IRA beneficiary dies before filing claim – do they “fail” as beneficiary?
Dad dies on May 1st. Son is sole bene on Dad’s IRA. Son dies two weeks later, before he had a chance to file any claim paperwork on Dad’s IRA. No contingent bene is named.
Does Son “fail” as beneficiary, meaning the IRA defaults to Dad’s estate?
Or because Son was alive at the time of Dad’s death, did his claim as beneficiary immediately “vest” at Dad’s death, meaning the bene IRA would go to *Son’s* estate?
I have two custodians giving me two different answers. I am inclined to go with the second interpretation, but can’t find a citation (IRC, CFR, etc.) to back me up. Can someone point me in the right direction, please?
Permalink Submitted by Alan - IRA critic on Wed, 2021-05-12 20:48
Yes, the second interpretation will apply barring either a disclaimer on behalf of son by son’s executor OR a survival period over two weeks being included with the son’s designation as beneficiary. It may also be possible that the beneficiary clause in the IRA agreement specifies a different outcome, but that would be rare. Possibly, these two custodian’s IRA beneficiary clauses differ on this questions, so the actual terms may need to be investigated.
RMD rules for inherited accounts generally conform to the person or entity that actually inherits the account upon owner’s death. The above situation is reflected by the following provision Form Pub 590 B p 10.
“Note. If a person who is a beneficiary as of the owner’s date of death dies before September 30 of the year following the year of the owner’s death without disclaiming entitlement to benefits, that individual, rather than his or her successor beneficiary, continues to be treated as a beneficiary for determining the distribution period.”
Therefore, son’s estate would acquire the IRA, but the RMDs to the estate would be based on the son as beneficiary. Typically, the 10 year rule would then apply to son’s estate, but son’s executor would normally assign the inherited IRA to the beneficiaries of son’s will or applicable intestate beneficiaries of son who could use the 10 year rule.
In the above scenario, many IRA custodian would attempt to convince the executor of son to accept a lump sum taxable distribution, and that should be resisted. But had this been a 401k plan, the lump sum distribution could not be resisted and would be distributed to son’s estate. A direct rollover from a 401k can only be made to a desigated beneficiary or qualified trust, so if the son is deceased a direct rollover is not allowed.