Inherited IRA

[Guest gogators]

My client's mother died in 2006. She had been withdrawing her RMDs. However, she was very ill during the end of 2006, and failed to take the RMD for that year. She died in January 2007.

The IRA was divided among her two children in Conduit IRA accounts. Now they have been notified that she failed to take the RMD in 2006.

I suggest that each of the children immediately take a distribution equal to 1/2 of the RMD for 2006 from each of their accounts, report it on their 1040s for 2007, and file a Form 5329 seeking a waiver of the excise tax for 2006. I don't believe that the kids are required to pay the distributions back to the estate.

Does anyone find any problem with this analysis?

[Guest mjb]

If the owner fails to take RMDS, the RMDS must be paid to the beneficiares designated under the IRA (including the default bene) since the owner's interest is transferred to them upon death. Estate has no interest in IRA after owner's death unless it was a beneficiary under the IRA.

[Guest fdyer]

My client's mother died in 2006. She had been withdrawing her RMDs. However, she was very ill during the end of 2006, and failed to take the RMD for that year. She died in January 2007.

The IRA was divided among her two children in Conduit IRA accounts. Now they have been notified that she failed to take the RMD in 2006.

I suggest that each of the children immediately take a distribution equal to 1/2 of the RMD for 2006 from each of their accounts, report it on their 1040s for 2007, and file a Form 5329 seeking a waiver of the excise tax for 2006. I don't believe that the kids are required to pay the distributions back to the estate.

Does anyone find any problem with this analysis?

Make sure that they pay their tax when they file for the waiver. If you are found to have taken immediate steps to rectify the situation - and in this case a medical situation is a strong excuse! - then they will usually grant the waiver, but the beneficiaries HAVE to pay their taxes up front and request that it be refunded when the waiver is granted.

I'm not certain about the estate, but it doesn't seem like they should have to re-pay it. I would suggest they get themselves a tax professional to guide them through this process. The money they could potetionally save by avoiding making an error in all of this would more than cover the fee a pro would charge.

[Guest mjb]

fdyer: why would ther be a Q of repaying the estate? The IRA benefits are non probate assets which means that the benefits pass outside of the estate of the deceased similar to LI proceed. Estate must be a bene to receive payment from IRA. Also check IRS procedures for waivers. I thought IRS no longer requires paying the tax upfront.

[Guest fdyer]

Don't know enough about estates. My concern would be that the RMD was due to the decedent and not her benes. Being that it is paid to her benes though, it seems as though that is where the tax liability lies. Still don't know enough to feel comortable to place a bet on it.

I'm unaware of the change to the waivers. My understanding is that you pay the tax and if they grant your waiver, then you get it back. It would be very kind of them if they are not requiring it be paid up front.

My next question would be that if the benes do not pay their taxes up front and the IRS does not grant the waiver, wouldn't there be additional interest due? Depending on the size of the RMD - the amounts on 50% being late could add up quickly. I could be mistaken, but I have never known the IRS to be so generous as to not penalize someone for any sort of delay in paying them. Or to be overly generous with the waivers either.

[BPickerCPA]

I've never had a waiver denied, and I've never paid it up front.

There is absolutely NO issue about repaying the estate. Even though the decedent did not take the RMD before death, the beneficiaries take it now, and they pay the tax. Technically, the estate owes the 50% because it was the decedent who failed to take the RMD. The beneficiaries have not liability, other than a possible transferee liability down the road. The estate needs to request the waiver.