Inherited IRA Question
Met with a young lady (age 31, will call Lucy)this morning who’s mother passed away in May of 2010. Lucy’s mom had an IRA (approx 250k)and named Lucy (her only child) as her beneficiary. After mom’s death, the advisor sat down with Lucy and explained to her that she did not have to take distributions from her mom’s IRA. In 2012, Lucy was contacted by the advisor and informed that because they had not started any distributions, should would need to cash out within 5 yrs of mom’s death and pay tax. They had Lucy cash out 50k last year and another 35k in February of 2013 and the rest within the next two yrs. These distributions have thrown Lucy into a higher tax bracket not to mention being taxed on money she does not need. Lucy’s accountant contacted the advisor and asked why Lucy was not told about her ability as a beneficiary to stretch her distributions, the advisor responded by saying he was not sure. Other than contacting an attorney to bring a potential suit, what recourse or options does Lucy have?
Dan
Permalink Submitted by mk foss on Mon, 2013-03-04 18:11
Some IRAs only provide for the 5-year rule for beneficiaries when the IRA onwer was under 59-1/2; if that’s the case here nothing else can be done. In most cases, life expectancy is the default. Lucy can switch to that method by determining her life expectancy from the Single Life table based upon her age in 2011. She would reduce that factor by 2.0 to determine the 2014 RMD and then go forward from there using life expectancy. She would need to file Form 5329 for 2011 to request that the 50% penalty for failure to take an RMD in 2011 be waived due to bad advice.
Permalink Submitted by Daniel P Stephans on Mon, 2013-03-04 18:38
This is beneficiary IRA question. I think you mean if the paticpant (mom) had died before age 70 1/2, the beneficiary would have to liquidate the account within 5 yrs assuming Lucy had not begun her distributions by 12/31 of the year following mom’s death (in this case 2011). This was the case. As a result, Lucy has liquidate teh account within 5 yrs and pay tax. If mom had died over the age of 70 1/2, Lucy could have used mom’s remaining life expectancy. Mom was in her 60’s when she passed. I’m looking for any private letter revenue rullings, etc.
Permalink Submitted by Alan - IRA critic on Mon, 2013-03-04 18:21
This certainly warrants potential litigation. Hopefully, she has documented all these discussions. Presumably, her mother passed prior to her RBD, and the vast majority of IRA agreements state that life expectancy is the default arrangement. This needs to be determined. If LE is the default, according to IRS letter ruling 2008-11028, she could have restored her life time stretch by making up the missed 2011 RMD along with the 2012 RMD in 2012. Pending review of the IRA agreement RMD provisions, she should REFUSE to take out any more this year. Unfortuneately, she cannot return or roll over what has already been distributed. But all details need to be organized and the contract provisions examined before proceeding further. She needs to obtain 12/31/2010 value and determine what her 2011 RMD would be using her age in 2011, then the 12/31/2011 value and 2012 RMD vrs what was distributed in 2012, same for 2013. Since she does not need the money, she probably wants to restore life expectancy RMDs if possible, if there is enough left to pursue that.See attached: http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061-1.html
Permalink Submitted by Bruce Steiner on Mon, 2013-03-04 20:22
Where was the lawyer handling her mother’s estate?