Inherited IRA Question

Submitted by Bryan Glancy on Fri, 2021-04-16 17:52

I’m working with a client that has inherited qualified pre-tax assets from her mother’s employer plan. My client (one of the daughters) was named as the only beneficiary at 100%. The verbal agreement and intent that her mother had prior to her death (12/21/2020) was that the assets were for the benefit of both daughters 50/50 with the understanding that my client would accept 100% of the assets to manage and oversee the assets for her sister (the second daughter with financial struggles) and then at a later date relinquish the assets to her sister.

Given the intent above, a better solution would have been to have my client serve as the guardian/ward/trustee of the assets of which she was controlling for her sister while having both of them named as beneficiary at 50% each.

Currently we need to establish an inherited IRA to accept the assets from the decedent. Before I set up the inherited IRA I want to consider any possible solution to avoid all of the assets going into an inherited IRA registered to one sister given this will be very tax inefficient. I’m hoping to find a way to have half of the assets registered to each daughter within an Inherited IRA as to not create any unnecessary taxes.

Is there anything I can do at this point to avoid all of the assets being registered to only one of the daughters?



Submitted by Alan - IRA critic on Fri, 2021-04-16 22:38

If named sister disclaims 50% of the plan benefit, that half will go to mother’s estate. If she has a will, who are the will beneficiaries. The disclaiming sister cannot receive disclaimed benefits as a result of the disclaimer, so she would have to also file a disclaimer under the will if named in the will. This is complex and would require an attorney to properly draft the disclaimers and work with the employer plan. 
If the plan balance was small enough, this might be able to worked out with the named sister doing annual tax adjusted gifts to the other sister. Of course, the name sister is probably in a higher tax bracket, which would make the tax adjustment larger. This probably is no longer practical if the annual gift exceeds the 15k gift exemption.

Submitted by Bryan Glancy on Tue, 2021-04-20 16:14

Hello Alan:First of all, I appreciate your response, thank you.For clarification the total amount of assets going to the named beneficiary will be 1.2 million.Also, we looked into disclaiming assets but there were two problems:1) The decedent died intestate2) The assets would go to the estate if disclaimed and the decedents spouse would be eligible for a portion and he would not be willing to disclaim his assets to allow them to flow to the non-name daughter.With that said I have a few other questions:1) Since we don’t have an option to get half of the assets to the sister that was not a named benefiary prior to transferring the assets to an inherited IRA, are there provisions of an Inherited IRA that allow us to push assets to the non named daughter at that point (subsequent to the assets registered to the named beneficiary)?2) If we utilize the annual tax adjusted gifting to the sister that was not a named beneficiary, is this done prior to distributing the assets out of the inherited IRA (Pre-tax) or is this done after the assets are out of the inherited IRA (Post-tax)?

Submitted by Alan - IRA critic on Tue, 2021-04-20 17:25

Other than disclaiming, which will not work in this scenario unless mother’s husband will cooperate, the only way to get funds to the other daughter is to have the named daughter take distributions large enough for both of them, but named daughter would have all the taxable income to report, and the gift would all be post tax. And with a large IRA, the annual gift tax exemption is insufficient to cover the annual gifts and an annual gift tax return would be due. That is why gifting is a hassle and impractical with this large an IRA, even more so if the named daughter is in a considerably higher tax bracket. If named daughter is married, perhaps spouse could join in the gifts to bring the exemption up to 30000 a year, but that is probably still not enough.
Evidently, there was little planning done by mother to better address the situation, and your client faces on going hassles as a result. Perhaps a local attorney could devise a workable plan. Note that the inherited IRA needs to be fully distributed by 12/31/2030 under the Secure Act 10 year rule, and due to the IRA balance, this would likely require large annual taxable distributions from the IRA to avoid a major tax bill in year 10.

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