IRA beneficiary dies before completing paperwork

Submitted by Robert Wright on Wed, 2015-09-02 16:47

A TIRA account owner passed away in February 2015.

One of the beneficiaries of the TIRA account was son #1.

Son #1 passed away in June of 2015 before completing the beneficiary claim forms for the TIRA account he had inherited from his parent.

So son #1 did not set up his beneficiary TIRA account and he did not name new beneficiaries for the inherited TIRA account.

The son’s share of the inherited IRA account will pass via probate court.
The son died intestate – without a will.

The 4 siblings of Son #1 will inherit his share of the inherited TIRA account.

Will the 4 siblings be able to stretch the share of the TIRA they inherit from Son #1 via probate?

If the 4 siblings can stretch the share they inherit from Son #1 via probate, what life expectancy would they use?

I hope my explanation is clear.

Thank you in advance for your help.



Submitted by Alan - IRA critic on Wed, 2015-09-02 18:14

First, the other beneficiaries need to create separate inherited IRA accounts so their RMDs can be determined by their respective life expectancies and not be affected by the deceased son’s share. Assuming the living beneficiaries do create these separate accounts, the deceased son is still treated as a designated beneficiary for his share and RMDs will be based on his single life expectancy using the age he would have attained by 12/31/2016. The personal administrator of his estate must submit both the death certificates for the father and the son and other paperwork the IRA custodian requires. The personal administrator can assign the interests of the 4 siblings in the inherited IRA to 4 equal inherited IRAs. All the siblings will have the same RMD divisor each year and the initial divisor for 2016 will be reduced by 1.0 for each year thereafter. The other living beneficiaries and the siblings (same people?) or the estate are also responsible for completing the owner’s 2015 RMD if he passed after his required beginning date and did not complete his 2015 RMD. This year of death RMD can be taken in any combination by these beneficiaries, and it can be taken before or after the IRA is assigned from son’s estate to the 4 siblings. To be clear, if the other living beneficiaries inherit both directly and also inherit the deceased son’s share of the IRA, they will each have to maintain 2 inherited IRAs having different RMD divisors, one using their own life expectancy and the other using the remaining life expectancy of the deceased son. I hope they get along, and can coordinate their communications with the IRA custodian.

Submitted by Robert Wright on Wed, 2015-09-02 18:29

Alan, just to make sure I understand.The deceased son’s birth year is 1962. He turned 53 in 2015.He would have been required to take an RMD in 2016.In 2016, he would have been 54 and his LE = 30.5.The 4 siblings that inherit the deceased’s son share of the their father’s TIRA need to start taking RMDs in 2016 based on the life expectancy of 30.5. In other words:All 4 siblings take RMD for their 1/4 share of the deceased son’s share of father’s TIRA:2016 30.5;  2017 29.5;  etc. Do I undertsand thyis correctly? My question is: Since Son #1 died prior to his RBD and his share of the inherited TIRA is passing to his siblings via probate court, does the 5 year rule apply to the RMD for his siblings? Will his siblings have to withdraw the share they inherit from their bother by 12/31/2020?

Submitted by Alan - IRA critic on Wed, 2015-09-02 18:40

  • Yes, you have the divisors correct. It will be best if no RMD is paid into son’s estate, and if the separate inherited IRAs can be created before the end of 2016, each beneficiary can take their 2016 RMD directly without having any distribution made to the estate.
  • You stated that “one of the beneficiaries was son #1”. Are the other direct beneficiaries the same siblings that will also inherit a share of this IRA from the deceased son, as well as directly from the account owner? If so, each one will end up with two inherited IRAs with different RMD divisors.

Submitted by Robert Wright on Wed, 2015-09-02 18:48

Yes. Son #1 and his 4 siblings [5 children in all] inherited dad’s TIRA.The same 4 siblings also inherit [via probate court] the share Son #1 inherited from Dad’s TIRA. Does the 5 year rule apply to Son #1 share that is passing via probate to the 4 siblings? 

Submitted by Alan - IRA critic on Wed, 2015-09-02 20:29

Did Dad pass prior to his RBD? That is a requirement for the 5 year rule option to be selected. This means that the 5 year rule and a year of death RMD are mutually exclusive. For example, if Dad passed prior to his RBD, the IRA beneficiaries would be free to create their separate inherited account and either elect the 5 year rule or life expectancy. They do not all have to make the same election. While the IRS has not issued specific guidance for successor beneficiaries (siblings receiving shares of son #1 inherited IRA), since son #1 never elected either the 5 year rule or life expectancy, I see no reason why each sibling could not also make either the 5 year rule or son #1’s life expectancy their option, just as they could for their direct shares of the IRA. Again, the 5 year rule is only an option if Dad passed prior to his RBD.

Submitted by [email protected] on Wed, 2015-09-02 20:40

I’m confused a bit here, since the designated beneficiary (Son #1) died before he established his own beneficiary IRA and before naming his beneficiaries on the beneficial IRA.  Since that would mean that there were no designated beneficiaries on his beneficial IRA, wouldn’t that mean that it passes to his estate and therefor the 5 year rule applies?

Submitted by Robert Wright on Wed, 2015-09-02 21:15

mhotchkiss: i was at first also. I beleive this is what is happening.I welcome Alan’s comment / correction.

  • 1. The TIRA owner died in 2015, after his RBD.
  • 2. Son #1 [1 of 5 beneficiaries] inherited 1/5 of the TIRA account. This established a Designated Beneficiary and the ADP.
  • 3. Son #1 gets to use his life expectancy for RMDs starting in 2016.
  • 4. When Son #1 passes away, the successor beneficiaries of Son #1 have to continue taking RMDs using the remaining life expectancy of son #1.

 

  • The basic rule here is: at the death of the first beneficiary [son #1 in this case], anyone who inherits the remaining balance of the beneficial TIRA only gets to take RMDs over the remaining LE of the initial beneficiary.

 

  • To quote from Natalie Choate:
  • “The ADP is established irrevocably once the Designated Beneficiary is determined. Any subsequent beneficiary is merely a ‘successor’ to the original beneficiary’s interest and is ignored in determining the ADP. Distributions must continue to be made over the remaining life expectancy of the now-deceased Designated Beneficiary (or at any faster rate required by the plan or desired by the successor beneficiary)”
  • p. 75; Life and Death Planning for Retirement Benefits 6th edition 2006

 

Submitted by Alan - IRA critic on Thu, 2015-09-03 01:01

Robert, I agree with your summary. The fact that son 1 passed before the date when the designated beneficiary is determined is what mhotchkiss was referring to. However, Pub 590 B, p 8 (final paragraph) states that this beneficiary is still considered in determining the designated beneficiary for the entire inherited account. In other words, that beneficiary is treated as if he lived till  9/30 of the year following the year of death. What is not clearly stated, but what I think is the intent is that the separate account rules would continue to apply to the other directly named beneficiaries, who could establish separate inherited IRA accounts by the end of the following year and use their own respective life expectancies.

Submitted by David Mertz on Thu, 2015-09-03 01:32

Even if the father had died prior to his RBD, I believe that the 5-year rule would not apply under these circumstances.  PLR 200811028 indicates that the life-expectancy rule is the default rule when there is a designated beneficiary.  Since son #1 presumably had not explicitly elected the 5-year rule (since the deadline for making that election did not arrive prior to his death), RMDs from the separate accounts established from son #1’s portion of the father’s IRA would have to be calculated based on son #1’s life-expectancy.

Submitted by Bruce Steiner on Thu, 2015-09-03 03:00

  • It may be simpler for son #1’s administrators to disclaim son #1’s share of the IRA.  In that case, son #1’s share of the IRA will go to the contingent beneficiaries, most likely son #1’s siblings, as if son #1 had predeceased his father.  That may make it easier to deal with the financial institution, and to calculate the required distributions each year.

 

  • Depending on state law, son #1’s administrators may need court approval to disclaim on son #1’s behalf.  However, if son #1’s share of the IRA would go to his siblings in any event, it shouldn’t be difficult to obtain court approval (if required under the applicable state law).

 

  • Bruce Steiner, attorney, NYC, also admitted in NJ and FL

Submitted by Alan - IRA critic on Thu, 2015-09-03 03:02

Presumably, virtually all IRA contracts now specify LE as the default rule, but in many IRA agreements beneficiaries have the option to elect the 5 year rule in various manners. The “restore the stretch”  PLR does not comment on the ability to make that 5 year election, rather that there is no effective deadline for those not making an election to restoring life expectancy RMDs. As for the 5 year election, when the beneficiary passes after the owner before any election has been made, does the representative of the deceased beneficiary have the option of making the election the deceased beneficiary could have made but did not? Have not heard of any ruling on this point, but since this issue arises with estate successor beneficiaries in the first place, it makes sense that the 5 year rule could be elected.  

Submitted by Bruce Steiner on Thu, 2015-09-03 03:11

  • I haven’t had a case where electing the 5-year rule made sense (and I doubt that I ever will), so I’ve never had to consider whether the executors of a deceased beneficiary would be able to make the election on behalf of the deceased beneficiary.

 

  • Also, unless each beneficiary’s share of the IRA is too small to warrant administering trusts, our clients generally provide for their children in trust rather than outright, and trusts don’t die.  However, it makes sense that the executors of a deceased beneficiary ought to be able to make the election on behalf of the deceased beneficiary.

 

  • Of course, if the election is detrimental, the beneficiaries of the estate might have a claim against the executors for doing so.

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