Yes, you could do that now instead of leaving the decision up to her as to how much she should roll over. If the RMDs on the inherited status account become too high, she can always roll over more to her own IRA. Those RMDs do not have to begin until the year you would have turned 70.5.

With some planning she should be able to avoid having to set up a 72t plan to get distributions from her IRA penalty free prior to age 59.5, which obviously in your main point in establishing a separate account for her to continue in beneficiary status.

Hopefully, you will still be around in 13 years, and you could then re combine the IRAs, as there will be no need for the extra account when she reaches 59.5. In the meantime, you could take your own RMDs out of the account you wish to reduce and/or make transfers between them to adjust the relative balances.

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A 72t plan is an approved method of taking SEPP (substantially equal periodic payments) from an IRA for a taxpayer under 59.5. The early withdrawal penalty does not apply to these distributions, but the risk is that if the plan is deviated from during it’s term, the penalty is the retroactive assessment of penalty and interest from the first year of the plan. Therefore, you avoid these plans if there is another option, as there would be in your case.

As to your first question, your wife can roll over funds from the inherited IRA or make an inherited IRA her own whenever she chooses. There is no time limit for doing this. However, once done those funds cannot go back into inherited status and would be subject to the RMD requirements of your spouse, or if she is still under 59.5 when needing distributions from her own IRA there would be a penalty…. that is unless she set up a 72t plan.

In summary, avoid the 72t plan if possible, but if unanticipated developments occur, the 72t plan can serve as a safety valve for escaping early withdrawal penalties.

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Section 72(t) is the section that, with several exceptions, imposes a 10% penalty on early withdrawals.

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Any assets left to your spouse receive an unlimited marital deduction for estate tax purposes. The main issue for those whose gross estate will be in excess of the unified credit is when the second spouse passes and that spouse’s gross estate includes what was left from the first spouse. At that point there is no second marital deduction, and estate taxes could come into play requiring a large portion of assets to be sold to pay those taxes. Children or other beneficiaries would then inherit that much less.

The unified credit goes to 3.5 million for 2009 and is scheduled to disappear in 2010 and then revert to only 1 million in 2011. I do not believe that either the 2010 or 2011 scheduled changes will come into being because Congress will pass something to continue the unified credit beyond 2009 at a higher level. Continuing 3.5 million or increasing to 5 million are reasonable guestimates.

But some states are also changing their own estate or inheritance tax credits to decouple from the federal. Therefore, individual state provisions must also be considered.

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There are two ways to transfer some or all of the IRA to the wife, but they’re probably not what he wants to hear. One is to get divorced and transfer some or all of the IRA to the wife in the divorce. The other is to roll the money back into a qualified plan and get a qualified domestic relations order (QDRO) transferring some or all of the qualifed plan benefits to the wife.

He could transfer his other assets to her. That would limit his estate to his IRA.

As the required distributions increase, if he has money left over after his living expenses and gifts, he might convert some of his IRA to a Roth IRA.

He could withdraw more from his IRA than is required, and transfer the amounts he withdraws (net of income tax) to her. I’m not sure whether that makes sense, since it would give up certain income tax deferral for a possible estate tax savings (but only if she dies first, and he has a taxable estate at his death).

Bruce Steiner, attorney
NYC
also admitted in NJ and FL

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gary wrote:

Have client who has been taking RMD’s for some years, and couple’s assets consist of $4MM in his IRA, almost nothing in her IRA, and their home, valued at about $600K. They have the typical living trust for their home and nominal personal liquid assets. Has been gifting using excess cash flow from RMD’s for many years, but the estate is still dangerously large, in my view. I know we can do some things to avoid an assumed $3.5MM exemption upon his first death. For ex, The surviving wife could disclaim to contingents benes, the children. BUT What happens if she pre-deceases, and he now has a $4MM IRA ? If he were to die shortly thereafter, his estate is above the assume $3.5MM exempt amount. How can we get more of that IRA into the wife’s estate now?

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Dennis,

Yes, if you were to pass she could transfer funds between the various IRA accounts without limit. She would also have a choice to maintain some or all in inherited IRA format or to roll over some or all to her own IRA.

For amounts she maintains as inherited, if she is the sole beneficiary of the IRA, she does not have to take any RMDs until the year you would have reached 70.5. But if she needs funds from these IRAs she can take distributions without any penalty since the distributions are coded as death distributions (Code 4 on the 1099R). Many surviving spouses therefore choose to delay the rollover until they are 59.5 when distributions from their own IRAs would no longer be subject to penalty. She could also roll over amounts she knows she will not need until after 59.5, and keep the rest in inherited form in case she needs funds prior to 59.5. During the period before you would have reached 70.5, if she passed her successor beneficiary would be treated as a designated beneficiary, ie could get a new stretch based on life expectancy. But this treatment ends the year you would have been 70.5, so she should not delay the rollover beyond that year.

For the inherited IRA, her RMDs WOULD be based on her age, re calculated each year, but again these do not have to start until the year you would have reached 70.5. Her RMDs from her own IRA will also be based on her recalculated age each year, but from a different table (Table III). RMDs are smaller using Table III than they would be from an inherited IRA since Table I applies to those.

She could also consider converting some of the balance to a Roth IRA which would eliminate RMDs permanently. However, this should not be done until her entire financial situation is examined to determine if this is beneficial or not.

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