Beneficiary IRA Distributions and Time Limit
My Client passed in July, 2010 and changed the parent’s IRA to a Beneficiary IRA for the son. The son received a distribution of $52,000 in November,2011, taxes were withheld and distributed the balance to his three children as a gift. How much time will IRS allow for distributions to take place from November 2011 for additional distributions for gifts to his children and for taking some additional funds to reinvest in a non qualified account. I have understood that the son would could take up to five years to exhaust the funds in the beneficiary IRA, if he doesn’t elect a lifetime distribution upfront. Would you kindly clarify these issues?? Many thanks for your assistance.
Permalink Submitted by Alan Spross on Wed, 2011-10-26 23:51
The 5 year rule only applies if the decedent passed prior to his required beginning date.
To be sure I understand your post, it appears that your client was the parent and the son was the IRA beneficiary. Also, I think you meant that the 52k distribution was in Nov, 2010. Further, I think you are concerned about the annual gift tax exclusion of 13,000 per donee. This might have been exceeded if any of the children received more than 13k in 2010 from the son, and that would trigger a gift tax return for the son. There is another 13k limit for each donee in 2011 and each year thereafter. If the son lives in a community property state and put the funds in a joint account before distributing the money, the funds would become community property with automatic gift splitting with his spouse. That would allow up to 26k to be gifted to each child, 13k from each spouse.
If the 5 year rule applies, the only requirement is that the account be totally distributed by 12/31/2015. But any amount the son wishes can be taken out in any year until then. But the son can still restore the lifetime stretch for himself by simply being sure to take the annual RMD for 2011 before year end. Even if he does not take the full 2011 RMD, he can probably restore the lifetime stretch by making up the difference and paying the penalty for those years that he fell under the annual lifetime amount. Under either method there is no annual maximum.
There is also no time limit for when he actually makes gifts to his children as the gift tax issues are the same regardless of whether the funds came from an inherited IRA or just another source.
I may have misunderstood your question or the relationships here and if that is the case please clarify any additional questions.