Estate issue with Ira

Submitted by Bob Justice on Fri, 2023-09-22 16:43

2 months before my Aunt passed away she sat down with her POA and made him beneficiary of her Ira. Supposedly this was done to help the POA who became the executor distribute the money to my Aunts heirs. When the POA now executor realized that claiming the IRA would have a tax consequence he decided to disclaim the money and give it to the estate. I’ve learned there is a 9 month rule in which this should be done. The executor has yet to disclaimer the IRA and if he does now in the 10th month since my Aunt passed he is liable for all the taxes for the IRA. This promise to distribute the Ira money was also written in the will. My questions is should the lawyer who made the will realize that this could cause problems? Couldn’t the IRA be left to the estate and avoid the current issues? Why add an extra complication if the executor could simply oversee the disbursement.
Thank you for your input.
BJ



Submitted by Alan - IRA critic on Fri, 2023-09-22 17:48

  • You are correct that a qualified disclaimer deadline is 9 months from the date of death, so that option is off the table now. As such the POA is the designated beneficiary and the IRA will not become a probate asset in the estate. This beneficiary will have to establish an inherited IRA, take out at least the annual RMD, then make a tax adjusted gift to the beneficiaries each year. The beneficiaries will not owe taxes since these would be gifts, and the beneficiary will have to report the taxable income so that justifies the beneficiary retaining the amount needed to pay the taxes. 
  • Assuming aunt was already taking RMDs, and also assuming that the POA beneficiary is not disabled and is more than 10 years younger than aunt was, the inherited IRA will fall under the 10 year rule with annual RMDs in years 1-9 based on the POA beneficiary’s single life expectancy (Table I). Of course, the inherited IRA can be drawn down faster. The annual gift exclusion is 17k per person, so the smaller the IRA balance is and the larger the number of will beneficiaries receiving gifts, the more likely that the POA will not have to exceed the 17k annual gift limit.
  • How old was aunt at the end of the year of death?

Submitted by Bob Justice on Fri, 2023-09-22 18:56

Thank you for your reply.  My Aunt was 82 when she passed and the POA/ executor 75.  To add complexity, the previous POA/Exe has stepped down and a new Exe has been appointed.  It was agreed that the disclaimer of Ira would be to give it to the estate to pay debt first.  Can this be done past 9 mo?

Submitted by Alan - IRA critic on Fri, 2023-09-22 20:18

  • Since the POA is not more than 10 years younger, they are an EDB and would have to take annual beneficiary RMDs over their life expectancy of 14.1 years starting in the year after death. The 10 year rule does not apply. SInce a deadline for a qualified disclaimer has passed, any attempt to disclaim would be non qualified and according to noted Retirement plan expert Natalie Choate, it could result in the taxable sale of the IRA (taxable distribution) for income tax purposes, therefore the POA should avoid considering a non qualified disclaimer. However, the POA as beneficiary could take taxable distributions and gift and them (subject to 17k annual gift exclusion) to the will beneficiaries who could pay estate expenses and final bills of the decedent.
  • If aunt did not complete her RMD for the year of death, the beneficiary of the IRA is also responsible for completing that RMD.

 

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