Inherited IRA

Submitted by Larry Mittnacht on Thu, 2018-08-23 15:46

My father passed last year with a large estate including a large traditional IRA. He was 73 and, unfortunately, did not name beneficiaries for his IRA. The IRA is passing to the estate and then to the beneficiaries. I’m being told it’s not possible to retitle the IRA for the various benefactors so they can stretch out the RMDs. This doesn’t sound right to me. Sounds like it is not only going to have to pay estate taxes but also either estate income taxes or the benefactors will have to pay income taxes. This looks like it might cut the value of the IRA in half or possibly worse. Does this situation sound correct?



Submitted by David Mertz on Thu, 2018-08-23 16:26

  • What you have been told is incorrect unless the IRA agreement stipulates that a distribution paid to the estate must be done under these circumstances; the tax code does not require it.  The inherited IRA can be distributed intact to estate beneficiaries (perhaps first titling it as an inherited IRA for the benefit of the estate) by dividing it into a separate inherited IRA for each beneficiary’s share.  However, since the original beneficiary was the estate and your father passed after the required beginning date for RMDs, RMDs will be based on the Single Life Expectancy table and your father’s age on his birthday in 2017, reduced by 1 for each subsequent year.  Some IRA custodians don’t want to deal with inherited IRAs and try to force a distribution even if it’s not required, so if the present custodian will not establish inherited IRAs for the estate beneficiaries, perhaps the IRA inherited by the estate can be transferred trustee-to-trustee (not by distribution and rollover) to another custodian.
  • If your father had not completed his 2017 RMD, it’s the joint responsibility of the beneficiaries.  It can be satisfied by the beneficiaries in any combination.
  • Once the money is distributed from the inherited IRA it is taxable and cannot be returned to an inherited IRA.  The estate would pass the income through to the beneficiaries on Schedules K-1 (Form 1041) for taxation on the beneficiaries’ individual tax returns at the individual’s marginal tax rates.
  • You’ll want to check your father’s tax returns to see if any Form 8606 had ever been filed for nondeductible traditional IRA contributions that would make distributions from the IRA partly nontaxable.

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