Distribution ofIRA with Estate as beneficiary

Submitted by Marjorie Determan on Wed, 2015-10-21 22:23

This scenario involves an IRA inherited by a 94 year old gentleman from his 54 year old son in August of 2012. Although both parents were alive at the time of Son’s death, only Dad was named. He dies within 8 months of inheriting the IRA (April 2013) and did not name a new primary beneficiary, so it fell to his estate.

His wife then follows him in death 6 months later (Sept. 2013), leaving two adult children as beneficiaries of both of their estates. The IRA was never included in Mom’s estate.

Fast forward 2.5 years. No distributions have been taken to date, as it is assumed that the 5 year rule is operative to govern.

Adult beneficiaries of the estate want to close the estate. Can they ask the custodian to establish two inherited IRAs this year and transfer the funds out? IF that is done, is that a reportable event from a Fiduciary tax return standpoint, and can they file a final fiduciary return this year, as this is the only asset that remains in the name of the estate?

Estate beneficiary distributions then will be subject to the 5 year rule with Brother’s dod (8/2012) starting the clock, correct? So, if we can get it transferred in time, they could take 2015, 2016, and 2017. would you agree that that would work? And now that the IRA is registered in the SSN’s of the Beneficiaries, all distributions are reportable to them, correct?

How does the IRS track this to make sure that these distributions are made timely?



Submitted by Alan - IRA critic on Wed, 2015-10-21 23:26

  • Dad is the designated beneficiary for RMD purposes, but he passed before electing the 5 year rule, so the default life expectancy rule which is likely contained in the IRA agreement will apply. However, due to his age the estate will be using a divisor of 4.1 (age 95 year after son’s death) for the 2013 RMD, 3.1 for 2014 etc.
  • The executor can still assign the IRA to the estate beneficiaries which is not a taxable event, but this will not change the RMD divisors that apply. The missing RMDs for 2013-2015 must be taken ASAP can this can either be done by the estate and passed through to the estate beneficiaries, or if the IRA can be assigned before year end, the estate beneficiaries can take their shares of the delinquent RMDs and file Form 5329 requesting that the penalty be waived due to the circumstances. The IRS will probably waive the penalties, but the late RMDs should be completed before year end.
  • Whoever the IRA distribution is made to will get the 1099R for the distributions.
  • IRS does not have a consistent and effective method for enforcing beneficiary RMDs. The IRS is banking on tax preparers and the financial services industry to communicate RMD requirements to beneficiaries.

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