Inheriting an already inherited IRA
A maintains an IRA with a well-known investment firm. He has no spouse and has already started taking his distributions. He lists three equal primary beneficiaries (and no secondary beneficiaries) on his account. He dies. One of his listed beneficiaries is his sister, B. Before B is able to convert her interest in A’s IRA into an inherited IRA of her own, she dies (after A’s death). B’s will names her sons, C and D, as her executors and equal beneficiaries. C and D complete the appropriate paperwork to transfer B’s share of A’s IRA into an inherited IRA in the name of B’s estate. In the process, they take an RMD on behalf of B’s estate.
C and D now seek to transfer their shares of B’s inherited IRA into separate inherited IRA’s of their own. May they do so? Or must they take their shares of B’s estate’s inherited IRA, but losing the tax protection an inherited IRA would provide? What law applies?
Does anything change if there are no named beneficiaries in A’s IRA, meaning that those assets pass under the terms of the estate, albeit to the same three beneficiaries?
Permalink Submitted by Alan Spross on Thu, 2012-05-10 19:11
The executor of B should be able to assign the shares of B’s estate beneficiaries to inherited IRAs for each.
However, the RMD for C and D depends on other circumstances.
Did A pass prior or post their RBD?
Was B older than A and the oldest beneficiary of A?
Was the inherited IRA for the estate established by the end of the year following the year of A’s death?
If A had NO designated beneficiaries, will also need the answer to first question above.
Permalink Submitted by William Cook on Mon, 2012-05-14 20:35
What law would apply to assigning shares in an inherited IRA in the name of an estate to the estate’s beneficiaries and maintaining those shares in new inherited IRA’s? Several well-respected financial services organizations have differing positions on this issue. What law applies?
Permalink Submitted by Alan Spross on Mon, 2012-05-14 20:51
It should not be a problem finding an IRA custodian that will set up inherited IRAs for the beneficiaries of an estate. Estate’s are not expected to have to remain open until the IRA is fully distributed since estate IRAs can still spread distributions over a number of years.
It is important to know that the RMD does not change as a result of assigning the IRA to the beneficiaries in separate inherited IRA accounts. The IRA still falls under the 5 year rule if the owner passed prior to the RBD or the remaining life expectancy of the owner had they lived if death occurs after the RBD. The benefit of assignment is that each beneficiary will have their own inherited IRA to manage and distributions will not have to run through the estate. Form 1041 will no longer have to be filed.
Here is an article written when it was more of a problem finding IRA custodians than it is now. But the advice given still holds:
http://www.ataxplan.com/bulletinBoard/ira_providers.cfm