Delayed distribution after lawsuit

Submitted by Felspar Baggins on Mon, 2022-11-07 15:18

Parent died in late 2018. Lawsuits ensued and
werent settled until early 2022, at which point
the broker finally distributed the proceeds
among several non-spouse beneficiaries.

No taxes have been paid along the way, nor could they…
Furthermore the account values at previous dates
are not available though could probably be estimated.

Laws have changed since 2019….

So what the heck should happen?

Here is my guess, but I would love to hear other interpretations
and suggestions.

Ordinarily, we would get our inherited ira sometime in 2019 and
elect to make minimum withdrawals based on the age of the oldest
beneficiary. We would
have to take the first withdrawal, by dec 31 2019, and
then another in each succeeding year.

Technically we have “missed” withdrawals in years
2019, 2020, 2021.

The problem is that when you miss a withdrawal, the IRS
says you have to pay a “fine” which they call an “excise tax”
of 50% of the amount you should have withdrawn but didn’t.
Ugh!

The formula for required minimum distribution (RMD) is
“balance at end of previous year” * RmdPct.
Unfortunately, we cant easily calculate the end of year
balance for 2019, 2020, 2021
since we didn’t get our share till early 2022, though
I suppose we could painstakingly work backwards
to deconstruct prices and dividends.

Fortunately, there is a possible loophole, to avoid the penalties.
If we take out the money we SHOULD
have taken out, and then fill out a form explaining why we didn’t, and if the irs accepts
our explanation, then we dont have to pay the excise tax. But we do have to
take out the amount we “should have” for 2019-2021, plus the amount we should
have for 2022.

All help appreciated.



Submitted by Alan - IRA critic on Mon, 2022-11-07 16:05

  • You are basically correct. But if parent passed prior to RBD, each beneficiary might have the option to elect the 5 year rule depending on the deadline or procedure stated in the IRA agreement for making that election. If a beneficiary is allowed to make that election now, there would be no annual RMDs required, but that beneficiary’s inherited IRA would have to be drained by the end of 2024. There would be need to determine year end balances or file a 5329 for multiple years under the 5 year rule. But the IRA agreement needs to be checked for any such interested beneficiary. 
  • Due to the CARES Act, 2020 beneficiary RMDs were waived and 2020 does not count as a year for determining the end of the 5 year rule period.
  • I assume that each beneficiary was named directly on the IRA beneficiary clause, and therefore that the estate or a trust was NOT the beneficiary.
  • For determining annual beneficiary RMDs, you are correct that the age of the oldest would apply since separate accounts were not created by the deadline of 12/31/2019. The IRA custodian issued a Form 5498 each year showing the prior year end value for RMD purposes. Year end 2018, 2020, and 2021 statements are needed. These statements went somewhere, but if not retained, the custodian should be able to provide a copy of them. The value is multiplied by each beneficiary’s inherited % of the account.
  • For any beneficiary wanting to retain the LE RMD option, a 5329 must be filed for 2019 and 2021 to request the penalty waiver, which the IRS will grant, given the fact that the IRA was frozen by litigation. There was also a requirement for the beneficiaries to complete the parent’s 2018 year of death RMD if parent passed after their RBD and did not complete their RMD for 2018. Therefore, a 5329 could be required from all beneficiaries for 2018, even if the 5 year rule was allowed and elected by a particular beneficiary. Any late RMDs taken in 2022 will all be taxable in 2022.  

Submitted by David Mertz on Mon, 2022-11-07 18:40

If “the broker finally distributed the proceeds among several non-spouse beneficiaries” is an accurate statement, the funds cannot now be in an inherited IRA.  The only way that the funds can be in an inherited IRA for the benefit of a non-spouse beneficiary is if, in the case where the original account was an IRA, the funds were moved by non-reportable trustee-to-trustee transfer.  In the case where the funds were in a qualified retirement account like a 401(k), the funds would have to have been directly rolled over to an inherited IRA.  Distribution to the beneficiary and subsequent 60-day rollover is not permitted in either case.  Hopefully “distributed the proceeds” was actually meant to say “transferred to inherited IRAs” or “directly rolled over to inherited IRAs.”

Submitted by Felspar Baggins on Fri, 2022-11-11 07:22

In my (barely educated) opinion, if a parent dies in but didn’t take out the RMD in the year of death, then it is the estate that is responsible for completing the RMD for the year of death.  Consequently, if this is NOT done then it is the estate that has to pay the fine (Excise tax).  Since the IRA passes outside the estate they are not responsible for the excise tax.  

Submitted by David Mertz on Fri, 2022-11-11 11:51

  • With the IRA passing outside the estate, the beneficiaries in any combination, not the estate, become the payees responsible for completing the decedent’s year-of-death RMD.
  • Section 4974 of the tax code is the section that imposes the excise tax for excess-accumulation and states, “The tax imposed by this section shall be paid by the payee.”  Since the would-be payees under these circumstances are the beneficiaries, the beneficiaries, not the estate, would be responsible for paying the excise tax.  The beneficiaries are the ones who now need to complete the missed RMDs and request waivers of the excise tax.

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