Decedent’s failure to re-title deceased spouse’s IRA, no RMD’s taken

Submitted by Olha Shevchenko on Fri, 2015-12-18 14:06

I am trying to unravel a problem with two IRA accounts that belonged to a man who died just short of his 80th birthday in 2008 and left the accounts to his wife as the primary beneficiary. She never had the accounts re-titled into her name and then she died in March of 2014 at age 85, leaving the accounts in the name of the original owner, her husband. As she never took possession of the accounts, she never took any RMD’s. RMD’s were being taken up to the date of the death of the owner of the IRA’s in 2008.

As I understand the situation, the IRA’s must be re-titled into the name of the estate of the wife, since there are no living beneficiaries to the IRA’s. The confusion lies with what happens next. Are there penalties and interest to be paid because no RMD’s were taken out of these IRA’s since the owner died? Are these penalties and interest compounding and accruing? What are the options for redeeming the IRA’s? Does it have to be a lump sum or are there other options for this scenario?

I am concerned about the tax/penalty issue. I am not sure what the rules are regarding the inadvertent failure to re-title the IRA with subsequent failure to take RMD’s.



Submitted by Alan - IRA critic on Fri, 2015-12-18 16:39

  • Since owner’s wife never retitled the IRA or named her own beneficiaries, it is normal that the agreement stipulates that the wife’s estate has become the beneficiary now under the agreement default provisions. The executor will have to provide documentation of the original owner’s death as well as his wife’s. His wife is treated as the beneficiary even though she never claimed the account, and by failing to take her RMDs as beneficiary she is deemed to have defaulted to ownership status. Having passed at 85, the estate become responsible for her year of death RMD for 2014, but IRS Regs only make a beneficiary responsible for the year of death RMD, nothing older. The IRS in addition does not proceed to collect penalties from decedent’s for RMD failures before their death.
  • So her estate becomes established as the current beneficiary. The estate must take out the 2014 year of death RMD calculated using wife’s age (85 or 86 at year end) and request a penalty waiver on Form 5329. The estate must then take RMDs over the remaining life expectancy of the wife (about 7 years) since the wife was deemed as owner. IRA custodians in general try to convince executors to take a lump sum because they do not want to get caught up in estate settlement issues or assign the account to several estate beneficiaries. Also, the estate will not want to remain open for 7 years barring unique circumstances and eventually the executor would attempt to have the IRA assigned. Unless the IRA agreement indicates that the custodian is able to require a lump sum distribution, the executor should act in the best interest of the estate beneficiaries and insist on assignment. But nothing will happen regarding missed RMDs before 2014.

Submitted by Olha Shevchenko on Fri, 2015-12-18 22:41

I sent my reply to your response twice. I am not sure if you are receiving my replies the way I am sending them. Sorry for the duplicate!!!

Submitted by Olha Shevchenko on Fri, 2015-12-18 19:06

Thank you very much for your response and advice. I consulted an estate attorney who advised me to redeem 50% of each IRA and withhold 50% for taxes, and to do this by the end of the year in order to cover penalties and interest for the years in which RMD’s were not taken by the default owner. This sounded extreme to me, but anything’s possible with the IRS. The scenario you present certainly sounds preferable, and almost too good to be true!As far as the 2014 year of death RMD, am I correct in assuming it should be paid out to the estate?Also, would you agree that it makes better financial sense to have the estate take RMD’s based on the life expectancy of the wife (default owner), rather than a lump sum, in order to spread the tax burden over several years rather than take a single big tax hit? Is the estate responsible for paying the tax on those RMD payouts, or will it be the beneficiaries of the estate? For that matter, will the beneficiaries (there are 2) have to claim their portion of each RMD payout as income on their respective tax returns (creating what amounts to a double-taxation situation)?Most importantly, does this all have to be taken care of before year-end (Dec 31, 2015), to avoid other penalties or interest? That is, PAY 2014 year of death RMD, FILE penalty waiver with IRS, SET UP inherited beneficiary IRA for estate, stipulating RMD’s be paid out over life expectancy of default owner,Thanks again.

Submitted by Olha Shevchenko on Fri, 2015-12-18 22:36

Thank you very much for your response and advice. I consulted an estate attorney who advised me to redeem 50% of each IRA and withhold 50% for taxes by the end of the year, in order to cover penalties and interest for the years in which RMD’s were not taken by the default owner. This sounded extreme to me, but anything’s possible with the IRS. The scenario you present certainly sounds preferable, and almost too good to be true!As far as the 2014 year of death RMD, am I correct in assuming it should be paid out to the estate?Also, would you agree that it makes better financial sense to have the estate take RMD’s based on the life expectancy of the wife (default owner), rather than a lump sum, in order to spread the tax burden over several years rather than take a single big tax hit. Is the estate responsible for paying the tax on those RMD payouts, or will it be the beneficiaries of the estate? For that matter, will the beneficiaries (there are 2) have to claim their portion of each RMD payout as income on their respective tax returns (creating a possible double-taxation situation)?Most importantly, does this all have to be taken care of before year-end (Dec 31, 2015), to avoid other penalties or interest: PAY 2014 year of death RMD, FILE penalty waiver with IRS, SET UP inherited beneficiary IRA for estate, stipulating RMD’s be paid out over life expectancy of default owner,

Submitted by Alan - IRA critic on Fri, 2015-12-18 23:25

The year of death RMD should be paid to the estate after the IRA custodian has the documentation they need to process a distribution. That would include the estate EIN. As for 2015 and subsequent RMDs, using the wife’s remaining life expectancy will produce the lowest tax bills, but perhaps the son does not want to keep the estate open 7 years OR go through the hassle of assigning the IRA balance to the estate beneficiaries. Certain beneficiaries may want the money now as well. Whatever is decided, the estate files a 1041 and the amount passed through to each estate beneficiary on Form K 1 will result in the beneficiary paying the tax, not the estate which has much higher rates. The IRA distributions are only taxed once at the lower rate of each beneficiary. It is likely too late to complete all these tasks before year end, so a 5329 will need to be filed for 2014 and 2015 by the estate to request the penalty waiver (same reason on both).  Not sure if the estate executor has been appointed and has the appropriate papers yet, since nothing can be done before that is complete.

Submitted by Olha Shevchenko on Tue, 2015-12-22 17:49

Thank you for your response. As far as the tax is concerned, do I understand correctly that when the RMD’s are taken out of the IRA’s for 2015, we should not ask for a withholding but rather wait until paperwork is filed in order for the separate beneficiaries of the estate to pay the tax? What should we do about the tax obligation for 2014? As it is being paid to the estate and will ultimately be paid to the 2 beneficiaries, does the RMD for 2014 get taxed in the same way?As far as the penalty waiver requested on form 5329 is concerned, can you advise as to what reason to give when requesting the waiver.Thank you.

Submitted by Alan - IRA critic on Tue, 2015-12-22 19:26

  • Right, having withholding taken for the estate will just complicate tax filing by the estate and to get the credit to the beneficiaries. The beneficiaries will have to pay taxes on their own return for the additional income in the year the IRA gets distributed to the estate. If they face an underpayment penalty, the interest rate is only 3%, so not a big deal. Or they could file a 2210 AI to reduce the penalty if a large part of their income is in the last quarter of the year, but that form is complex and time consuming to complete.
  • There should not be a tax obligation for 2014, since there was no IRA distribution in 2014. The 2014 RMD is taxed in the year distributed (2015 if time). And the penalty will probably be waived if Form 5329 is filed.
  • The estate executor can then assign the IRA to the two beneficiaries early in 2015. Each will have their own inherited IRA titled as such. The 2016 RMDs are not due until the end of 2016 and will be based on the remaining life expectancy of the decedent. The 2015 RMD divisor used by the estate will be reduced by 1.0 for each successive year, so there will be about a 7 year stretch available for each beneficiary.
  • With respect to the 5329 “reasonable cause” for missed RMDs, the estate is only responsible for the year of death RMD (2014), and the reason that was missed may be some combination of lost time identifying the account and the RMD status and the time needed to establish the estate, provide documentation for both wife and husband’s death etc. If there are any other delays caused by conditions, include them. However, select the best one or two and try to simplify the cause for the IRS, as they would rather not lead a real long and involved description. Chances are very good that the penalty will be waived.

Submitted by Olha Shevchenko on Tue, 2015-12-22 20:33

I do not completely understand what you mean by having the executor “assign” the IRA to the 2 beneficiaries of the estate. If the estate is the sole beneficiary of the IRA’s, how can the beneficiaries of the estate establish inherited IRA’s if they are not beneficiaries to those IRA’s? I did not think inherited IRA’s were a possibility in this scenario. I may have misunderstood, but I thought that RMD’s will be paid to the estate and then the beneficiaries will in turn  be paid from the estate. Thanks again for sharing your expertise.

Submitted by Alan - IRA critic on Tue, 2015-12-22 21:22

Read this link from one of the top IRA experts in the US. It will explain the estate assignment situation and there are also links to other useful info:   https://www.ataxplan.com/bulletin-board/notice-to-executors-and-trustees/. It is not practical to keep estates open for years just to pass through RMDs to beneficiaries. Separate inherited IRAs leave each beneficiary with their own inherited IRA to manage as they wish, but it will not change the RMD calculation which will continue to be based on the decedent’s life expectancy as it would have been had the estate continued to hold the IRA.

Submitted by Olha Shevchenko on Wed, 2015-12-23 01:05

Thank you for the link and for the information therein. This clearly offers an option preferable to funneling RMD’s through the estate until fully liquidated. I will look into this possibility. If the custodians that currently hold the funds will not proceed in this way, do you think it is feasible to move them to a custodian who will? I feel like I may encounter resistance. But if it is legal then I will simply insist.

Submitted by Alan - IRA critic on Wed, 2015-12-23 02:38

Both are legal and the IRS has no reservations about either. However, you would expect that the new custodian would feel a greater responsibility to cooperate than a new one. For that reason, you should put as much pressure on the current custodian to assign the inherited IRA to the beneficiaries as possible. Once assigned you could agree to transfer them to another custodian if it will help as the current custodian still rids themselves of the inherited IRAs that way. Each beneficiary might prefer a different custodian, one that that they already have another account with. This might provide some leverage with the new custodian to accept the accounts either before the assignment has been made or after. I would stick with larger custodians if possible because they hold more larger accounts with higher net worth individuals and could be more comfortable with cooperating. The amount of leg work could vary between almost none and more than you want to undertake, but with persistance you should be able to get it done. Here is another related article on this general situation:  http://www.morningstar.com/advisor/t/83651808/titling-the-inherited-ira.htm

Submitted by Olha Shevchenko on Wed, 2015-12-23 18:57

I spoke with a rep at one of the funds (Highland) about the possibility of bypassing the estate and creating 2 beneficiary IRA’s. He said they can’t authorize it because there is no-one to sign off on it. Owner and primary beneficiary are both deceased. And he said we can’t do a plan to plan transfer for the same reason: who is authorizing the move?The IRA is still in my father’s name, though as you pointed out my mother is the default owner. I seem to find myself at square one, or at least at the point where I have to transfer this account into the name of my mother’s estate before doing anything else. Am I missing something? Does it make sense for me to take that step and then proceed to create the beneficiary IRA’s once transferred to the estate?

Submitted by Alan - IRA critic on Wed, 2015-12-23 19:28

As the last link above explains, evidence of both your father’s and mother’s death need to be provided to the custodian. They cannot do anything until the actual beneficiaries come forth to “claim” the account. Then an inherited IRA can be established for her estate, so the estate is not being totally bypassed. Most custodians want to proceed step by step (owner to designated beneficiary to successor beneficiary (estate) to estate beneficiaries) rather than skipping directly from owner to estate beneficiaries. This is not a problem as long as they are willling to accept the final assignment. They also have to do the first steps before the account could be transferred to another custodian as the last link explains. Once the inherited IRA is set up for the estate, at any point thereafter the executor should be able to have the IRA assigned out of the estate to the estate beneficiaries. This is the process the executor must do with all estate assets to ever be able to close the estate. The sample letter included in a link from an earlier post should be used if any reluctance is encountered. Do you think the rep is indicating that they will not accept the last step or just that each step must be individually completed with paperwork they require which will of course include death certificates for each parent?

Submitted by Olha Shevchenko on Wed, 2015-12-23 23:55

I have already supplied the death certificates, Letter Testamentary, etc. and have started the process to transfer the IRA into the name of my mother’s estate. I have still to submit the final paperwork requesting the transfer. I halted the process when I thought that it might be possible to by-pass the estate. I misunderstood the order in which the steps must be taken before we can establish inherited IRA’s. So as I understand it, the first order of business no matter what is to re-title the IRA into the name of my mother’s estate, then take it from there. I am unclear as to when the RMD’s for 2014 and 2015 should be taken? Before or after the re-titling. Does it matter? I was told by Highland to provide a letter of instruction requesting that the distributions be taken at the time the IRA is re-titled. Although I did not ask the question directly, I believe Highland is requiring us to go through each step and is not necessarily indicating lack of cooperation with my ultimate goal of creating 2 inherited IRA’s once the orignal is re-titled. Of couse I need to ask the question directly in order to plan a future course of action.

Submitted by Alan - IRA critic on Thu, 2015-12-24 00:10

Doesn’t matter whether those RMDs are taken into the estate or into the inherited IRAs assigned later. There is a trade off here. If those RMDs can be taken before year end, the 5329 penalty waiver will be limited to 2014. On the other hand if the RMDs are paid to the estate, they will have to be passed through the estate to the estate beneficiaries on a K 1. If there are other income producing assets in the estate a 1041 and K1 will already be required so adding the IRA RMDs  to that return is not a big deal. On the other hand, if the IRA is the only income to the estate, waiting until the individual inherited IRAs are established and then taking the RMDS will eliminate the hassle of filing a 1041 and K1.

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