Inherited IRA

Submitted by Joe Goodwin on Thu, 2015-06-04 16:41

A divorced mother age 78 died naming her two sons equal beneficiaries of her qualified IRA annuity with no contingent beneficiary or beneficiaries. Both sons are in high income tax brackets and do not need the inheritance. Prior to her death she had not taken the required minimum distribution for the 2015 tax year. She incurred substantial medical expenses in 2015. Two questions: 1. If the two sons, both with two children in their 20’s, chose to disclaim their inheritance, is there a way to make their four children equal beneficiaries? 2. If the answer to this question is no, should a full withdrawal from the IRA be made instead of the required minimum distribution since her medical expenses will substantially reduce or eliminate any tax due on this income? If neither idea is doable, can you suggest a better option?



Submitted by Alan - IRA critic on Thu, 2015-06-04 17:36

  1. The IRA agreement would need to be checked to determine default beneficiaries, but in most cases the result would be that the IRA would go to mother’s estate and would end up with the beneficiaries under her will. However, much of the stretch would be lost. An alternative might be to have the sons take RMDs and make annual gifts to their children under the 14k annual exclusion. Note that mother’s 2015 RMD must be distributed this year, but if distributed to the sons, it will not impair their option to disclaim if they decide to disclaim.
  2. Any distribution including the year of death RMD will be reported and taxable to the recipient of the distribution. A disclaimer or partial disclaimer resulting in the disclaimed portion of the IRA going to mother’s estate will give her personal representative (executor) the option of using these funds to pay the unpaid medical costs within 1 year from DOD as if the decedent had paid them when provided. The medical expenses thus paid could be deducted on decedent’s amended 2014 return and final 2015 1040, but then could not be deducted on the estate tax return. See IRS Pub 502. This will result in the IRA distribution being taxable to the estate and passed through to the estate beneficiaries. Therefore, the marginal rates for the estate beneficiaries should be compared to mother’s marginal rates in 2014 and 2015. Of course, the relative amounts of the IRA and expenses as well as several other variables will have to be analyzed carefully.

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