Beneficiary IRA – RMD for Entity or Individual
Hi Guys,
First post here, I am a hopeful CPA in training. I have picked up some great information from reading the posts, so thanks everyone for contributing and for maintaining the site, it is extremely helpful.
My question is regarding how to calculate beneficiary ira RMD amounts. Here are the facts: Individual (brokerage) IRA, the owner dies. The primary beneficiary is listed as the spouse, no contingents listed. The spouse, an elderly woman, decides she doesn’t want any part in receiving the IRA positions (or the taxes), she wants them to go to her children. Therefore, the spouse submits necessary paperwork to disclaim the IRA assets.
At this point, my logic tells me that the estate of the original ira owner owns the account. The children of the original owner set up accounts and receive the funds at the spouse’s discretion (who is the executor of the estate), but now the calculation becomes a question. The children would like to each receive a lifetime income stream based on their age at the year after death. This is not possible if the Entity (the estate) is the legal owner, so I have been told.
Can anyone shed some light on #1. -When the spousal beneficiary disclaims the account, does the account then go back to the estate of the original owner? Or can the beneficiary disclaim the account and give authority as to who should receive the funds?
#2. If the estate does legally own the accounts, and the executor then gives authority to divide the account up to the beneficiaries, is the beneficiary IRA RMD calculation then based on the entity and not each individual? If so, this is a huge disadvantage, because the 5 year full withdrawal rule applies (I think). The whole point of the mother disclaiming the funds was to have the children receive a yearly income stream. There is actually a roth account as well, same situation.
Any help is appreciated!
Thanks.
Permalink Submitted by Alan Spross on Sat, 2011-08-06 04:47
A disclaimer should never be done without definite determination where the funds will go. IRA agreements contain default provisions stating where the funds go if there is no primary or contingent beneficiary. So the IRA agreement is the first item to be researched. Since the disclaimant is a widow, the most likely default beneficiary WILL BE the estate of the decedent, although is possibly could list the children.
In no event can the disclaimant (widow) direct where the IRA funds will go when she disclaims.
IF the estate does turn out to be the default IRA beneficiary, the IRA will be an asset probated under the will of the decedent and that could give rise to the widow having to disclaim under the will as well. Since the estate cannot be a designated beneficiary, it becomes important whether the owner passed prior to his RBD or later. If prior to the RBD, the 5 year rule applies and all the estate beneficiaries will have to drain the IRA by the end of the 5 th year following the year of the owner’s death. If owner passed on or after the RBD, the estate beneficiaries can take RMDs or the remaining life expectancy of the decedent so that would stretch the IRA for more than 5 years in most cases.
Accepting the funds might have provided a longer stretch depending on how old the widow is. She could have taken the RMDs and gifted the proceeds to the children, but if her tax bracket is higher than theirs this becomes less attractive. The Roth would not be affected by her tax rates, but the Roth does present another problem. The owner of a Roth is always treated as passing prior to the RBD, and that means the 5 year rule applies even if the owner passed after this RBD. This could give rise to the situation where disclaiming the TIRA would be acceptable, but not disclaiming the Roth which will preserve all the Roth funds until the widow passes since she can assume ownership and not take RMDs or take some distributions tax free and gift them to the children.
The estate executor can usually close the estate and have the IRA account assigned to the beneficiaries who can then create separate accounts. But these separate accounts do not change their RMDS, they just provide separate management and control of each’s inherited IRA.
Permalink Submitted by brock gustafson on Sat, 2011-08-06 17:29
Thank you for the quick response.
The original owner passed after RBD, and as far as I know the ira agreement is for the estate to own the account if no beneficiaries listed. It makes sense that the beneficiaries could each establish bene IRA’s after probate and with authority from the executor, but I have received conflicting information on the RMD calculation method. If the spouse disclaims and the estate owns the account up until the account is split up to the beneficiaries, one could think the RMD would be calculated based on the entity, similar to how it would be calculated if a trust owned the bene ira. And if RMD calculations are treated this way, the only option I see is the 5 year rule.
The least risk from the custodian’s perspective is certainly the 5 year rule, since the IRS wins without a stretch IRA. But obviously the beneficiaries would rather have stretch IRA accounts if possible, at least for the traditional IRA.
I think the best option is for the original primary beneficiary, the spouse, Not to disclaim the account. But if she insists and her lawyer agrees that the stretch IRA is an option for each beneficiary, the transfer agent will have to find a way to understand and comply.
If you can shed any additional light on how the entity RMD calculation method is incorrect it would be very helpful!
Thanks again.
Permalink Submitted by Alan Spross on Sat, 2011-08-06 19:25
The 5 year rule can only apply if the IRA owner passes prior to the RBD. In this case, since the owner passed after the RBD, the remaining life expectancy of the owner is the only option. For example, if the owner was 78, the IRA must be distributed over a period of 11.4 years. Table I applies in Pub 590 and the RMD divisor is reduced by 1.0 each successive year.
As for the processing issues of transferring an IRA out of an estate to the estate beneficiaries, the following should be helpful:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm
It is definitely not in her interest to disclaim the Roth since the 5 year rule applies to Roth IRA. The Roth is treated as if the owner died BEFORE the RBD and that is why the 5 year rule would apply there, whereas it would not apply to the traditional IRA. Even for the traditional IRA, it is probably best to not disclaim unless the children need to distribute most of the money and would not stretch the IRA even if they could.