Inherited IRA not under my control RMD’s?

Submitted by Brian Hennaman on Tue, 2010-03-30 22:37

My mother passed away in 2006. It was brought to my attention in 2008 that I am the beneficiary of a Trad. IRA she had. She passed away at age 63, so she was not taking RMD’s yet. She listed her beneficiaries as “my decendants,” so I have been battling back and forth with the IRA custodian to the IRA (or my portion of it) officially transferred into my name as beneficiary. I am hoping that in the next month that will have finally happened. At this point, the IRA is still titled completely in my mother’s name, and the title does not yet say “daughter x, beneficary.” Since I am officially becoming the owner of the IRA now, in 2010, am I responsible for paying RMD’s for 2007 and 2008? If so, does the 50% penalty apply to me? I think I have a legitimate case to not pay the 50% tax since I was not even notified that I was a beneficiary until 2008. Plus, since I will not take control of the of the IRA for another month, there is no way I could have requested the RMD’s come out any earlier than now. What does the IRS say I have to do in this case? Also, what documentation had the IRS been receiving since 2006 on the IRA, and what documentation will they receive going forward that would alert them to any possible missed RMD’s? If I don’t pay what I’m supposed to pay if there are penalties, how many years have to pass before I am in the clear that the IRS can’t come back and fine me? For those who post, please identify your background, so I may ascertain what level of confidence I can have in your answer.



Submitted by Anonymous (not verified) on Wed, 2010-03-31 02:16

First off, the sources you need to look at are Publication 590 and the Final RMD Regulations of 2002. You can GOOGLE everything very easily:

Your mother died pre-RBD which means that you have a choice of annual LE distributions or liquidate the whole account within five years. You mentioned missing 2007 and 2008, why not 2009?

I don’t think you have a good case stating to the IRS you just did not know this account existed – anybody could say that, so I would think of something more believable, if you ask for a waiver of the 50% penalty for the 3 years you missed (see IRS Form 5329 Instructions on how to ask for the waiver). And ofcouse, make up the missed RMD immediately.

You could also go the other route and deplete the account by 12/31 of the 5th year following your mother’s death. No penalties exist for this course of action.

The IRS received annual 5498’s showing the fair market value of your mother’s year-end balance. Unless they have a program in place to connect the dots – SSN matching a taxpayer who filed a final return, I do not think they would pick up on anything.

Hope this helps. I’m sure other post will follow.

pko

Submitted by Alan Spross on Wed, 2010-03-31 03:20

Quite likely much of the delay here was caused by the beneficiary designation “my de(s)cendants”, which includes multiple generations in certain situations and is therefore ambiguous and not the same as a per stirpes designation. It is quite surprising that the custodian accepted this format, knowing that it could easily have produced litigation etc. Perhaps it has been resolved that you are the sole beneficiary based on the family structure.

I agree that you should take the 2007 and 2008 RMDs ASAP. The 2009 RMD was waived and 2009 is also ignored if you intend to use the 5 year rule. IRS private letter ruling 2008 11028 allowed a beneficiary to preserve the lifetine stretch by making up missed RMDs and paying the 50% excess accumulation penalty for the delinquent RMDs on Form 5329. However, there is no indication that you could not also request that the penalty be waived per page 6 of the 5329 Instructions. Use the best reason at your disposal to justify the request.

As pko indicated, the IRS receives the 5498 each year, but the custodian probably did not know for awhile who was the ultimate beneficiary either. To that end, you might be able to secure copies of the 5498 forms that went out to document your claim that neither you nor the custodian knew who the beneficiaries would be until the potential beneficiaries came forward or were contacted. That would assist with the penalty waiver.

Here is a link to an article by Ed Slott regarding the letter ruling cited above:

http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…

I suggest being more specific when naming your own successor beneficiary, which you should do ASAP.

Submitted by Anonymous (not verified) on Wed, 2010-03-31 03:38

Thanks for mentioning the 2009 waiver. I always forget that it also applies for Inherited IRAs.

pko

Submitted by Bruce Steiner on Thu, 2010-04-01 03:15

The likelihood the IRS will waive the penalty may depend on the facts. The lawyer who handles your estate planning, or the lawyer handling the estate, should have experience in dealing with the IRS on requests for the abatement of penalties, and should be able to give you some idea of whether it’s worth asking for the penalties to be waived. If you decide to ask the IRS to waive the penalties, present the reasons as best as you can. If the IRS won’t waive the penalty, and the amount involved is large enough (which it may not be), you (or the lawyer) can appeal the decision (administratively to the IRS’ Appeals Office).

If you can explain how it was that you didn’t know that you were a beneficiary, that may be helpful.

I don’t think the beneficiary description is as significant as others have suggested. A laywer would have used the word “issue” instead of “descendants,” but I don’t think that should make much difference. And whether you use “per stirpes” (e.g., if there are three children, A, B and C, and A survives, B predeceases leaving two children, and C predeceases leaving three children, then A gets 1/3, B’s two children share 1/3, and C’s two children share 1/3) or “by representation” (A gets 1/3, and the other 2/3 is divided equally among the five children of B and C), the result is the same as to the surviving child.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL

Submitted by Alan Spross on Fri, 2010-04-02 04:22

Bruce, you don’t think that a given “descendant” could argue for a per capita allocation vrs per stirpes?

Submitted by Brian Hennaman on Sat, 2010-04-03 01:34

Thanks to all for you replies. I think I have this figured out now.

Happy Easter and Passover.

Brian

Submitted by Bruce Steiner on Sun, 2010-04-04 04:04

Perhaps. I hadn’t considered that since in more than 30 years I’ve never had anyone provide for issue of different degrees per capita (in other words, an equal share to each child, grandchild, great-grandchild). The cases where people made dispositions to a class of persons per capita generally involve grandchildren (where someone might provide for each grandchild equally regardless of how many are in each branch, and might cut out the children of a deceased grandchild), nieces and nephews (again where someone might provide for each niece or nephew equally regardless of how many are the children of which sibling, and might cut out the children of a deceased niece or nephew).

The best way to illustrate the question of how someone’s issue take is with an example. Suppose you leave your estate to your issue. You have 3 children, A, B and C. A survives you. B precedeases you leaving 2 children. C predeceases you leaving 3 children. “Per stirpes” means A gets 1/3, B’s 2 children share 1/3, and C’s 3 children share 1/3. “By representation” means A gets 1/3, and B’s and C’s children share the remaining 2/3 equally. “Per capita” would mean that A, B’s 2 children and C’s 3 children each get 1/6. That makes no sense.

The default in New York used to be per capita if the issue were all of the same degree (in other words, if A also prececeased, so that you only had grandchildren, but no living children, then the grandchildren would take equally, the same as they would “by representation”), but if the issue were not all of the same degree (as in the above example, where A survives), then they take per stirpes. The default in New York is now “by representation.”

Of course, it’s unlikely that someone would outlive two or more of his/her children. I’ve only had one such case. And, of course, most Wills override the default and specify what happens if a beneficiary predeceases.

In this case, if the beneficiary designation is silent, perhaps the IRA agreement provides a default.
————–
Alan wrote:

Bruce, you don’t think that a given “descendant” could argue for a per capita allocation vrs per stirpes?

Add new comment

Log in or register to post comments