IRA BENEFICIARY NIGHTMARE

Submitted by Rene Nourse on Fri, 2016-09-02 18:56

A husband and wife (both currently under 70 1/2, but the husband will be in 2017) inherited IRA accounts from their respective mothers (both were taking RMD’s at the time of their passing). The wife’s mother passed in 2010 and the husband’s mother passed away in 2005. The adviser never informed them that they needed to take distributions and now they are trying to figure out what to do. Since the wife’s inherited IRA balance was only about $5,000, she elected to simply liquidate the entire account and will pay the taxes when she files in 2017. Will she still need to pay the 50% penalty for the previous years that she didn’t take RMD’s?
The husband’s inherited IRA, on the other hand, has about $75,000 in it. Can you weigh in on what the tax consequences will be for both?



Submitted by Bruce Steiner on Fri, 2016-09-02 19:33

  • They can request a waiver of the penalties by filing Form 5329.
  • The husband may be able to take the missed distributions (requesting a waiver of the penalties), and still be able to stretch the IRA.  See PLR 200811028:  https://www.irs.gov/pub/irs-wd/0811028.pdf.
  • What’s an “adviser”?  Where were the lawyers for the estates?  Why didn’t the lawyers advise them as to how to handle the IRAs?

 



Submitted by Alan - IRA critic on Fri, 2016-09-02 19:58

  • If both parents passed after their RBD, life expectancy RMDs will apply to the husband and wife. They need to calculate what their RMDs would have been for each year starting in the year after they inherited. Then they can file a bunch of 5329 forms, one for each year requesting that the penalty be waived for reasonable cause. While the reason is weak because they were getting a 5498 showing an RMD required every year, the IRS might still waive the penalties since they are self reporting the omissions. Before filing these forms, they need to calculate and distribute each late RMD, so they can indicate that when requesting the penalty waiver.
  • For the wife, the process will be somewhat easier. She only needs to file a 5329 for 2011-2015. Since she has now drained the IRA, she has already made up the late RMDs and more. The total late RMDs would probably be less than 2,000, therefore a possible penalty of less than 1,000.
  • For the husband. there are more years starting in 2006 (except 2009 can be ignored because RMDs were waived that year). His potential penalty would also be much greater, but since life expectancy is the default method, he should probably calculate all the late RMDs (this could be a hassle if year end records of the balance were not retained), just distribute that total to keep taxes down, and then continue on with annual RMDs starting this year. After the make up RMD distribution, he may still have around half the IRA left.
  • They will probably need some help with getting the data and/or doing the proper RMD calculations for each year.


Submitted by Rene Nourse on Wed, 2016-09-07 01:34

The problem is that the custodian never sent annual 5498 for either accounts. Their position is that these types of accounts are non-reportable.  So, it makes their situation even worse…..



Submitted by Alan - IRA critic on Wed, 2016-09-07 03:00

The custodian should have provided annual statements of the FMV of the IRAs, but it is correct that they do not have to calculate an RMD amount. Not having received more info, they might indicate as much on the 5329 penalty waiver requests.



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