Beneficiary of IRA dies shortly after IRA Owner.

Submitted by Erik Hoffman on Tue, 2015-11-24 20:14

Owner of IRA Age 75 dies in California..
4 children listed as equal beneficiaries..
8 days later 1 of the children dies. (owners son)..
The deceased beneficiary share will get paid out to his estate..
Is there any way deceased beneficiary spouse can avoid lump sum taxation??
Can an inherited-IRA be established here for the spouse of deceased beneficiary?



Submitted by Alan - IRA critic on Tue, 2015-11-24 21:02

  • The deceased beneficiary is still considered a designated beneficiary in this situation with respect to RMDs for this 25% share. But because of his estate becoming the successor beneficiary of his share, the IRA custodian will likely push for a lump sum distribution to the estate. However, unless their IRA agreement indicates such, they have NO authority to just issue a check. In fact, the IRS has approved the estate beneficiaries receiving their shares as inherited IRAs if so requested by the estate executor. The executor should request a transfer of this share to inherited IRAs for each of the estate beneficiaries so the estate can be closed in a timely manner. These beneficiaries can then take RMDs based on the life expectancy of the deceased beneficiary, but cannot use their own life expectancies. And these inherited IRAs should be established no later than the end of the year following the year of death to be sure the RMD does not have to be based on the life expectancy of the oldest child instead of that of the deceased son. The executor may have to push back to resist a distribution to the estate because once that is done, the stretch is lost and taxable income may spike in the lump sum distribution year. Again, once a custodian (especially a bank custodian) sees an estate beneficiary, they automatically try to push out a lump sum because they do not want the expense and hassle of dealing with estates and even more beneficiary shares.
  • If the surviving spouse of the deceased beneficiary is the will beneficiary or state intestate law beneficiary if no will, then they have the right to an inherited IRA. As always, the IRA agreement should be checked to make sure it contains to specific provisions that would affect this fact pattern.
  • This article by Natalie Choate further explains this situation and includes a link to a sample letter: https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees/

 



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