IRA with an Estate Beneficiary
IRA passes away in DEC 2009 at age 74, Traditional IRA valued at $410,000. The total value of the estate is about $1,500,000. The sole beneficiaries of the estate are the decedants 7 children, the youngest being age 24.
My research indicates that an IRA can be established as a Benficiary IRA of the estate. What distribution options are available to pass the IRA to the beneficiaries?
Permalink Submitted by Alan Spross on Mon, 2010-01-25 22:50
Since the IRA owner passed after the required beginning date, the estate is able to take RMDs over the remaining life expectancy of the IRA owner as if the owner lived.
The 2009 RMD for the owner is waived. The table I divisor for age 74 is 14.1. That divisor is reduced by 1.0 each year, so for 2010 the divisor is 13.1, then 12.1 for 2011 etc.
Rather than keeping the estate open for 13 years, the executor can have the IRA assigned to the estate beneficiaries, who must each continue to use the same formula for their RMD. This IRA could last 13 years if distributions were limited to only the RMD for each estate beneficiary.
Permalink Submitted by Anonymous (not verified) on Tue, 2010-01-26 03:43
alan:
Refresh my memory. How does it continue after the divisor reaches 1.1 in year 13?
Thanks.
pmk
Permalink Submitted by Alan Spross on Tue, 2010-01-26 04:55
I recall the discussion, but not the conclusion. It seems like the divisor would continue to drop to a fraction less than 1.0, in this case to .1. The tables do not show any divisors less than 1.0 and an owner would never run into this. Once the divisor equals 1.0 or less, it still does not guarantee that the account is drained if the IRA has earnings after the 12/31 valuation date.
For example if the divisor was .8 and the account balance on prior 12/31 was 1,000, the RMD would be 1,250. That would usually drain the account, but not if the account gained more than 250 before the RMD was distributed. But when the divisor goes to -0- it appears the account would have to be totally distributed.
I can’t see this carrying on more than a year after the divisor falls below 1.0 for a non spouse beneficiary. But for an owned IRA the lowest divisor is 1.9, meaning that the RMD alone could never totally drain the account unless the account lost a large % after the valuation date and before the RMD distribution.
Permalink Submitted by Rodney Skelton on Tue, 2010-01-26 14:27
Alan,
Thank you for this answer. I have a couple of follow-on questions, In order to assign the IRA to the Estate Beneficiaries, must all beneficiaries participate in this assignment, or will each beneficiary have their own IRA and what type of IRA is this, i.e. Inherited IRA or some other naming convention? Can a portion of the beneficiaries take a distribution instead of taking the assigned IRA?
If the executor chooses to distribute the IRA rather than assigning, do you have recommendations on how to minimize taxes to the estate and/or beneficiaries?
Thanks for your assistance!
Rodney