Disclaiming to minimize taxes paid and reduce administrative headache
Two questions, about taxes on money distributed from an inherited IRA in the name of the estate and about taking RMDs before disclaiming.
Background: I was co-beneficiary (50-50%) with my stepmother on my father’s IRA. My father and stepmother died at the same time this year. I am now the sole beneficiary. I am also the executrix of his estate. He was 77 and taking RMDs; he had not taken it for 2012. That has to happen before the end of the month, obviously.
I plan to keep the half the IRA and get the other half to my dad’s heirs (my brother and I, 25% each; my four stepsiblings, 12.5% each). I am already distributing the maximum gifts to them from a non-retirement account on which I was beneficiary. (The two accounts contain the bulk of the cash assets, split 60-40). I have three objectives: minimize the headache of tracking gifts and taxes out of the IRA, minimize the taxes paid on distributions, and accelerate the other heirs’ access to the money. I am in the 28% tax bracket; the others, lower.
According to the IRA custodian, if I disclaim part of the IRA, that part defaults to the estate as an inherited IRA in the name of the estate. The heirs may not inherit this asset as individual inherited IRAs. The estate must take RMDs at my dad’s rate. The distributions I make from the IRA as executrix are taxed at the estate tax rate. The heirs may owe tax at their own rates on those distributions.
FIRST QUESTION: is it true that heirs may owe tax on money they receive as a result of IRA distributions to an estate, even though the estate would already have paid tax on the distributions?
I see in posts here that taking an RMD on an inherited IRA does not prevent disclaiming later.
SECOND QUESTION: Does that apply to everyone or vary by custodian? The IRA custodian says I may not take the RMD and then disclaim.
I just realized that to achieve the allocation I want most expeditiously, the smart move would have been to disclaim the non-retirement account, sending that money into the estate free of restrictions, then make gifts for a short period out of the IRA. (Sigh. Live and learn.)
Permalink Submitted by mk foss on Thu, 2012-12-13 18:30
As you mentioned, you can take your father’s 2012 RMD and still disclaim. Apparently he had no contingent beneficiary named on the account and the custodian’s default beneficiary is his estate. In order to disclaim, you’d have to disclaim your interest in the IRA and disclaim your interest in the IRA payable to his estate for the disclaimer to be valid.The estate uses your father’s age to determine RMDs. The amounts will be quite a bit larger than RMDs during his lifetime. The RMDs are included in the gross income of the estate but the taxation can be passed on to the beneficiaries if they receive distributions within the same tax year that the estate received the funds. The individual’s tax rate can be used on the IRA income if they receive a distribution from the estate that is not a specific bequest. There is no income passed out with a specific bequest.There is no double tax on IRA distributions – if the estate pays the tax, the beneficiaries do not, but if the timing is right the beneficiaries can receive funds and pay tax at their lower rates. The IRA custodian gave you the rule that applies in almost every case. I don’t know of any custodian that would automatically include all children and stepchildren when no contingent beneficiary is named.
Permalink Submitted by Lise Lingo on Thu, 2012-12-13 19:28
The people I was talking to at Morgan Stanley (not the IRA custodian) had said the same thing about the tax implications of distributions from the IRA: if the estate takes a distribution and gives it to heirs in the same tax year, the heirs pay the taxes on it, not the estate. That makes more sense than what the IRA custodian said (granted, they reiterated that they’re not tax advisors, so maybe I shouldn’t complain about that).
Permalink Submitted by Alan - IRA critic on Fri, 2012-12-14 00:44
You can complete your father’s RMD and still disclaim, but if you take out any more than his RMD the disclaimer will not be a qualified disclaimer.I assume your stepmother passed first and you are sole beneficiary under that scenario or did the simultaneous death Act come into play?You don’t have to keep the estate open longer than necessary in order to accomodate remaining life expectancy RMDs for the others (12 years). You can assign their shares out of the estate so that each of them can maintain their own inherited IRAs over that period. For your share only, you can use your longer individual life expectancy since you are a designated beneficiary.