Deceased account holder failed to take rmds

[R. Butler]

IRA account holder dies in 2014. Should have taken rmds beginning in 2012, but failed to do so. His child is the beneficiary. To add a twist the deceased had a will to which he leaves everything to a charity.

The chariy is asserting that the rmds for 2012 - 2014 should be payable to the estate and thus go to the charity. I dont see that that is the case, but it would help if I could point to a cite. Is there a cite that is on point?

Thanks in advance for any guidance.

[GMK]

As I understand it, the beneficiary of the IRA receives the RMD's that are or were due for the years up to and including the year in which the IRA holder died.

Assuming the child was designated as the beneficiary of the IRA on the IRA's beneficiary designation form, the child beneficiary receives the IRA benefits and receives the RMD's.

It does not appear from the wording above that the child is the beneficiary because the child was named in the will (and not because of the IRA's beneficiary designation form), but if that is the case, then the IRA beneficiary is the default beneficiary in the IRA policy, which might be the estate or might be the child or whatever the policy says. The will cannot designate the beneficiary of the IRA.

Sorry, don't have cites at hand.

[R. Butler]

Thank you for your response. A follow up question. Under §54.4974 the excise tax was due in the year that the rmds should have occurred. If that excise tax wasn't paid it seems that the 2012 and 2013 returns need to be amended and that the estate would be reposonsible for the excise tax. Am I understanding that correctly?

[Lou S.]

In the past you were supposed to pay the excise tax and request a refund for cause. The IRS is kinder and gentler now. Send in an explanation of why the RMD wasn't made, how it was corrected and request that the excise tax be waived. A CPA should be able to help you with a letter.

My mom missed and RMD when dad's IRA transferred to her. We made that year and the next as soon as discovered, did not pay the excise tax but requested a waiver and it was never an issue. Your mileage may vary but I've heard a number of similar stories to mine with waiving penalties on late RMDs.

I'd also have to think the IRS would be especially understanding with a charity as the beneficiary.

[My 2 cents]

Am I interpreting the original post correctly? I understood it to be a given that the child is the properly designated beneficiary under the IRA, so the entire proceeds of the IRA ought to go to the child, and (I hope I do not make this sound unnecessarily negative) it appears that the charity to whom the participant's entire estate was left is looking to find a way to gain possession of some of the IRA as well. The most recent post ended by saying that the IRS might be especially understanding with a charity as the beneficiary, but the charity is not a beneficiary of the IRA. Maybe they meant that the IRS would forgive the estate of paying excise taxes for the unpaid RMDs because the charity would otherwise receive the funds that would have gone to pay the excise taxes. Does it work that way?

I certainly agree that the terms of the will do not affect the identity of the IRA's beneficiary. The will is of no effect until the participant has died, by which point the beneficiary of the IRA is a settled issue.

[Lou S.]

You are right. My bad. Got confused thinking the charity was the beneficiary. They rest of my post wrt to the RMDs and excise tax should still hold regardless of who eventually receives them.

[mbozek]

There are two separate questions.

1. Failure to take MRD in prior years is solely the responsibility of the deceased owner. It is not transferrable to the estate or the beneficiary. IRS penalty does not apply to taxpayer who did not own the asset in year that tax was incurred. Beneficiary can take the 2014 MRD by Dec 31 since deceased did not take it.

2. Claim by charity to IRA depends on state law. For example in NY a will provision designating a beneficiary can override a prior IRA designation if the will provision specifically identifies the IRA for which the beneficiary designation is to be changed because NY law permit the beneficiary designation of an IRA to be changed if specifically identified and made in writing by the owner. However a general bequest in a will designating the residuary of an estate to a specific party is not valid as to non probate property such as an IRA.

Executor of estate needs to consult with counsel to determine how state law is applied.

[GMK]

1. Failure to take MRD in prior years is solely the responsibility of the deceased owner. It is not transferrable to the estate or the beneficiary.

Thanks for the clarification. I believe it (because you said it), but is there a cite?

The one or two articles I have found that discuss "prior due" MRD's going to the beneficiary must have been referring to cases like the first year an MRD is required but not taken until the next year. That is, cases where the decedent was not already past the deadline for taking the MRD. Interesting ...

[GMK]

For example, the IRA owner turns 70-1/2 in 2011, does not take an MRD's, and dies in 2014.

The IRA beneficiary takes the owner's MRD for 2014, but the MRD's for 2011, 2012, and 2013 have to be taken as payments to the deceased owner, becoming part of the decedent's estate and distributed according to the decedent's will (so the charity may get what's left of those RMD's after the excise tax is paid from the estate).

After the MRD's are paid, the remainder of the IRA balance goes to the IRA beneficiary, the child.

Is that how it goes?

[mbozek]

I don't know how the estate will be able to take the MRDs for 2011-13 since the IRA accounts become the property of the IRA beneficiaries at the death of the IRA owner and the beneficiaries as separate unrelated taxpayers are not liable for the taxes that are the obligation of the deceased. I dont know whether the estate can ask for contribution from the beneficiaries for taxes that were accrued by the decedent but not levied by the IRS against the decedent prior to death. Such taxes may be a liability of the probate estate since they were accrued by the decedent before death. Also how would the IRA assets be transferred to the estate without the beneficiary being taxed on the distribution since the beneficiary is required to pay taxes on all distributions from the IRA. If the IRS is not aware that the decedent did not take MRDs prior to death why would the executor want to alert the IRS to the failure of the decedent to receive the MRDs. Everyone knows that the IRS has no way to determine that an MRD has not ben taken for a particular year and does not have the resources to implement such a program.

[GMK]

Got it. Thanks, again. More interesting than I thought.