How to handle non spouse inherited IRA from Estate IRA
This situation has a long history and several twists and turns. I will try and be as clear about it as possible.
My questions have to do with how best to take distributions from this IRA as it stands now:
Original owner was my client’s older brother. Disappeared when age 52, body never found, and was declared dead when he would have been 57, in August 2011, by the courts. Sole beneficiary of the IRA was his Father, age 88 in 2011.
Father would have been required to take an RMD by 12/31/2012, at age 89. Father dies 4/5/13, still age 89, without ever having made a distribution from IRA. The IRA was not changed to a Beneficiary IRA with Father as owner prior to his death, so passed to his estate. The account was about $62K in value.
My client, (A), age 54 in 2012, and her brother (B), age 44 in 2012, were sole beneficiaries of the estate. The IRA account was changed to the following registration at the time of Father’s death in 4/2013: Estate BDA IRA of the Estate of Father, Beneficiary of Deceased Brother, Living brother (B), Administrator.
Schwab, the custodian, said they would only make distributions to the Estate. The Estate (administered by younger brother (B)) did not request them, finding Schwab difficult to work with in this situation. So, no distributions were taken from Fathers death through present. Estate was closed at end of 2015, and Schwab transferred IRA to new custodian in same registration (above). That custodian agreed to split the IRA into two BDA IRAs, one for Client (A), and one for Brother and Administrator (B), so approx. $31K each.
Can A and B now begin distributions based on the life expectancy of the Eldest of the two (A, now age 58)? Should they make distributions for prior years or not? Should they file 5329s for this?
Or, is it best to simply lump sum the BDA IRA asap? My understanding is that they do not have the option of the 5 year rule. Is this correct? What would you advise these folks to do?
Permalink Submitted by Alan - IRA critic on Wed, 2016-05-11 00:00
The applicable distribution period for this IRA is 5.9 years based on the age of the designated beneficiary in 2012. That means the IRA must be drained by 12/31/2017. Each remaining beneficiary therefore has only two years to drain the IRA and since they finally have their own inherited IRA accounts, they should take out the 2013-2016 RMDs and file a 5329 to request a penalty waiver for those years on a 5329 for each year. The IRS should waive the penalty.Of course, if they choose to, they can simply drain each inherited IRA since there is only one year left anyway and that would only be around 20% of the balance remaining in 2017. The IRS should waive the penalty in a situation like this. As for the 5 year rule, Schwab’s agreement uses life expectancy as the default option and the father did not make an election for the 5 year rule in writing, therefore LE based on age 89 remains the applicable method.