Beneficiary dies before changing account title as Inherited IRA

Submitted by Sue Wong on Tue, 2013-10-01 18:28

IRA owner father dies at 81, has 2 separate IRAs, the son is the primary beneficiary of one of his IRA’s, and the sister is the other Primary Beneficiary of the 2nd IRA. The son dies 5 months later and did not take title of the IRA. RMD has not been taken out for the year yet. There was a contingent beneficiary which I understand is no longer valid since the primary beneficiary (son) has the right to name his own beneficiary, and now the Inherited IRA has to go through probate court to determine who will inherit the son’s Inherited IRA. Since he never took possession of the Inherited IRA and passed away within the same year, can the other (daughter) beneficiary of his other IRA take the MRD that pertains to the son’s inherited IRA to satisfy the RMD that year so to avoid the 50% penalty, or does the MRD has to be distribute from the son’s Inherited IRA payable to his estate?

If the daughter is able to take the MRD on behalf of her brother’s inherited IRA from her Inherited IRA just to satisfy the MRD it would make things simpler since the estate for the deceased brother has not been established, and time is of the essence since there is only 3 months left in the year and establishing one and going through administration will definitely be a longer process and may MRD for the son’s Inherited IRA may not make the deadline.



Submitted by mk foss on Tue, 2013-10-01 18:58

This is a sad situation but I don’t think that the timing is as tight as you expect.

  1. If the father did not take his entire MRD before he passed away, the daughter can take enough from her inherited IRA to satisfy the father’s 2013 MRD.
  2. If the daughter is unwilling to do this and the son’s estate cannot be established quickly enough to take the Dad’s MRD before 12/31/13 the IRS will waive the penalty if the MRD is taken out as soon as practical and From 5329 is attached to a 2012 return explaining what happened and requesting a waiver.

Submitted by Sue Wong on Tue, 2013-10-01 19:43

Item 1. I would agree with you on the logic of this as the RMD is pertained to the dad. But, what I understand is that the minute Dad passed, the beneficiary(ies) will become the owner of the Inherited IRA and distribution should be coming out of the beneficiary Inherited IRA and each would have to do MRD from their Inherited IRA. If the son beneficiary technically is now the owner of the Inherited IRA, and he has passed and can’t physically to it, and technically should be paid out to his estate, and if the sister is willing takes out the MRD from her own Inherited IRA to satisfy the brother’s MRD Inherited IRA and is paid out in her name, then I’m not sure that the MRD from the brother’s Inherited IRA is really satisfied since the MRD did not come out of his Inherited IRA.

Submitted by Alan - IRA critic on Tue, 2013-10-01 20:04

For the year of death only, the decedent’s unsatisfied RMD balance can be withdrawn by any beneficiary or in any combination among the beneficiaries. Often one of the beneficiaries wants to take a distribution that is large enough to satisfy the entire year of death RMD and if so the other beneficiary does not have to take a distribution for that year. Should one beneficiary choose to satisfy their share only, the IRS would presumably look to the other beneficiary (estate or otherwise) to take out the remaining share. In this case there was a beneficiary death and in such cases if the entire RMD does not get distributed by the end of the year, the IRS will almost always waive any penalty if the beneficiary files Form 5329 and states their “reasonable cause” for not completing their share of the RMD.  Of course, this flexibility applies ONLY to the year of death RMD.

Submitted by Sue Wong on Wed, 2013-10-02 00:32

Alan- This completely make logical sense, it would be helpful if you could point me in the direction of where the rule is written so that there is assurance that the living beneficiary can take it out of her Inherited IRA instead of taking it out of the deceased beneficiary’s Inherited IRA since setting up the estate can take longer than the time frame they are in.  Thanks

Submitted by Alan - IRA critic on Wed, 2013-10-02 03:23

  • This year of death RMD option is not directly addressed in the tax code. The interpretation is gleaned from the following IRS Reg 1.401(a)(9)-5 Q 4 copied below, in which it states “must be distributed to “a” beneficiary”. It does not specify any particular beneficiary and the IRS is only concerned that the year of death distribution is completed. It is also generally believed that this would not apply if different IRA accounts were inherited by different beneficiaries, only when a single IRA is inherited by multiple beneficiaries.

 

  • <<<
  • A–4. (a) General rule. Except as provided in paragraph (b) of this A–4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee’s date of death is determined using the Uniform Lifetime Table in A–2 of §1.401(a)(9)-9 for the employee’s age as of the employee’s birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee’s death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee’s death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee. >>>>>

Submitted by Bruce Steiner on Wed, 2013-10-02 19:06

The son’s executor may be able to disclaim on his behalf.  If so, the son will be treated as having predeceased the IRA owner.  In some states, an executor needs court approval to disclaim.  To be effective for tax purposes, the disclaimer must be completed within 9 months from the IRA owner’s death.  There are other requirements as well.  If neither the lawyer for the IRA owner’s estate nor the lawyer for the son’s estate explained this, the son’s executor should consult with appropriate counsel.Bruce Steiner, attorney, NYC, also admitted in NJ and FL

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