(Another) Estate Inherited IRA Question
I have a unique (I think) situation that I haven’t been able to find any answers to.
We had two clients, lets call them Barbie and Ken. Barbie passed away leaving Ken as the designated beneficiary of her IRA. A few weeks later, Ken passed away. In the meantime, Ken had not updated his IRA beneficiary — it was still Barbie. We opened an Inherited IRA for Ken’s Estate. In Ken’s Will, he wanted his Estate to go to his 5 siblings (per stirpes).
After Ken’s passing, in the time we were establishing Inherited IRAs for the 5 individual beneficiaries (to perform an “Estate Bypass”), one of the individual beneficiaries also passed away (let’s refer to this one as John Cena).
John Cena has one child and sole beneficiary, Dwayne “The Rock” Johnson. Since John passed away before performing the “Estate Bypass” but after Ken, how should Ken’s Estate Inherited IRA flow? Does it go to Dwayne? Does it go to Dwayne through an Inherited IRA for the Estate of John Cena? Does it flow to Dwayne in the form of a distribution? If so, who pays the tax?
I’m just trying to figure out who gets the proceeds (my thinking is Dwayne), how does it go to them, and who pays the tax?
Thank you for your help!
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-08 02:30
IRA distribution income is reported by whoever receives the distribution including distributions that pass through an estate to estate beneficiaries. Assignment of the IRA out of the estate by the executor can result in distributions being deferred until the eventual beneficiary takes the distribution. The situation described here explains why some IRA custodians will not cooperate with executor assignment, and instead prefer to simply make a total distribution to the estate that inherited the IRA. It should also be noted that had Ken updated his beneficiary to his siblings “per stirpes” on the IRA agreement, then Dwayne would have inherited from the IRA, not subject to probating of the will. As it is, with multiple estates subject to probate, Dwayne will still end up with his share of the inherited IRA, but it may take considerable time. He will also eventually have to report the taxable income.
Permalink Submitted by David Mertz on Tue, 2022-03-08 03:56
“It should also be noted that had Ken updated his beneficiary to his siblings “per stirpes” on the IRA agreement, then Dwayne would have inherited from the IRA, not subject to probating of the will.” That doesn’t sound right to me since John did not predecease Ken. Even with a per stirpes designation, I would expect that the John’s share would be assigned to an inherited IRA for the benefit of John’s estate which could then potentially be assigned out of John’s estate as an inherited IRA for the benefit of Dwayne. However, it would be prudent to check Ken’s IRA agreement for anything that applies to this situation. I seem to recall that some IRA agreements state that if a beneficiary dies without having designated a successor beneficiary, the beneficiary’s share is required to be distributed to the beneficiary’s estate. If that applies here, that would seem to preclude establishing an inherited IRA for the benefit of John’s estate and then assigning that out of John’s estate.