’s post death creation, the 5 year rule will apply for the Roth IRA requiring it be drained by the end of 2022 (2020 does not count). But not for the inherited TIRA.
To add to the complexity, the courts do not have the authority to make various exceptions to the RMD rules and other tax requirements. But TRP is in control to a degree, so the trustee or the trust attorney needs to talk to them soon.
Permalink Submitted by Paul Edmunds on Tue, 2022-01-11 17:04
Thank you, Alan for your thoughts & comments on this convoluted matter. And YES, the minor was named as a 40% beneficicary on the accounts. Our next step is to contact TR Price and see how they are willing to proceed with the recently drafted and approved trust documents.
Permalink Submitted by Bruce Steiner on Thu, 2022-01-13 00:14
T. Rowe Price may be able to transfer some or all of it to an inherited IRA in the name of a family member as custodian for the minor under the Uniform Transfers to Minors Act.
Another possibility is to wait until the minor turns 18 when she can take it over. She could then set up an inherited IRA, take the missed distributions, and ask the IRS to waive the penalties based on her having been a minor. Since the missed distributions probably weren’t very large, even if the IRS doesn’t waive the penalties, they probably won’t be very much. Alan is correct that the IRS tends to be liberal in waiving the penalty.
Depending on state law, setting up a guardianship for the minor might or might not be practical. In some states guardianships are cumbersome.
Given the amount involved, they may want to consult with competent tax/estates counsel.
Bruce Steiner