IRA Disclaim

Submitted by Jeff Nolan on Fri, 2012-06-29 20:54

My clients mother passed away in March 2012. She has an IRA worth $330,000. My client is married and sole beneficiary. However my client has 7 brothers and sisters and wants them to receive equal shares. We talked about disclaiming 7/8’s and dividing equally among the brothers and sisters. His accountant told him there would be a problem since his wife would be next in line if he disclaimed. I thought if he disclaimed it would go to the estate (which is to be divided equally amongst the children according to will) and then to his brothers and sisters. Is this correct?

Need Help.

Thanks



Submitted by Bruce Steiner on Fri, 2012-06-29 21:57

His accountant shouldn’t be giving legal advice.

What does the beneficiary designation say as to contingent beneficaries?

If the beneficiary designation is silent as to contingent beneficiaries, what are the default provisions of the IRA agreement?

If it’s not practical to disclaim a portion of the IRA, perhaps he could disclaim other assets, or perhaps he could make gifts to his siblings, either now (in other words, as quickly as he can using the annual exclusion), or each year as he receives that year’s IRA distribution (adjusting for income taxes).



Submitted by Denise Appleby on Sat, 2012-06-30 08:49

Adding to Bruce’s list of questions… just in case the disclaimer would lead to the default beneficiary provisions applying, the question becomes ” are all of the 7 siblings children of your client’s mother”?



Submitted by Jeff Nolan on Sat, 2012-06-30 20:44

Client is currently checking with Merrill. He does not think there was a contingent bene. All 7 siblings are his mothers children. Why they weren’t listed he does not know.If I understand correctly, if there is no contingent, it will go to the estate and will go through probate and will be divided according to the will. Is that accurate? (Mother died in Illinois)



Submitted by Alan Spross on Sat, 2012-06-30 22:17

Yes, that is accurate following qualified disclaimer when there is no contingent and the estate is the default beneficiary under the IRA agreement. He would only disclaim 7/8 since he cannot benefit from a disclaimer as as 1/8 beneficiary under the will. He must take his mother’s 2012 if she passed after her RBD, and taking the year of death RMD will not invalidate his ability to disclaim. He could also choose to take 1/8 of that RMD providing the estate distributes the rest and/or the IRA is assigned to beneficiaries before the end of 2012 and they understand to each take their own share out by 12/31. The IRS does not care which beneficiary satisfies the year of death RMD in the event they want to satisfy it unequally.

He can then take RMDs from his inherited 1/8 IRA using his own life expectancy. The siblings will inherit the rest of the IRA through the probate process. Their ability to stretch their portions is affected by the mother’s age at death being on or after her RBD. If she passed prior to her RBD, the 5 year rule will apply to the 7 siblings interest. If after, the siblings can use her remaining non recalculated life expectancy.

Either way, the executor should assign the IRA to the siblings so they can set up an inherited IRA for each of them and at least manage their inherited IRA investments as they see fit, even in the worst case of a 5 year rule.

Client needs to check his mother’s tax returns or records to determine if she had any basis in her IRA. If so, this would be inherited and all distributions would include a tax free portion.

Remember, there is a 9 month time limit to execute the disclaimer.



Submitted by Jeff Nolan on Mon, 2012-07-02 16:48

Thank you for the informatio…..

My clients brother passed away in 2004. If after disclaimer, the estate ends up as beneficiary, and the will stipulates children of deceased to be divided equally,is his deceased brother’s wife eligible for a share? Or, does the will have to specifically mention her as a beneficiary of the estate?



Submitted by Bruce Steiner on Mon, 2012-07-02 17:00

The Will should say what happens to property passing to a deceased beneficiary. In the case of a child, usually it will say that it goes to or in trust for his/her issue, but sometimes it will say that it goes to or in trust for the child’s spouse, and occasionally it will cut out the deceased child’s family entirely, in favor of the testator’s other issue.

If the Will is silent, then check the default provisions of the applicable state law.



Submitted by Jeff Nolan on Tue, 2012-07-17 22:08

Here are the final facts;
1. Mother died March of 2012(80yrs. old)….Father passed away 2010
2. 8 children – all children same parents (one child has passed) 7 remaining
3. $340,000 IRA Account
4. Oldest son as Primary Beneficiary -100%
5. Second oldest as Contingent Beneficiary – 100%
6.Will states estate to be divided equally. Deceased persons share to descendant’s , per stirpes

What we are proposing;
1. Primary Beneficiary disclaim 87.5% – 12.5% transfer to inherited IRA (If correct….. to be taken over their life expectancy)
2. Contingent Beneficiary disclaim 87.5% – 12.5% transfer to inherited IRA (can contingent take over life expectancy?nif not what are their options)
3. Remainder to estate to pass through probate……set up 6 inherited IRA accounts (what are the options for the remaining beneficiaries of the estate?)



Submitted by Alan Spross on Tue, 2012-07-17 23:43

Remember that mother’s 2012 RMD must be taken out by the end of this year. There are various ways to do that, but if all disclaimers and per stirpes issues can be finalized by year end, each interest could take 1/8 of the 2012 RMD. Mother’s 2012 RMD can go to any beneficiary, but doing that will complicate the math relative to the remaining interests.

1) Primary beneficiary disclaims 7/8 and all interest in the IRA under the will. RMDs for retained interest taken over primary’s life expectancy (non recalculated)
2) Contingent beneficiary disclaims 6/7 since there are only 7 interests received by the contingent and all interest in the IRA under the will. Contingent’s life expectancy as above.
3) Remaining interests under the will (presuming mother’s estate is the default beneficiary under the IRA agreement) will require RMDs over mother’s remaining life expectancy using age she would have attained at the end of 2013 had she lived. If she would have reached 82 by 12/31/2013, these other interests in the IRA must drain the IRA in 9 years (9.1 initial divisor). They cannot use their own life expectancy because they were not designated beneficiaries on the IRA. Therefore, they will get less than 1/2 the stretch of the primary and contingent.

The estate can still assign their interests in the IRA to the 6 beneficiaries (perhaps more depending on per stirpes heirs) so they can each manage their portions independently. If probate cannot be completed in time for RMDs, the RMD for the will beneficiaries will be paid to the estate and passed through to beneficiaries on a K1. Remember to check if Mother had any basis in her IRA from non deductible contributions. If so, each interest acquires a pro rata share of basis and files an 8606. They also need to name their own successor beneficiaries ASAP. IRA custodian will probably try to push distributions to the estate but executor can control when distributions are made.

Disclaimers in this situation are tricky since they most be done at two levels within 9 months of death. Legal assistance should be considered here.



Submitted by Jeff Nolan on Thu, 2012-08-02 22:23

Im’ back for a little more help. I appreciate all the info. How do we divide the assets when there is very little cash. if I understand correctly there can be no direction from a beneficiary who is disclaiming. We have the disclaimers for the primary and contingent. But once again there are 6 more beneficiaries that will split the remaining portion when it flows through the estate. We have to remove the two disclaimed portions in order to process the remainder in estate at probate. Is there a way to sell the assets in the IRA to create cash with out triggering a problem? We cannot divide the IRA in 8 equal parts in its current allocation. In case you were wondering, yes, the rmd for 2012 has been take.



Submitted by mk foss on Fri, 2012-08-03 17:06

You can liquidate assets within the IRA to make the division easier – since only withdrawals from the IRA are taxable there’s no acceleration of tax.

It seems like primary beneficiary must disclaim a percentage of IRA plus his/her interest in the estate’s inherited IRA. The contingent beneficiary must do the same thing. Probably everyone is aware that only the remaining 6 are to inherit the IRA but the disclaimer needs each disclaimant to disclaim what they’d inherit both directly and indirectly in order to be valid.



Submitted by Alan Spross on Fri, 2012-08-03 17:30

Mary Kay,

Are there any transactions the disclaimant might perform in this situation that would bring the “non acceptance” requirement for a qualified disclaimer into play?

For example, before the disclaimer is processed, the disclaimant may opt to transfer the account to another custodian, move the account to cash, change the investments, name a successor beneficiary in the event disclaimant passes before the disclaimer is accepted etc. Are any of these things a possible acceptance issue, or does the disclaimant only have to avoid taking distributions exclusive of decedent’s RMD?

The Regs include several examples with respect to real estate assets, but strangely they do not specifically mention brokerage accounts.



Submitted by Bruce Steiner on Fri, 2012-08-03 17:43

You can do more than most people think and still be able to disclaim. See Rev. Rul. 2005-36, PLR 200203024, and my article in Steve Leimberg’s Employee Benefits and Retirement Planning Newsletter #309 (6/30/2005). However, where possible, it’s better to disclaim before doing anything, so as to avoid the issue.



Submitted by Jeff Nolan on Mon, 2012-08-06 22:18

BAck again. Was just informed the primary beneficiary received the remaining MRD back in April. His mother died in March. The check was made out to him which he deposited in the estate account to pay bills. Doesn’t this fall into the IRD category and would be taxable to the beneficiary? I sent an email to the attorney asking if we needed to amend the disclaimer to reflect t the payout. Here was his response “So why couldn’t that be considered part of the RMD, payable not to ——- personally, but to ——–as Executor of the Estate? We can check with him, my guess is that he deposited that into the Estate account, and we’ll account for it that way, since it is the estate that must take the RMD or face tax penalties otherwise.

Thanks for you help.



Submitted by mk foss on Mon, 2012-08-06 22:48

The beneficiary is the one to take the MRD once the owner dies – it is NOT the estate. The beneficiary can take the MRD and still disclaim. Rev Rul 2005-36 made it clear that the disclaimer is still valid if the beneficiary as of the date of death takes the decedent’s MRD.
The MRD is not taxable to the estate, it’s taxable to the beneficiary who received it.



Submitted by Alan Spross on Mon, 2012-08-06 23:14

How about him reporting the full 1099R RMD and then nomineeing 7/8 to the estate to keep the disclaimer math from becoming more complex?

His 1/8 he deposited to the estate that is his could be returned to him as a short term loan made to the estate.

Would that be easier? RMD is then taxed according to the various shares post disclaimer.



Submitted by Bruce Steiner on Fri, 2012-09-21 02:59

This forum is for general information, not specific legal advice. I suggest you consult with competent tax/estates counsel.



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