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Inheriting or Bequeathing an IRA

Some time back, I wrote a post called “On My Death, Please Take a Breath” about how one should wait before doing anything in haste financially after the passing of a loved one. I paid specific attention to the inheriting of an IRA, and received some feedback prompting a longer discussion.

First, there are different rules if you inherited the IRA from a spouse or non-spouse. If your spouse passed and left you an IRA, you are able to roll it into your own account, and treat it as your own.

If you inherited the IRA from a parent (for example) or other non-spouse, the rules are a bit tricky, but not impossible, to understand. The IRA becomes retitled as JoeTaxpayer, beneficiary, Charles Schwab Custodian. It’s most important to note, the funds can NOT be mingled with any other funds you have. You must begin taking withdrawals by December 31 of the year following the person’s death, and you use the life expectancy table 1 in Appendix C of IRS Publication 590 to determine your required distributions. Note also, you refer to this table once only, for the initial distribution. In subsequent years, you reduce the divisor by 1, unlike withdrawals from your own IRA after 70-1/2 where you refer to the table each year to find your new withdrawal requirement.

Another important point – If the original IRA had contingent beneficiaries, you may disclaim your inheritance and allow the next in line to inherit the IRA. Why would you do this? If you are a high earner, in a high tax bracket, you may not need the money at all, or if the next person listed as beneficiary is your child, their RMDs (required minimum distributions) may be so small, they avoid tax, or are minimally taxed.

While on the topic of contingent beneficiaries, an IRA must have its beneficiaries noted on the account, they are not inherited through a will. If there is no beneficiary listed on the account or if the only beneficiary either pre-deceases or dies along with the account owner, the IRA funds must be withdrawn by the heirs within five years of the passing of the owner. Note, in your will you can include instructions to your beneficiaries not to withdraw the funds (i.e. not to ‘cash out’ the account 100%, but only take RMDs, this is a note you’d include, it’s not binding) in the IRA after your passing.  This is the worst decision they can make. If they are afraid of the stock market, or don’t understand the investments you left them, they should simply change its contents to Treasury bonds or CDs.

Lastly, this is a complicated topic, it’s easy for even the so-called pros to make an error. Read up to understand the rules, and ask questions before you make a tragic mistake and are hit with a huge tax bill. A final note, I mention nothing about converting your inherited IRA to a Roth IRA. This is not allowed for a non-spouse beneficiary, and for a spouse, only if they put the IRA into their own name first.

{ 201 comments… add one }
  • JOE November 27, 2012, 11:43 am

    If there are living, named, beneficiaries, they are the only ones who can receive the inherited IRA and take distributions over their lifetime. If the named beneficiaries disclaim their inheritance, it then follows the will/estate, in which case, they may see the money distributed as they hoped, but it’s then part of the probate estate. IRAs inherited this way are withdrawn either over the RMD schedule of the deceased, if she was over 70-1/2 and started withdrawing RMDs, or within 5 years.
    The dollars involved would determine how much effort one should put into this. For example, if I were inheriting $20,000 in an IRA that I really felt should have been split with my sister, I’d keep the entire account as a beneficiary IRA, and give her a check for $7500, as 25% is my tax bracket.

    I hope this helps. And for my readers, an example of why the beneficiaries on all accounts should be reviewed each year.

  • JOE November 27, 2012, 11:58 am

    I’d suggest that after the RMD for your mom is made, the account be split in 3, properly titled for each of you and then separately chip in for the final expenses. This way, each sibling can choose whether to take only her minimum withdrawal for the first year, or take a larger withdrawal to be used for this purpose. Depending on how large this account was, I’d hope you can all let it grow as much as possible to help with your own retirements.

  • Brian December 7, 2012, 5:30 pm

    Thanks for the reply, so let me get this straight my deceased Uncle Jesse was listed as the beneficary of his deceased brothers IRA (Uncle Buford) I am the executor of Uncle Jessies estate. Myself and a cousin are listed in uncle Jessie’s will as splitting any funds left in any accts. I am in the process of getting the letter of testimentary from the courts. what should I do with this IRA. The bank said it is normal for an estate account to be setup with an EIN # Since I can’t use Uncle Jessie’s SSN. and that the IRA would be moved to that and then ? Does the estate pay the taxes before it is split between me and my cousin? Its in excess of 80,000 or do we each treat it as income for this year and pay taxes. From what I’ve been reading I can’t role it over into a inherited IRA account since Uncle Jessie did not have either off us listed as beneficiary since he did not know he was even listed as the beneficary of his brother. If you require additional info please send me and email an I will get back ASAP Thank you again for your wonderful website.

  • Jenny December 9, 2012, 8:28 pm

    My mother has IRA in the amount of $60,000 of which my sister and I are beneficiaries. We are ages 52 and 51. Under the current tax rules, my mother’s estate is below the amount that would incur an estate tax. Based on this, would it be beneficial for her to take a lump sum withdrawal of the IRAs so that they would be taxed at her tax bracket instead of at our tax bracket that is much higher?

    Thanks!

  • JOE December 9, 2012, 9:10 pm

    Absolutely not! If she’s in a low bracket and wants to help you, the better choice is for her to convert to a Roth IRA, either all at once, or over a few years, to not jump to the next bracket. This way, she can pay the tax at her lower rate, but keep the money in a retirement account so it can continue to grow. When she passes, you’ll each get 1/2 the account, and have RMDs each year, but with no tax due. You can always withdraw more than the RMD if you wish, or just take the minimum and see years of growth for the inherited account.

  • Cliff December 18, 2012, 6:47 pm

    Can the funds in a 401-K IRA be left to a trust with two daughters and three grandchildren as beneficiaries with the trust receiving annual RMD and paying the tax and then making distribution as specified in the trust? We would not want the grandchildren to take any money until they are ready to use it for college. We also do not want their parents to take the money in one or even five payments. Can we get by with our existing trust, amended as necessary, or should we have a trust for each beneficiary?

  • JOE December 19, 2012, 2:07 pm

    There are two parts to what you are attempting. 401(k) plans have their own rules, not all permit lifetime distributions to a beneficiary. I’d check with the custodian of the plan to verify what they allow. As for the IRAs – a properly set up trust is a pass-through entity, as a trust is not human, it has no life, and for purposes of the RMD, the beneficiaries’ age is used to do the calculation. If the trust is set up with 5 beneficiaries, it’s the oldest whose age determines the RMD. This may create far higher withdrawals than you want to generate which is why individual trusts might be preferable.

    But on to part two – I don’t believe it’s permissible for the RMDs to drop into another trust, the money must be distributed to the beneficiary. In the case of minor children, the parents are obligated to keep the money in an account for their benefit, a UGMA account for example. This should satisfy your intentions, but the funds are available to be used at the parent’s discretion once distributed from the IRA within the Trust.

    I hope that helps answer the question. It’s possible to accomplish your goals, but those surviving you need to be in agreement.

  • Shelley December 27, 2012, 2:03 pm

    Hi Joe, I hope this is a simple question with a simple answer. My dad (age 92) passed away on April 15, 2012. His small IRA was split between my brother and myself (each of us received about $30K, so we’re talking a smallish amount.). I have established an “inherited IRA” account and plan to take it all out in early 2013 (my husband and I will be in a lower tax bracket in 2013 as he just retired from his job.) BUT the question is, do I still have to take an RMD for this year (2012) to keep the IRS happy? I’d rather not as we’re still in a high tax bracket, but if it will keep the IRS at bay, then I will take the RMD. I find conflicting advice on this question. Thanks and Happy New Year!

  • JOE December 27, 2012, 9:27 pm

    Hi, Shelley.
    Sorry or your loss. If you take it all out within five years of his passing, there’s no penalty. In fact, I’ve seen the advice thatifone misses a few years of RMDs after inheriting, this strategy would negate the accumulating penalties.
    By the way, you don’t have an RMD for 2012, but your dad still had to take his before the funds were transferred to the inherited IRAs as he was over 70-1/2. This may have added to the conflicting advice you read.

  • john January 16, 2013, 1:43 pm

    if someone has roth iras, can the beneficiary be set up as a trust to manage the roths and retain its tax free features for a child who has difficulties in managing money himself?

  • JOE January 16, 2013, 1:58 pm

    Absolutely. You must handle this through a well qualified trust attorney who has expertise in this topic. The trust will act as a conduit to pass through the RMDs, and perhaps a bit of flexibility so the trustee can withdraw for emergencies, if necessary. One key point, while the IRA owned is alive, no transfer is made, the assets are not put into trust until the owner has passed, and even then, the wording for the trust is important.

  • Leah January 16, 2013, 5:05 pm

    Hi Joe,
    My aunt and I are listed as TOD on my grandmother’s IRA (about $22,000). My grandmother died 1/7/2012. We missed taking her RMD out in 2012. My aunt took her 50% of the IRA out in October. I have not done anything yet. What do I do about her RMD for 2012? What do you suggest I do with my half of her IRA ($11,000)? I am 42.

  • JOE January 16, 2013, 6:35 pm

    The missed RMD must be taken out now, and has a 50% penalty. The amount is also taxable to you. I don’t know what Grandma’s age was last year, a look at Publication 590 will tell you the RMD that should have been taken.

    My current article Qualified Charitable Distributions would avoid penalty, by allowing you to donate the entire RMD amount.

    At 42, your RMD is just over 2.5% of the year end account balance. I’d invest in a low cost S&P Index mutual fund, and let it grow over time.
    I’m sorry for your loss.

  • Lisa January 19, 2013, 7:24 pm

    My friend passed away in mid 2012. She had a will and named me as her executrix. She had closed all of her bank accounts before her death (suicide). The only property she owned was in Mexico and she and her ex-husband owned that together, luckily she left that to her ex-husband. Plus they were selling the property at the time of her death.

    The only thing she had at the time of her death were mutual funds and a IRA. Her broker/financial adviser/representative said she had removed all beneficiaries from all mutual fund accounts and her IRA. So this meant that the accounts went to her estate, which is what she wanted. It would be easy if she had noted a few beneficiaries, but there are a total of 10. One of the beneficiaries filed for bankruptcy and another has no tax ID. Some beneficiaries are here others are out of state.

    Since there were NO funds to pay for her funeral, bills, taxes, etc. I cashed out all of the mutual funds and her IRA. The court makes you file a 90-day inventory. Her broker/financial adviser/represent told me at the beginning of June that I should just leave everything in and take out what was needed to pay bills on her behalf. However, because of the fluctuation of the market, her accounts had lost over $20,000 from the time of her death to when I was able to meet with her broker/financial adviser/representative (I met with him after I had all of the appropriate paperwork from the court-letter of testamentary-showing I was appointed as executor). For the next 20 plus days the market kept going up and down terribly. I am listed as 1 of the 10 beneficiaries, but I did not want any of the other 9 saying that I lost money by not cashing out ASAP rather then waiting to see how the marker would do OR prolonging the distributions they are to receive.

    The amount of money left over (mutual funds and IRA account) after paying her funeral expenses, bills, estate expenses and pre-tax money I had taken out when the IRA was cashed in (25%) is $200,000 ($43517.00 is the actual amount I received in a check from her IRA account). In North Carolina there would not be an estate tax on this amount ($200,000). However, with the IRA being cashed out I wanted to make sure enough money was set aside to cover potential taxes and penalties. My friend was 43 when she past way. I just received the 1099-R from her investment company today. I obtained a tax ID for the estate because of this. I did this to make things as easy as possible since 9 other people are involved and I’m still not sure of the exact amount each of us will end up receiving from my friends estate (not to mention the bankruptcy issue with one and no tax id for another person).

    ***So, I’ve said everything, here is the question: For the estate, will additional taxes need to be paid and will there be a 10% penalty on the IRA withdrawal? I have not received any tax forms on the mutual funds that were cashed out.
    The exact amount of her IRA account was $64,966.42 before cash out ($16249.10 was taken out for federal tax & $5,200.00 was taken out for state tax). What else do I have to look forward to now? I just want to get everything done so everyone can be happy and move on.

    I will be filing taxes for her for 2012 (she did not earn anything due to disability, luckily she was still living with her ex-husband, she had recently applied for disability and was approved a few days after her death) They divorced in 2011, I’ve asked him for a copy of their tax returns from 2011, but he still has not given it to me. And I will be filing for her estate.

    Any advice you can lend would be greatly appreciated. Plus if you know of a great accountant in North Carolina. I spoke to three after her death and received different information.

  • JOE January 24, 2013, 12:51 am

    First, I am so sorry for your loss.

    This is a pretty complicated situation. I can tell you that there will be no penalty on the IRA being taken out after her passing, but the total withdrawn is taxable. Since it was taken out before being distributed to her heirs, the beneficiaries, the tax is probably owed by the estate and her 2012 tax return should first be filed before distributing any of the remaining funds. Given the size of the estate, no federal estate tax would be due, only the tax on the IRA distribution. I assume when you say there are 10 beneficiaries, these are all noted on the will, correct? Given the amount involved, you may want to consult an attorney that specializes in settling estates. This may be a bit beyond my expertise.

    For future readers – the woman who passed away and deleted all beneficiaries from the IRA account cost her friends some money. Each of them should have been able to inherit a $6500 IRA and take tiny withdrawals over their lifetime. A small hit, $1600 each, but money they could have saved from Uncle Sam.

  • Cyndi January 27, 2013, 12:18 pm

    Joe, my parents are in their 80’s. just sold their house to move closer to us so we can take care of them. In order to find a place I had 115k in an IRA I wanted to use to purchase a house for them. But I am being told because they are my parent I can not use my IRA on a house they would live in? I thought I was doing the right thing by helping my parents? They have 100k to put into a house but we had relied on my 115k to add to their monies so they would not have to take a mortgage. Any ideas or suggestion on how I can use my money?

  • JOE January 27, 2013, 12:37 pm

    The rule you are thinking above is that first time home buyers are permitted to take $10,000 from each their IRAs (for a couple) with no 10% penalty. There are two key points here. “First time” buyer and “no penalty.” This has to be a purchase for your own home, not a parent. More important, tax is due on withdrawal, it’s only the penalty that’s avoided.

    If you are 59-1/2 or older, you’d have no penalty anyway, but the tax is likely to put you into a higher bracket than usual. Very kind of you to want to help, but you need to understand the potential cost.

  • Virginia Jingst January 31, 2013, 10:58 pm

    I have tried to read these posts but there are so many with all sorts of problems I’m just confused now. My cousin and I are listed on an Aunt’s IRA as beneficiaries. Its only $15,000. Her will states that all assets be split between 9 nieces and nephews. We both feel this includes the IRA. For simplicity, and lets face it when you split it 9 ways it won’t mean much, we would like to cash it in and then split it. Is there a way to do this and make everyone responsible to pay their own taxes on it?

  • JOE January 31, 2013, 11:13 pm

    The IRA beneficiary form takes president over the will. You present a broker with a death certificate and they acknowledge the money is yours. No lawyer, no probate.
    If you really wish to split the money, you need to tell the broker you wish to both disclaim your right as named beneficiaries. Once the will is presented and probated, the broker will hand out the remaining money 9 ways, and each beneficiary pays their own tax. Not inheritance tax, but income tax.

  • Virginia Jingst February 4, 2013, 4:35 pm

    Thank you so much that was the most straight forward answer I’ve gotten!

  • Gary February 5, 2013, 3:54 pm

    Joe, really enjoyed reading all of your info here. My wife’s mother recently passed away, with both my wife and my wife’s sister named as 50% beneficiaries on her IRA. It is a very small account, about $6100, from which she has been taking her RMDs. There was also a substantial savings account at the same bank that had all 3 of them named as joint account holders with right of survivorship. My mother-in-law died without a will and no contingent beneficiaries on the IRA. Five days after her death and before anything was done to split and transfer title to the IRA or deal with the savings account balance, my wife’s sister died, also without a will. Our attorney says that the savings account passes directly and soley to my wife as a joint owner and since that account was the only other asset other than the IRA, there will be no probate opened or estate established for my mother-in-law.

    I’m not particularly concerned about my wife’s share of the IRA. Like I said it’s a small amount, we’ll go to the custodian once we have the death certificate, take title to her share, and will probably just cash out the $3000 or so that will be hers rather than deal with the record keeping on a very small RMD. But I’m a bit confused and concerned about what happens to the 50% that would have gone to her sister. My assumption is as a matter of law, that 50% became hers immediately upon her mother’s death and would now have to pass through her estate via probate to get distributed. All well and good. But I anticipate some rather complicated probate matters concerning her sister’s estate and I don’t want my wife and her responsibilities for closing out her mother’s affairs to get bogged down and unneccessarily entangled in that. It will also be somewhat complicated by the fact that my sister-in-law’s family and estate handlers will all be out of state. So while it will be very simple for my wife to go to the custodian, which is in our home town, and present her beneficiary credentials, it will much more involved process for her sister’s estate. I don’t want to show up there and be told we have to come back with my sister-in-laws estate representative to make any kind of move.

    What I’d like to see happen when my wife and I go to the custodian is 1) get them to take out her mother’s required 2013 RMD and deposit to the savings account that still has her mother’s name on it (remember, no estate established for mom), 2) take mom and the sister’s names completely off the savings account based on the death certificates (we will have a copy of both), 3) establish an IRA “Mom’s Name Deceased, for the Benefit of My Wife” and transfer 50% of the IRA balance to it, and 4) leave the remaining 50% in mom’s name and let my sister-in-law’s estate handlers figure out what to do from there.

    Once that’s done, we plan on cashing out my wife’s portion of the IRA, deposit to the savings account, then transfer the whole kit-n-kaboodle to our financial institution, leaving nothing behind except the 50% IRA due my sister-in-law’s estate.

    Not that it matters to this discussion, buy my sister-in-law was survived by a spouse and one adult son from a prior marriage. If she hadn’t passed, she and my wife would have closed mom’s savings account and split the proceeds. But with this turn of events, we didn’t feel it right that half of her mom’s savings should be distributed to a second spouse (who mom didn’t really like anyway) and further down the chain of descendants. We also have 3 adult sons and what we have decided to do is distribute $40,000 from grandma’s assets as $10,000 individual gifts to each of the four grandsons, and my wife will retain the remaining approximatley $100,000 as the sole surviving child.

  • JOE February 5, 2013, 8:52 pm

    It looks like you got it all right.

    The savings account belongs to your wife, I agree. Unfortunate for her brother in law, who would have gotten half had the sister moved quickly on splitting the account, but, in effect, it was maintained as a joint account between the two sisters.

    As far as the IRA goes, you got it right on that as well, the designated beneficiary getting the 50% share and titling as you noted. She will have RMDs based on her age and in any year, can withdraw more, but not less than the RMD. The sister’s spouse would seek the remaining half of the IRA, but not as a ‘designated beneficiary,’ since it was never in the sister’s name. That makes it a probate matter although your state may have a de minimus amount before probate is required.

    For what it’s worth, this is why (a) retirement accounts should have contingent beneficiaries, and (b) when one passes, the heirs need to move fast. I understand here that only five days elapsed, which may make this last remark impractical in this particular situation.

  • Paul February 9, 2013, 5:39 pm

    First, thank you in advance for your help. My wife (55) inherited a traditional IRA from a deceased parent. The parent was 71. She set it up as a beneficiary IRA and started taking the RMD. For a couple years we took the RMD, calculated the basis on IRA form 8606 and paid tax on the taxable amount. We don’t need the money right now so last year, she had the company holding the IRA investment fund stop sending the RMD to us and just reinvest it back in the same IRA fund. The 1099-R from that company shows the gross distribution (box 1), and that full amount as taxable (box 2a)–but the box for “taxable amount determined” (box 2b) is marked “No”.
    A) Can she legally reinvest the distribution back into the same IRA?
    B) Do we owe tax on it if we didn’t physically take the distribution?
    C) If so, how do we calculate how much of the distribution is taxable?

  • JOE February 9, 2013, 9:29 pm

    Interesting – The RMD must be taken each year, need it or not. An RMD that’s not taken out of the IRA carries a 50% penalty. It seems as if the broker took it out for your wife, but redeposited the funds? An improper deposit only has a 6% penalty. This is better, but it’s still strange to me that the broker would ever accept a deposit into an inherited IRA, this is never allowed.
    Last, you mention 8606. Was some of the account post-tax money? Each year, you prorate the post tax balance over the year end balance and that ratio is the amount you are not taxed on when withdrawn. I hope this gets you closer to your answer.
    I’d like to better understand that transaction – “stop sending the RMD to us and just reinvest it back in the same IRA fund.” This is the part I’m unclear on.

  • Paul February 11, 2013, 4:52 pm

    Thank you for your quick response. Looks like we have some cleaning up to do with the broker. Are the rules the same for an inherited Roth IRA–redepositing not allowed?
    Oh and yes, unfortunately the original inherited IRA is a combination of both pre- and post-tax money requiring the 8606.

  • JOE February 11, 2013, 6:55 pm

    No problem Paul. Yes, an inherited Roth IRA has RMDs even though the owner, while alive didn’t have to take RMDs regardless of age.

    By the way, be sure to list new beneficiaries on the inherited accounts to make it easier when your wife passes. (May it not be for 55 more years!) The subsequent beneficiaries continue RMDs as when your wife took them, they do not recalculate based on their age.

  • Deb February 14, 2013, 8:10 am

    Joe, help me. I keep reading different rules about the 5 year rule for Roth distributions for a non-spousal beneficiary, or at least I’m having difficulty interpreting the rules. Mom died in late 2007. Did I have to take money out by end of last year or by end of this year (2013). If it was supposed to be last year and I missed it, now what? Am I going to get hammered on taxes?

    Do I take the distribution now and hope the IRS doesn’t catch it? What’s actually reported to the IRS on an inherited Roth IRA distribution? Can I plead ignorance? And was it the responsibility of my brokerage firm to notify me that this had to be done? Thanks so much for your help.

  • JOE February 14, 2013, 10:26 am

    I’m so sorry to hear this. If she passed in 2007, you should have started to take your RMDs in 2008. This would have let you stretch the IRA withdrawals over your lifetime. The next choice, especially if one missed multiple RMDs, is to empty the account by the end of the fifth year. 2012 in this case.

    Even though it’s a Roth with no tax due, there’s a penalty of 50% for the ammount not withdrawn that should have been. Yes, I’d empty the account, no tax due, and beg for forgiveness if the IRS assesses you the 50% penalty. You can make a case for the penalty being due ‘only’ on the 5 years withdrawals not taken if you were a designated beneficiary, i.e. listed as such on the account. I can’t comment on the broker. It’s not a simple matter.

  • myesha February 16, 2013, 10:46 pm

    Hi i just turned 21 on sunday the 10 of this month of Feb my mom past away on Dec 12 2008 i just found out last month that my mom left me a IRA account i don’t know what to do im struggling financial because both of my parents are deceased and im living on my own what should i do

  • JOE February 17, 2013, 5:09 pm

    There are a number of options.
    One choice for an inherited IRA is to withdraw all the money by the end of the fifth year after the deceased passed. That’s the end of this year. You’ll owe taxes on the withdrawal, but no penalty.

    If the amount is large, and the tax for a lump sum like this puts you in a high bracket, you might consider taking out 5 years worth of RMDs. The first four years of withdrawals ‘not’ taken carry a penalty of 50%. At 17, the RMD you should have taken in 2009 was the end of 2008 balance divided by 66, then 2009’s RMD was the 12/31/2008 balance divided by 65, and so on. You need to get the history of the account and do some math, but the good news is the 4 year total is approximately 6.2% total withdrawal and a 3.1% penalty.
    Again, if the account is 6 figures, you should consider this as it’s a way to stretch the remaining balance over the next decades, by taking these small withdrawals. I hope this helps. Let me know if you have a follow on question.

  • JOE March 7, 2013, 4:19 pm

    Laurie – I’m sorry for your loss. The correct way to handle this would have been for the IRA to pass to you as an inherited IRA. No Federal Tax due at all, and no Estate Tax at the Federal level. I see that MN Estate tax starts on Estates greater than $1M, so, while no Federal Estate tax was due, MN might have had a bit of tax to pay.

    The $50,700 is now being taxed all at once, instead of you being able to take tiny distributions each year. This was bad advice by whoever gave this advice to your brother. I would grill them on this and tell them they just cost you the tax on this amount, which isn’t huge compared to the estate, but my goal is to maximize one’s wealth, not the bill to Uncle Sam.

    To be clear, the IRA would have still been part of the estate tax issue, but it would not have resulted in the income tax bill you are seeing had it been kept in the IRA.

  • Laurie Farnam March 7, 2013, 3:56 pm

    Hi Joe, I really need your answer to this question re: how my brother John’s IRA was ‘handled’ by the estate attorney and the Trustee. My only brother and sibling passed away in April of 2012. In his very quickly prepared Trust was an IRA valued of $50,700. I learned from my brother’s Morgan Stanley ‘broker’ that I had originally been named beneficiary of the IRA, but subsequently ‘removed’ apparently at the suggestion of the attorney and/or Trustee. At the time, I didn’t give this any thought as there was so much going on just dealing with my brother’s sudden loss. This IRA value was simply added to the entire estate value. MN estate state taxes have just been paid, but not the IRS taxes yet. I am demanding to see a copy of the tax return since I am affected by taxes. In the Trust Asset values, there is an amount of $18,000 (estimate) that I assume is slated for State and Federal taxes on this IRA. I have not confronted the Trustee or attorney yet… but this is an outrageous amount of tax.. I am the primary beneficiary of my brother’s estate, but he also left various amounts of money to 15 beneficiaries/friends. Apparently, we will all absorb this $18,000 tax. Please please tell me this action of the Attorney was ILL-ADVISED! If I had remained beneficiary on the IRA, would the $50,700 value been ‘taxable’ on the State estate tax level? In other words, my brother’s estate was just over 1,000,000 where MN requires payment of estate taxes. I’m wondering if the IRA $50,700 value helped “push it over” the million dollar mark? I need answers on so much right now because “they” are trying to get me sign a Disbursement Agreement and I don’t feel comfortable doing so right now!
    Joe, thanks so much (in advance) for your reply!

  • Sue March 13, 2013, 4:17 am

    My father recently passed away and we found out the beneficiaries of his IRA are my brother and I. My mother desperately needs the money so my brother and I were about to sign the disclaimer so my mother would get the IRA. Unfortunately before my brother signed the disclaimer he passed away unexpectedly. Is there anything we can do to make sure my mom gets the entire IRA?

  • JOE March 14, 2013, 8:36 am

    Sue, first, I’m sorry for your loss.
    These things are rarely a simple answer when I don’t have all the facts. First, a beneficiary form should have primary beneficiaries, and it seems it was 50% Son, 50% daughter on the form. Was a secondary beneficiary listed? i.e. in the case that you and your brother had both passed before your dad, did the beneficiary form have a contingent beneficiary? If so, was it your Mom? If someone else was listed, you can’t direct the money away from them. You would need to take withdrawals and gift the money to Mom. If no one else was listed, your Mom can get the IRA, but it passes through the estate, probate, and then it has to be withdrawn by the 5th year after your dad passed. An IRA not inherited through the beneficiary form process cannot be stretched over the life of the beneficiaries.
    Last, if your mother was the contingent beneficiary, you simply disclaim your half, and it passes to her. If your brother has his own family, I believe they’d need to agree to this, as it’s part of his estate.

  • JOE March 18, 2013, 11:53 am

    Absolutely! An inherited IRA should have beneficiaries listed as well. The only ‘gotya’ is the next beneficiaries must continue the RMD schedule of the deceased, the clock doesn’t start again.
    e.g. Say my mom passes, and leaves her IRA to my 14 year old. The RMDs are based on my daughter’s age for the first year and the divisor number decrements by one each year after. At 14, her RMD is based on the number 68.9 the first year. The Life expectancy table is not consulted again, the divisor drops by one each year. In other words, the IRA has 69 years to distribute assets, but no more.
    The current beneficiary IRA owner should add the new beneficiary on the account and note the RMD numbers for the next generation. Thanks for this excellent question!

  • Mary March 18, 2013, 11:44 am

    Hi Joe, I have a relatively simple question that I cannot find black & white answer to. Simply if there is a beneficiary on the IRA. The owner passes and the beneficiary transfers it to a Inherited IRA. Can the beneficiary then assign his beneficiaries? Is MN law different on this issue?
    Thank You.

  • Debbie March 19, 2013, 2:58 pm

    I have a letter from an attorney and a decree of separate maintenance to transfer a beneficiary IRA (from his mother) to the wife. Is this possible and how would it be done?

  • Maggie March 20, 2013, 9:49 am

    My dad died last month. He had a traditional IRA of $14,000. We found out from the bank that he failed to remove his ex-wife as his beneficiary. The bank has informed us that the ex-wife does not have rights to his IRA and it goes to me as successor of his trust. Being such a small amount my sister and I have decided to cash it out. The bank has informed me that this cash out must go to me alone as I am the first successor of the trust. My question is what are the tax implications for me and how best to then give half to my sister? How should the check be made out to me? Any advice would be greatly appreciated!!!!!!!

  • JOE March 20, 2013, 3:03 pm

    First, sorry for your loss.
    I mean no disrespect to the bank employee, but the facts as you state them have the ex-wife as legal owner of that IRA. The beneficiary designation on an IRA takes priority over a trust or will. The bank is incorrect to go around a beneficiary designation on an IRA.
    That said, if you withdraw the funds, the tax is taxed to you as ordinary income, no penalty, and it’s a low enough amount that you can gift anyone you wish a portion of it. I suggest you reserve 40% for taxes, keep 30%, gift sister 30%, and then when you do your taxes in 2014, see how much tax was due with this extra income.
    An IRA inherited can also be withdrawn over 5 years, but no more. I’d usually suggest this to reduce the tax hit, but as you suggested, this isn’t a very large sum.

  • JOE March 20, 2013, 3:16 pm

    It sounds like a QDRO – Qualified Domestic Relations Order – to me. The institution holding the IRA should be able to accomplish this.

    Typically, an IRA can only change owners on death. My wife and I don’t share an IRA nor can we move funds from one person to the other. A QDRO is a court ordered transfer that should be honored by the IRA custodian.

  • Judith Scalzi March 21, 2013, 11:18 pm

    Both my parents died in 2012. I am a co-executor of their wills. They each left IRAs in the amounts of $30,000. and $32,000. They each named each other as beneficiaries of the IRAs with no secondary beneficiaries named. There are five beneficiaries including myself. Several including the other co-executor, want the IRAs dispursed instead of depositing the IRAs into the estate account. They would each pay the taxes based on their income level which is an advantage to them. I would prefer the estate receive the IRAs and pay the taxes at the estate tax level of 35%. For me to follow their plan, it would cause me to be bumped into a higher tax bracket than that of the estate. Question, is their plan legal? If so, is there a way fo me to take my portion of the IRA dispursal over a five year period?

  • JOE March 22, 2013, 8:08 am

    Their request is correct. It’s less common to want the estate to pay the tax, although I believe it’s an option. An IRA received outside of a proper beneficiary designation must be withdrawn by the end of the fifth year, so yes, you each have that option, of how to take the withdrawals each year.

    For my readers – I can’t stress enough – it’s important to have your retirement accounts reflect a beneficiary, and second beneficiary as well.

  • JOE March 22, 2013, 9:21 am

    Nicole, I’m sorry for your loss, and situation. Unfortunately, the IRA passes strictly though the beneficiary designation on the account. Now, the executor, the brother, may kindly take the IRA into account when splitting the rest of the estate, but isn’t under any obligation to do so unless specified in the will.
    The second issue, the rest of her estate, is a legal matter, and you and your other brother should act fast to secure your shares of the estate.

  • Nicole March 22, 2013, 9:11 am

    If my mother left no will and she named my brother sole beneficiary to her IRA, it was known for years it was to be split 3-ways between me and my two brothers. Do I have any right to that money? What if my older brother voluntarily became my mother’s executor to her estate, he hasn’t given me and my younger brother our fair share, he wants to use money to pay rent on apt my mother and him lived in. What are my legal rights?

  • JOE March 22, 2013, 8:07 pm

    I am 100% certain that in the situation you describe, taking RMDs from an inherited account, there is no penalty for taking more than the minimum. The first gentleman is mistaken. (And for my readers, the fact that Teresa is 52 is not relevant. The inherited IRA has an annual RMD, required minimum distribution regardless of the age of the beneficiary)

  • teresa johnson March 22, 2013, 8:02 pm

    Joe,
    I have been getting conflicting info from my financial planner in Virginia, and my father’s financial planner in Pennsylvania.
    I have two beneficiary IRAs inherited from my father. I am 52. While I understand that I will have to pay taxes on any amounts I receive, I’m being told by one planner that I will have to pay the 10% penalty if I take more than the required MRD, and the other is telling me that there is no penalty because it’s a beneficiary IRA.
    Can you please help me clarify this? I’m very confused, and I don’t know who to believe.

    Thanks,

    Teresa

  • JOE March 28, 2013, 9:04 am

    I am sorry for your loss.
    The estate should be settled and closed as soon as possible. The fact that your brother didn’t list beneficiaries on his IRA is a problem, but it’s behind us, no going back.
    As you know, the impact is that the IRA must be distributed over a 5 year period instead of the lifetime of a beneficiary. There’s an exception to this, if he died after the ‘required beginning date’ RBD (70-1/2) then the distribution period is the IRA owner’s life expectancy calculated in the year of death, reduced by one for each subsequent year. If this wasn’t the case, the 5 year rule prevails.

    But the IRA itself should not remain in the estate, nor should tax be paid under the estate’s ID. The IRA should be in your name as an inherited IRA and withdrawals, whether over his calculated distribution schedule or the five years, is to you at your marginal rate.

    Please write again if you have any further question or follow up needed. I’m sorry to say, the pros get this wrong all the time as the laws regarding IRA accounts are too confusing for most.

  • Randi Davis March 28, 2013, 8:22 am

    I am sole beneficiary to my brothers estate. He had an IRA worth over $340,000 and a house. There was no beneficiary name listed on IRA so it went into his estate. I obtained a Federal ID number for the estate and the first payment of 5 from the IRA went into the estate account as “Brother John Decd IRA FBO Est of Brother John, Sister Randi Exec” from Merrill Lynch as Custodian. I had them withhold over $9,000 Federal Taxes from the first payment of almost $70,000. I also received the RMD in my social security number since I am over 70.5. My tax accountant has it figured that the estate owes an additional $13,000 of Federal which brings it up to about $23,000 and $4300 in State taxes. The money is sitting in the estate account. I understand I have to file a 1041 estate tax return because Merrill Lynch sent me a 1099-R on the almost $70,000. My questions to you are: Does this seem like the proper amount of taxes for this money and when I withdraw this money from the Estate Account, since I am the sole beneficiary, do I have to pay more taxes for it on my personal tax return? And also when do I have to take the money out of the Estate Account? If I leave it in there until the 5 years are up, will I have to pay taxes on it again when I withdraw it. Should I close out the estate and just have this desposited to my personal bank account? I am very concerned about all of this and my tax accountant or Merril Lynch cannot give me a direct answer. Thank you so much.

  • Brandy Hatton April 11, 2013, 9:57 am

    Joe, My mom died in September of 2012. She left an ira with 270, 000 in it. I split the ira 40/40/20 with my sisters to be fair. I did this because I also got her house and car. I was trying to be fair. My sisters promised to help pay taxes. Now that they have found out how much they are they refuse to help me. I feel extremely stupid for trusting them. Is there anything I can do ?

  • JOE April 11, 2013, 1:48 pm

    Brandy, I’m sorry for your loss. This seems to have become a family/legal matter. If the IRA listed you as sole beneficiary, you should have been able to keep it in tact, avoiding a large tax bill. RMDs (required minimum distributions) would be due each year, but these would have been small and depend on your age. You then would have been able to gift from that withdrawal each year after figuring out the tax. A 100% withdrawal was the costliest way to handle this, as all the money would be subject to your highest tax rate, and the amount you owe for this withdrawal is probably over $70K, less than you kept for yourself.
    You might be able to sue them to recover the taxes due on their proceeds, but I am not a lawyer, and don’t know whether you’d succeed, as they can maintain it was a gift.
    Last – you should research Form 709, the gift tax return. In 2012, you could only gift $13,000 to an individual with no gift tax consequences. Form 709 permits you to take a credit against your lifetime gift limit, no tax will be due, but this form is needed to disclose these gifts.

    I hope my readers can benefit from this story. I’m sorry I could not help more.

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