Beneficiary won’t sign paperwork for inherited IRA

Submitted by Stephen Cuskley on Fri, 2016-11-11 19:09

My brother passed away last month and my sister and I are beneficiaries of my brother’s IRA.

I have signed the paperwork to set up an inherited IRA for myself, but my sister has not agreed to sign the paperwork. Unfortunately she suffers from paranoia (her paranoia has been well documented by the Department of Children and Families in Florida, but she has never been legally declared incompetent) and she is afraid to sign the paperwork.

Because the brokerage house that has my brother’s IRA can’t persuade my sister to open an inherited IRA, they told me that it would be best if my brother’s year-of-death RMD (about $25,000) be given entirely to me, just so that the distribution can be made this year. They don’t even plan to ask my sister’s permission to do this. I asked them if I can then receive half of my brother’s IRA in my inherited IRA – LESS $25,000 – so that in the end my sister would receive the same amount that I do (assuming she eventually agrees to sign the paperwork to open her own inherited IRA) but they just gave me a runaround, saying “don’t worry, everything will be taken care of.” I also asked them if the IRS would even allow them to give me the entire year-of-death distribution and they told me that I’m overthinking this and there’s nothing to worry about.

But I’m worried. What if I get audited, and they discover that I got my brother’s entire year-of-death RMD? Would I get in trouble for taking it all and leaving my sister with nothing? Or would they penalize my sister and require her to pay a 50% excise tax because she never took her distribution? Or both? It seems like there’s a lot of holes here.

Also, I’m wondering what happens to my sister’s half of my brother’s IRA if she never disclaims the IRA and never opens an inherited IRA. Is there a time period after which it would be automatically taken care of in some way? Would it go back to my brother’s estate? And to complicate matters further, my sister is a beneficiary of my brother’s estate!

Just to let you know, I’m not worried about the tax implications of this for me. I’ll gladly pay the tax on the extra $25,000 of income I would receive this year if this arrangement can solve the problem of distributing all of my brother’s year-of-death distribution and give my sister a chance to come around and sign the paperwork.

Thanks,
Steve



Submitted by Alan - IRA critic on Fri, 2016-11-11 19:45

  • While you can legally receive the entire year of death RMD since it is not a beneficiary RMD, the custodian would have to maintain accounting such that your interest in the plan would now be less than 50%. Custodians sometimes try to impede one beneficiary from setting up an inherited IRA until all beneficiaries submit the paperwork. While this is easier for the custodian, they have no business penalizing all beneficiaries for the actions of another. Fortuneately, you have until 12/31/2017 to establish your own inherited IRA under which you can use your own life expectancy for RMDs. Otherwise, the oldest beneficiary’s age must be used for all beneficiaries.
  • The IRS does not care if you receive the entire year of death RMD. There is also little evidence that if you were to take out just YOUR share of the RMD that you would ever be penalized even if your sister never responds and take out her share. I would insist to the custodian that you are willing to take out ONLY your share of the RMD, and if they refuse tell them you do not want ANY of it. First of all, beneficiaries often do not complete the year of death RMD in that year because it takes time to ferret out how much RMD remains and in some cases they do not even know they inherited an IRA. If your brother had more than one IRA, perhaps he took his full RMD from the other accounts?  All this custodian knows is the RMD for their particular IRA. Now if you want and need the full 25k it is certainly OK to accept the distribution. Otherwise, if you think that your sister might respond given more time and the year of death RMDs are taken out next year, all you have to do is file a 5329 and the IRS will waive the penalty for not having distributed this year. Have you talked to your sister or to whoever is helping her with financial affairs?  For a late in the year death, it is entirely routine that the year of death RMD is not completed in that year.
  • Remember, if you do receive 25k it must be reported on your 2016 return. 25k could put you in a higher bracket than 12.5k. Whatever amount is distributed is taxable to the beneficiary that receives it, NOT to your brother’s estate. On the other hand, if you take whatever share of the year of death RMD next year, you will be taxed next year on both that distribution and your own beneficiary RMD for 2017. If it comes up, the custodian should have no authority or responsibility to decide who takes out how much and when, although you should know that custodians generally do not like inherited IRAs much for the very reasons that you face here.
  • With respect to your sister’s interest, if she does not respond within perhaps 2 or 3 years, the custodian could escheat the account to the state and in some states it will be difficult to claim it. This is another reason to insist that YOUR own beneficiary IRA be set up with 50% of the balance ASAP. You can then take out the amount you wish and you might very well want to transfer it to another custodian, perhaps where you have your own accounts. Then you will have full control over your own account, naming your own successor beneficiary, changing the investments as needed etc. Your interest in this IRA will no longer be affected by anything your sister does or does not do.
  • In summary, do not be concerned with the penalty since it can easily be waived if the RMD is not completed this year. I would be more concerned about any stonewalling delaying your ability to establish your own inherited IRA.
  • You probably have further questions now. If so, please advise. 

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