Inherited IRA

Submitted by Thomas Snyder on Fri, 2023-07-14 15:09

My brothers Howard and Charles died in January of 2023. Howard never married and had no children. Charles was married with one living child, Brad and one deceased child, Julie.

Howard died intestate and has an IRA with Schwab. He named Charles and me as equal share beneficiaries. The Schwab estate agent told me that the IRA beneficiary designation did not contain the term, “per stirpes”, which means I would inherit 100% of the IRA.

How do I transfer Charles’ portion of Howard’s IRA to Brad? Schwab set up an inherited IRA for me and the composition of the account is mostly stocks. I know I have to pay the RMD for this year. If I inherit Charles’ 50% and sell the stocks and send Brad the cash, then I think, I will have to pay capital gains tax on the dollar amount I send to Brad. Is there another option to avoid paying tax on Brad’s share of Howard’s IRA.

Thanks for your time.

Regards,
Tom Snyder



Submitted by Alan - IRA critic on Fri, 2023-07-14 16:25

  • Am assuming that Charles pre deceased Howard. If the inherited IRA balance is small enough, you could take taxable distributions and gift the tax adjusted remainder to Brad. The 2023 gift tax annual exclusion is 17,000. Your taxes on all distributions are taxed as ordinary income, not cap gains. Your distributions must also address your RMD. Your beneficiary RMD starting in 2024 is either based on the 10 year rule or if you are not more than 10 years younger than Howard you are an EDB (eligible to stretch RMDs over your single life expectancy) and not subject to the 10 year rule. However, if you are more than 10 years younger than Howard and therefore not an EDB, you will be subject to the 10 year rule, and with Howard apparently taking RMDs, you would have to take annual RMDs in years 1-9 of the 10 years. While complex, you must meet your beneficiary RMD requirements as a minimum, but if you opt to gift post tax to Brad you will likely be withdrawing more than your annual RMD.
  • If the IRA is large, and you wish to file a qualified 50% disclaimer (deadline  9 months after DOD), half the IRA will go to Howard’s estate, but there is no will and state intestate rules would have that half re routed back to you and that is not allowed with a qualified disclaimer. Perhaps if you then disclaimed that portion of Howard’s estate as well that portion of the IRA would make it to Brad. But this path involves careful and expensive estate lawyer involvement and execution. Not clear who will be appointed as Howard’s personal rep and that person would become involved in the disclaimer process. If you talk to an experienced estate lawyer, they will probably recommend the much simpler gifting process, but if you exceed 17k in any year, you will have to file a gift tax return.

Submitted by David Mertz on Fri, 2023-07-14 17:07

  • If the amount is large enough and Brad’s marginal tax rate is significantly below your own, the expense of obtaining the disclaimer, disclaiming the 50% both directly and through the estate so that the disclaimer would be qualified, might be offset by the tax savings.
  • For any portion that passes to Brad through the estate, Brad would not be a designated beneficiary and RMDs from that portion would be determined under the rules for a beneficiary that is not an individual.  Also, to be able to close the estate, the inherited IRA would have to be assigned from the estate being the beneficial owner to Brad being the beneficial owner, something that many IRA custodians resist doing (I’m not sure about Schwab), although that resistance could possibly be overcome by transferring the inherited IRA to another custodian.  These concerns might have an impact on deciding if a disclaimer makes sense.

Submitted by Thomas Snyder on Fri, 2023-07-14 17:37

Charles did predecease Howard by 11 days and the IRA balance is small enough to use the gift tax exclusion.Thanks for your help.

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