Clients inherit IRA with unmet RMD amounts for 9 years prior to owner’s death in December 2018

Submitted by Jennifer Dorsey on Tue, 2019-01-29 15:27

In August 2018, clients discovered that their parent (diagnosed with dementia) had a heretofore unknown IRA. On discovery, clients moved the American Funds IRA into an existing brokerage account. Parent had not taken RMD for 9 years (2009-2018). Brokerage firm calculated the total RMD amount due through the years at $54,976.17. On December 11, brokerage firm advised clients -who had POA over financial affairs of said parent- to take unmet distribution. Parent died on December 16 before distribution was taken. Clients inherited whole brokerage account including IRA by TOD. Clients (Beneficiaries) took possession of the accounts including inherited IRA on January 4, 2019.

Questions:

1. What are the obligations of the beneficiaries who have inherited the IRA? Presumably, they should take the RMDs for 2018 and 2019. How will this late distribution of the parent’s 2018 RMD affect the RMD the beneficiaries must take for 2019? Do we still use the same 12/31/18 value, or should it be adjusted? What are the state and federal tax obligations? Parent lived in NJ, beneficiaries in NY.

Presumably, beneficiaries will complete IRS 5329. Anything else?

2. What of the unmet RMDs between 2009-2017? What are the obligations of the beneficiaries for the unmet RMDs? What are the additional obligations/laws/IRS statues to address?

Thank you for your attention to this query.



Submitted by Alan - IRA critic on Tue, 2019-01-29 17:37

  • IRS Reg 1.401(a)(9)-5, Q 4 indicates that the beneficiary(s) are responsible for completing the year of death RMD, but no mention of prior years. The IRS has not attempted to require years prior to the year of death RMD to be brought current, even though an argument could be made that the year of death RMD automatically includes RMD shortfalls for prior years.  Therefore, client’s are likely OK if they simply withdraw the 2018 owner’s RMD and file a 5329 for 2018 with THEIR returns requesting the penalty waiver for reasonable cause.
  • For their 2019 beneficiary RMDs, they should use their respective shares of the actual 12/31/2018 balance, making no adjustment for the 2018 RMD being late.
  • Beneficiaries would be taxed on all distributions received in NYS. Not sure whether there is any NJ inheritance tax implications.
  • It was not clear exactly what was done in August. If the IRA was transferred to an IRA brokerage account there was no distribution made, but if it was distributed into a taxable brokerage account, then there is a large taxable distribution that might have satisfied several years of RMDs.  (?)

Submitted by Bruce Steiner on Fri, 2019-02-01 03:51

There is no New Jersey inheritance tax on transfers to children.  New Jersey also repealed its estate tax, effective for persons dying on or after January 1, 2018.

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